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File-Sharing Pioneer Turns to Free Internet Calling

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"Skype is a good company," said independent telecom analyst and commentator Jeff Kagan. "But Skype is never going to catch up to the major service providers," the large telephone and cable companies that increasingly are offering bundles of services, including local and long-distance calling, wireless, high-speed Internet access and digital television.

Zennstrom, who seems to relish being underestimated, is neither a stereotypical underground hacker nor a nerdy geek. Bespectacled and soft-spoken, he looks every bit the preppy, mid-level executive. He believes in capitalism and is motivated to disrupt markets that operate inefficiently.

"There's a duty," he said between appearances at a recent industry conference in Canada on Internet telephony. "You should not allow big monopolies to be inefficient. . . . If you buy services from a big monopoly that doesn't care about consumers and overcharges you, most people get really upset about that."

His strategy is to use new technology to fight entrenched companies that are too big to react quickly. "Not only is it great fun," he said, "it creates huge business opportunities."

Zennstrom's gift, say those who have followed his career, is his ability to pinpoint the industries most vulnerable to attack.

"Zennstrom is the regime changer," said Timothy Wu, a visiting technology law professor at the University of Chicago. "He makes happen what economists predict would happen" when technology overtakes existing business models.

The Big Efficiency idea underlying Skype and Kazaa struck Zennstrom and his longtime business partner, Janus Friis, when they worked together in the mid-1990s at Sweden's Tele2, the first independent phone company in Europe to take on state-sanctioned monopoly carriers.

Wouldn't it make sense, they reasoned, to allow computers to share information directly with each other rather than routing traffic through centralized networks and equipment?

Watching the music world get turned upside down by the Napster file-sharing service, which still relied on some centralized components, Zennstrom and Friis worked with some Estonian programmers to build a purer, more powerful computer-to-computer system known as "peer-to-peer."

Zennstrom said his goal was not to replace Napster, which was under legal siege and ultimately shut down for facilitating the pirating of copyrighted music.

Instead, he wanted the studios to use his more efficient system to legally put music into the hands of consumers via a payment method that would be negotiated.

Zennstrom said the music studios he visited in Los Angeles, which he declined to name, refused to consider it. A spokesman for the Recording Industry Association of America declined to comment on Zennstrom.

When legal troubles shut down Napster, enthusiasts turned to Kazaa as a way to keep swapping files that was harder for authorities to disrupt because it was so decentralized. By 2001, Kazaa and similar software proved so effective for moving large files (legal or otherwise) that the technology soon accounted for the majority of all Internet traffic.

Although Kazaa withstood early legal challenges, continued battles loomed. Zennstrom did not like the idea of a life spent negotiating music and movie rights agreements, so he sold Kazaa to Sharman Networks Ltd., a firm run by Australians and incorporated in the South Pacific island nation of Vanuatu. After taking some time off, he and Friis began talking about aiming their insight about efficient networks at another big industry: telecommunications.

Today, he just smiles at questions about how Skype will make money on a strategy of giving away basic calling for free.

Yahoo and Google, he notes, never charged for someone to conduct a search. Instead, the rapid adoption of search technology by so many people made the companies hugely valuable and opened the door to moneymaking, add-on services.

So the company offers Skype Out, which charges small toll fees for Skype users to call non-Skype users around the world, at rates below traditional long-distance rates. Already, the service has about 1.5 million users, though the company declines to reveal how much money it is bringing in.

The company also is letting users sign up and test-drive Skype In, which for a fee lets non-users call Skype users and provides voice mail.

Skype backers such as longtime venture capitalists William H. Draper III and his son, Timothy C. Draper, contend that the key to Skype's success is its ability to provide services at vastly lower cost than competitors.

With no networks, lines and poles to maintain, London-based Skype operates with 171 employees worldwide yet has nearly as many users as Verizon has residential phone customers. Verizon's land-line division employs 142,000 people.

Zennstrom is plotting pushing Skype into mobile phones, and he already has cut a deal with handset-maker Motorola Inc.

As long as the mobile phone can connect wirelessly with the home computer, as many now can, Skype users can walk around their homes and talk, rather than be chained to the computer desks.

About 30 percent of Skype's users are businesses, Zennstrom said, and the company is developing a pricing plan for large corporate customers.

As for the next big industry ripe for an attack? Zennstrom just smiles again.


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