Niklas Zennström : Music industry's nemesis is busy doing the same to world telecoms

The Interview: Founder and chief executive of Skype

If the history of the world wide web had been given the Hollywood treatment we would soon be settling down to watch Internet II: The Next Generation.

As the titles fade the familiar assortment of geekoid aliens beam down from their bedrooms, spouting technobabble that few understand, waving business plans containing the usual hilariously simplistic schemes.

But the big difference in the sequel is that these new companies are coming up with things people actually want, and therefore stand a decent chance of making money.

To be fair. a few dot.com survivors, such has eBay and Amazon, have shown you can make money, but star of the show these days, and the latest new thing, is Skype, a company pioneering something as simple as telephone calls made using internet connections. With Skype, and a handful of rivals, you can call Aunt Fanny in Florida for free, or at least at no extra cost to your basic internet connection.

Leader of the Skypes, or perhaps we should call them Skypons, is Niklas Zennström, a robotic-sounding Swede living in London, running a company from Soho with 200 employees but 52 million users who hail from all four corners of the known world. He and his co-founder, Janus Friis, have backing from a string of Silicon Valley magnates.

"Companies like BT won't make money from voice calls in future. They can't do anything about that," Mr Zennström says without a flicker of doubt in his monotone voice.

"There are different mentalities that are changing over time. Firstly, they ignored us. AT&T in the US said we were just a toy. They said we couldn't compete; that we had no scale. Now that's changing. They are developing their own strategies."

Internet telephony is the hot topic in business at the moment. Microsoft bought the Skype lookalike Teleo last week, just a few days after Google announced it would launch messaging and calls over the internet. Yahoo! bought Dialpad to do the same thing and Skype, well Skype is still independent and therefore the subject of much takeover speculation, with the internet convert Rupert Murdoch spoken of as a possible buyer. A price tag of $3bn (£2bn) has been mentioned.

"We do not make comments on rumours. Once we have done something ... I can't comment," Mr Zennström says. He may well partner with another business, having already raised some cash from investors. "The last time we raised money, in January last year, we said then we shouldn't need any more before we break even. That's still the case. But we can still raise money to grow the company one way or another. We have options."

However intriguing that sounds, Mr Zennström is quick to get back to the technology. "The thing about the internet is the openness. People can link to each other themselves. You have 1 billion people using the internet with 200 million of those now using broadband internet connections, so the internet has become a powerful network. It can carry calls."

Perhaps we should pause here for a moment and just run through what internet telephony is exactly.

People have been sending e-mails, text messages basically, from one computer to another using the internet, for years. With the advent of faster, more powerful broadband internet connections there is no need to stop at text. Using a piece of software - supplied for free by Skype and others - your voice is converted into digital data, whizzed down your existing internet connection and then reassembled by your friend's PC also running Skype software.

Plug a headset into the back of your computer to hear and speak and you have got rid of your telephone, replacing it with a PC. Sending voice data from one PC to another becomes just part of the general internet traffic and therefore there is no need to pay anything extra. You can call PC to PC, PC to phone or phone to phone using this Voice over Internet Protocol (VoIP) technology, to give it its proper name.

It's the same principle as Peer to Peer (P2P) digital file-sharing technology. This led to the practice that so horrified the music industry when it woke up to the fact that people were simply loading CDs, or digital music files, on to their computers and sending them to friends and family using the internet and a bit of downloaded software from websites such as Napster or Kazaa.

As there is no chance anyone else can sue you for copying your own voice and distributing it over the internet, you are not about to end up being prosecuted like the people behind Kazaa, which, as it happens, was founded by none other than Mr Zennström. "Telephony has become software," Mr Zennström intones. "We had the idea for Skype three years and two months ago. It became apparent to us that telephony would be the killer application for P2P technology. When we started Kazaa the vision was P2P as a disruptive technology that enables new businesses. We realised voice would be a very, very good application because the internet had become, for many people, broadband. The capacity is good on the internet, that's not going to go away. Within a few years' time you will have wireless broadband - think Skype for mobile phones - pretty much everywhere. It makes sense, therefore, to use the internet to make phone calls."

But it can't be much of a business if Skype's software is supplied free and calls are free as well. Therein lies the catch, albeit a small one. Using Skype to call a regular telephone or PC without Skype costs the equivalent of 2 cents a minute. Calling a mobile phone will cost 27 cents a minute. Mr Zennström claims 2 millionof his 52 million users are paying customers, but refuses to declare his revenues.

But calling a fellow Skype user is free. The more people in the Skype network, the more calls that can be made at no extra cost. Mr Zennström is busy embedding his software in every website possible so his users can communicate with these sites for free as well, further expanding his network. He is also persuading companies to install it within their businesses to reduce their telephone bills.

And he is taking every opportunity to put the boot into traditional phone companies that still charge for line rental and calls on top of that. "Traditional telephone companies have invested in networks for 125 years. They have a lot of capital invested and they are also paying hundreds of pounds to acquire each customer (Skype does not advertise). They are using outdated technology to make calls."

Skype's service neatly piggybacks on the copper wire and cable networks already paid for and installed in the ground by BT and others, while revealing that if you have an internet connection you do not necessarily have to pay for calls carried on those networks.

Mr Zennström can offer at least one crumb of comfort to the telcos. "They can still make money from selling internet access. They own the copper cables to the houses. They can take advantage of that: that's their competitive advantage. We're actually helping them to sell broadband because people are getting broadband to get Skype."

Sadly for Mr Zennström BT is already doing a Skype with something called BT Communicator, which is gradually being taken up by customers along with broadband internet connections. The technology and its use will become ubiquitous fairly rapidly, so Mr Zennström should probably sell out sooner rather than later.

The Skype's the limit

Age: 39

Pay Skype is a private company registered in Luxembourg so does not disclose pay. As a major shareholder of a companyworth about $3bn (£2bn), he stands to earn a substantial sum should it be sold.

Education Studied engineering and business at the University of Uppsala in Sweden. Attended University of Michigan in his final year.

Career Joined Tele2 in 1991. Founded Kazaa website, but sold it in 2002 without making money. He faces a lawsuit in the US over illegal file-sharing. Set up Skype in 2003.

Family & Interests Married with no children. Enjoys sailing.