Tuesday, May 10, 2011

Microsoft Crosses Swords with Cisco

Microsoft surprised many observers today by announcing the acquisition of Skype. By now, I’ve already read at least a dozen articles about this acquisition and since my blogging is extracurricular, I had to wait until the kids were in bed. Therefore, I will try not to repeat what everyone else already said but rather examine the acquisition from a different perspective. I see Skype as a major move in Microsoft’s war on Cisco.

Cisco has been working on unified communications at least since their March 2007 acquisition of Webex. Unified communications (UC) makes a lot of sense for Cisco which had already dominated network communication with its routers and switches. Cisco has also made a lot of progress in Internet telephony or voice over Internet Protocol (VoIP) as we like to call it. And once the human communication such as Webex was added to the picture, unified communication was born.

Skype is a Luxembourg-based company that was founded in 2003, acquired by eBay in October 2005 and Spun off to an investment group in November 2009. Skype is supposedly very profitable and with 170 million users, it is a tremendous asset. Skype has been clearly looking for a buyer since the spin-off and the possible suitors were rumored to be Facebook and Google. But in the end, Microsoft stole the show for a hefty price of $8.5 bln - the largest acquisition they’ve ever made.

The acquisition shows that Microsoft is willing to make big moves to get back at the new generation of competitors - from Facebook to Google and Apple. Microsoft is aggressively pursuing the mobile market with its own Windows Phone operating systems and a dozen or so partnerships with smartphone hardware manufacturers including Nokia who recently bet the farm on Windows Phone. And given that both mobility leaders, Apple and Google, have their own online communication offerings with Apple FaceTime and Google Voice, Microsoft needed to counter.

Skype offers great voice and video communication along with many advanced capabilities such as conferencing, voice mail, etc. But Skype will also give a great boost to Microsoft’s Lync offering. Lync is all about unified communications with capabilities such as presence, instant messaging, Web conferencing, and enterprise voice (VoIP). While some of the capabilities are duplicate between Skype and Lync, the very popular Skype service gives Microsoft a tremendous installed base as it straddles the consumer and the enterprise market which aligns well with Microsoft’s ambitions.

A major attraction of Skype for Microsoft must be its reach - it allows calls to non-Skype land-lines and mobile phones and it runs on practically all desktop and mobile operating systems. Contrast that with Apple’s FaceTime which only runs on iOS and Mac and thus faces an uphill adoption battle. Microsoft also needs to convince the carriers to embrace Windows Phone 7 devices and Skype might give them a great leverage or possibly an alternative.

With its focus on Lync and voice, however, Microsoft appears to have declared a war on Cisco. Cisco has been building out its unified communications business for several years with no major competition in sight and with a great leverage provided by its hardware business. Sure, Cisco competed with several unified communications players from Avaya to IBM and Siemens but none of them came even close to Cisco’s breath of offering and market presence. And the fact that all that voice and video traffic may cause customers to upgrade their hardware was an added benefit.

Well, that quiet time may be over now as Cisco found a mighty challenger in Microsoft. The Lync/Skype combination is a strong contender to Cisco’s collaboration and unified communications. Pretty exciting times, if you ask me!


  1. "Skype is supposedly very profitable and with 170 million users ..."

    Very profitable? Don´t think so.

    And how many of the users are active? And how many of those are premium users that actually pay for the service?

  2. I wondered about the profitability myself which is why I used "supposedly" in the sentence. But that's what the CEO apparently said in the press conference: $860 million in 2010 revenue, with 20% growth year over year, $264 million in EBITDA - those aren't bad numbers.

  3. According to http://blogs.ft.com/fttechhub/2011/05/skype-microsoft-liveblog/?catid=163 :

    "Skype is now profitable, ..., after reporting losses of $7m last year."


    170m connected Skype users, growth of 40 per cent year over year – 600,000 new registrations every day. Skype users used over 207bn calling minutes in 2010. Overall revenue has grown 20 per cent year over year."

    And according to http://blogs.ft.com/fttechhub/2011/05/skype-may-be-the-glue-in-microsofts-multimedia-strategy/:

    "In its IPO filing last August, Skype said that it had 560m registered accounts as of last June, with 124m active on a monthly basis. Skype’s commercial problem has been that only 8.1m pay for any extra services, on average. That’s just 6.5 per cent of its active user base, a relatively low number for a “freemium” business (Spotify, for example, claims over 15 per cent of its active users pay for its music service)."

  4. This acquisition goes squarely against Google.

    Did you realize the perfect PR timing stealing the thunder from Google IO.

    Wait for a Facebook/Microsoft Skype announcement ...

    If executed well this may indeed help MSFT to promote Lync (as Skype for the Enterprise ;-) but I doubt this was a major driver.