The Skype Story

The story of Skype is a modern tale of geography, luck, adventure, history, technology, and perseverance. It began in Copenhagen in 1997, when Niklas Zennström met Janus Friis.

At the time of their meeting, the Internet was still a relatively new consumer technology, but it was quickly gaining momentum as demand for Web sites and bandwidth was increasing worldwide. Internet service providers (ISPs) were proliferating, and computer-engineering graduates with business skills were in short supply.

Niklas was just such a graduate, having completed dual degrees in business and computer engineering from Uppsala University in Sweden. He was in Copenhagen building get2net, an ISP business for Tele2a European independent phone company challenging the national telecom monopolies. Janus, ten years younger than Niklas, had no college degree and had been working as a tech-support representative at a competing ISP.

Niklas and Janus couldn't have been more different, but they met at Tele2 and connected immediately. Throughout that first year and into the next, they spent long hours dissecting Internet-related technology problems and brainstorming solutions. When Tele2 moved Niklas to Luxembourg and then to Amsterdam, Janus always followed to stay an integral part of the team.

A Potential Solution

By 1999, the Internet gold rush was in full swing, but Niklas and Janus were still working inside a large company. They both felt as though they were missing out on the dot-com boom, and they wanted to strike out on their own. Janus persuaded Niklas to quit Tele2, and the two men evaluated new business ideas until a solid idea finally emergedin the form of a potential solution to a bandwidth problem that Niklas experienced directly.

When Niklas was building get2net, he thought that it was absurd to have to buy bandwidth from companies in the United States to enable his European customers to watch movie trailers or listen to streaming music. The lack of a cost-effective way to transfer large files was a constant source of frustration.

Niklas and Janus thought they could solve this problem by storing files on subscribers' computers, allowing the computers to share information directly with one another (instead of routing traffic through traditional networking servers and other centralized equipment). Niklas and Janus also reasoned that they could provide subscribers access to these files through a special network browser that subscribers would pay to use.

P2P Computing

Niklas and Janus's idea coincided with the hot topic of the day: P2P computing. Technically speaking, P2P computing is a way of allowing computers in a network to communicate directly with one another to exchange information or accomplish difficult tasks. Allowing computers to connect directly with one another prevents the network bottlenecks that result from using centralized equipment and mainframe computer servers.

P2P computing was emerging as the hot Internet technology, and it was being popularized by two entirely different P2P applications: ICQ and Napster.

ICQ, which stood for "I seek you," was the first fully functional instant-messaging application. ICQ allowed users to find one other; establish a P2P communication channel; and offered features such as presence, buddy lists, and "rapid messaging" with offline support. Napster, the MP3 music-sharing service, was experiencing a huge surge on college campuses worldwide, proving that P2P networks could be used to transfer large files effectively.

From a consumer-technology standpoint, ICQ and Napster were proving three things:

• ICQ was demonstrating that technology could be used to simplify the process of interconnecting users and allowing them to communicate efficiently on the Internet.

• Napster was demonstrating that P2P computing could be used to transfer large amounts of data.

• Both applications were demonstrating that ease of use and searchable directories were critical enablers for P2P networks.

With ICQ and Napster as evidence that P2P networks could solve some of the problems that Niklas had experienced at get2net, Niklas and Janus set out to build their own system.

KaZaA

Niklas recruited four Estonian game programmers who had worked for him at Tele2. The system they built had a resilient software architecture that, among other things, made it impossible to shut down. It also included strong encryption and enabled users to see who in the network was online. Their new design became the next major innovation in consumer P2P networking technology.

In early 2001, Niklas and Janus formed a company called Consumer Empowerment to realize their vision of a consumer P2P network. They built a network browser called KaZaA to work in concert with their P2P network technology. They also licensed the use of their network to other companies.

In July 2001, Napster was shut down by the courts for reasons related to copyright infringement. Napster had generated a huge demand for this new form of music distribution, but there was no longer a way to satisfy it. Word of an alternative called KaZaA spread quickly.

The KaZaA network browser application was easy to use and worked well on top of the new P2P network technology. It allowed users to organize, view, and play media files through an integrated media jukebox. It supported file formats other than MP3. And unlike Napster, it had software and video clips. It also had patches for games and programs that were difficult to get from "official" Web sites because the developers' sites were too slow.

KaZaA became the application of choice for moving large electronic files, and the use of KaZaA skyrocketed. As traffic and downloading surged to tens of millions of users, the development team reinforced the network architecture, added new features and capabilities, and optimized the system as it scaled globally in real time.

Then, in January 2002, as the Dutch courts were deliberating the merits of a lawsuit against rights-management agency Buma/Stemra, KaZaA was sold to the Australian company Sharman Networks for an undisclosed sum.

A New Idea

Niklas and Janus took some time off and then began to look for places where they could use their experience. They looked specifically at industries that relied on an inefficient centralized infrastructure and ones in which consumers could reap the benefits of the technology.

Telecommunications quickly became a candidate. Aside from historically delivering questionable "customer service," telecommunications relies on a heavy centralized infrastructure with many different types of networks that are expensive to build and maintain. Developing new services is difficult and takes a long time because these networks don't interoperate neatly. Moreover, real estate, buildings, and vast amounts of capital-intensive equipment (such as large mainframe computer servers, switches, lines, poles, and trucks) are required to run the business, contributing to large inefficiencies that translate into expensive services for consumers.

As Niklas and Janus were privately honing in on the decision to build a voice application, Niklas was approached by a partner representing Draper Investment Company, a boutique international venture capital firm with close ties to Silicon Valley. Together with Janus and close associate Geoffrey Prentice, the four hammered out a business plan, and Draper Investment Company provided the seed funding.

Skype was born.

The team decided to focus on building an application to deliver free voice calls computer to computer, with the assumption that if they could get massive adoption, they could provide value-added services and ultimately establish a complete telecommunications solution.

A voice application presented a special challenge, however, because for a voice application to succeed, there have to be enough people on the network who know one another and want to talk to one another. In addition, ease of use, connection stability, and call quality have to be as good as or better than what people have become accustomed to with landline and cell phones.

Skype Beta

Niklas and Janus hired the Estonian programmers again, this time to build a software application that would go beyond KaZaA's architecture, work behind firewalls and Network Address Translation (NAT) devices, install and configure easily, and be simple and straightforward to use.

The team spent a year developing the system and quietly launched Skype beta in August 2003, with the hopes that the application would "go viral"that people would get their friends and family members to use Skype, and that they in turn would get their friends and family members to use Skype.

Six months later, more than 6 million copies of the software had been downloaded worldwide, and in February 2004, Niklas and Janus were featured on the cover of Fortune magazine. A little over a year later, Skype passed its 100 million downloads mark.

Skype Today

Today, Skype has more than 75 million members and is being used in more than 225 countries and territories in 27 languages throughout the world. Skype users can now call into and out of the traditional phone system, as well as use Skype for conference calls, IMs, file transfers, and video calls. Worldwide, Skype serves more voice minutes than all the other Internet voice communication service providers combined.

In addition, there is an extensive and growing list of partnerships with hardware, software, ISP, and media companies that are developing products and services that complement Skype.

On September 12, 2005, eBay agreed to acquire Skype Technologies SA for approximately $2.6 billion in cash and stock. Said Janus, "Together, we feel we can really change the way that people communicate, shop, and do business online."