Competitor Acquisition Announcement Summary

Microsoft Acquires Skype for $8.5 Billion

OVERVIEW
On May 10, Microsoft announced the acquisition of Skype for $8.5 billion. Microsoft made an unsolicited offer to Silver th th Lake Partners in mid-April, the price was finalized April 18 , and the deal closed May 9 . It appears that the acquisition is primarily a move to compete with Google for advertising revenues on the back of consumer video, and to complement existing Microsoft search offerings. In their press conference, Microsoft and Skype discussed reaching billions of users worldwide, emphasizing the value of video as it relates to advertising and improving the user experience for consumers on home and mobile devices. While Microsoft talked about the potential for linking across home and work environments, the emphasis was very much on the consumer applications and revenue streams it will derive through Skype. There were limited references to Lync and none to Office 365. While there are potential longer term implications for Cisco, Microsoft was careful to avoid being dragged into discussing potential Skype applications for enterprise Unified Communications and Collaboration. It is clear, however, that this move will put Microsoft further in conflict with Service Provider customers having just become the worlds largest service provider in subscriber numbers.

ANNOUNCEMENT DETAILS AND ANALYSIS

Skype acquisition is about competing with Google The primary reason for the Skype acquisition is to compete with Google in the lucrative search and ads insertion market. Secondarily, it is clear that Microsoft did not want to allow Skype to fall into the hands of its competitors. With an IPO in sight, Skype had to build an enterprise communications business to move away from being viewed as a commodity minutes reseller. In a Microsoft context Skype has a different meaning. It allows Microsoft to extend Bing and ad insertion to a Skype client that can be ubiquitous across the desktop, mobile platforms, and gaming devices reaching over 170 million users. The acquisition gives Microsoft a new competitive edge in the ads war. Skype joins Microsoft as a 6 Business Unit headed by Tony Bates The integration of Skype will prove challenging because Microsoft has several equivalent technologies, namely MSN Messenger, Lync, and Office 365. Though Skype will operate as a separate business unit, employee retention may prove challenging. Retaining their team will be a key to Skypes ongoing capacity to innovate. Tony Bate will become th the 7 President at Microsoft. This may result in internal rivalries and continued changes in the executive suite. Microsoft will leverage Skype and the Facebook partnership to strengthen its social media position Microsoft will be able to collect consumer data and design new products based the social and viral attributes of the Skype solution. A typical user communicates with eight to ten people using a Skype account. The partnership between Facebook and Microsoft/Skype will potentially improve Microsofts social media position versus Google. Video-based advertising is a key area of focus During the press conference, Tony Bates emphasized the ability of the Skype/Microsoft platform to reach billions of potential customers focusing on the potential to leverage this for advertising insertion, search and communications for consumers. Skype video currently accounts for 40% of its total minutes. In addition to launching multi-party video, Skype recently acquired Qik, which developed video streaming, recording and sharing capabilities for mobile devices. Skype has mobile clients that work across all the major mobility platforms. Skypes latest video capabilities will provide Microsoft an opportunity to deliver rich media advertising across home and mobile devices.
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Steven Rahman, Matt Barham

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Microsoft/Skype Acquisition Response

Skype connects home and work devices While Steve Ballmer did not focus on making Skype an enterprise solution, he alluded to a future in which Skype would work alongside enterprise solutions including Lync and Outlook/Exchange. He talked about using the Skype and Microsoft solutions to connect your life enabling users to use a combination of home and work devices. Specifically, Microsoft detailed supporting: Continuing Skype availability on non-Microsoft clients Microsoft devices, including Xbox, Xbox Live, Kinect, and Windows Phone Enhancing Skype by connecting to Lync, Outlook, and other business products

Fig 1. Microsofts view of where Skype fits into the consumer and enterprise communications architecture

Cisco Response: Skype Acquisition Does Not Threaten Cisco Business

According to Ballmer and Bates, Lync continues as Enterprise UC&C productnot Skype During the press conference, Ballmer asserted that Skype would not compete with Cisco and WebEx. He emphasized that Lync already served that purpose, nor did he mention Office 365 in his response. In addition, Tony Bates only mentioned the early stages of Skype Connects SIP trunking as being an enterprise play. The emphasis of the announcement was around 170+ million consumers, video advertising, and social medianot enterprise-class UC and Collaboration. That said, connecting home and work was highlighted as an advantage when competing in the enterprise segment. This can easily be countered by pointing to the following issues: Proprietary Lync or proprietary Skypewhat gives? Microsoft already developed audio and video proprietary codec for the Lync product. The IP telephony and video elements of Lync have seen limited adoption in the enterprise segment. Skype introduces a new layer of proprietary codec for its voice and video solutions. If Microsoft decides to incorporate Skype into its enterprise UC portfolio, it might be compelled to replace the current Lync product; otherwise, it would take several years to merge them into a single solution. Key question for the customer: Are you willing to invest in a Lync product that is likely to go through a radical revision? Single unified client, no more Microsoft claimed that one of its differentiating features was its single client and the interoperability of the various UC products. Skype introduces a new client, new infrastructure, and new proprietary technology. There is no current integration nor is there an articulated integration roadmap. Key question for the customer: How long are you willing to wait for clarity around the single client?

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Steven Rahman, Mark Jackson, Matt Barham

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Microsoft/Skype Acquisition Response

Three disparate products complicates Microsofts video offering Microsoft developed 1) Lync RTV desktop video, 2) partnered with Polycom for video, and now 3) acquired Skype with its proprietary video technology. Three platforms will create compatibility issues with endpoints and video transcoding. The acquisition will likely impact the Polycom partnership. In addition, it becomes more complicated for Microsoft customers to plan a Unified video solution for their organizations. Key question for the customer: It took Polycom five years to develop integration with Microsofts proprietary RTvideo codec, how long are you willing to wait for Microsoft to deliver Skype as an integrated video solution? Skype is not an enterprise-class solution. Period. Skypes current offering and track record does not meet the levels of reliability and security required of enterprise-class voice and video solutions. In December of 2010, a massive outage impacted at least 20% of Skypes users for more than a full day. This was only one of many well-documented outages. It is not clear if Microsofts SaaS solution is capable of providing enterprise grade service. During the week of Skypes acquisition, there were multiple significant BPOS outages. Without a deterministic enterprise-grade architecture with QoS, SLAs, and high availability in place, Skype is currently not viewed as reliable enough for enterprise customers. Many analyst reports have stated that Skype falls short of delivering specific enterprise-class UC capabilities (e.g. E-911). From a security perspective, enterprises using Skypes peer-to-peer architecture wont know exactly what type of information is traveling across their networks. In addition, reports have been published documenting information leakage that occurs regardless of the encryption methods implemented. Finally, the Skype application has been subject to numerous exploits that have allowed hackers to compromise end-user systems. Key question for the customer: Are you willing to risk your business on a communication architecture with historical issues around quality, security, and availability? Microsoft raises the bar for competing with its own SP partners Many Service Providers (SPs) communicated frustration that Microsofts direct offering of BPOS and now Office 365 services actually compete with the SPs efforts to sell the same solutions. For example, a major North American SP stated that they have no intentions of increasing efforts around Office 365 or any new solutions that may result from the Skype acquisition. By acquiring Skype, Microsoft instantly became the largest international voice service provider worldwide, which will inevitably increase competitive tensions between Microsoft and its own base of SP partners. The acquisition can be viewed as anti-Service Provider. Skype will compete for traditional voice minutes rather than replace call control systems or existing PBXs. SPs may even be encouraged to implement new broadband and mobile charges or even pay per bit models. There is an opportunity here for competitors to align their interests and challenge jointly with Microsoft and Skype. Key questions for the service provider: Does it make sense to align you business strategy with a vendor who invested $8.5 billion in a platform that directly competes with your business? Additional References Selling Competitively on IWE http://iwe.cisco.com/html/index.jsp#url=/web/competitive/Microsoft Microsoft Competitive Site http://wwwin.cisco.com/competitive/

Cisco Company Confidential

Steven Rahman, Mark Jackson, Matt Barham

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