The New York Times

December 13, 2005

The Baltic Life: Hot Technology for Chilly Streets

TALLINN, Estonia, Dec. 8 - Visiting the offices of Skype feels like stumbling on to a secret laboratory in a James Bond movie, where mad scientists are hatching plots for world domination.

The two-year-old company, which offers free calls over the Internet, is hidden at the end of an unmarked corridor in a grim Soviet-era academic building on the outskirts of this Baltic port city. By 5 p.m. at this time of year, it is long past sunset, and a raw wind has emptied the streets.

Inside Skype, however, things are crackling - as they are everywhere in Estonia's technology industry. The company has become a hot calling card for Estonia, a northern outpost that joined the European Union only last year but has turned itself into a sort of Silicon Valley on the Baltic Sea.

"We are recognized as the most dynamic country in Europe" in information technology, said Linnar Viik, a computer science professor who has nurtured start-ups and is regarded as something of a guru by Estonia's entrepreneurs. "The question is, How do we sustain that dynamism?"

Foreign investors are swooping into Tallinn's tiny airport in search of the next Skype (rhymes with pipe). The company most often mentioned, Playtech, designs software for online gambling services. It is contemplating an initial public offering that bankers say could raise up to $1 billion.

Indeed, there is an outlaw mystique to some of Estonia's ventures, drawn here to Europe's eastern frontier. Whether it is online gambling, Internet voice calls or music file-sharing - Skype's founders are also behind the most popular music service, Kazaa - Estonian entrepreneurs are testing the limits of business and law.

And by tapping its scientific legacy from Soviet times and making the best of its vest-pocket size, Estonia is developing an efficient technology industry that generates ingenious products - often dreamed up by a few friends - able to mutate via the Internet into major businesses.

These entrepreneurs grow out of an energetic, youthful society, which has embraced technology as the fastest way to catch up with the West. Eight of 10 Estonians carry cellphones, and even gas stations in Tallinn are equipped with Wi-Fi connections, allowing motorists to visit the Internet after they fill up.

Such ubiquitous connectivity makes Tallinn's location midway between Stockholm and St. Petersburg seem less remote.

Even the short icebound days play a part, people here say, because they shackle software developers to the warm glow of their computer screens. For the 150 people who work at Skype, Estonia is clearly where the action is.

"What Skype has shown the world is that you can take a great idea, with few resources, and conquer the world," said Sten Tamkivi, the 27-year-old head of software development.

Whether Skype poses a mortal threat to telephone companies, as some enthusiasts suggest, is an open question. But it has become an undisputed technology star - a status cemented in September when eBay, the Internet auction giant, bought the company in a deal worth $2.5 billion.

More than 70 million people have downloaded Skype's free software from the Internet, Mr. Tamkivi said, and it is adding registered users at a rate of 190,000 a day. On a recent evening, 3.7 million people were logged on to the service, nearly three times the population of this country.

Professor Viik and others relish the attention that Skype has brought Estonia. But he says his country cannot build a long-lasting technology industry on a single hit or even a few hits: Kazaa was hugely popular before it ran into a blizzard of copyright-infringement lawsuits.

Silicon Valley, Mr. Viik noted, is composed of clusters of companies that feed off one another. Skype is a closed company, with proprietary software and owners who are so secretive about their plans that for a time local journalists did not know where its offices were.

The company's two founders are not even Estonian. Niklas Zennstrom is a Swede, and Janus Friis is a Dane. Skype's legal headquarters are in Luxembourg; its sales and marketing office is in London. Although Estonian developers wrote Skype's basic code, only a fraction of the eBay bonanza went into Estonian pockets.

Part of the problem for Estonia's entrepreneurs is the nation's inexperience in capital markets. It regained its independence only in 1991, after the collapse of the Soviet Union. Estonia's entrepreneurs do not yet have the Rolodexes of their Scandinavian counterparts. Recently, Tallinn got its first high-tech venture capital firm.

Then, too, there is its small size. Estonia's entire software development industry employs roughly 2,500 people, less than the research and development staff at a major American technology company.

"Let's be frank," said Priit Alamae, the 27-year-old founder of Webmedia, another leading software design firm. "Estonia has 1.3 million people; we have 200 I.T. graduates a year; we do not have the resources to develop our own Microsoft."

The competition for talented recruits is driving up salaries more than 20 percent a year, he said. While Estonia remains cheaper than neighbors like Finland or Sweden, the gap is narrowing rapidly.

In some ways, however, Estonia's labor shortage has contributed to its success. Companies here are extraordinarily efficient. And they tend to focus on niche products or on business models - like Skype's or Kazaa's - that can expand from a small base by word of mouth.

Skype and Kazaa are powered by so-called peer-to-peer technology, which allows computers to share files or other information on a network without the need for a centralized server to route the data. In Kazaa's case, the files being swapped are songs. In Skype's case, they are voices.

"There is no new technology in Skype," Mr. Viik said. "It is an example of how you put together bits and pieces of technology in a clever way. Estonians are very good at putting together bits and pieces."

Necessity is the mother of invention, but what is it about Estonians that makes them the Baltic's answer to Bill Gates?

"People here are kind of introverted and into technology," said Jaan Tallinn, a tousled-haired man who looks younger than his 33 years and wrote the software code that is the basis of Kazaa and Skype. "We have long, cold winters when there isn't much to do, so it makes sense."

Other people cite history: Estonia's long subjugation by the Soviet Union, and the euphoria that came with freedom.

"It's as if a young country suddenly came into independence with great hopes but few material resources," said Steve Jurvetson, a venture capitalist in Silicon Valley. Mr. Jurvetson, whose family has Estonian roots, has invested in a few start-ups here, most notably Skype.

Estonia owes one thing to its former oppressor. In the 1950's, the Soviets chose the Baltic states as the site for several scientific institutes. Estonia wound up with the Institute of Cybernetics - basically a computer sciences center - that now houses Skype and many other firms.

That scientific legacy remains embedded in society, people say. It is most visible in Estonia's receptiveness to new technology. Internet penetration is estimated by the telecommunications industry to be 49 percent of the population.

Estonians use mobile phones to pay for parking, among other things. Most conduct their banking online, and more than 70 percent file their taxes on the Internet. The state issues a digital identification card, which allows citizens to vote from their laptops.

In a rare disappointment, less than 2 percent of the electorate, or 10,000 people, voted electronically during recent local elections. One hurdle was that voters had to buy a card reader to authenticate their ID's. The government hopes for better numbers for the next election, in March 2007.

Some people contend that Estonia's success is a function of hard work and happy circumstance rather than raw talent.

"I can't say that Estonians are the greatest software programmers," said Allan Martinson, who last June started the first high-tech venture capital fund to be based here. "You can find more talent in Russia."

While entrepreneurs complain about the shortage of skilled workers, more and more young foreigners are ready to trek to this northernmost Baltic nation for a job. Skype employs people from 30 countries; in the halls, one hears plenty of English, and even some Spanish.

Oliver Wihler, 35, a Swiss software developer, moved to Tallinn from London in 1999, drawn by the heady professional atmosphere and by Estonia's parks and forests. Now he and a business partner, Sander Magi, 28, run a company called Aqris, which reformats Java software.

"The commute in London was a drag, and I missed not having any green space," Mr. Wihler said.

Estonia offers plenty of that. But Skype is relying on more than a pleasant lifestyle; it is taking a more traditional approach in its recruitment by offering stock options in eBay. But Mr. Tallinn says that is only part of the company's appeal.

"The other draw," he said, "is that if you want to work for a company that influences the lives of tens of millions of people, and you want to do it in Tallinn, there really isn't any other choice."