Skype at 10: How an Estonian startup transformed itself (and the world)

Chapter 2: Welcome to Estonia, Silicon Valley with a moat

Say it’s a decade ago, and you’re an Estonian at a dinner party somewhere else in the world. Your fellow guests are unfamiliar with your homeland, and you’re struggling to ring a bell.

“Estonia. It’s a Baltic nation.”

Blank stares.

“It’s about halfway between Stockholm and St. Petersburg.”

Maybe some polite “Mm-hmms.”

This was the reality for Estonians at one point, but nowadays things are definitely different, says Heidy Heinpalu, who has been the manager of Skype’s main office in Estonia since 2004.

"Not many know where Estonia is, but everyone knows Skype. So now I say I’m the president of the country where Skype is."
- Toomas Hendrik Ilves , President of Estonia

“Finland had Nokia. We didn’t have a famous brand. But straightaway after Skype was created, everybody started using Skype as a business card for Estonia. We’re all really proud,” Heinpalu says.

It’s a business card even Estonian President Toomas Hendrik Ilves carries. “Not many know where Estonia is, but everyone knows Skype. So now I say I’m the president of the country where Skype is,” he mused to employees during a visit to Skype’s Palo Alto, Calif., office a few years ago.

To fully understand the ambitious, high-tech, torpedoes-be-damned hearth in which Skype was forged, start by understanding Estonia.

Even if you only go back a modest couple of hundred years, the country’s political history can issue a Wimbledon-style whiplash. After two centuries of Tsarist Russian rule, Estonia gained its independence after World War I, only to lose it again after World War II when the country was swallowed up by an expanding Soviet Union. In the 1990s, when the U.S.S.R. began to crumble, Estonia became independent once more.

Look Who's Talking infographic

At a time when much of the developing world was driving at high speed into the Internet age, the newly free Estonia was saddled with crumbling, Soviet-era infrastructure – not much by way of a ride. So Estonians elected young, creative, tech-savvy leaders, and got to work untangling decades of mismanagement and replacing the country’s dated infrastructure. But Estonia didn’t stop there. The country, with its medieval buildings and Russian Orthodox churches and cobblestone streets, decided to refashion itself as a high-tech hub.

In Tallinn, a city The New York Times would eventually call “a sort of Silicon Valley on the Baltic Sea,” the craggy, medieval town wall became a monument and the medieval moat a city park and walking trail. Modern glass and steel buildings began to rise, and the city became renowned for its civic forward thinking. Tallinn residents now use mobile devices to buy bus tickets and pay for city parking, and from gas stations to cafes, have enjoyed nearly ubiquitous Wi-Fi for years.

“Estonia just threw out all the old Soviet stuff and started again, and they started over very well,” says James Bowman, a Skype employee who moved to Tallinn from Brighton, England, six years ago to be with his Estonian girlfriend (now wife).

In Tallinn, Bowman found beautiful forests and beaches, more vodka than he’d ever before encountered (he still can’t keep up with the locals), absolutely unforgiving winters and surprisingly warm and welcoming people.

“A lot of people may tell you that Estonians are very serious and not particularly friendly, but I’ve found the opposite,” he says.

Still, he admits Estonia took some getting used to. In England it hits the news if the temperature hits five degrees below zero, Bowman says. During his first winter in Tallinn, the temperature got down to 22 below zero.

“My mother sent me packages of thermals to wear,” he says.

When his British family was preparing to attend his wedding in Estonia, Bowman got all sorts of cultural and travel inquiries, including whether they’d be able to drink the water.

“They expected us to be living on farms without normal facilities, then came over and were pleasantly surprised and a little bit embarrassed by just how advanced some things are over here,” Bowman says. “I’m sure most Brits feel that the U.K. has done pretty well, tech-wise. They should come over here and have a look.”

It is in this paradox of a place – a country where tourists still flock to the Museum of Medieval Torture Instruments, but whose president started computer coding at age 13 – that a world-changing technology was created.

In 2001 and 2002, Niklas Zennström, a Swede, and Janus Friis, a Dane, were developing peer-to-peer technology with some Estonian engineering whizzes. They’d already had a fair bit of success (and controversy) with Kazaa, a peer-to-peer file-sharing company, and were working on their second startup, Joltid.

“We were spending a ton of money on calls communicating between Stockholm, where I was, and Copenhagen, where Janus was, and Tallinn, where the engineers were,” Zennström says. “At some point in time we realized, ‘Hey, maybe this peer-to-peer technology we were developing could be a solution.’ Phone companies were charging so much for international phone calls as well as for roaming.”

"I’m sure most Brits feel that the U.K. has done pretty well, tech-wise. They should come over here and have a look."
- James Bowman , Skype design researcher

The entrepreneurs wondered if there could be a future where people could use the Internet not just to share files from person to person, but to make calls from computer to computer, and from handheld device to handheld device.

Zennström, Friis – along with Estonian developers Ahti Heinla, Priit Kasesalu, and Jaan Tallinn – were really, really excited by this idea. Could they get the technology to work? They thought so. Could they really get people to sit in front of computers wearing headsets, even when they weren’t landing planes or selling Time Life records? The team certainly hoped so. But in the swirling financial chaos of the post-dot-com bust, investors wouldn’t touch it.

“They said, ‘Can’t you do something with e-commerce? Something we’re familiar with?’ Already Skype was off to a very challenging start,” Zennström says. “We relied on close friends to help us in the early days.”

Energized by the possibilities, the team pulled together and prepared to launch Skype. Well, actually, “Skyper.”

“The original name had an ‘r’ at the end, which came from peer-to-peer in the Sky,” Zennström says.

There wasn’t a dot-com domain available for “Skyper,” so their only choice was As they came closer and closer to launch, the pressure was on to finalize a domain name. In a scene that could have come straight out of “The Social Network,” Zennström remembers a day shortly before launch that the team decided they didn’t really want a dot-net domain, dropped the “r” and registered

“Skype became a very good name, and people using Skype became Skypers,” Zennström says. “That was a brilliant move.”

Before it became one of the most successful Internet companies of its time, Skype’s founders were running their technology without a user interface, interacting with it using a DOS command. Deep in the woods of development, Zennström decided to take a break from the countless test calls between engineers. He was curious whether the new product would work to reach someone on the outside. From the DOS prompt (C:\Skype >), he issued the call command and tried to ring an old school friend in Singapore.

“Hello, can you hear me?” Zennström asked his friend.

He could. Fully absorbed in chatting about the good old days, it wasn’t until about 45 minutes later that it fully dawned on Zennström. Skype was working.

“That was a big moment for me,” he says. “It was pretty cool.”

Skype launched in August 2003. It attracted a million users in the first month. Now investors were calling.

“We watched as people started using it in more and more countries. It went viral,” Zennström says. “That’s when we knew – Skype was going to take off.”

The world and the tech industry were not far behind the founders’ realization.

Skype had finally left the harbor, but there would be some rough weather ahead.

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3: Skype is in the dictionary