Telephony used to be tightly controlled by the carriers and their systems; then VoIP came along, but very much as a second string. Now internet telephony is growing up, finding its way into the heavy duty systems of operators and enterprises, and the race is on to take control. Cisco is reported to be wooing Skype, even as Google expands its own telephony strategy. Some operators, notably Verizon and 3, are embracing Skype, while others are trying to drive the VoIP sector in their own right ‘ Telefonica with its Jajah purchase, for instance, or BT with Ribbit.
According to the TechCrunch blog, citing ‘reliable sources’, Cisco has already made an offer for Skype, wanting to get in ahead of the former eBay unit’s planned IPO. This would need to be in the multibillion dollar range, given that Skype is targeting $5 billion from its flotation ‘ far more than the $2.75 billion eBay got for selling it to private investors last year (or the $2.6 billion it had paid to acquire it in 2006).
Neither firm would comment of course, but such a deal would boost Cisco’s push into unified communications (UC) and collaboration, as well as its rising interest in consumer markets, bringing some of the capabilities it sells to enterprises to the broader user base.
The most obvious synergy would be in its expanding UC platform, which has massive strategic importance, putting the network at the heart of all of an enterprise’s behavior and data needs, and relegating the server’s role to storage. This contrasts with the approach of Microsoft, which wants to place more intelligence and value in the server platform to keep Windows and its services central; or the fully web-based, and less controllable, strategy of Google.
Skype could bolster Cisco’s UC strategy, give it a strong over-the-top element to counteract Google (but under Cisco’s control), and certainly fit the core business better than it did eBay’s. While eBay had to struggle with the challenge of making a web telephony business profitable, Cisco would have very different objectives ‘ enhancing the revenue and profit of its far broader and higher value models. “Embedding the Skype technology into some of Cisco’s existing products, like WebEx and Unified Communications, will only make those products more valuable,” Zeus Kerravala, analyst and senior VP at Yankee Group, told CNet. “So they wouldn’t necessarily have to make the traditional consumer Skype service hugely profitable.” That would be good news for Skype too, which remains over reliant on continuing success for consumer Skype Out. Although it has started to turn a profit since it split from eBay, if its service declines it will have few other options ‘ unless its technology has been integrated into something larger, from a financially stable giant like Cisco.
Corralling a major force in VoIP could be advantageous to Cisco and could expand its growing consumer web strategy, but in its enterprise heartland the main interest is more likely to be video. Video is the main driver of increased investment in IP networks, still Cisco’s bread and butter, and in software frameworks such as security and apps delivery. As such, it has become an obsession for the IP giant, which recently bought video platform ExtendedMedia (see separate item). CEO John Chambers recently commented: “Video is today’s VoIP network’, and Skype brings one of the biggest online videoconferencing bases, claiming 40% of calls using its software are for video chat.
The most obvious place to incorporate Skype technology into the Cisco range (the value of its standalone service is limited to the giant) would be in WebEx, the collaboration and conferencing system that Cisco acquired in 2007 for $3.2bn and made the basis of its new UC strategy and its assault on Microsoft Live. This has been stretching from the network back end into the devices themselves, in line with Cisco’s push to deliver the whole IP chain ‘ it recently announced a tablet optimized for WebEx and videoconferencing, for instance. Skype video and voice could take WebEx to a new level, targeting smaller businesses and mobile usage.
Skype video would also complement Cisco’s other corporate UC products by providing a video element to add to VoIP and presence. As with WebEx, it could add a lower cost, simpler strand to these systems, pushing them down to small businesses and even consumers. This follows the same pattern we have seen in many Cisco businesses, such as WLans, starting with big companies and moving into the small office and the home. This progress, in turn, diversifies the range of devices Cisco offers as it tries to be an end-to-end provider ‘ in recent years, the Linksys consumer routers, Scientific Atlanta set-top boxes, Flip mobile camcorders and other products have joined Cisco’s traditional endpoint offerings, such as VoIP handsets, and brought it into the living room. This is not really about becoming a consumer gadgets maker, though Cisco is widely expected to come up with a smartphone eventually, but about exploiting the entire chain of IP service and content delivery right down to the individual user, wherever that user may be. This has led to the recent tablet launches, for video and another for home energy management, and more are likely to follow.
Skype would fit well into that strategy to integrate hardware and software in delivering a wide range of targeted IP services, finding its way into the video tablets, Flip and other offerings. And it could certainly help bring some high end services, such as Cisco’s telepresence videoconferencing, to the mass market via standard gadgets such as TVs and even phones. Even at January’s Consumer Electronics Show, the giant showed a videoconferencing platform that would run on HDTVs or broadband lines in the home, going a step beyond video chat. But cost would be an issue without a low cost approach like Skype’s (not to mention the readymade base of 124m active users that come with the brand).
So what are the downsides for Cisco? One is the potential conflict of interest with phone company customers like AT&T, but as the whole market moves towards VoIP, that is likely to become a far smaller obstacle. Another is that Skype does not bring much financial upside in its own right, though as we have seen, Cisco is likely to want it for underlying technology, brand and a readymade customer base rather than actual revenue/profit.
And Skype would certainly help it keep Google in its place, as the search giant also gets interested in telephony and, following the opposite path to Cisco’s, pushes up from consumer to enterprise services. Last week, Google announced an extension of its disruptive Voice offering, allowing free phone calls in the US and Canada from its Gmail application (as well as undercutting conventional services on international call rates). Just as Cisco responds to the cannibalization of its high end conferencing business by Skype, Google will come along with its own threats.