Cisco fights Microsoft on Skype

FRAMINGHAM, Mass. — Does Cisco Systems Inc. have non-buyer’s remorse over the Microsoft/Skype union?
 
Cisco this week appealed the European Commission’s approval of Microsoft Corp.’s US$8.5 billion takeover of Skype, citing the possibility that Microsoft may take Skype in a proprietary direction and impede interoperability with other vendor’s video offerings. Cisco and Microsoft are fierce competitors in unified communications and collaboration, which includes video conferencing and chat capabilities like those provided by Skype.
 
But Cisco also apparently passed up the opportunity to acquire Skype 18 months ago just before the company was looking to go public in a US$5 billion IPO. At that time, Cisco was rumored to be considering buying Skype.
 
Now, after bypassing that opportunity, Cisco is looking to block Microsoft’s closure of the Skype deal. If Cisco didn’t view Skype as a needed asset, why impede Microsoft’s purchase of the company?
 
It’s just business – nothing personal.
 
“I think this appeal’s about business,” says analyst Henry Dewing of Forrester Research. “They compete in the Unified Communications space. By tying (Microsoft) up, having to figure out one more thing they have to so with the EU, that prevents them from moving forward for a while.”
 
Cisco may also be looking for Microsoft to give up a Skype jewel before being able to close the deal, says Rich Costello, senior research analyst for Unified Communications at IDC. The U.S. Federal Trade Commission approved the deal last summer.
 
“Now that Microsoft’s plans for Skype are clear – tie Skype’s users to the MS Lync platform – Cisco’s objection centers on the fact that this integration will deny Skype users from interoperating with other vendor platforms, especially in regards to video conferencing, as both Skype and Microsoft support proprietary audio and video codecs,” Costello says. “Cisco likely thought that there would be some conditions set forth for such interoperability prior to the MS/Skype deal’s approval by the EC, after all Cisco had to meet a similar EU condition (open up its TelePresence Interoperability Protocol) prior to getting the EU’s approval on its Tandberg acquisition.”
 
Cisco had a devil of a time closing the Tandberg acquisition, which made Cisco the No. 1 videoconferencing vendor in the industry. It faced shareholder dissent on the value of the deal; and then, as Costello notes, had to make its TelePresence Interoperability Protocol available industrywide as a concession for closing on the Tandberg deal.
 
Cisco is apparently looking for Microsoft to make the same or similar concessions.
 
“The open argument is not without merit,” Dewing says. “When Cisco bought Tandberg, somebody else lodged the same appeal with the EU.
 
“If Microsoft and Skype release non-industry standard solutions and people have to put in gateways, it puts the onus on the consumer to make it work,” he says. “That has not worked well. Adhering to a standard makes it all work more seamlessly. Video is the next phone call; that’s what Cisco talks about. Implementing multiple different standards will not advance that vision.”
 
As to why Cisco [Nasdaq: CSCO] did not buy Skype when it had the opportunity to, Dewing believes Cisco was already having second thoughts about the depth of its immersion into the consumer market. Cisco had already made an unwise decision to acquire Pure Digital and its Flip pocket videocam, which Cisco subsequently killed in a restructuring that essentially gutted its consumer business and offerings.
 
“Cisco’s interest in Skype…was about the time they were exiting a lot of consumer markets,” Dewing says. “We’re still waiting to see how Microsoft is going to monetize that ($8 billion+) purchase price. If the consumer option was not open to Cisco then they may not have seen a path forward that they could monetize, that perhaps Microsoft does see. The Skype brand is clearly an enormous, enormous consumer value.”
 
But Microsoft [Nasdaq: MSFT]  is likely to leverage Skype’s consumer cache in its enterprise UC offerings as well, Dewing believes.
 
“I think they would be foolhardy not to,” he says. “You pay $8 billion for something you better use it everyplace you can. Skype is a great way to reach an awful lot of people. That number of people, any business would be crazy not to open the gates to talk to them. Connecting to those consumers – allowing businesses to do that more easily, more naturally – certainly is (valuable).”
 
Skype had 663 million registered users at the end of 2010, according to its IPO filing, which was dashed when Microsoft announced intentions to acquire the company. Skype may have doubled that user number with its integration deal with Facebook last fall.
 
(From Network World U.S.)