DudeAsInCool
October 11th, 2003, 04:36 PM
To Whom May I Direct Your Free Call?
October 12, 2003
By NICHOLAS THOMPSON
IN the fall of 2000, Niklas Zennstrom and Janus Friis had
not yet earned any powerful enemies, at least so far as
they were aware. They were just two obscure Swedish
entrepreneurs who had worked with three Estonian
programmers to write a file-sharing application called
Kazaa. At the time, the free program was merely one of
Napster's several weak stepsisters, lumped together in news
reports with the likes of Snarfzilla and ToadNode.
But a few months later, the record industry and its lawyers
swatted down Napster. And Kazaa, with its easy-to-use
interface and reliable technology, quickly began scooping
up users. Kazaa does essentially everything Napster did,
with one important difference.
Because Kazaa's file sharing relies on routing requests
through individual users' computers instead of central
servers, the record industry has been unable to shut down
the service in court - but not for lack of trying.
As their legal bills mounted, Mr. Zennstrom and Mr. Friis
decided to sell the company to Sharman Networks last year.
But the two have since hatched a plan that has a chance at
causing another, potentially bigger uproar.
Mr. Zennstrom and Mr. Friis have reunited with the same
team of Estonian programmers who wrote the code for Kazaa
and have created a way to allow people to make high-quality
phone calls over the Internet without having to pay a
penny.
On Aug. 29, their new company, called Skype, released a
preliminary version of the program. Already, more than a
million people have downloaded it, the company's Web site
says.
It is "a real opportunity to do something that is
disruptive in a very positive way," Mr. Zennstrom said. "We
have a big ambition with Skype: it is to make it the global
telephone company."
Skype, which rhymes with "hype" and has no particular
meaning, allows free calls between any two users who have
downloaded the software. It is simple to use and provides
clear connections to anyone with a broadband connection and
a basic headset.
The program relies on a technology called "voice over
Internet protocol,'' or VoIP. By routing calls over the
Internet, VoIP essentially turns computers into phones. It
is the core technology driving a number of small phone
companies and is causing headaches for traditional
providers, who are trying to fend off new rivals even as
they attempt to integrate VoIP into their own systems.
Everyone, it seems, is getting into the act. Cable
companies like Time Warner Cable are starting to offer VoIP
calling plans; Microsoft and Yahoo are using the technology
to power their instant-messaging programs; and Cisco
Systems is selling hardware that allows businesses to
convert their internal phone systems to VoIP.
What makes Skype so special? Well, it's free.
And unlike
other VoIP offerings, Skype's software and audio
connections are based entirely on the same peer-to-peer
infrastructure that powers Kazaa. For example, if two users
want to call each other, the call can be routed directly
between their computers instead of having to pass through
central servers. Peer-to-peer routing also frees the
company from having to buy and maintain much equipment,
because its system relies entirely on the computers of
individual users.
Even Mr. Zennstrom, 37, and Mr. Friis, 27, say they are
surprised by how fast Skype is catching on. Based in
Stockholm, the company is controlled by a privately held
holding company called Skyper Limited. It has spent no
money on marketing the software.
The company does not earn any money right now, but is
betting that consumers will eventually pay for premium
services, like voice mail. This winter, Skype plans to
introduce a feature that will enable users to call people
on regular telephones - for a fee it says will be
"substantially lower'' than current phone service. That
means that Skype wouldn't just allow computer-savvy users
to call one another; it would allow them to call anybody
with regular phone service.
IN a recent report on the telecommunications industry,
Daiwa Securities wrote that Skype "is something to be
scared of, and is probably set to become the biggest story
of the year'' in the telecom sector. "We think the Skype
offering (and whatever may follow it) is akin to a giant
meteor hurtling on a collision course toward Earth," the
report said.
Other analysts are more skeptical. Eventually, they say,
Skype's growth will depend on customers who do not
understand peer-to-peer networking or have computer
headsets. Moreover, the program works best over broadband
connections, which just 16 percent of Americans have at
home, according to a May report from the Pew Research
Center.
"Will Skype be important and influential? It absolutely has
the potential to be that and to drive regulatory debates
and to be a financial disruption," said Blair Levin, a
former chief of staff at the Federal Communications
Commission who now works as a senior telecommunications
analyst at Legg Mason. "But I don't think it's as scary to
the phone companies as Napster and Kazaa were to the record
companies." If the phone companies are scared, they're
certainly not showing it. "Skype has a couple of
challenges,'' said Vint Cerf, senior vice president of
technology strategy at MCI. Most of all, he said, Skype
"needs to deal with the fact that there are a lot of people
who need to be reached who are not on the Internet.''
Skype, which has been around for only a month, doesn't
dispute that. But the company says that enabling its users
to call regular telephones is one of its chief priorities.
And even skeptics who do not think that Skype is much of a
threat agree that the basic technology that drives it -
VoIP - will lead to fundamental changes in the industry.
"VoIP is going to change everything," says Jeff Kagan, a
telecommunications consultant based in Atlanta.
"The big telecom companies worry that VoIP could completely
undermine their business within 12 months," says Berge
Ayvazian, a senior research fellow at the Yankee Group.
With VoIP, when someone speaks into the telephone, or
microphone, the sounds are broken down into ones and zeros,
sorted into packets of information, and then shot across
the worldwide network of fiber lines, just like e-mail
messages. At the designated end points, the packets of
binary code are reassembled and turned back into sounds. In
the regular phone network, calls initially pass over less
efficient copper wires and the phone companies must
maintain dedicated connections between users, instead of
just mixing the information in with the rest of the
Internet.
The first VoIP companies were established in the
mid-1990's, but they were plagued by confusing technology
and connections that made users sound as though they were
talking in caves, and with mouths full of cotton candy.
Now, though, new engineering, faster connections and
agreements on standards have solved many of those problems.
All the interviews for this article were conducted either
using Skype or an alternate VoIP service.
A few start-ups - most notably Vonage, based in Edison,
N.J. - offer customers complete VoIP calling plans for a
fee, using standard telephones connected to VoIP adapters.
Vonage already has 55,000 subscribers and offers unlimited
calls within the United States and Canada for $35 a month.
The presidential campaign of Howard Dean has installed
Vonage's system in several of its field offices.
THE major phone companies have responded with a two-pronged
strategy. On the one hand, they are rapidly building the
technology into their own offerings. MCI expects to have
made a complete transition to VoIP by 2005. AT&T will offer
a major digital voice service to businesses in 2004 and has
begun a consumer pilot program, based mainly in New Jersey.
On the other hand, the regional Bell companies are arguing
for new regulations that would tie up VoIP companies that
let consumers make calls to customers on the regular phone
network, as Skype hopes to do soon.
According to critics, VoIP companies receive an unfair
advantage because the F.C.C. and state governments regulate
them as information, not phone, companies because they rely
completely on the Internet. That frees them from multiple
tax and regulatory commitments, like directly paying into
the federal "universal service fund" that subsidizes rural
telephone access. Some state governments are considering
that issue; in Minnesota last week, a federal judge
overruled a decision by the state's Public Utilities
Commission to force Vonage and other VoIP companies to
submit to the state's traditional phone regulations. The
F.C.C. and Congress will almost certainly take up the issue
soon, too.
"When Congress looks at it, it will be an interesting
collision of two mantras: One, you shouldn't regulate the
Internet; and two, there should be regularity parity," says
Representative Edward J. Markey of Massachusetts, the
ranking Democrat on the House telecommunications
subcommittee.
UNLIKE their experience with Kazaa, Mr. Zennstrom and Mr.
Friis said they did not see any fundamental problems on the
legal front for Skype, a contention that major phone
companies agree with. Skype's main use will almost
certainly be social - making phone calls.
Ultimately, Mr. Zennstrom said, Skype will have to deal
with regulations once the company allows users to call the
existing public phone network. But he said he hoped that
the Internet service providers that give subscribers access
to Skype would end up paying the universal service fees.
For the most part, Mr. Zennstrom is taking the same
position with Skype that he adopted with Kazaa. He says
that the company is just providing software; that users can
do with it what they want; and that there are too many
potential legal issues internationally to worry about them
all.
"We don't know if Skype will be banned in Bhutan," Mr.
Zennstrom said. "The only thing that we know for sure is
that we are providing something very competitive that is
very good for the consumers using it. If a country were to
ban it, that would be very bad for consumers there."
Skype also faces a potential standoff with the F.B.I.
Because traffic over Skype is strongly encrypted and
distributed over wide-ranging sources, it could hamper
authorities' ability to wiretap.
Paul Bresson, an F.B.I. spokesman, said, "It is legal; it
is a concern; and it is something that we are looking
into."
For now, Mr. Zennstrom and Mr. Friis are charging ahead. "I
am here to have fun and to have some challenges and try to
achieve them and to make an impact,'' Mr. Zennstrom said.
"Of course, I want to make money, too."
Does Mr. Zennstrom relish the idea of causing trouble for
the telecom industry? He laughed, then said, "Yes, that's
fun."
http://www.nytimes.com/2003/10/12/business/yourmoney/12kaza.html?ex=1066940365&ei=1&en=d5ddf66a2087f4ea
October 12, 2003
By NICHOLAS THOMPSON
IN the fall of 2000, Niklas Zennstrom and Janus Friis had
not yet earned any powerful enemies, at least so far as
they were aware. They were just two obscure Swedish
entrepreneurs who had worked with three Estonian
programmers to write a file-sharing application called
Kazaa. At the time, the free program was merely one of
Napster's several weak stepsisters, lumped together in news
reports with the likes of Snarfzilla and ToadNode.
But a few months later, the record industry and its lawyers
swatted down Napster. And Kazaa, with its easy-to-use
interface and reliable technology, quickly began scooping
up users. Kazaa does essentially everything Napster did,
with one important difference.
Because Kazaa's file sharing relies on routing requests
through individual users' computers instead of central
servers, the record industry has been unable to shut down
the service in court - but not for lack of trying.
As their legal bills mounted, Mr. Zennstrom and Mr. Friis
decided to sell the company to Sharman Networks last year.
But the two have since hatched a plan that has a chance at
causing another, potentially bigger uproar.
Mr. Zennstrom and Mr. Friis have reunited with the same
team of Estonian programmers who wrote the code for Kazaa
and have created a way to allow people to make high-quality
phone calls over the Internet without having to pay a
penny.
On Aug. 29, their new company, called Skype, released a
preliminary version of the program. Already, more than a
million people have downloaded it, the company's Web site
says.
It is "a real opportunity to do something that is
disruptive in a very positive way," Mr. Zennstrom said. "We
have a big ambition with Skype: it is to make it the global
telephone company."
Skype, which rhymes with "hype" and has no particular
meaning, allows free calls between any two users who have
downloaded the software. It is simple to use and provides
clear connections to anyone with a broadband connection and
a basic headset.
The program relies on a technology called "voice over
Internet protocol,'' or VoIP. By routing calls over the
Internet, VoIP essentially turns computers into phones. It
is the core technology driving a number of small phone
companies and is causing headaches for traditional
providers, who are trying to fend off new rivals even as
they attempt to integrate VoIP into their own systems.
Everyone, it seems, is getting into the act. Cable
companies like Time Warner Cable are starting to offer VoIP
calling plans; Microsoft and Yahoo are using the technology
to power their instant-messaging programs; and Cisco
Systems is selling hardware that allows businesses to
convert their internal phone systems to VoIP.
What makes Skype so special? Well, it's free.
And unlike
other VoIP offerings, Skype's software and audio
connections are based entirely on the same peer-to-peer
infrastructure that powers Kazaa. For example, if two users
want to call each other, the call can be routed directly
between their computers instead of having to pass through
central servers. Peer-to-peer routing also frees the
company from having to buy and maintain much equipment,
because its system relies entirely on the computers of
individual users.
Even Mr. Zennstrom, 37, and Mr. Friis, 27, say they are
surprised by how fast Skype is catching on. Based in
Stockholm, the company is controlled by a privately held
holding company called Skyper Limited. It has spent no
money on marketing the software.
The company does not earn any money right now, but is
betting that consumers will eventually pay for premium
services, like voice mail. This winter, Skype plans to
introduce a feature that will enable users to call people
on regular telephones - for a fee it says will be
"substantially lower'' than current phone service. That
means that Skype wouldn't just allow computer-savvy users
to call one another; it would allow them to call anybody
with regular phone service.
IN a recent report on the telecommunications industry,
Daiwa Securities wrote that Skype "is something to be
scared of, and is probably set to become the biggest story
of the year'' in the telecom sector. "We think the Skype
offering (and whatever may follow it) is akin to a giant
meteor hurtling on a collision course toward Earth," the
report said.
Other analysts are more skeptical. Eventually, they say,
Skype's growth will depend on customers who do not
understand peer-to-peer networking or have computer
headsets. Moreover, the program works best over broadband
connections, which just 16 percent of Americans have at
home, according to a May report from the Pew Research
Center.
"Will Skype be important and influential? It absolutely has
the potential to be that and to drive regulatory debates
and to be a financial disruption," said Blair Levin, a
former chief of staff at the Federal Communications
Commission who now works as a senior telecommunications
analyst at Legg Mason. "But I don't think it's as scary to
the phone companies as Napster and Kazaa were to the record
companies." If the phone companies are scared, they're
certainly not showing it. "Skype has a couple of
challenges,'' said Vint Cerf, senior vice president of
technology strategy at MCI. Most of all, he said, Skype
"needs to deal with the fact that there are a lot of people
who need to be reached who are not on the Internet.''
Skype, which has been around for only a month, doesn't
dispute that. But the company says that enabling its users
to call regular telephones is one of its chief priorities.
And even skeptics who do not think that Skype is much of a
threat agree that the basic technology that drives it -
VoIP - will lead to fundamental changes in the industry.
"VoIP is going to change everything," says Jeff Kagan, a
telecommunications consultant based in Atlanta.
"The big telecom companies worry that VoIP could completely
undermine their business within 12 months," says Berge
Ayvazian, a senior research fellow at the Yankee Group.
With VoIP, when someone speaks into the telephone, or
microphone, the sounds are broken down into ones and zeros,
sorted into packets of information, and then shot across
the worldwide network of fiber lines, just like e-mail
messages. At the designated end points, the packets of
binary code are reassembled and turned back into sounds. In
the regular phone network, calls initially pass over less
efficient copper wires and the phone companies must
maintain dedicated connections between users, instead of
just mixing the information in with the rest of the
Internet.
The first VoIP companies were established in the
mid-1990's, but they were plagued by confusing technology
and connections that made users sound as though they were
talking in caves, and with mouths full of cotton candy.
Now, though, new engineering, faster connections and
agreements on standards have solved many of those problems.
All the interviews for this article were conducted either
using Skype or an alternate VoIP service.
A few start-ups - most notably Vonage, based in Edison,
N.J. - offer customers complete VoIP calling plans for a
fee, using standard telephones connected to VoIP adapters.
Vonage already has 55,000 subscribers and offers unlimited
calls within the United States and Canada for $35 a month.
The presidential campaign of Howard Dean has installed
Vonage's system in several of its field offices.
THE major phone companies have responded with a two-pronged
strategy. On the one hand, they are rapidly building the
technology into their own offerings. MCI expects to have
made a complete transition to VoIP by 2005. AT&T will offer
a major digital voice service to businesses in 2004 and has
begun a consumer pilot program, based mainly in New Jersey.
On the other hand, the regional Bell companies are arguing
for new regulations that would tie up VoIP companies that
let consumers make calls to customers on the regular phone
network, as Skype hopes to do soon.
According to critics, VoIP companies receive an unfair
advantage because the F.C.C. and state governments regulate
them as information, not phone, companies because they rely
completely on the Internet. That frees them from multiple
tax and regulatory commitments, like directly paying into
the federal "universal service fund" that subsidizes rural
telephone access. Some state governments are considering
that issue; in Minnesota last week, a federal judge
overruled a decision by the state's Public Utilities
Commission to force Vonage and other VoIP companies to
submit to the state's traditional phone regulations. The
F.C.C. and Congress will almost certainly take up the issue
soon, too.
"When Congress looks at it, it will be an interesting
collision of two mantras: One, you shouldn't regulate the
Internet; and two, there should be regularity parity," says
Representative Edward J. Markey of Massachusetts, the
ranking Democrat on the House telecommunications
subcommittee.
UNLIKE their experience with Kazaa, Mr. Zennstrom and Mr.
Friis said they did not see any fundamental problems on the
legal front for Skype, a contention that major phone
companies agree with. Skype's main use will almost
certainly be social - making phone calls.
Ultimately, Mr. Zennstrom said, Skype will have to deal
with regulations once the company allows users to call the
existing public phone network. But he said he hoped that
the Internet service providers that give subscribers access
to Skype would end up paying the universal service fees.
For the most part, Mr. Zennstrom is taking the same
position with Skype that he adopted with Kazaa. He says
that the company is just providing software; that users can
do with it what they want; and that there are too many
potential legal issues internationally to worry about them
all.
"We don't know if Skype will be banned in Bhutan," Mr.
Zennstrom said. "The only thing that we know for sure is
that we are providing something very competitive that is
very good for the consumers using it. If a country were to
ban it, that would be very bad for consumers there."
Skype also faces a potential standoff with the F.B.I.
Because traffic over Skype is strongly encrypted and
distributed over wide-ranging sources, it could hamper
authorities' ability to wiretap.
Paul Bresson, an F.B.I. spokesman, said, "It is legal; it
is a concern; and it is something that we are looking
into."
For now, Mr. Zennstrom and Mr. Friis are charging ahead. "I
am here to have fun and to have some challenges and try to
achieve them and to make an impact,'' Mr. Zennstrom said.
"Of course, I want to make money, too."
Does Mr. Zennstrom relish the idea of causing trouble for
the telecom industry? He laughed, then said, "Yes, that's
fun."
http://www.nytimes.com/2003/10/12/business/yourmoney/12kaza.html?ex=1066940365&ei=1&en=d5ddf66a2087f4ea