The Case to Buy Skype

It took a few years, but EBay finally concluded that Skype has “limited synergies” with EBay or PayPal. Not much of a surprise there. The acquisition was never understood and criticized by many. But Skype as done reasonably well under EBay – the service is strong and growing. The company generated $551 million in 2008 with healthy margins and EBay forecasts revenues will double to $1 billion in 2011.

EBay officially announced plans to spin Skype off via IPO in early 2010.  They paid a total of $3.4 billion (with bonuses) for the company in 2006 and did a write-down of $1.4 billion off the books – but Skype is a valuable asset and many will be kicking its proverbial tires. Including the original co-founders, Niklas Zennstrom and Janus Friis, who already made an offer. These two have done so well with Skype that it is only fitting they buy it back for a fraction of their selling price – but they will have to beat the competition first. Rumors have already surfaced that Google, Microsoft, and Cisco are all interested.  

By declaring their intent to do an IPO, EBay has formally signaled they are taking offers. What they really want likely is a controlled auction, something they understand. In fact, they should just list the whole thing on their auction service.  I think it is very unlikely Skype will go to an IPO – far too much trouble. The private auction they will create will be more lucrative. But who will buy it?

The suspects named above make some sense, and none of them will get the criticisms EBay received on the acquisition. But there is a very strong case for one of the traditional PBX players to buy Skype.  I will count out Nortel due to their financial situation, but Cisco, Avaya, NEC, Siemens, and Mitel all make logical candidates. A PBX maker buying Skype would represent a bold, aggressive move into the future – will they see it that way?

I don’t know which of these candidates can actually pull it off financially other than Cisco – most of these companies are private – but Mitel one of the smaller ones two years ago purchased Inter-Tel with comparable revenue levels. But what follows is a strategic discussion of the acquisition – which will generally apply the same for all of them.

The Next Generation of Telecommunications is Unified Communications

Every PBX maker is investing heavily in integrated UC software with presence, click to dial, improved messaging, and video capabilities. The problem with this model is they are making solutions that work with their hardware – useless to everyone else. This both limits their available market, but the value of their communications solution. Skype has created stable clients that work on a variety of platforms, offering voice, IM, video, presence – completely independent of hardware. A switch vendor could enhance the Skype client  with PBX information such as phone status, boss/admin features, and hunt groups – none of which are currently in Skype. The switch vendors could enhance their core offerings with features like a call center solution that can manage (queue, route, monitor, and report)  PSTN calls, emails, chats, and Skype calls.

In software development costs alone, there is probably a good story here, but the installed base is the real value. Microsoft changed their product’s name from Live Communications Server to Office Communications Server – because the Office Franchise has more pull than the Live franchise. Installed software creates the value hooks. There is a huge installed base of Skype. It is stable, mature, and low cost to use – leveraging that into additional value is a lot less effort than creating new software and getting it installed.

Skype is used worldwide; international traffic minutes increased 41% in 2008, and now represent 8% of all international calls – greater than all of the traditional telephony carriers. This represents the vast majority of Skype’s revenue. Do the equipment carriers care about “carrier” services? Unsure… I know Mitel has carrier services they acquired from Inter-Tel, and Avaya has their roots in network s. But the key is Skype’s growth strategy which is tighter PBX integration (SIP to Skype) and mobility offerings. An equipment maker offering tight integration to Skype would have a leg-up.

A PBX that could route calls to Skype clients or phones with equal dexterity (not via a SIP gateway) would be very interesting. Skype has been experimenting with this on Digium’s Asterisk platform (currently in closed beta). The Skype to SIP offering should work on all equipment solutions, the market pull is there. So the owner of Skype could play the “co-option” card. This means they get to act like they are cooperating while going for the jugular. Folks with the exposed jugular don’t like this term. Microsoft enjoys this with OCS –every PBX maker is scrambling for the best OCS interoperability story – while MS also positions the product as a PBX replacement.

Existing Market is Eroding

The PBX makers need to be looking at reinvention.  It isn’t about dial tone any or hardware any more.  It is about software ingenuity, unified communications, and cost reductions. The drivers around phone system sales are advanced UC features – such as presence, videoconferencing, and collaboration. These are the core strengths of Skype. Integrating them into sophisticated, mature call processing, messaging, along with complementary hardware is the play I see.

So if the PBX makers aren’t selling servers (that is going to Dell, HP, and IBM), and not selling phones (multiple solutions available for SIP based endpoints), and don’t have core strengths in desktop software – what is left? The fact is a strong communications solution is changing and involves many pieces; a core PBX vendor has many of the necessary parts, but stronger integration with the desktop, carrier capabilities, wireless integration, and a worldwide installed base looks pretty strong to me. The current UC solutions- that only work around specific hardware isn’t the right approach. Communications needs to cross borders, departmental borders (IT/Voice), corporate borders (videoconferencing with customers and suppliers), and national borders (worldwide software distribution on completely disparate systems). Skype can enable this with a strong call processing foundation.

Offensive Strategy in a Defensive Market

The fact is PBX makers are under attack, on every front.

To the South, they have the new players – companies like Microsoft, Google, IBM (and Skype) with strong UC offerings that are expanding their voice capabilities. These companies promise “transformational” solutions to old telecommunications problems and threaten both carriers and equipment makers via hooks from their installed solutions.

From the East we have the traditional phone system model coming to an end – not just the traditional “ports” model of pricing, but all hardware. Siemens, Avaya, and now Mitel all make their core software available for third party servers. SIP trunks are eliminating the need for PRI cards. Companies like Polycom, Tandberg, Snom, and Grandstream are going after the phone revenue. Even the companies that “make” their own phones are generally outsourcing the core chipset to companies like Broadcom.

From the North we have the existing or traditional direct competitors – yes maybe Nortel is dropping out – but the competitive nature of the business is as fierce as ever. Cisco differentiates with their network infrastructure, Avaya uses its installed base and maturity. The abilities to differentiate beyond that are somewhat short term and limited (price, new features, strong dealer, etc.). Skype offers a differentiation with significant value and long lasting.  

From the West we have the cellular networks that are quietly improving their value proposition. Ten years ago, the cell phone was simply a land line/PBX line alternative that offered low quality mobility for a higher per minute cost. Today the cell phone provides our on-the-go connection to our connected world, the voice part of its value greatly diminished to make room for all that other value; email, chat, Internet, applications. Many small organizations are eliminating their phone systems using wireless solutions instead.  The administrative services aren’t there yet for larger organizations – but really how much longer? What is keeping the cellular networks from offering a simple way to manage numbers/ devices (DIDs), unified messaging, an ability to transfer calls, a corporate (shared minute) plan, or abbreviated internal dialing? We know it is coming.

EBay is going to spin-off Skype, which is likely. An IPO would be interesting, but unlikely. But an IPO would result with little impact to the telecommunications/UC space. Basically, no big deal. I don’t think things would be much different other than improvements for EBay’s core business.

But a strategic acquisition could make a huge difference in our humble industry. I don’t see much value for IBM, Microsoft, or Google – other than kill it off. But I see a tremendous amount of value for a PBX player.