An Internet cafe announcing itself with an internationally known symbol in Tallinn, the capital of Estonia.
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.