Cisco Underestimated Skype's Value. Acts against Microsoft Acquisition

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Cisco Underestimated Skype's Value. Acts against Microsoft Acquisition

Cisco is far from the most open company in tech so it is ironic it is monopoly1.jpgconcerned about a monopoly over video conferencing a result of the Microsoft acquisition of Skype. The company’s Martin De Beer said, “For the sake of customers, the industry recognizes the need for ubiquitous unified communications interoperability, particularly between Microsoft/Skype and Cisco products, as well as products from other unified communications innovators.” This statement coincided with Cisco challenging an EU court over the acquisition.

One has to wonder however if Cisco underestimated Skype’s value. After all, the company has been sold twice in the last few years and the networking company didn’t close the deal either time.

The thesis that Cisco did not realize Skype’s importance is backed up by Cisco’s other actions – launching its consumer video service Umi - a Skype competitor. As you may recall I immediately said this service would fail and backed it up with ten reasons.

Here are the first three as a reminder - #1 is the most important for now:

1) Skype. Elaboration would be talking (writing) down to you.
2) Cisco's solution at $599 for the equipment and $24.99 per month is insane for a new consumer technology which has little to no network effect related to Metcalfe's Law. Oh and you need 3.5 Mbps upload speed for 1080p calls - meaning higher broadband bills for some.
3) Facetime: Apple's FaceTime is free and even though at the recent ITEXPO many people commented that using the software on an iPhone 4 is not great because inevitably your hand gets tired and falls to your stomach causing a nose-hair view of yourself to be transmitted - we can expect Apple to Facetime-enable everything they sell. Will Umi interoperate? If not, how will it compete?

And yes, the service failed shortly thereafter.

What is Cisco’s stance on video openness? In October of last year, the company responded to critics regarding its somewhat closed video ecosystem and decided to become more open. But this was five years into selling their telepresence products.

If anything, Cisco has been one of the more closed vendors in the market.

Remember what happened when Cisco announced it would buy Tandberg? Well, Stefan Karapetkov, Emerging Technologies Director for Polycom said the following:

Cisco announced today that they will acquire Tandberg, and this will have significant impact on the video communications market. It will reduce competition, and limit customers' choices, especially in the telepresence space. It will, hurt Radvision who now fills the gap in Cisco's video infrastructure portfolio.

I am however more concerned about the standards-compliance that have been the pillar of the video communication industry for years. Tandberg and Polycom worked together in international standardization bodies such as ITU-T and in industry consortiums such as IMTC to define standard mechanisms for video systems to communicate.

Cisco on the other hand is less interested in standards, and considers proprietary extensions as a way to gain competitive advantage. The concern of the video communication industry right now should be that the combined company will be so heavily dominated by Cisco that standards will become last priority, far after integrating Tandberg products with Cisco Call Manager and WebEx.

Telling is the fact that both Tandberg and Cisco declined participating in interoperability events over the last few months.

But this doesn’t mean Cisco hasn’t done the correct things for its shareholders by being more closed than most other companies. After all, if you are a dominant provider of a solution you aren’t required to open up your product unless a government forces you to. And this is why Cisco has inserted itself into the regulatory approval in Europe of the acquisition of Skype by Microsoft. De Beer continued, “Cisco does not oppose the merger, but believes the European Commission should have placed conditions that would ensure greater standards-based interoperability, to avoid any one company from being able to seek to control the future of video communications.”

And this is the challenge Cisco faces. Last week, Microsoft had a Lync Pavilion at ITEXPO in Miami and it was mobbed – lots of attention and buying – and it will expand in ITEXPO in Austin, Texas. And this was before Skype integration. Based on what I saw, enterprise buyers and resellers want UC solutions from Redmond.

Cisco will no doubt lose more share to Microsoft in the enterprise – this seems to be a given. But when FaceTime is a fast-growing competitor and is very closed, do we need to force Skype and Microsoft to open? In fact, in five years I predict Cisco having to worry more about Apple in the enterprise than Microsoft and Skype. And good luck getting Apple to open up.

It seems Cisco grossly underestimated Skype’s value and importance. The company had been burned by failed consumer product company purchase after purchase and didn’t want another mistake. This makes sense. But by the same token, Microsoft is facing a titanic battle with Apple and needs any advantage it can get. And this doesn’t even take into account the damage done by Google in the mobile and other spaces.

In a free market – companies should be able to make the decisions they think make the most sense for themselves and shareholders. I believe it would be an error to force Microsoft/Skype to open up.

Moreover, with the pace of IT consumerization is speeding up, Cisco will no doubt be playing a very difficult game of making purchases of pure B2B companies while having to understand which B2C companies are indeed crucial in the B2B world as well.



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