13 Comments

Summary:

With 560 million registered users (124 million of which are active), but only 8.1 million paying customers, Skype could use some help. Cisco makes a great deal of sense as a buyer, because it can monetize Skype’s user base in a way that Skype never could.

Credit: Malthe Sigurdsson

Free? Forever? Hmm.... Credit: Malthe Sigurdsson

Skype is apparently up for sale, with Cisco the likely buyer. True or false, Cisco makes a great deal of sense as a buyer, because it can monetize Skype’s user base in a way that Skype never could. With 560 million registered users (124 million of which are active), but only 8.1 million paying customers, Skype could use some help.

This may sound like heresy to acolytes of Silicon Valley economics. After all, the new economics of software go something like this: Give great stuff away, then charge for advanced features for the few who need them.  In open source we call it “Open Core.” For Silicon Valley Web entrepreneurs, it’s “freemium.”

In both cases, it’s sub-optimal.

No, it’s not because of skewed ideas of user freedom, but because it ends up being difficult talking out of both sides of one’s mouth. A marketing message that reads “This is a great product! (Just not for you…)” is tough to articulate and maintain.

Yes, it can be done. However, it’s very hard.

Now consider Cisco and Skype. Cisco doesn’t have any problems getting paid for its software, hardware, and services. It sold $40 billion worth of both last year. What Cisco doesn’t have is a low-cost/free option to drive adoption of its technologies.

Enter Skype.

Skype, as stated, has lots of user adoption. While Skype is no chump at $406 million in annual sales — and it seems to be getting better at up-selling its user base– it will be easier for Cisco to negotiate an “upgrade to x” deal than it will for Skype with its new Connect services.

At Alfresco, my previous employer, the company was highly distributed, and we used Skype extensively to connect our home workers and remote offices. While I paid to use SkypeOut when I needed to call home while in London, I may have been the only one in the company to pay Skype any money.

Net income to Skype for our company of 100 employees, all of whom were active users of Skype? Maybe $2.00 per month.

Skype was good enough for 99 percent of the employees, so why would we pay?

Cisco can offer plenty of reasons. Companies like Alfresco grow up. When they do, they need more sophisticated video and phone conferencing solutions than Skype can provide. Cisco has them covered. Start with Skype, then move to Cisco gear.

It becomes even more interesting if Cisco finds a way to integrate Skype calls with its more expensive hardware and software solutions: something like Vidyo, which does just that. (Another possible acquisition, Cisco?)

This blending of free services, both open- and proprietary, with separate, paid offerings is the winning business model going forward. Google does it. Facebook does it. Red Hat does it.

Cisco looks likely to do it, too, with a Skype acquisition. Cisco-plus-Skype appears to be the perfect example of how to accelerate a business using a free complement. “Free” can mean a great deal of cash, done right.

Related content from GigaOM Pro (sub req’d):

Report: The Enterprise Videoconference Lanscape, 2010 – 2015

  1. What does Skype have to do with user freedom?

    It’s a fallacy to imply Skype is “open core” software. Open core software specifically refers to software freedom and licensing. Skype is proprietary through and through—it has nothing to do with open core and while it has and is an excellent value, it has little to do with user freedom either.

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  2. Cisco makes phones. Cisco makes routers. Cisco buys Skype, makes IP mobile phone..?

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  3. I think Cisco purchasing Skype makes a great deal of sense for both companies and have discussed this as recently as yesterday on my website (ahem). But —

    I am not at all following your logic. Cisco is hauling in $40 billion in sales. Why does it need a “low cost/free option to drive adoption of its technologies.” Like what? Did I miss something?

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  4. Facebook should buy Skype. For a persistent client, presence options, easy comms integration through a lowest-cost architecture.

    Apple should buy Skype. Since they have the juice to solve Skype’s big mobile problem, and Skype would be creatine (or crack) for Facetime.

    Google should buy Skype. For the registered users. And just to get turned down by the FTC.

    Skype should buy RingCentral. To reach small businesses and monetize their service.

    Cisco? Well, they did announce home videoconferencing through televisions, and their business services do need persistent presence tools.

    Someone should buy Skype. To extract the other 90% of their potential.

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  5. Yes. And, in order to justify another tier of service, Cisco can add better quality in areas such as image quality and fewer dropped calls.

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  6. Thanks Matt. Two thoughts: Firstly, Cisco does have a free beta version of WebEx that has (or at least did) integrated VOIP. Secondly, Skype – the name being derived from Sky peer-to-peer is based on a completely different network model than Cisco uses for its collaborative services. Wondering if you could comment further.

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  7. What I am worried about is that Cisco might buy Skype for chump change, and then begin treating them like they treat most of their current Cisco customers, and initiate a modest charge for the “formerly free” services. In other words, what if they give free unlimited calling to all phones in the US (like Google Voice already does) but Cisco CHARGES for the new service, and then increases the cost of calling the rest of the world.

    You see, the basic problem is that most of Corporate America (and this includes Cisco, Microsoft, HP, etc.) are built around the “charge for services” model, and have their executives, board, and stockholders as their focal point, NOT their employees or their customers or the greater good of the community. They are constantly on the lookout for a “greater return on our investment.”

    Google, on the other hand, is customer and employee centric. The fact that they treat their employees well makes their employees happier and more productive. Their goal is to build better products, not to enrich shareholders. The customers receive better products for NO cost, or a very reasonable cost. The ADVERTISERS subsidize the cost of providing the services Google offers, and they get more bang for their buck because their dollars are spent on targeted marketing, not shotgun marketing. (Ever notice that on Microsoft and Yahoo’s sites, they CHARGE advertisers to force YOU to look at ads you have NO interest in?) With Google, the ads are relevant to your interests, so you don’t mind them, and the costs to the advertisers are lowers because they are not paying for views by people uninterested in their products. So the employees win (with better working conditions and more freedom), the advertisers win (lower costs, more effective targeting), the customers win (free or low cost products), and then something called Market Domination happens when more and more customers sign up for the free products, and pretty soon the stock prices shoot through the roof. (444% increase in the past 5 years. Compare that rate of return to Microsoft or Cisco.)

    Will Cisco come to realize they need to keep Skype free and use the service to market upgrades to its own products, or get into the marketing business and sell relevant access to Skype’s customers? Who knows. I am not confident that Cisco knows anything about anything except their OLD way of doing business, which is very much outmoded.

    How long will it take for the Chinese to clone and counterfeit every current profitable Cisco product and sell it for half price? What will happen to Cisco’s bottom line then? What will they do? Boycott China? Sue them? Get their products banned in the USA? Is the powerful entertainment industry able to stop Chinese counterfeiting of music and movies? When will American industry realize that the new world economy requires new mechanisms for marketing and distribution and pricing? The old ways are obsolete.

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  8. [...] could mean acquiring Skype, which has endeavored to push into the living room through its SkypeKit offering. A move like that [...]

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  9. Sergey Nikolayev Friday, September 10, 2010

    I use Skype in form of DECT wireless phone for last two years. It is Linksys model, (CISCO’s subsidiary).

    And I must say I like it. I pay $10 a month for Unlimited World plan, which gives me possibility to talk a lot to my friends.
    And I spent up to extra $15 a month for calling to other none covered regions, especially mobile phones. It is perfect for long distance calls.

    But what it greatly misses, especially in Canada where Rogers and Bell block all competitors, it is high quality local service. Skype in is prohibited for some weird reasons understandable only to aboriginal British descents.

    Skype provides a lot other ways to communicate for example I can use my account from several different places simultaneously. That allows to me to chart from computer and speak with Linksys Skype phone with the same person at the same time.

    What is bad about it:
    – My Linksys has very slow address book, it is really frustrating fact.
    – Video is useless for home use. Having video conferences for business is good idea, but for home is quite useless. I don’t want to be in situation when my relatives pop-up naked in background while I make video call.

    So generally it is not bad idea for CISCO to take Skype, but it would create serious tensions with cable providers, they already loose their content distribution, now if Cisco take on Skype and makes good hardware in price range between 60-100 dollars, it would kill land lines completely.

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