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Summary:

Skype, the Internet telephony company that is in the process of being acquired by Microsoft has one ambition — get to a billion users – even if it risks the company losing control over its customers. And that just is fine for Facebook.

Mark Zuckerberg

Skype, the Internet telephony company that is in the process of being acquired by Microsoft, has one ambition: to get to a billion users, even if it risks the company losing control over its customers. At the same time, the company also wants to become synonymous with video calling.

“For us, the most important thing — our goal is a billion [users] and this will help us get there, ” Tony Bates, chief executive officer of Skype said at a press event earlier today. He is betting that Facebook will be able to get Skype’s paid products in front of more people. “I did allude to the fact that there’ll be a way to get Skype paid products,” he said.

“Today is the start of a long strategic partnership which will include exposure to free and PAID products for all Facebook users. Makes perfect sense for us,” said Skype spokesperson Brian O’Shaughnessy. He pointed out in an email that CEO Bates wants Skype to equal video calling, and this helps the company get to that point — and will help make “video is fundamental to the new social construct.”

Skype had added support for Facebook in its Windows client recently, but it is still not clear how that integration has worked out, both in terms of generating revenues and more engagement between the two services. In the fourth quarter of 2010, Skype averaged more than 145 million connected users per month. Facebook has about 750 million members.

Same Skype, Just Thinner

Bates pointed out that Facebook’s video chat was using the same peer-to-peer technology that is used by Skype. “Same free Skype service, but trimmed down to fit within Facebook,” is how he described it. In order to use the service, you need to download a java plugin — if you don’t have it installed you are invited to a video call, and given the opportunity to download the plugin (you don’t need a Skype account to use the service).

Even if we buy into the argument that Facebook can get Skype a lot of new customers, I still think it is a highly risky strategy, and it runs the risk of the company losing a grip on its customers. Let’s remember that at one point even IBM thought Microsoft was only going to help them sell more computers and make more money.

Facebook could learn a lot more about Skype’s customers through this partnership, and then try and woo them into Facebook and obviate the need for Skype all together –theoretically speaking, Facebook could replace Skype with its own video-chat backend and no one would notice. In fact even today, if you don’t look hard enough you will miss that Skype logo when the chat window opens up. It is there, and yet it is not there.

Good for Facebook isn’t Great for Skype

Furthermore, even if Facebook plays clean and straight, how much does Skype get from this deal. My skepticism stems from the fact that Facebook is skewed almost entirely towards average folks, while Skype’s premium video services are largely used by professionals — whether they belong to a startup or work for a big company. More importantly, if Google’s Hangout becomes popular like I predicted, Facebook won’t have an option — it will need to roll out group video chatting. Guess what is Skype’s premium service? Group video chatting & conferencing. And let’s not forget, Skype has some challenges around monetization, without Facebook.

Some of my fellow Skype watchers feel that it is not such a bad deal. Alec Saunders, a veteran of internet telephony argued that since Skype is too quirky for his wife and too weird for his mother, Facebook’s version actually might be a good thing for Skype usage and will get them to a billion people.

The questions is to what end? Andy Abramson who blogs about internet telephony believes that in the end it will be about Facebook vs Google. To that extent I agree. Ironically Skype, which at one point wanted to turn carriers into dumb pipes is being turned into a dumb pipe itself.

Don’t get me wrong — I am glad Skype and Facebook friended each other. For the record, I had suggested last year and again earlier this year that Facebook buy Skype. Why?

In one swoop, Facebook would dominate what I’ve maintained is both the new age and classic social networking. They will have people’s credit cards; they have their real-world phone information; and in the end, they have a better, more useful, social graph than Facebook itself…..A simple search box inside the Skype client, and the two companies are starting to take attention away from arch-nemesis, Google.

Obviously that didn’t come to pass. Instead, the next best thing happened. Facebook’s rich grandpa – Microsoft decided to spend $8.5 billion on Skype. And somehow I feel that Zuckerberg just got a sweetheart of a deal.

  1. Om, insightful post as always!

    IMHO this is all about Skype’s bright future as *the* video calling service, integrated into dozens and dozens (and dozens) of communications experiences. You wrote it, “Bates wants Skype to equal video calling.”

    This deal is 5 years in the making and will help accelerate video calling’s growth with average consumers. So if video calling grows and Skype = video calling… then Skype wins more than it loses. Video calling is all about user education and acclimation. The more you use it, the more you use it.

    You note correctly that FB could always remove Skype later on and build its own video calling service. True… but if Skype doesn’t do this deal then that risk is still the same. Yes, FB blocked Skype from getting too deep a relationship with FB users in this integration. One can only assume that when paid Skype products roll out those FB video callers will become more and more aware of the Skype backend and other clients.

    Now if Google successfully commoditizes Group Video Calling by getting enough penetration and getting the experience right then Skype could find itself struggling to monetize, but again, that’s true whether or not it does this deal.

    My full thoughts are here: http://www.caveatcreator.com/2011/07/facebook-now-with-100-more-skype.html

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  2. Manpreet Singh Thursday, July 7, 2011

    Om, why do you believe Facebook might replace Skype with its own video-chat backend in the future? I thought the daunting task of providing a video server backend is what prompted them to go with Skype in the first place. Skype probably isn’t sharing their internals with Facebook with this deal either.

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  3. The fact that this is a better deal for Facebook doesn’t make it a deal that Skype could refuse. They share a mutual foe in Google and there is no shortage of companies with video calling technology that would have jumped at the chance to work with Facebook.

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  4. We will see…
    I see a slower Skype service unless you could use it through lite.facebook.com.

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  5. Skype lose big-time in this deal because they start losing their long-term Users who simply will not trust any of their business communication to be even remotely aligned with Facebook. Skype has always been a trusted provider to international tech teams working together; that trust starts to deteriorate as soon as Facebook enters the room.

    I believe we’ll see the heavy video call/international-business user migrate quickly to Google Plus (I already did). Is that any more secure? Not likely. But, there is the illusion of security that makes me more comfortable.

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  6. I wish them luck.

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  7. But Facebook dumping Skype makes the rich Grandpa mad. To what extent is Facebook patiently waiting for the lord of the manor to die, and ascend to their seat at the table? Tons of users sure, plenty of opportunities to make money, but MSFT’s got tons of cash, they’ve MADE money. The tension is delicious.

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  8. pk de cville Saturday, July 9, 2011

    I see the bigger story as the continuation of FaceBook and Msft getting into deeper alignment.

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