The guerrilla roots of Skype

For most people, it means sitting in front of your computer to talk, often for free. Four out of ten times, there are cameras involved too, turning the session into a video chat. The service has become popular for long, rambling chats with distant friends and relatives.

Children too young to talk on the phone can still be entranced by the image of Grandma on the computer screen. “Skype really is that inner circle, that inner set of social experiences,” CEO Tony Bates said on Tuesday.

Skype bypasses the traditional phone system by routing calls and video over the Internet, just like e-mail and web pages. The calls vault effortlessly over national borders, ignoring the fences that phone companies put up in the form of international calling charges. Usernames take the place of phone numbers.

Calling from computer to computer is free. Skype charges for calls to phone numbers on the traditional phone network. It also charges for getting a phone number associated with your Skype username, so people can call you from regular phones.

Skype wasn’t the first to offer phone calls over the Internet when it launched in 2003, but the way it did it was unique and rebellious. It relied on a technology that had already disrupted the music industry—peer-to-peer file sharing, in which computers connect to share things directly, without an intermediary vulnerable to legal action.

The founders, Niklas Zennstrom, a Swede, and Janus Friis, a Dane, had run a peer-to-peer file-sharing network called Kazaa. They sold it to an Australian company in 2002 after coming under intense legal pressure from the entertainment industry, which accused Kazaa of facilitating the theft of millions of copyright-protected songs and videos.

The Australian company ended up fighting long battles in court, while Zennstrom and Friis walked away. The pair turned their efforts instead towards applying the peer-to-peer principle to communications.

This was the genius of Skype: Thanks to peer-to-peer technology, it could get started with very little investment. The heavy lifting of running the network — figuring out how to find users and connecting their calls —was mostly done by the users’ computers. With very low costs, Zennstrom and Friis could afford to give the software away, feeding its popularity.As Skype grew, eBay Inc  came calling. In 2005, it bought the company for $2.6 billion, with a plan to integrate it into its auction site.

The synergies never materialised. Skype languished under eBay, with a rapid succession of CEOs. Despite low operating costs, revenue was small; just a few per cent of active users paid any money to Skype.

In 2007, eBay had to write down much of Skype’s value. Two years later, eBay sold two-thirds of Skype to an investor group that included Zennstrom and Friis for roughly $2 billion.

Microsoft announced an agreement on Tuesday to buy the company for $8.5 billion— three times what eBay had valued it at. Microsoft sees in Skype a way to support its own products. Skype still has room to grow on phones, including those running Microsoft’s Windows software.

Skype has been slow in getting onto cellphones, which have seen explosive growth since Skype was founded. Cellphone companies feared that allowing Skype on phones would hurt revenue by letting callers save their minutes.

The phone companies came around slowly after US regulators started to take an interest in Skype’s complaints. AT&T said in late 2009 that it would allow Skype calls over its wireless network. Since then, the other major carriers have joined, figuring that Skype calls are a way to sell data plans.

Another area Skype has a foothold but no dominance is the living room. TVs are increasingly connected to the Internet. Panasonic and Samsung TVs come with the capability to do Skype video chats, but no built-in cameras. Today, Skype’s technology doesn’t give it much of an advantage over competing services. Video-chatting software isn’t hard to create.

What Skype does have is a big user base — the roughly 170 million people who have the software installed, know how to use it and tell each other “to Skype”. Competitors have to replicate that user base somehow because communications software is only as good as the number of people you can contact with it.