Why Skype is perfect for Cisco

One of the biggest dilemmas the online auction site eBay had with Skype was figuring how to successful work the technology into its core business. At the same time, eBay also wasn't able to make Skype's own business model profitable enough to justify its huge expense.

By contrast, Skype's business and technology would fit nicely into Cisco's existing product line. In fact, Cisco wouldn't have to make Skype's traditional business model, which generates cash mainly from its Skype Out service, profitable to still make an acquisition of the Skype technology a huge success.

"Embedding the Skype technology into some of Cisco's existing products, like WebEx and Unified Communications, will only make those products more valuable," said Zeus Kerravala, a senior vice president with Yankee Group. "So they wouldn't necessarily have to make the traditional consumer Skype service hugely profitable."

Video is keyCisco is all about video these days. In fact, that's all CEO John Chambers can talk about. At a recent event in New Jersey, Chambers said video is quickly becoming the killer app of all IP networks, including the Internet itself. With each new evolution of TV, the applications consume more network resources. And this feeds Cisco's business, as well as other businesses.

The most natural

The most natural and easiest place to integrate the Skype technology into Cisco is in Cisco's WebEx conferencing service. WebEx is a leading collaboration tool that allows businesses to share documents and communicate online with one another. Skype video and voice integrated into that service would take WebEx's service to a new level. Many businesses large and small are already using Skype video anyway.

Skype technology could also be a nice complement to other Cisco products. For example, Skype video would also fit nicely into Cisco's other corporate unified communications products providing a video element to the voice over IP calling and presence applications. It could also be used to bring Cisco's telepresence video conferencing service to the masses.

The past few years

Cisco has been selling its high-end videoconferencing equipment to large companies for the past few years. And in January at the CES show in Las Vegas, the company said it would be testing a consumer version of the product that offers a similar video conferencing experience at home. The telepresence system will use consumers' existing high-definition TV sets and broadband Internet connections.

But even with new deals in the works, Skype's revenue stream is still predominately tied to one service: SkypeOut. This is the Skype service that allows users to call regular phone numbers from their Skype account. Considering that only 8.1 of its 124 million active users are actually paying customers using this service, the company's revenue stream is somewhat precarious.

Part of Cisco

As a part of Cisco, Skype wouldn't have to worry if its traditional consumer business stumbled. Unlike eBay, which couldn't find a good fit for Skype's existing business, Cisco could still benefit from Skype's free consumer services even if it made little to no money. Skype has a total of 560 million registered users worldwide, with 124 million using the service every month. That is a lot of eyeballs throughout the world that could associate Cisco's brand with making Skype calls.

At the end of the day, Cisco's main business is still selling switches and routers that shuttle traffic across corporate networks and around the world via the Internet. Video is the most bandwidth intensive application out there. And anything Cisco can do to drive more video usage is money in its pockets. That is why a Skype acquisition makes sense as did the Pure Digital acquisition.

The only potential snag is that if Cisco were to acquire Skype, it would then be in direct competition with some of its biggest customers, phone companies such as AT&T and Verizon Communications. But Kerravala doesn't think that is a big worry for Cisco.

More competitive position with some of its customers

"It definitely puts Cisco in a more competitive position with some of its customers," he said. "But the market is moving toward VoIP anyway. And there are just so many synergies between Skype and Cisco."