Kazaa is to Music as Skype is to Telecommunications

Janus Friis and Niklas Zennström, of Kazaa fame, are hard at work trying to get a non-beta version of their latest peer-to-peer application for making free phone calls. Skype is poised to take the world be storm.

Though Skype is not even a finished product (the most recent release is beta version 0.94, released on October 30), it has already been downloaded more than 2.6 million times in just over two and a half months. For a little perspective, it took Kazaa-the most popular piece of downloaded software ever created-more than six months to reach that number of downloads. What’s more, Skype has achieved that download rate without any advertising. “Skype can change the way people think about communications,” says Jeff Kagan, an independent telecommunications analyst. “Skype is the Napster of the phone system.”

With the maturation of VoIP the two programmers found that if they merged it with their peer-to-peer infrastructure they could produce the same effect with phone calls that they did with music sharing. These guys really like to stir the pot.

With Skype’s creators’ controversial past (Kazaa remains the music industry’s public enemy number one) and the program’s rocket-like popularity, it’s tempting to envision the day when programs like Skype eclipse the major telephone companies. But don’t rush to sell your telco stocks (assuming you’ve held on to some); significant challenges remain before Skype becomes more than a nuisance to the AT&Ts of the world. “Skype will never threaten the traditional phone companies that have billions of revenue,” says Kagan. “But it is going to be a grass roots success story.”

One of the biggest challenges is that Skype can only be used with other Skype members, similar to how several years ago e-mail services allowed users to exchange messages only with other members of the same service. Until Skype’s popularity reaches a tipping point, this relegates Skype to secondary phone line status rather than primary. Second, Skype users can’t dial emergency services such as 911. Third, with phone company call rates dropping, offering service for free isn’t the draw it once was.

Friis says his company is “in discussions” with other VoIP players to introduce interoperability among their programs. He also maintains that the 911 issue is not a big technical problem and eventually will be addressed.

“Skype has the potential to be bigger than Kazaa,” Friis insists. “But the great thing is it doesn’t come with the legal issues around it.”

If you haven’t taken a look at Skype yet, you can see it here.