Interview: Skype is enjoying the hype

Interview: Skype is enjoying the hype

Niklas Zennström made a name for himself as cofounder of the Kazaa peer-to-peer (P-to-P) file sharing service. Now the entrepreneurial Swede hopes to make his latest venture, the Skype P-to-P voice service, a household brand.

Niklas Zennström made a name for himself as cofounder of the Kazaa peer-to-peer (P-to-P) file sharing service. Now the entrepreneurial Swede hopes to make his latest venture, the Skype P-to-P voice service, a household brand. In recent weeks, the chief executive officer (CEO) of Luxembourg-based Skype Technologies SA has signed a string of deals with wireless handset manufacturers. Carrier Devices Ltd., for instance, has agreed to install proprietary Skype VOIP (voice over Internet Protocol) software in its i-mate branded Pocket PC phones with Wi-Fi capability. Motorola Inc. is also on board to integrate Skype software into a number of its new wireless devices. Another big-name manufacturer on the list is Siemens AG.

In a crowded booth with music blaring in the background, soft-spoken Zennström fielded a number of questions from IDG News Service.

Contrary to reported customer complaints about call latency, failed connections and voice quality with Skype, Zennström said the VOIP offering is much better than traditional phone service. Don't expect this shrewd businessman to knock his own service in free editorial space. Zennström takes pride in boasting that his company is adding millions of customers without paying a cent on large advertising campaigns.

IDGNS: Your service appears to be growing strongly. What are your numbers?

Zennström: Skype is growing extremely rapidly: We have 29 million users and are adding 155,000 users each day. Most of them run the software on their computers, but we also have around 1.3 million Pocket PC users.

IDGNS: Last year, you entered into an agreement with RTX Telecom A/S to develop a line of cordless phones. How do these work?

Zennström: You can connect the cordless phone to a normal socket and use it as a normal phone. But it also has a USB connection to your computer, which runs the Skype software. When you push a designated button on the handset, you can use Skype to make a VOIP call.

IDGNS: But your computer must be running all the time. Some people don't want to have their machines running all day. Are you looking at a product for these users?

Zennström: Many people like to keep their computers on most of the time, so connectivity isn't an issue with them. But, yes, some people don't like to have their machines running all day. So we are working together with a partner on a router-based product to reach out to a larger group. We will integrate our software either into the cordless handset or the base station, which users can then connect directly to their router. We can't say today when we will launch this new product.

IDGNS: Skype has attracted numerous users because it's free. But last year, you launched a new service, called SkypeOut, that allows users to pay for VOIP calls terminating in the public telephone network. How's that service doing?

Zennström: We now have around 1 million customers for this service. They pay €0.017 (US$0.023 ) to call to any landline in 20 countries. We're also working on a logical counterpart: SkypeIn, which accepts calls from the public telephone network.

IDGNS: You're working to let Skype users send and receive SMS (Short Message Service) text messages. What else can we expect?

Zennström: Let's wait and see. In October, we released an API (application programming interface). Software developers can develop a lot of other applications with this API. One company, for instance, has developed an SMS gateway for Skype users to both send and receive text messages. Another company has developed an answering service. So we're starting to see more and more companies develop applications around this API.

IDGNS: In the early days of VOIP, lots of folks complained about poor quality. How is Skype's quality?

Zennström: Our phone call quality is far superior to traditional calls made on the public telephone network, which is based on narrowband technology. Traditional telephone technology is coding speech at 300 hertz to 3,000 hertz or something like that. It's using limited spectrum. We're using wideband codec, with a much higher frequency spectrum.

Today, the Internet has much more capacity. When we tested VOIP in 1997, we came to the conclusion that the public Internet at that time wasn't good enough for VOIP: There was too much packet loss and too many delays. Since then, the capacity on the Internet has been doubling almost every year.

IDGNS: But what happens if everyone moves to VOIP?

Zennström: I don't see this as a problem because of the doubling of capacity and also the fact that voice requires very little capacity, compared to file sharing. We've also taken a very different technology approach with peer-to-peer, which has an impact on efficiency. With some VOIP systems, users must go through a server to connect to each other. This is an extra leg. Our service connects users directly. It avoids bottlenecks by taking the shortest path over the Internet to connect users. We are able to utilize full broadband connectivity.

IDGNS: So with quality like that, what else are you planning?

Zennström: Video calls.

IDGNS: Is there a market for that?

Zennström: If you go to Logitec (Inc.), they'll tell you that they're selling over 10 million Web cameras a year. Video on the Internet has suffered from poor quality, mainly because the video streams are passing through many servers and using narrowband codecs. But since we use P-to-P, we're expecting much better quality.

IDGNS: So where do you see VOIP headed in the future?

Zennström: Down the road, everyone will be connected to the Internet -- even wirelessly, using different technologies. Telephony will become a software application that you run on your device. Once telephony becomes a software application and not something requiring a dedicated network, you have completely different rules. First of all, you can't charge for a call just as you can't for other software tasks. You don't charge for each page you download into your Web browser or each page of text you compile in your word processing program.

IDGNS: Until now, VOIP has thrived in an unregulated market. Are you concerned about possible regulation?

Zennström: In well-developed regions of the world, such as Europe, North America and parts of Asia, regulators understand that there's no reason to regulate VOIP. You regulate something to protect consumers. If there is a dominate player, the regulator needs to ensure a level playing ground for competitors. No one gains anything from VOIP being regulated. There is absolutely no reason for such regulation. You're only stopping market forces if you do so.

Granted, some developing countries may think differently. They view telephony as a way to make money. But this is short-term thinking.

IDGNS: Speaking about paying, many people think the Internet is something that is essentially free -- free phone calls, free surfing and free messaging. Your free P-to-P phone service sort of propagates this impression, wouldn't you agree?

Zennström: The Internet isn't free. Some people may be able to take advantage of some special promotions for free Internet access but typically you pay a monthly access fee. So in that sense, the Internet isn't free. In the Internet value chain, some companies provide network infrastructure. Others offer applications. We provide software to run over the Internet. We have chosen to do this for free. That's our decision, and we're benefiting from this decision.

IDGNS: How exactly are you benefiting, assuming that you want to make money?

Zennström: Look at Google. When did you last pay to use Google? Similar to Google, we offer a free service but charge for value-added services, such as SkypeOut and down the road for the Skype phone.

IDGNS: Until now, you have been able to grab business from telephone companies without much of a fight. Many of them, however, are now entering the VOIP market -- AT&T Corp., BT Group PLC, Deutsche Telekom AG and Telefónica SA, to name a few. Do you see telcos as a big threat?

Zennström: The great thing today is that consumers can make a choice. They can choose whomever they want. Today, 29 million people have made a decision to use Skype. They're using Skype as an add-on service; they're not throwing away their normal phone yet. Over time, however, we expect people to stop using the public telephone service altogether and use VOIP only.

Unlike the telcos that have built telephone networks, we view telephony as a software application, which you download and install on your own device, whether it's a computer or PDA or Wi-Fi phone. Our cost model is very different. It's about zero. We don't have to maintain equipment, and we don't have a big, global advertising campaign.

IDGNS: Operators have been fond of saying that owning network infrastructure is an asset. But you seem to be saying it's more of a liability?

Zennström: Our benefit is that we don't have a network. If you have a network, you have a cost structure and you're limited in your geographical penetration. Deutsche Telekom, for instance, targets its service mostly at customers in its local market where it has a network.

IDGNS: But what if telcos come out with their own VOIP software similar to Skype?

Zennström: Some already are. BT, for instance, came out with such a service last summer. The service is picking up. Calls between BT users are free. But they pay a relatively high price to make outside calls.

And some telcos are even promoting Skype to their users, such as Hutchison (Telecommunications International Ltd.) in Hong Kong.

As I said before, when telephony becomes a software application on the Internet, the dynamics are different. Rapid software development is necessary. Telcos haven't been best in world in that area.

IDGNS: True, but they learn fast, especially if they feel threatened. Are there any particular operators you need to worry about?

Zennström: There will be many different companies competing in this space, and that's good for consumers because there will be plenty of choice. Some telephone companies will work with us. Some will do their own thing. Some won't do anything. BT is certainly a company to watch.

IDGNS: Your Kazaa P-to-P file sharing service has had its day in court. Any legal issues to worry about with your P-to-P voice service?

Zennström: There is no legal issue with voice. There is no legal monopoly to provide voice service in developed countries.

IDGNS: And what can we expect from Skype at next year's Cebit?

Zennström: I hope to show a whole lot more devices at the next show. -- IDG News Service

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