In-depth: Microsoft Skype marriage to benefit the channel

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In-depth: Microsoft Skype marriage to benefit the channel

Last week's $8.5bn acquisition of VoIP provider Skype by Microsoft is so far the largest tech acquisition of 2011, and certainly one of its biggest stories.

In the last few days the networking fraternity has been trying to make sense of Redmond's mammoth buy. Why would Microsoft want Skype?

Skype is a consumer-oriented service that looks great on paper but struggles in the corporate world, so at first glance there seems little to recommend it to Microsoft. Remember that it was acquired before by online auction house eBay in a deal that nobody would hold up as a success story, and then again by venture capitalists Silver Lake, who seem quite happy to wash their hands of it.

Skype's financial record is no more alluring. Like many online services it has always struggled to make money; it barely scraped operating profit of $20m and made a net loss of $69m in 2010. It is hardly a picture of health.

Some onlookers, among them David Pogue of the New York Times, believe that tie-ups between corporate monsters and consumer darlings are inevitably doomed.

The demise of the Flip camera, killed off by Cisco's ill-advised consumer junket is a case in point, and Pogue opines that given Microsoft's history  Skype will be unceremoniously snuffed out itself in a couple of years.

So it is quite obvious that Microsoft is buying Skype for something else. What is that? Strength and brand would seem to be the answer.

Ben Horowitz of California-based VC firm Andreesen Horowitz - which part owned Skype along with Silver Lake and the Canada Pension Plan Investment Board - makes an interesting point about the strength of Skype on his blog.

Horowitz points out that since Skype's acquisition from eBay, the firm has successfully fended off massive attacks from Google and Apple, both desperate to get into the VoIP game.

"Apple built video calling right into the iPhone, making their Facetime product the default offering for iPhone users," writes Horowitz. "How did that impact Skype's usage on the iPhone? 50 million users have downloaded Skype's iPhone product since the release of Apple's Facetime."

When you consider the size and apparent loyalty of Skype's customer base things become much clearer. Skype is hugely popular, with well over 150 million users and a paying user base that, in terms of numbers, comes close to rivalling subscribers to Activision Blizzard's World of Warcraft franchise.

Furthermore, just as the brand name Hoover became the default verb for vacuum cleaning in Britain, Skype is starting to become the default term for placing a VoIP call. Who wouldn't want to own that type of equity?

But this can't be just a consumer play, and of course there is an angle for business users, too. With Skype expected to become a major component of Microsoft's real-time enterprise comms platform, Lync, sales will surely soar off the back of the deal.

The Lync platform has been gaining increasing traction with business users, and so for that matter has Skype; its attempted IPO last year was very much intended to get it noticed by corporates.

But what of the industry players? So far, reaction has been very upbeat. Chris Baldock, managing director of SaaS, cloud and unified comms provider intY - itself a big Microsoft partner - brands it a "brilliant" move.

"It finally positions Microsoft as a global voice player," he says. "The strategic value will come when they plug it into Lync and Office 365; immediately every Microsoft-owned desktop will have a phone number."

"The driver for the channel will be very much about making the case for web-phone capability bringing about business efficiency. Customers want to buy this stuff, but they have fear, uncertainty and doubt, they need handholding and management, so it will be the channel partner's job to get Skype into their customers," says Baldock.

So does this mean voice-centric companies like Avaya or ShoreTel should be worried? Chris Baldock's colleague, intY co-founder and business development director Mark Herbert says yes, they will be.

"The voice market should be much more worried than the IT market by this, because the data channel suddenly has a much bigger market to play in," he says. "The voice channel doesn't go into the data market quite so easily or enthusiastically."

Polycom president and CEO Andy Miller says removing Skype from the "competitive equation" and placing it with Polycom's strategic tech partner Microsoft will be great news for his business.

"The integration of Lync and Skype is positive for us, because the better Lync performs, the greater our opportunity in terms of video endpoints, software and infrastructure sales," says Miller.

"The acquisition presents us an excellent opportunity with service providers, who are critical partners in Polycom's cloud strategy and growth," he adds.

Andreas Wienold, EMEA sales vice president at video conferencing vendor LifeSize, says the acquisition is a good example of the "blurring of the lines" between video-converencing platforms.

"Users no longer worry who is providing the service, just as long as it works effectively and reliably. After all, why should communication at work be any more complicated than it is at home?" says Wienold.

"The deal is further evidence of Skype moving towards a stronger business focus and will guarantee improved stability, interoperability and cost effectiveness of their services for users. Our recent announcements with both companies further highlight the drive for greater integration within the video communications industry, and Microsoft and Skype are clearly serious about increasing their play in this market.

"Interoperability is fast becoming the litmus test for busiensses shopping for enterprise video conferencing and telepresence vendors," concludes Wienold.

IDC senior research analyst Rosalind Craven believes that Skype will be an important play for Microsoft in the smartphone market, "potentially providing a unique selling point for Nokia's upcoming range of Windows phones".

However, she adds: "Mobile operators, with a few notable exceptions, have traditionally been very wary of Skype and mobiel VoIP in general, and [they] remain essential partners in the sale and distribution of mobile handsets, especially in markets like western Europe where device subsidies remain high.

"Pushing Skype to the fore of a new device's features as an attractive selling point may actively put off mobile operators," says Craven. "While deep Skype integration and exclusive features could be a great selling point for Nokia, potential hostility could prevent [them] taking full advantage, diminishing the value of this gutsy acquisition."

"What mobile operators are scared of is a potential future scenario where the majority of mobile users have VoIP on their phones and habitually bypass voice services making free calls to each other," Craven points out. However, she adds that there is little immediate threat to their revenues, what with so many VoIP calls being PC to PC.

But if the mobile operators have grounds for cold feet, there are others actively salivating at the prospect of supporting implementations of Microskype.

Take video specialist Vidyo, where CMO and senior vice president of corporate development, Ashish Gupta, is gearing up to jump on the bandwagon before it rumbles off into the distance.

"The market for video conferencing is clear and businesses of all sizes need to ensure they have a future proof HD platform that supports the way enterprises work on the devices they want to use," says Gupta.

"Today you can't imagine a business that doesn't have mobile support; tomorrow there won't be a business without video conferencing," he adds.

Tom Cahill, EMEA vice president, makes the case for BI sales, which he says will be essential, not just for Microsoft and Skype, but for their users, to see where the ROI and synergies from the integration will ultimately lie.

"Such an upheaval can present an opportunity, as this approach enables you to establish which systems are flexible enough to cope with the inevitable next time the organisation experiences significant change," he says.

Although it is still too early to say just what will happen to Skype, whatever the future holds for it under new ownership one thing does seem clear, and overall it is good news for VARs; the amount of auxiliary opportunities around supporting business users will keep the comms and data channel busy for some time yet.


This was first published in May 2011

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