Niklas Zennström: Telecoms troublemaker

Though known for bearing a slight resemblance to Bill Gates, Niklas Zennström has concentrated on creating the sorts of upstart businesses that are a thorn in the side of big companies such as Microsoft.

Zennström, a thirtysomething Swede, co-founded with Janus Friius the file-sharing software maker that raised the ire of the RIAA, Kazaa, in 2001. More recently in 2003 he and Friius started up Skype, the maker of voice over IP (VoIP) software that is letting millions make free phone calls. Zennström is CEO.

It's no coincidence Zennström's best-known entrepreneurial projects both involved disruptive technologies.

While working at Tele2 when it was a small company trying to compete with the Swedish telco incumbent, he experienced firsthand the difficulties of running a business with a commodity service like telephony. To make a profit, Zennström explains, you minimise operational costs and spend heavily on marketing to differentiate yourself as you squeeze out thinner and thinner margins.

"It becomes like toothpaste; you bombard [customers] with advertising - 'use us, use us, use us' - when in reality it's the same service," he told silicon.com during an interview at Skype's London offices.

"Disruptive technology is great because it's a quantum leap in competitive advantage," he continued. "You change the nature of the game and you get the advantage."

The very real threat VoIP poses to incumbent telecoms companies - and the key role Skype has played in popularising the technology - earned Zennström a spot near the top of silicon.com's 2004 Agenda Setters poll.

Skype software allows people to place voice calls, send text messages and share files for free but has virtually no operating costs because it uses the internet to handle the voice traffic and has spent minimally on marketing - no big ad campaigns, and no plans for any in the future, said Zennström - instead relying on viral marketing, or word of mouth recommendations by users.

So far the results have been quite good. Just 15 months after the company launched the public beta version of its software, Skype boasts 14 million users and 37 million downloads of its software. Versions are available for Windows, Mac, Linux and Pocket PC.

Tim Draper, managing director of Skype investor Draper Fisher Jurvetson, said: "This is a major improvement in the way people communicate on the order of Hotmail and ICQ, only a lot bigger and growing a lot faster."

It's a market many believe has a bright future. VoIP applications such as Skype could be a €6.4bn business in Western Europe by 2008, according to a recent report from consultancy Analysys.

VoIP 'soft phones' are not new, though, and Skype's success where others have failed lies in an easy-to-use interface that mimics instant-messaging applications as well as the rise in broadband that allows for calls with high voice quality. The peer-to-peer, or distributed, networking model - as opposed to a centralised server - also helps data move along quickly and avoid the lost bits of conversation common with older soft phones.

But Skype is not sitting on its laurels. It has its sights on the business market, with plans next year to offer a package aimed at small companies or departments within a larger company who want to use the software as a complement to their existing phone service. Zennström sees it as "a natural evolution" for Skype, already available on Pocket PC, to work on smart phones over mobile networks. And the company's breaking into Asian markets such as Japan, China and Taiwan by partnering with local web portals.

Skype doesn't take its millions of users for granted, employing their suggestions to drive product development and even calling on the most vocal users as beta testers.

This focus on the user apparently overshadows any desire to play along with the rest of the industry, as Skype is not compatible with Session Internet Protocol (SIP), which is becoming the standard among VoIP players.

Zennström said Skype uses a proprietary protocol because "we thought SIP was not good enough". He admits SIP may be right for certain types of corporate VoIP solution that are multi-faceted but has no plans to get on that bandwagon.

"We focus on solving problems for our customers and making a great product. We're not focused toward the industry, we're focused internally on our customers and we're using the best technology to do that."

A private company with two rounds of venture capital funding under its belt, from Draper Fisher Jurvetson, Index Ventures, Bessemer Venture Partners and Mangrove Capital Partners, Skype has not had to worry about revenues right away. It's a situation Zennström appreciates after Kazaa, which to make money allowed adware on its network - a factor that has led to its drop in popularity and tarnished its reputation among users.

Instead Skype has worked to build a substantial user base - and gain the trust of its users - by giving away ad-free software at no cost and then charging for extra features.

Skype currently makes money from the sale of Plantronics headsets (necessary to use Skype on a computer) and from its one for-pay service, SkypeOut, which charges - about 1.1p per minute - for calls from Skype software to standard telephones. The service currently counts 295,000 users and the goal is for five per cent of Skype users to becoming paying SkypeOut customers.

By this winter, the company plans to roll out more pay features such as voicemail, videoconferencing and SkypeIn, which will let people place calls from a telephone to Skype software users and will allow Skype users to choose a phone number with any country or area code they like - a key advantage to date of VoIP services such as Vonage and AT&T CallVantage.

Vonage and AT&T CallVantage are often mentioned as competitors to Skype though the offering is quite different. Skype is software-only and carries voice date exclusively over the internet. Vonage and AT&T's service require the installation of a router alongside a telephone and computer and allows the user to make calls on the telephone.

To Zennström, though, "this is not a growth market" but an intermediary service between true VoIP and fixed-line that uses the net only for the final portion of the call.

One dark cloud looming over the VoIP market is regulation - which right now it's free of but which could certainly change the rules of the game should a company like Skype be subject to the regulations and taxes of the standard phone companies.

In contact with regulators around the world, Zennström's not worried about it. Regulators, he said, are keen to protect customers from monopolies and create a good competitive environment. If anything, VoIP has led to more new entrants and competition in the telecoms market than before it arrived, so there's no need to regulate it, according to Zennström.

"[Skype] is a software app [used] to communicate just like any other... There's no need to regulate it just like there's no need to regulate email or IM or web browsing."

It's still early days for Skype but if VoIP overtakes fixed-line phone service like so many expect, Zennström could end up with more in common with Bill Gates than looks.