The sage of the Valley – Michael Arrington of TechCrunch, reports Cisco made an offer to buy Skype. The only real explanation that is needed is what the hell took so long. It’s reminiscent of An Affair to Remember, the Skype Affair version just never ends. I suggested a UC player grab Skype back when eBay announced the first Skype IPO intention; The Case to Buy Skype April/09.
The logic is and was how unified communications is bundling and integrating what the “UC industry” players are building and what Skype is offering. Avaya, Cisco, Microsoft, Mitel, NEC, ShoreTel, and so on are all integrating presence, IM/chat, and video into their core VoIP suite, generally as an island. Each of these companies (and many more) have full time developers, product managers, and support staff all working, often for the time first time, on pc client communications software. Their unstated goal, do what that Skype thing does. All of these vendors combined, have a smaller foot print than tried and true Skype.
But I do not mean to suggest Skype is nothing but simple PC client software. Skype is a network, a carrier by most definitions and one of the biggest. It has over 500 million users – that’s more than any carrier has subscribers according to Mary Meeker of Merril Lynch. Everyone knows that CPE is one business, and carrier services is another – and these businesses are best kept separate. After-all, look at the original Ma-Bell, it was so successful with its equipment and carrier services that the Government had to break it up multiple times. Leaving Carterphone and Divestiture out of this, let’s look at more recent trends.
- Many carriers are embracing hosted Voice, a direct competitive threat to the CPE business.
- Cisco already is banking heavily on its WebEx investment – now central to its UC suite. Cisco is integrating pay as you go services with its CPE model quite effectively. Cisco expanded its Webex Services from collaboration to messaging as an Exchange/Notes service alternative.
- Cisco is also betting heavily on video services; and Skype’s video network is the largest. In 2009, Skype reported 12% of its traffic was international and 34% was video
- Last January at the Consumer Electronics Show, both Cisco and Skype introduced a living room strategy with video enabled television sets.
- Last year, Skype began offering Skype for SIP (now Skype Connect), and Cisco was one of the few vendors Skype supported.
- Cisco published a report that shows it believes video will drive the wired and mobile Internet’s growth, in one study, Cisco predicts 39% growth in mobile Internet data traffic between 2010-2014.
- Both Skype and Cisco are aggressively trying to play the 3G/mobile market. Cisco is planning on launching its first 3G device the Cius and Skype already offers mobile users some very powerful tools.
Cisco is looking pretty strong. In fact, the recent Gartner UC Magic Quadrant placed Cisco in the magical quadrant, and second only to Microsoft. Gartner felt that Microsoft’s Exchange and Windows platforms gave it a slight advantage over Cisco’s router and telecom dominance. But Skype could change all that. In one Cisco solution, Cisco utilizes Microsoft’s Office Communicator client (UC client). But Skype’s robust client comes complete with a huge network of users (and revenue). Microsoft is launching its latest release of Communications Server later this year, and the chest bumping is about to get turned-up a few notches.
Combining Cisco with Skype effectively creates a CPE powerhouse with a robust VoIP-Client-Video carrier service. Cisco could extend its SaaS business as well as extend the capabilities of its UC CPE and services with Skype’s network and clients. Cisco loves proprietary networks. The move would increase the product and service gap between itself and its current closest UC rival Avaya, and provide Google a worthy competitor in its undisclosed UC domination strategy.
I don’t think Skype is desperate, but I don’t see very many exit options for its current owners.
IPO: The current IPO market sucks, especially in communications. Ask the folks at Mitel and Broadsoft their opinion. Plus, IPO means it wants to do it alone. That was fine until last week when Google said “we can VoIP too”. Google launched its own Skype-like VoIP solution via Gmail last week. Though the solution is not as elegant as Skype’s, nor is the Gmail base as large as Skype’s, it was a pretty clear warning shot across Skype’s bow. Google users made a million calls in 24 hours and Google took three days to roll out the service. At best, you can argue that Skype has a huge head-start, but Google in the rearview mirror (profound saying: objects in mirror are closer than they appear) would likely have a deflating affect on an IPO. TechCrunch suggested that Cisco would have to be bidding $5B for Skype… I suspect the price dropped last week.
Another UC Player: That’s a great idea, and the number two player is Avaya. While Avaya just may be a great partner for Skype – don’t believe it. The two companies are currently mostly owned by Silver Lake. After the acquisition, I assumed we would start seeing Skype-Avaya integrations, but absolutely nothing came out of it. When I asked my contacts, I got the usual – ‘can’t share, but I can say we are talking’. Evidently those conversations were dropped, Skype Connect never even supported an Avaya platform. After Avaya, the players get much smaller… Mitel and NEC are unlikely candidates.
Google: I don’t think our watchful regulators would allow Google to acquire Skype. The Gmail calling feature and Google Voice (and G’Chat) might suggest Google wouldn’t be interested in acquiring Skype. Let me rephrase that, I am sure Google is interested in acquiring Skype, but not paying for it.
Tis the Season: Nothing like a recession to drive mergers and acquisitions. Cisco has some cash, a clear vision of video, UC, Cloud services, and VoIP – and Silver Lake wants out.
Is this really the best fit for Skype? I can’t say what they are thinking, but Skype has an impressive cast of characters with an Enterprise bent trying to decide what is best. That includes David Gurle (from Microsoft) and Jonathan Rosenberg (from Cisco). Short answer, yes.
But Cisco is Business and Skype is Consumer. Yeah, sort of. Skype is working hard to get into the enterprise and Cisco loves the consumer business as long as it doesn’t have to talk to consumers. Cisco has done an excellent job with Linksys. Skype users don’t get to talk to Skype either, so really Skype is a perfect consumer business for Cisco. Cisco will run the consumer side of Skype as a cash cow, and leverage it to the hilt for enterprise services.
Is Skype worth $5B? Probably not, but there is only one way to find out. In general it is a buyer’s market and I don’t think there are very many at the auction. Cisco of course won’t pay cash anyway, so that begets a whole separate discussion on what is Cisco worth. I suspect the valuation will be lower than the initial rumor and I don’t anticipate a bidding war. Skype is inherently a free service, and the vast majority of its users don’t pay anything. But then HP paid $1.2B for Palm which I can’t explain. So my official response to this question is maybe.
I think the implications of such a merger are fairly significant. If Google does what I think it would do, it now has a real competitor. The UC players are getting caught without a partner at the dance as the CPE industry continues to migrate toward services. A year ago, Mitel became an MVNO, but in general, services such as carrier services, video, and mobility are what is driving equipment sales.
The carriers too are facing increased pressure from Skype and now Google on long distance. The carriers want to avoid (as Skype did) not becoming dumb pipes. Their business is changing – and having Cisco operate as a carrier without being managed/controlled as one, could prove to be interesting.