How I Built This with Guy Raz - Skype and Kazaa: Niklas Zennström

Episode Date: March 17, 2025

In the early 2000s, one of the most popular pieces of software in the world was a free peer-to-peer file-sharing network called Kazaa. It was launched by two Scandinavian entrepreneurs, Niklas Zennström and Janus Friis, with the simple idea that internet users should be able to share anything with anyone in the world. After being knee-capped by lawsuits from the music industry, Niklas and Janus applied peer-to-peer technology to a new business: Skype, a service that allowed anyone with an internet connection and a microphone to talk to anyone else in the world… for free. At its peak,  Skype connected hundreds of millions of global users, and in 2011, it was purchased by Microsoft for $8.5 billion. This episode was produced by Chris Maccini with music by Ramtin Arablouei. Edited by Neva Grant, with research from Kathryn Sypher. Our engineers were Jimmy Keeley and Patrick Murray.You can follow HIBT on X & Instagram, and email us at [e-mail]. Sign up for Guy’s free newsletter at guyraz.com.See Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.

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Then someone else steps in the front of me. And then there's a motorcycle coming. So there's all these people from all different direction. And of course, a slip. And you get this thick pile of papers with a lawsuit. This is like a movie. Yeah. That was the moment that we wanted to avoid.

But we knew it would kind of happen at some point. Welcome to How I Built This, a show about innovators, entrepreneurs, idealists, and the stories behind the movements they built. I'm Guy Raz, and on the show today, how a small team of Scandinavian entrepreneurs disrupted two global industries and built two iconic brands, Kazaa and Skype. The 1990s were a really different time. In those years, before Spotify and Amazon and Apple Music, if you wanted to be a very different time, the 90s' time, if you wanted to be a really different time, they were a really different time, if you want to see, to listen to a specific song, you had to buy the whole CD at a record store. And if you lived in one country and wanted to talk to someone in another country, it was going to cost you a lot of money like a dollar or more per minute. But both of those frustrations disappeared practically

overnight in the early 2000s. Music became widely accessible and shareable, and audio calls from one country to another became free. Now, at first, it might seem like music and international phone calls have nothing to do with each other. But the new startups that were disrupting both the music and the telecom industries were all powered by the same provocative idea. Peer-to-peer networking. Basically, you remove the middleman, be it big telecom or the music industry, and you let users find each other on the internet. And this was a totally revolutionary concept. Two friends, one Swedish, the other Danish, helped pioneer the technology that enabled much of this upheaval.

Their names are Nicholas Zendstrom and Janice Fries. The first platform they built was called Kazaa, and when it was released in the early 2000s, it made it easy for anyone to share a media file with anyone else on the internet. Kazah was really cool and it was loved by many people, but it was soon crushed under the weight of several lawsuits. by the recording industry. To them, what Kazah was allowing was basically online piracy.

So Nicholas and Janice decided to try something else to take the idea of peer-to-peer networking and apply it to telephone calls. In 2003, they launched Skype. Overnight, anyone with an internet connection and a cheap microphone could call anyone else with those things and talk for free as long as they wanted. Skype was eventually sold to even,

and then in 2011 sold again this time to Microsoft for $8.5 billion. Since then, Skype has become less of a force. In fact, just recently, Microsoft announced plans to retire it. But regardless, in their respective moments, both Skype and Kazah rattled powerful industries and helped upend the top-down hierarchy of the early Internet. Nicholas Zendstrom was and still is a serial entrepreneur who grew up in Uppsala, Sweden. It's a university town where both as parents were teachers. The family would spend their summers sailing around the islands in their small boat in the Baltic Sea.

We spent most of the summers sailing in our little boat with my parents, my sister, and the dog. And I spent a lot of hours just making drawings of sailing. So sailing as a kid, I know, was like a real passion and you had this sort of idea of maybe one day being a naval architect, which is a very specific kind of job. You were in the Navy. I mean, there was a time when Sweden, I don't think it still has it, but had compulsory military service. So you served, what, for like a year or half a year in the Navy? Yeah, like one and a half year. And it was compulsory service.

This was also, again, this was in the 80s where, you know, we. We still had the end of the Cold War. And Russian submarines was routinely doing their exercise in Swedish territorial water. So it was actually quite exciting to be in the Navy then. It's like we tried to find Russian submarines, but we were not successful. But I was quite happy afterwards not to continue. I was really keen to start studying. So I kind of moved on.

Got it. And I guess for college, you went to Uppsala, University in Sweden. which is where your parents taught. And instead of pursuing naval architecture, you would wind up studying engineering. Yes. And I guess when you graduate, you got a job with like a big Swedish conglomerate.

And I guess they were trying to start like a new service, like a new telecom service called Tele2. Yeah. So the main business was, you know, fixed telephony. Right. Just a phone line in your house. Yeah. But the other side business that they have.

was data networks, commercial internet's offering. And it was exciting because it kind of coincided with Mosaic browser come out. And where the company offered dial-up internet to consumers. And that really, really took off. And it coincided with a campaign or initiative that actually the Swedish government was doing where if you bought a computer for home through your company, it was tax deductible. So you had this boom of two things happening at the same time in Sweden during the 90s was people bought this home PC because it was subsidized. And you got your dial-up internet.

Right. And by the way, this isn't just an interesting aside, which is a lot of times very, you know, seemingly innocuous decisions by governments. Like, hey, we'll give you a discount on computers, or we'll give you a tax-free computers if you buy them, you know, to encourage people to use computers. And we'll throw in the internet. those decisions oftentimes, like, they are huge opportunities for people to launch businesses because it, you know, there's these incentives and then people, you know, whether it's like today, it might, you know, buying an electric car or, you know, there's all these incentives around manufacturing, at least in the U.S.

And it's interesting to think about what was happening in Sweden at the time. Yeah. I think it was, I really think that was part of the reason why you look at, where Sweden is punching above its weights in terms of kind of unicorn companies. Part of that is because a lot of those founders, if you look at Doni Leic, of course, Spotify or Sebastian Schemkowski, there were kids when this was happening. So they benefited of having those computers at home with the Internet dial-ups, right? So for sure it was a good thing.

It's really, really interesting because you're right. Sweden is a tiny country that has punched up above its way. Okay, so you are at Telethu. And meantime, I mean, I know you're paying attention to this whole dot-com boom that's happening in California. And when do you remember thinking to yourself, man, this is, I got to figure out how to get into this thing because you're a, you're a, you're a, you know, sort of a middle manager, a Teletoo, right? I mean, you are in this big corporation. But meantime, you must be noticing something happening, particularly in California. Yeah.

Absolutely. And you know what was interesting because it was so exciting to try out all the new, you know, the first, you know, really internet services like Yahoo and Alta Vista was a big. Yeah. Lycos. Lycos, exactly. And all those kind of things was so exciting. And at the same time, actually, there was a dot-com boom also in Europe, in particular in Sweden.

There were quite a few online companies that were set up at the same time. And at some point, I realized I'm missing the gold rush. This is an opportunity of the lifetime. Why am I an employee? Of course, yes, I had stock options and I had a nice career. I was like getting, you know, increased salary. It's like this, you know, was going to good career path. You're in your early 30s.

Yes, exactly. Yeah. And it's like I'm almost getting too old. And it's happening right now. So at some point, you know, it was time to decide to jump ship. Something very fortuitous in your life happens around this time. I guess this is sort of in the mid to late 90s. You're sort of the head of a division at Telethu. And I guess you hired this young guy named Janus Fries to run customer support. And he's like 21 at the time. And I guess what pretty soon you noticed that he was maybe more talented than. than just being like a customer support agent? Yeah.

And it realized pretty quickly that this guy is an outlier and is brilliant. What did you notice about him? Because he was like 21 or 22, right? Yeah. Yeah. No, first, like, he had, you know, jumped, you know, school after ninth grade or something because he was bored. He was a genius. Yeah.

So then he learned everything by himself. But he was also very quick to understand what was happening online. and this was just really, really good to learn from. So, yeah, he was definitely not your typical corporate person. When did you start to think, hey, maybe this guy, Janus, Yannis, sorry, I'm not pronouncing his nightmare. I mean, I get a lot of hate mail from Sweden, that maybe he was the guy that you could, like, start something with.

Like, did you start to talk to him? Would the two of you have conversations and say, you know, we really should just come up with something on our own and leave this this corporate job. Yeah, I think that was certainly, that's what happened. You know, we had a lot of conversations. And for me, I was kind of much more into my career, and I think he was much freer. And I think it's easier to leave something that is like not a secure thing, but to become an

entrepreneur if you do it together with someone else. So, you know, I don't know if I would be by myself, would I have done this? Let me, let me understand. So you were, you were about 10 years older than Janus. He's in his early 20s, you're in your early 30s. You were married, I think, at that point already. Yeah. And did you have children?

No, no children. No children yet. Okay. But, you know, you've had a pretty significant leadership position now by this point at Teletu. And just to be clear, he convinced you that the both of you should resign and step down and build something together without having a specific idea of what that would be. Yeah, yeah, that's perfectly accurate. Like, I definitely needed someone to nudge me in that direction for sure. I'm just curious, Nicholas, because I think of you as a risk taker, and we're going to talk about your career,

but here it sounds like you were risk, more of a risk-averse person at the time. And I'm wondering what your father, for example, thought of this, because he had this stable job as an art professor and Sweden, the culture you grew up in, probably encouraged people to get a job and then eventually, you know, stay there for 40 years, get a pension, have a nice life, get your six weeks of vacation every year. You were essentially throwing that all away. I mean, did anybody your dad or your mom or anybody say, this is not a good idea? Yeah, to be honest, I did not consult my parents.

I informed them. I think they always believed in me and trusted my decisions. but I think it was an interesting conversation I had with my wife because we had just moved to Amsterdam. We were there for a year, a nice place to live. And I said, hey, I told her, you know what? I really think I'm going to quit my job and start a company. And she was the one then who actually told me,

I think you should do it. Because I don't want, when we're older, I don't want you to tell me I wish that I tried to become an entrepreneur. So she was probably more like, go out and do it, get it out of your system, and then you figure it out. But we also had such an great opportunity because she had a good job. We realized we could support ourselves on her salary. Yeah. Even if I wouldn't make any money as an entrepreneur.

And all right. So you guys, I think from what I read, this is around Christmas, 99, early 2000. You and Janus resign from Telethu. Yeah. He moves into your apartment in in Amsterdam. It's crazy. Like it's you and your wife and like this this like 22 year old, 23 year old guy is moving in. And you start to brainstorm ideas.

Yeah, exactly. So yeah, he moved into our guest room. We took our kitchen table, became the office table. So the living room became the office. And it was awesome. What were you guys doing at the kitchen? table. Like, were you just talking? Were you writing? Did you have like a whiteboard with a bunch of ideas? Like, what? Tell me what you were doing. Gee, it was a long time ago. So what we,

the first, first we kind of thought of, like, we're going to have so many ideas. So we're just going to do like a studio. And we call that fast track. And we're going to come up with a lot of different businesses. And the first thing that we wanted to launch was more of like a consumer. comparison site, not on the price comparison, but also reviews

for e-commerce. Consumer products like today you would go to wire cutter or something. Yeah, something like that. And this is like we,

I mean, this is sort of pre-social media, but there were, I mean, it was the kind of beginnings of this peer-to-peer

reviewing, you know, user sort of generated content very early days. But I wonder, there's also something else

that was going on because I remember this. I did a story, story on this in the year 2000. And you can, by the way, anybody listening can just go back, type my name in Napster. And you'll find this back when I used to work for NPR as a radio reporter. I did a story on Napster. And Napster was taking the world by storm in 2000, in 99, 2000. And you must have been noticing this. I mean, all of a sudden, overnight students started to

show up to university with a computer and a hard drive, not their CDs anymore. because they could store everything in their computer and shirt. What did you, what did you guys, were you guys on an Abster? Yeah, so the kind of 1.0 version of the web was very much still company to consumers. Even like something like Yahoo, there was not a community. It's like, and it's the interesting thing with the internet when the end users can be connected. And that's something that we felt that was the right thing to do because it's like it was kind of bypassing the corporations. and empowering the end users.

That was what we thought was a beautiful thing with Internet and it was yet to be happening. When we saw Napster, of course, was a huge aha moment for a few reasons, right? One was a technical reason, like that actually was it worked, that you can actually connect and use your own computer as an uploading server.

That was fascinating, on a technical level. But more than a social level, what was fascinating is that this was again, it was users communicating directly with each other and sharing their content. Which was music, obviously. People were uploading music

and then all of a sudden you could get well, free music which turned out to be a problem. But you could just, people could upload their music collection, you could download it and not have to buy it. Yeah, completely. We thought this is amazing, but we thought

why stop there? You can do so much more. And this is what the internet should be. It should be peer to peer. And we thought it's a huge opportunity to take this to the next level to build basically a peer-to-peer network for anyone to search for any type of rich media content, whether that is digital photos, digital videos, shareware, whatever, PDFs. Because Napster was limited to music and you thought, well, why don't we come up with a peer,

Maybe there should be a peer-to-peer system where you could share everything. Exactly. All right. So this is really the moment, right? This is around the, I think, spring of 2000s, so five or six months after you guys leave your jobs. This is the thing you decide, let's focus on this. And you're going to call it Kaza. Yes, exactly.

And to build it, I guess you contracted with some programmers in Estonia, who you'd worked with earlier on a project when you were at Telatou. And just as an aside, I mean, this is just a few years after the fall of the Soviet Union. And Estonia kind of became this like mini powerhouse of engineers and programmers who were, I guess, relatively cheap to hire, right? Yeah, they were cheaper, but the reality was like they were excellent. And the core three key people, they had a company called Blue Moon, and they were just brilliant. So Blue Moon are the people that Janice and I call when we were. We wanted to develop Kazam. How did you even have any money to pay them?

I mean, you were not independently wealthy at the time. No, so we tried to raise money. It was very hard. We failed. Hard to do from Amsterdam in 2000. Yes. And there were two things that worked against us. One was something called the dot-com crash.

Yes, everybody was freaked out. Exactly. So it got worse and worse. No one really want to invest anymore. And the other thing is that we were doing something that was similar to Napster. Yeah. And as you remember, and you mentioned, that Napster had a lot, started to get a lot of legal problems with the record industry.

Right. Who would want to be involved in your idea? Exactly. When Napster was getting hammered with lawsuits, which eventually would destroy it. Completely. So those were things that worked against us, right? So, so, but of course, we were optimistic. We're almost there.

We're going to, we're going to. raised money. And so we, I think, well, the reality was that I used my savings. I had an apartment that had sold. So I think they used some of that to fund us. Some good friends of mine were kind of gave us some angel money. But it was hard to get money. And then I ended up doing a little bit of consulting work also on the side just to kind of pay the bills.

Yeah. How much money do you do all together, like more than $50,000? $100,000? Yeah, probably something like that, that range. But it was really tight. Money was tight. And that was always the thing that was a challenge. And that was the thing that caused stress a lot, like how we're going to pay the bill.

Yeah. We also hired like two people in Amsterdam. So they came to the interview to my apartment. And then when they started to work, they were a little bit kind of uncomfortable. It's like around six, seven, it's like because we were like basing in our kitchen and like should we continue to work? Dinner time, your wife's home. Exactly. So that was an interesting time.

And by the way, you're building a product without any business model. Well, our business model was advertisement. So we put in ads. banners, you know, in Kasa, in the software. And that was something that was like controversial at the time, you know, because some of those things were also tracking users' behavior. And at the time, people did not like. Of course, now everything you do is being tracked all the time.

So now it was okay. But at the time, it was like controversial. And it was a bit of an issue because when people use like a peer-to-peer software and then There was advertisement there. There was something that people didn't really like so much. But we actually, because our costs were so low, we just, you know, when it started to grow with advertisement, just we could sustain ourselves actually. Yeah. You launched Kazaa in September of 2000.

And this is like, you know, back in the Wild West days of the Internet, when people would just put things out there. And they would generally spread among hardcore users, you know, the people were really full. following the Napster trends and things like that. And from what I understand, originally, I mean, like, I think you release it on a day in September, and on day one, it gets downloaded like 10,000 times, which is really great for a first day launch in 2000, right? But one of the things that I read was that right off the bat, on the page, you asked users not to use it for music. Yes. So, exactly.

So, again, things were quite fluid. because when we started, we thought, like, well, surely we're not going to exclude music because it's a general tool. But over the time, as we were developing this during the summer, Napster got into more and more trouble. They were getting sued by every single, everyone, every music label, RIA, yeah. Yeah, exactly. So RAA were suing Napster and they had to kind of put some restrictions. So we said, hey, there's an opportunity here because for us was so obvious that you're not going to put Gini back in a bottle. Music's going to be online and they just need to be the right solution.

And we said that we actually could have that solution. So we went to the local kind of music rights. Yeah, the rights holders. The rights holders of organizations say, hey, there's an opportunity here. actually we can provide solution to what Napster is doing where you can actually provide your content

online on our platform and then you can actually have different business model you can have paper play you can have subscription or advertisement. So you thought you would be sort of a legit version of Napster. Yeah. So what we did was like when we launched we put

up this notice on the homepage it's like we're working on a solution with the rights holder record company and stay tuned. So please don't use this for music. And I guess you guys got a lawyer who helped arrange meetings with representatives from the RIAA and the Motion Picture Association of America in the U.S. You guys would fly to the U.S. You'd meet with all these lawyers and kind of make your case. So you flew out to what, New York or Los Angeles? Los Angeles. Okay, so tell me about this trip. I think this is in 2001.

And by this point, by the way, Kazah is exploded, right? Exploding, exactly, exactly. Millions of people are using it. And at this point, mainly using it to do what? To download illegal music? Music, yes. So as Napster got more and more crimpled because of the restrictions,

eventually kind of pretty much closed down, those users were looking for alternatives. And it happened to be because I was the best alternative. So we got more and more users basically got all the Napster users and then more, I guess, which was great because, of course, if you're providing a consumer service, who doesn't love users, right?

So that's great. But we also realize it's like they didn't really do what we asked them to do. Yeah. They were sharing music. All right. So let's get back to your trip. You come out in June of 2001. The background is, Kazara is the biggest, it's basically taken over for where Napster left off.

Yeah. You guys are coming to the U.S. thinking, okay, we're going to meet with these industry folks and make our case and see if we can collaborate. Exactly. And they were like interested to come up with solutions because I think they understood that the Internet is not going to go away. That you need to work on solutions. Yeah. But the follow-up from them also was then from the, you know, cease and desist letters, right, basically from the lawyers. You were getting cease and desist letters from lawyers at this point.

Yes. So, you know, you had a business meeting really, really, you know, nice. And then, you know, a bit later you're getting kind of a cease and desist letter from the legal department of the same, you know, organization or from RIAAA, so that, you know, the record industry association of America. And meanwhile, while you're in L.A., somehow you get a hold of a document from the RIAAA, essentially. like letting you know that a lawsuit is coming. Yes. Someone mailed us, I think it was. Somehow we got this email with an internal memo from RIAA,

outlying that I think the title was, you know, public enemy number one. So we didn't, like, of course, we speak to our lawyers who then advised us, yeah, they're very likely going to try to serve you in the meeting. Oh, they were going to use the meeting to serve you the papers. Yeah, that's what we thought. do, right? Or the lawyer thought it's like, is impossible. For us, this was interesting because we were like, wow, this is like Grisham book kind of. Yeah. Not as dangerous, but the thrill was there,

for sure. So we didn't show up ourselves in a meeting. So our lawyer, he says, I can produce you my client, but, you know, we need to sign something first that you are not going to be serving them. But we were around, and we were like, you know, basically driving around or sitting around, you know, next door trying to not be visible. So we kept a really low profile. Yeah. So for us was all about not being served while we were there. So you were just kind of evading them and trying to presumably get out, go back to Europe.

Exactly. So we, it's like, so then let's not use credit cards. Let's use pay cash. So what we did was like first like paid cash hotels and then what hotels in Los Angeles take cash. They're not the nicest hotels. Put it that way. But that was fine.

We did a few nights. And then we went to LAX and we bought tickets like as late as possible for takeoff, right? So there was no chance that they would have a chance to pick it up. So yeah. So we were happy to get out of US. And that was like the last time I was in the US until 2007. six, I think. Wow.

All right. So you guys basically head back, and now you are finding yourself in a position that Napster had found itself. And you are just saddled with lawsuits. They eventually also are going to file suits against you in Europe. And meantime, you've getting millions of downloads per week. It becomes like one of the world's most popular pieces of software. but from what I understand, you had no revenue. You'd no money.

I mean, very, some advertising, but really, you had no money coming in. I mean, weren't you scared about being saddled with multi-million dollar lawsuits when you had no real money coming in? It was extremely stressful. But what we realized were a few things, right? One was like, well, I don't have a lot of assets, right? The only thing we had was our company. And your company was worth nothing at that point.

point, right? Exactly. So we realized like we got nothing to lose. That's a pretty interesting thing when you're, you know, when you're like in a battle with someone, that's kind of liberating when you realize that. And the other thing was like we realized that these guys are big, but they're also really slow.

One thing that I learned from the company I worked with in my first job, one of the kind of the phrases was used internally was that it's not the big, the big, beats the small, it's the fast that beats the slow. That's kind of what I took on. It's like, we're just going to be faster than them, and we have nothing to lose.

They have a lot to lose. We have nothing to lose. When we come back in just a moment, Nicholas and Janice have so little to lose that they decided to start a whole other company, one that will grow much, much bigger than Kazaa. Stay with us. I'm Guy Raz, and you're listening to how I built this. Hey, welcome back to How I Built This. I'm Guy Raz. So it's 2002, and the recording industry is suing Kazah for enabling internet piracy.

And Nicholas and his partners decide that fighting those lawsuits is fruitless. The record companies are needed to make an example of us. But at some point, we realized, like, you know, we don't want to become martyrs. And we don't want to kind of prove a point useful to proving a point. And we realized that we have such conviction in peer-to-peer. So at some point we decided, you know what, let's just move to the next chapter with peer-to-peer. Let's sell this thing. That's exactly.

So this is, I think, in January of 2002, you do sell it. It's acquired by a company called Sharman Network's undisclosed price, but it was not a lot of money. Not get a lot of money out of this. No, no, no, no, nothing really. I mean, you know, less than a million. But we did retain the technology. Right. So basically you sell Kazaa, but the technology, the peer-to-peer technology, which is called Fast Track, right?

Yes, exactly. You keep that as your own property. Yes. But it's amazing. I mean, it's just, you know, you had at one point, I think the third most popular piece of downloaded software in the world. And it sells for less than a million dollars. Yeah. It was a, and now the idea I'm imagining also the idea behind selling it was you thought, well, maybe these lawsuits will go away.

Yeah. So this, of course, become a problem, you know, because of the other side, RAA, MPA. They said, well, these guys now are trying to do a maneuver to get away from this. Yeah. Essentially, it did not get you out of the lawsuit. It didn't matter that you sold it. You were still being sued left and right, and we'll come back to that because that, that, that, that, that features later, but you guys sell this thing, right, for very little.

Yeah. But it seems like you already, you and Janus, I keep saying Janus and Janus, and I'm sorry, Janus, if you're listening. I think it either works, yeah. But you guys already are saying, okay, we did this, we still have this peer-to-peer technology. Let's think about the next thing that we want to build. Yeah. I mean, I guess at this point, you were in, you're still in Amsterdam. I think at that point I'm actually moved to Stockholm.

Janos back in Copenhagen, where it was from, and our developers were in Estonia, and we had one person in Amsterdam. Okay. So you were distributed, and I guess you're calling each other all the time because you've got to communicate over the phone. And that sparks an idea. Tell me about. about how it sparks an idea. Yeah. So you have to remember fully distributed, really cash poor, saving money was an important thing

because we were calling each other. And back when I was at Teletu, one project that we were doing back in, I guess, 99, was trialing voice over IP. VOIP, voice over internet protocol. I remember there were all these phone companies that were starting in the early 2000s. a VOIP, and it sucked. It's really, really sucked. So the conclusion back in, like in 99 was, it's not that great. But then I thought like now we're in 2002, surely things moved on.

And the other thing was happening now was also the other kind of enabling technology trend was broadband. You know, we started to have broadband at home through your cable TV or whatever. So surely we can use voice. of IP, you know, so I asked one of our engineers, hey, why don't we set up voice of IP so we can use that between ourselves? So you asked one of your engineers, hey, can you set this up so you don't have to pay telephone bills? Completely.

And it turned out that it was really complicated. So if you were, like, skilled engineer, you could do it, right? But then the other result, when we started using it, that pretty crappy voice quality. So it wasn't very successful. But the other thing we did was traveling. The great thing in Europe is that it's easy to travel between different countries. So you take your mobile phone, travel to another country and still use it, which was amazing. The problem is that the roaming fee was very, very expensive.

So the mobile operators really took advantage of roaming because essentially to cost to produce a phone call, whether you're roaming or not, is kind of the same. Right. But there was an opportunity for the phone companies to charge, like, extra money. And that was something that was, like, thinking about as an issue. And then we had another kind of mega trend that was happening was Wi-Fi. Yeah. Right.

You started to have Wi-Fi everywhere. And then you also started to have this PDA, personal digital assistance. You know, remember the compact iPa. Palm pilots. Palm pilot, exactly. And this was actually, ironically, Microsoft was ahead of the curve. They had Windows, you know, Pocket PC. So at some point, we started to figure out,

hey, there's an opportunity here to build, you know, you take your Pocket PC, the killer app for this would be voice, so that you could use, you access this Wi-Fi, global Wi-Fi signal everywhere, and then you connect and make voice calls over the Internet and provide, you know, free Internet telephone. Just be clear, the idea was, hey, let's piggyback on these existing personal devices people are carrying, and particularly

this Microsoft one, where it already is kind of like, it's a handheld device. It just doesn't have phone, but we can basically create an application where users could use it as a free telephone. Completely. What I'm curious about, I mean, this is now 2002, you're digging into a very complex question because it's not yet what it would become, which of course was Skype, was not used. yet it wasn't fully formed how it would be used. Like initially you're thinking it's going to be on these PDAs, personal devices, and so on. And that's not what happened, as we know.

But just as an aside, I mean, by, I know around September of that year of 2002, you got a little bit of seed funding. $250,000. Sounds like a lot, but it's, for what you were going to do is nothing, almost nothing. And I, from what I've read, it was quite hard for you to find anybody. willing to finance this. Yes. So we thought like we had this amazing business

what we're called Skyper because it was peer to peer in the sky right on the Wi-Fi. Peer to peer in the sky. Sky per peer to peer to sky. That was it and and but it needed all these different stages and we got Bill Draper to invest.

Bill Draper kind of a legendary investor. Yeah so Bill Draper is like you know he's one of the, I guess, first generation of Silicon Valley venture capitalists. Yeah. And he had someone working for him, Howard Harttenbaum, out of Luxembourg, to basically do like early stage investments. And Howard was like looking around and he got hold of me.

And I was very suspicious because, so you have to remember, this was still, we were trying to avoid being served. So we were like hyper Oh like this is lawyers again Playing dirty tricks So like still try to pin you down for the Cazosos Yeah so it's like this is like

Maybe this is a way to try to serve us Through this potential investor So we were like extremely normally If you're an entrepreneur Looking for money you would be like Yes please jumping at it Yeah you would like sit up the meeting with the VC Who wants to have a meeting with you

But I was We were extremely difficult to get hold of for that reason. But it turned out to be completely legit. And Bill Draper, he said, I know nothing about the technology. I know that the telecom industry is huge, and they're dinosaurs.

I also know that you guys had success with Casa. You created something that would become really big. You did not make money from it, so you must be extremely hungry for success. Yeah. All right, so you've got a little bit of cash to start building this thing. Yeah. And this is going to take longer than building the technology for Kazaa.

It's more – it's interesting because Kazan sounds very complicated. I mean, sharing files. But actually, it turns out that trying to transfer voice in real time over the Internet is quite challenging. This is not an easy thing to do. And just at a curiosity, I mean, was 250,000? $1,000 enough money to develop this thing? No, but I think we raised a bit more. But it was still in the hundreds of thousands, I think.

But during the time, again, this was created so much stress for me when I could not pay our developers. I saw that development actually came to a halt at a certain point. In the summer of 2003, it just stopped because you couldn't pay the Estonian developers. How did you, I mean, as you sort of start to run out of money in the summer of 2003, what did you do? Are you just dialing anybody you could to see if you could get money? Yeah, so we went around in Europe. We went to kind of all the VCs, and we tried to raise money and were unsuccessful. And we thought that these VCs there, they don't get it.

And the model for European VCs at the time was to invest in a copacat of a US internet company and used the language barrier as a moat. So you kind of was really smart to invest in, say, a German coppercat of eBay because eBay would probably buy them or a Nordic version of Amazon. That was the model pretty much. And we had this plan, we're going to change global telephony using peer-to-peer technology, which no one else had done. But of course, the other thing that made them also not wanting to invest, that we had this pending litigations of billions of dollars. So you can understand that a VC would not want to invest. Every month was about scraping money. But it also made us super lean, right?

We did not grow up. Grot organizations. We realized we could get things done with very few people. So, okay. So it took basically a little more than a year and a half of developing the technology. And it launches, you release a beta version on August 29th, 2003. By this point, when you release a beta version, the original idea was let's put this on like these personal devices, these like Palm Pilot type devices.

But by the time you released it, that was out the window. Yeah, well, so what we realized was that, okay, that vision was great, but how do we get there? It's just not going to happen from day once. We needed to do things in different stages. The first stage was to develop Skype for PC. They'd have to plug in a microphone. They'd have to buy a microphone. And this was the thing that was the big unknown for us, because most computers did not have.

a microphone, why would you? Yeah. So when we launched, this was always the challenge. Would people really be able to use it, even if they wanted to? Maybe they download the software. It cannot make a call. And another thing we didn't know, will people really want to sit in front of the computer to have a phone call?

Because otherwise, you know, people probably had a cordless telephone for the fixed telephony or they had a mobile phone. Now they have to be in front of the computer. You didn't have video right when we started, but you're sitting in front of your computer to make a phone call. It turned out that people had absolutely no problem to do that, and people had absolutely no problem to figure out a way to connect a microphone. And why was that? Because the desire for people to connect with the loved ones, with the friends, relatives, or for business across the world for free, was a pretty big desire. So people had no problem to sit in front

the computer and to make those calls. And what made this so kind of perfect in a lot of ways was the built-in virality, right? Which is like you had to download Skype and then if you wanted to talk to your friend around the world, they also had to

download it. Once both of you downloaded it for free, you could just talk. 100%. That built-in virality was like a really fundamental growth driver because you probably have like five to 10 people that you speak to regularly, whether, you know, friends or family.

And that's really how it spread. And just to kind of clarify, I mean, this was free. I mean, this is the second business you create where the product is, you have to pay for it, which is great in terms of getting a lot of users, but could also create a long-term problem, which is you don't have any money coming in. Yeah, so, you know, one thing we figure out, we're not the only one, figure that one out. If you want to have like a viral consumer online servers, you should take away all frictions for people to use it, right? Make it free.

Yeah. Now, to your point, where do you have your revenue? Because having very low cost and you can have very small overhead because we're a small, scrappy, bootstrapped organization. We did not need to make a lot of money to cover overhead. but the business model was always going to be the paid service. A premium offer eventually. Exactly. And that we thought, we launched that later on, but first we need to get a free service out.

But we were pretty confident that we would be able to have a premium service because there will be a lot of phone calls that you want to make that are not on Skype. So the idea that we had that we launched was Skype out, meaning that you call. from Skype to a public telephone number. That was not a Skype number. Exactly. So I could call you from Skype to any phone number in the world. But the pitch to consumer was that you make a global long-distance phone call

or international phone call, but you're paying a local rate. So, you know, think about that. If you say that you're like in San Francisco and you have relatives in Australia. Yep. That's a pretty expensive phone call. But for your Australian relative to make a phone call to their neighbor in Sydney is a pretty cheap phone call because it's local rate. So what we did, we used the internet to transport this call from wherever from you in San Francisco and then have a local agreement with a local telecom operator in Australia to connect locally. So we could sell local phone calls globally.

Yeah. We thought it was pretty disruptive. offering in the world of telecommunication. All right. So you launch it in August of 2003, soft launch, really launches in like September of 2003. By April 2005, you've got 100 million downloads of this thing. So this is no joke. I mean, I remember. And I know a lot of people listening can remember using it. I mean, I lived, I was a foreign correspondent at the time. It was like a lifesaver because I could go in an internet cafe in, you know, the Balkans or in, in the Balkans or in the, the Middle East somewhere and use it.

My mom, who traveled around the world with a backpack at the time, that's how she communicated with people. So it was really an amazing product. But I still have to think that even then, even as you got 100 million downloads in April 2005, you're not a profitable business. We raised money. So this time, no one wanted to invest. when we launched in September 2003

and it really takes off virally immediately, right? And then now we've got phone calls. Now we get emails. Now people are saying, oh, okay, yeah. Now we want to talk, yeah. So you get several US VCs contacting us, flying over, offering us nice dinners. So we managed to raise money.

I think almost $20 million in March of 2004. Yeah, that's the B round. So we did an A round of like, I think, I don't know, it was like $3 million or something. Then we did the B round already like six months later. So you didn't have to worry about profitability essentially. But what was interesting, though, is that we launched the paid service, I think, I don't know, 15th of May or something in 2004. And the beautiful thing with this was that it was prepaid. So you, when buying those Skype out credits, you uploaded $10, $20, whatever you wanted,

and you had your credits that you could use to make calls. So it's like a traveler's check or a gift card. Essentially, people are prepaying for something that they're not going to use right away. No, exactly. And a lot of people picked up on this, I think kind of 5, 6% or something of users. It was actually very, very popular. So we started to collect a lot of cash. So we didn't really have to touch that the 20 million that we raised in a series B.

We didn't really have to touch it that much, actually. All right. So you have, you've got this thing is growing. There's a lot of excitement around it. Meantime, you do get served with papers from this previous lawsuit, the Kazaa lawsuit. Like somebody finds you. I guess you were in London. Yeah.

And, like, you step outside and there's, like, a bunch of, like, servers waiting to serve you papers. Yeah. So that was, so we moved to London because we thought launching a global online company, internet company from Europe, London is the best place. So we move there. And I was walking out with my wife, I think it was a Monday in the morning, you know, stepping out the door, you know, talking to each other as you usually do. And then someone comes up and calls my name. And I kind of like figure out, you know, in a split second, okay, this is the moment.

So I start running because I didn't want to be served. And I started running. I wasn't very fit at a time because I was like an entrepreneur trying, you know, working very hard and not exercising. Eating pizza. Yeah, exactly. And definitely not going to the gym. And but then someone else steps in the front of me. And then there's a motorcycle coming.

So there's all these people from all different. Wow. You're just like a movie. Yes. So I tried to kind of, you know, I try to change direction and, of course, a slip. And then, of course, you're being served as you see in the movies. Like, you know, slapping the papers on you. And you get this, you know, thick pile of papers with a lawsuit.

And my wife was really angry with them. It's like trying to defend me. and but then it's done. It's happened very quickly. But that's one of those moments. It's like you get a lot of adrenaline and then it's like, you know, you're scared. It's like what's happening.

Because that was the moment that we wanted to avoid but we knew it would kind of happen at some point. When we come back in just a moment, Nicholas is pursued not just by lawyers but by executives from some of the biggest tech companies in the world who are looking to acquire Skype. Stay with us. I'm Guy Raz, and you're listening to How I Built This. Hey, welcome back to How I Built This. I'm Guy Raz.

So it's 2005, and depending on the moment you ask, Nicholas is having either a very good or a very bad year. On the one hand, he's still facing onerous lawsuits from his time at Kazah. But at the same time, Skype is exploding in popularity, and giant tech companies are starting to take notice. I mean, you knew that the big tech companies. Yahoo, AOL, Microsoft, Google, they were looking at what you were doing, and they could easily build something to replicate it and potentially crush you. Were you getting nervous at all? Yeah, so we, you know, if you remember back in the time, Yahoo! Messenger, which was awesome. A lot of people used it. You had AOL with AOL instant messenger, and you had Microsoft with Microsoft MSN Messenger. All text messaging. All text messaging.

Yeah. But they had like pretty much everyone online in the Western world at the time. So we were always nervous like, when are they going to wake up and compete? Because if they're going to crush us or not. And then we got this message that Yahoo is building something. Okay, so let's talk with them. And we kind of say, okay, what are you doing? Maybe we can do something together?

Yeah. And then we find out that it's not only a Yahoo. It's also AOL and Microsoft and even Google are kind of looking at building their versions of Skype. So we say, okay, that's not great. So we speak to all of those companies and ask them, hey, why don't we do a partnership? We provide a version of Skype that is integrated into their messenger. Oh, so you're a white label. We'll do like a white label for you.

A white label, yes. Smart. Okay. And then we charge you for that, but also if you invest into our company, we have a stronger relationship. So we thought that could be good because then we can get like a big sibling to protect us from the others. We can get more distribution. We can get capital and we take out one potential competitor. But the interesting thing is that the answer from all of those companies,

was, no, we're not interested in that. We were already building it, but we would be very interesting to have a conversation about a much closer relationship, i.e. to acquire us. Buying you. Yes. Now, we started this company not to be acquired

because with Kazar, we had to get out of it. So this time, we're building something that's going to last. And there should be a company online that is like dominating. online telephony or communication or real-time communication. And that's something that we wanted to do. So you've basically all of these suitors coming in. I mean, what an amazing position to be in, right?

Because the more people who want to talk to you, the higher the price goes. And then in addition to AOL and Microsoft and Google, you get contacted by eBay as well. So, I mean, a lot of heavy hitters interested in you at this point. 100%. So we use this competitive situation to try to negotiate and see who's going to be willing to pay more. At the same time, we were not committed to selling because we said, well, we're not really for sale because we're raising money. We want to be independent.

But, you know, and there's a few others who are interested. We decided to run a process, but we also run a process to raise gross capital to stay independent. So, you know, it's going to have to be a really high premium. And through this process, you know, we ended up with eBay coming up with like a really attractive offer, 2.6 billion and a 500 million earn out. And just as an aside, I mean, eBay is thinking, okay, this could be a great way for people to use our platform. You know, they can communicate through. I mean, not a bad idea from eBay's perspective, but they're going to pay a lot. I mean, it was going to be up, I mean, with all the incentives.

They're paying over $3 billion for this thing that you just launched two years before. Yeah. It was unreal. You know, be clear, it was unreal. And you have to put this in the context of 2005, right? It's like there was a few years post.com crash. The largest internet MNA before us was PayPal to eBay, right? 1.5 billion.

Right. And so this was like 2X. It's amazing. And then you had... It's amazing. YouTube was also $1.6 billion or something like that. Also the same year with Google. So this was the largest...

Acquisition. Online acquisition post.com of an internet company globally. So, I mean, you would be foolish to reject that. And you didn't, of course. They bought it. And overnight, I mean, you had gone from just a few months earlier, you're freaking out about whether you can make payroll to now be a multi-millionaire. Yeah.

No, no, it was certainly life-changing event, not only for us, but also for a lot of our team, right, who had options. A bunch of these Estonian programmers had options. Yeah, totally. So there was a lot of people who benefited. But we wanted to continue to build. So we were happy to stay on. I stayed on as a CEO for a few years because we had all these ideas and the vision, how to scale it. Yeah.

Meantime, let's just go back to the lawsuits, there's this lawsuit that's still hanging over you. And I guess that year, so 2005 you were, you guys sold to eBay. You're working at eBay in 2006. And I think in 2006, you and the new owner of Kazaf, you agree to settle. with all of the various companies filing lawsuits against you, in part because now you had a bunch of money. I mean, you had to actually pay some money, right, to settle this lawsuit?

Yeah. So in parallel when we were negotiating with eBay, we worked with another set of lawyers trying to settle with suitors with MPA and RIAA before the transaction was announced because we knew, of course, that when the transaction is going to be announced, we can have to pay them something, right? And then, but we didn't manage to do that. It's like time was running out.

So we had to pay them to settle. But that wasn't the hard thing to do because, you know, to get that problem to walk away was pretty nice. All right. So that goes away, but you do have to put some money into it. One interesting thing, and I don't want to get into this too deeply just because there's so much you've done. But while you are at eBay running Skype,

You and Janice start two things. You start a venture capital firm Atomico together. And you also begin working on another business called Juiced, which is going to be, I guess the best parallel is to today. It was going to be like Hulu, what Hulu became, which was a video platform for, well, for watching content. Yeah, I think we had this vision that you could use, this peer to peer. so many different things. Right. And we built a team for that.

And again, I was like CEO for Skype. I was, you know, full time there. So we hired people, you know, management team, really, really good people, by the way, to run this. But I think that it's hard. Is you a founder and you start a company, but you don't have time to run it? You have other people running it.

I think it's just you don't have that connectivity. I think it's harder to be successful. You can be successful, but it's, harder. Yeah. That company, Juist, eventually, would not, it wouldn't work out. No. And it makes sense now because your whole, the whole concept begins with this peer-to-peer platform. It makes sense that you're going to try and come up with all these different ways to use it, right? You start with Kazaa, then you go to Skype, then you go to Juist. Now, in 2008, concurrently, when Juist was being built, you and Janice create a company called RDI.D.

audio, Ardeo, which essentially is the first version of what Spotify would become. This was going to be a streaming music service. Tell me why, I mean, look, again, you've had massive success and you've had a huge impact on our culture globally. But why do you think Ardeo didn't work? Because it came out before Spotify started. Well, it's kind of the same time. And I thought, Arduo was really, really good. User experience. And we launched in the US like a year before Spotify. So we had that market. We could have taken it. Why did not take off? I don't really know exactly the answer.

But I think one reason was that I think we learned through both Casa and Skype that we didn't want to pay for user acquisition. And like that should just be viral. There was really little virality in it. So that was one of the issues. So I think Spotify, they paid for users. They were more aggressive about user acquisition and spending money on marketing. Exactly. Both that and brilliant in terms of building relationships with some of the big online companies like Facebook and others.

So Spotify created an amazing kind of aura around them because it wasn't available in the US. But first was only available in Sweden and become a very, very popular, you know, the void off the Casa and off the kind of Pirate Bay. And then, you know, people just waited for that to take off. You were out of by 2007 out of eBay and done with Skype, and that was it. You were finished. But remarkably, you would return to Skype. In 2009, eBay, apparently they, you know, they kind of wrote it down because they were

was not a successful product for them. Skype was not, and they decided to sell it. I guess they sold a majority share of it for about $2 billion to some investors. And you and Janice tried to buy it back when you heard that eBay wanted to sell it. And so I think I think you guys got a 14% stake in Skype. I guess essentially we're able to get equity in Skype that you had already sold. for essentially a fraction of the cost. Yeah.

And it was risky because you had to show that it was, I mean, eBay could not successfully make it work. But, I mean, you guys must have had confidence that you could help turn this around. Yeah, I mean, Skype was doing well, right? What had happened during the years at eBay, you know, the company got too big, as typically happens in really large corporations, they just hire a lot of people becoming too much. of a corporate culture. So we thought this company under private ownership and you refocus it has a huge potential. Yeah.

So that's what we kind of got back into it. And it's amazing. And I mean, I'm sort of, you know, fast forwarding here. But then it gets acquired by Microsoft in 2011, 18 months later. Yeah. So Microsoft came along and makes an offer that, you know, the investors took on. for $8.5 billion. For $8.5 billion.

So not only does eBay do great, but all the investors, I mean, 18 months later, have a massive return. Your 14% stake was probably comparable to the original sale that you had when it was $3 billion. Yeah, completely. It's amazing. So now you are out of the business. you know, you really, I think, after that period of time, were focused primarily on being a VC. But after the end of RDO, was there any talk of, okay, well, let's start another company, or at that point where both of you sort of thinking, okay, we can focus on being investors.

Yeah. So I think for me, there was a need for better investors in your business. Europe. Yeah. You know, back then, you're talking about 2002 to 2007, whatever, that time period, there was one place in the world that you had to be if you were serious about building a tech company, which is where you are. Yeah. San Francisco Silicon Valley.

That was the only place in the world, right? And what we did, we proved that it was possible to build a global tech leader from Europe. And we were not just like super-spers. We were not just like the exception that proved the rule. You know, we were just normal people. My conviction was there's no reason why there will not be other companies on the scale of Skype or even bigger coming out of Europe. So Atomico was built with a mission to disrupt the monopoly of Silicon Valley.

I'm curious just to get your thoughts on Skype today because Microsoft clearly is leaned into teams, which is its competitor to Zillac. And there was a lot of talk during the pandemic about how it was a moment for Skype and Zoom kind of overshadowed it. But what's your sense? I mean, do you feel like, do you care? I mean, does it have any emotional resonance with you or any thoughts about what they've done with this thing that you built? The first time, when we sold Skype, I was so emotionally attached to it, you know, to the extent that was part of buying it back, right? when Microsoft acquired it, I did not have that emotional attachment

because I moved on. Yeah. You know, they obviously paid a lot of money for it. And of course, they could have done, if you ask me, they could have done so much more with it. You know, they kind of, I think they missed an opportunity to make it really, really big. But I'm not so sad about it.

I mean, it's like we had a reunion, 20-year reunion since we launched, and it was just great to see people. and I'm so proud of what we achieved. One thing what we did was that we looked at, what is the Skype effect? And we looked at how many companies have been started from Skype alumni?

And it turned out there's been 900 companies started by Skype alumni, but also the second generation. So that effect is, like, that's just the direct effect. It's amazing. And the other effect that Skype have had on Europe is that it created this belief

among a lot of entrepreneurs that they can build the next Skype. Yeah. When you think about all of these things that happened, right, I mean, you left Teletu, you know, on the prompting of Janus. And, you could, you know, today you could have been almost 60 and you could have been close to retirement and you get your party at Teletu and you, you know, you're whatever, Swedish telecom. And, you know, you'd have your boat and you'd enjoy, you'd have a good life.

You probably have a very nice life. And that was one path you could have taken, but you took this path and obviously had a massive impact with the things that you helped to found and build. How much of that journey do you attribute to the work that the grind and how much do you think had to do with just luck and chance? You know, that's a very good question, right? The reality is that being at the right base at the right time is pretty critical. And, you know, the reality with starting companies is that there's very, very few companies that are successful. And, you know, the companies I've been part of starting, one became really successful but no money. One became a big home run.

And two others, you know, we burnt a lot of money. But that's still pretty good record. That track record is, like, amazing, right? It's like, it's not basketball when you have like a, you know, 40% field goal. it's more like soccer, right? It's like you have to take a lot of shots on goal and most of them you're going to miss, but you have to keep shooting,

and that's just kind of the statistics of being an entrepreneur. That's Nicholas Zendstrom, co-founder of Kazaa and Skype. By the way, shortly after I interviewed Nicholas, Microsoft announced that it would permanently retire Skype and shift its remaining users over to Microsoft Teams. Skype will really be. ring for the last time on May 5th, 2025.

Hey, thanks so much for listening to the show this week. Please make sure to click the follow button on your podcast app so you never miss a new episode of the show. And if you're interested in insights, ideas, and lessons from some of the world's greatest entrepreneurs, please sign up for my newsletter at gairoz.com or on Substack. This episode was produced by Chris Messini with music composed by Ramtinere Blui. It was edited by Neva Grant with research help from Catherine Seifer. Our engineers were Patrick Murray and Jimmy Keely. Our production staff also includes Alex Chung, J.C. Howard, Casey Herman, Imman, Ma'Ani, Sam Paulson, Carrie Thompson, John Isabella, and Elaine Coates.

I'm Guy Raz, and you've been listening to How I Built This.