Microsoft Crosses Swords with Cisco

Microsoft surprised many observers today by announcing the acquisition of Skype. By now, I’ve already read at least a dozen articles about this acquisition and since my blogging is extracurricular, I had to wait until the kids were in bed. Therefore, I will try not to repeat what everyone else already said but rather examine the acquisition from a different perspective. I see Skype as a major move in Microsoft’s war on Cisco.

Cisco has been working on unified communications at least since their March 2007 acquisition of Webex. Unified communications (UC) makes a lot of sense for Cisco which had already dominated network communication with its routers and switches. Cisco has also made a lot of progress in Internet telephony or voice over Internet Protocol (VoIP) as we like to call it. And once the human communication such as Webex was added to the picture, unified communication was born.

Skype is a Luxembourg-based company that was founded in 2003, acquired by eBay in October 2005 and Spun off to an investment group in November 2009. Skype is supposedly very profitable and with 170 million users, it is a tremendous asset. Skype has been clearly looking for a buyer since the spin-off and the possible suitors were rumored to be Facebook and Google. But in the end, Microsoft stole the show for a hefty price of $8.5 bln - the largest acquisition they’ve ever made.

The acquisition shows that Microsoft is willing to make big moves to get back at the new generation of competitors - from Facebook to Google and Apple. Microsoft is aggressively pursuing the mobile market with its own Windows Phone operating systems and a dozen or so partnerships with smartphone hardware manufacturers including Nokia who recently bet the farm on Windows Phone. And given that both mobility leaders, Apple and Google, have their own online communication offerings with Apple FaceTime and Google Voice, Microsoft needed to counter.

Skype offers great voice and video communication along with many advanced capabilities such as conferencing, voice mail, etc. But Skype will also give a great boost to Microsoft’s Lync offering. Lync is all about unified communications with capabilities such as presence, instant messaging, Web conferencing, and enterprise voice (VoIP). While some of the capabilities are duplicate between Skype and Lync, the very popular Skype service gives Microsoft a tremendous installed base as it straddles the consumer and the enterprise market which aligns well with Microsoft’s ambitions.

A major attraction of Skype for Microsoft must be its reach - it allows calls to non-Skype land-lines and mobile phones and it runs on practically all desktop and mobile operating systems. Contrast that with Apple’s FaceTime which only runs on iOS and Mac and thus faces an uphill adoption battle. Microsoft also needs to convince the carriers to embrace Windows Phone 7 devices and Skype might give them a great leverage or possibly an alternative.

With its focus on Lync and voice, however, Microsoft appears to have declared a war on Cisco. Cisco has been building out its unified communications business for several years with no major competition in sight and with a great leverage provided by its hardware business. Sure, Cisco competed with several unified communications players from Avaya to IBM and Siemens but none of them came even close to Cisco’s breath of offering and market presence. And the fact that all that voice and video traffic may cause customers to upgrade their hardware was an added benefit.

Well, that quiet time may be over now as Cisco found a mighty challenger in Microsoft. The Lync/Skype combination is a strong contender to Cisco’s collaboration and unified communications. Pretty exciting times, if you ask me!