Margin Protection Is Behind Cisco's Late Shot at Microsoft-Skype Acquisition

Rob Enderle

With Microsoft's acquisition of Skype approved by the European Commission last October and officially closed in the same month, it came as a bit of a surprise that Cisco decided to move against it. This is kind of like waiting until the bride and groom are back from their honeymoon to object to a marriage. Chances are that it won't undo what was done and all you'll do is piss off both parties and a whole mess of in-laws. While it might make a foundation for a wacky romantic comedy, it doesn't make for good business and given the focus on Cisco's executive team of late, you'd think looking like idiots would be low on its priority list.

 

What is particularly strange, if you read the Cisco Blog post, is that its complaint seems to be based on a practice of making videoconferencing systems not operate together, which has actually been championed by companies like Cisco. In effect, the company seems to be complaining about a practice that it has been practicing. Cisco is hardly the poster child for interoperability in the networking space and often prefers its own technology over a standard that has been the bane of competitors and IT folks trying to create mixed environments. So what is really going on here?

 

Cisco Is Worried Skype Will Kill High Cisco Margins

 

The historic problem with videoconferencing is that systems don't talk to each other. In this, the Cisco blog is absolutely correct: A person making a call on a video-enabled device should be able to connect seamlessly to another video-enabled device. But should and does are vastly different. In Cisco, for instance, its telepresence system wouldn't connect to its failed UMI videoconferencing system, which only seemed to work with other UMI devices and Google TV. Google TV, as implemented by Logitech, wouldn't connect to Lifesize, its business teleconferencing product. And try to get Apple's FaceTime to work with anything non-Apple. In fact, since this technology was first identified in the 1960s, the big problem with videoconferencing is that it doesn't interoperate.

 

Microsoft, unlike the vast majority of vendors in this space, isn't a hardware vendor but a platform/software vendor. Its goal in life is to get its stuff on every desktop it can find regardless of who makes the hardware. Since its own anti-trust challenges it has been a champion of both interoperability and technology licensing so that, under it, Skype could actually become the industry standard for videoconferencing that we, as users, have been not so patiently waiting for. In short, it could actually fix the problem and Skype was already working on FaceTime interoperability when the merger was announced.


 

So this acquisition could address the very problem Cisco wants addressed, right? Wrong. Cisco doesn't actually want this problem fixed. In short, its worry of margin collapse is real.

 

Common Standard = Commodity Hardware

 

Remember decades ago when AT&T owned the U.S. phone system? You rented phones because buying them was too expensive and AT&T had impressive margins. Once the AT&T lock-in was broken, AT&T phones weren't even competitive anymore, phone prices dropped and you could get great phones for a lot less money. Right now, if you are a company like Cisco and you sell a telepresence system (and Cisco generally gives the first one away as a free sales incentive), you have to stay with Cisco for every other system you buy. Cisco can maintain high margins because no one can bid into the now-closed Cisco shop and Cisco becomes a mini-monopoly in your firm.

 

Skype could do to Cisco what the U.S. government did to AT&T and provide a common standard where vastly cheaper systems could come in and force Cisco to compete on price collapsing its margins in this lucrative area, while actually making the technology more useful.

 

In short, Cisco is attempting to block the very thing it is claiming to be behind: a low-cost common solution to interoperable videoconferencing.

 

Wrapping Up: Being Pro-Skype

 

Here in the U.S. this is an election year where it isn't uncommon to find politicians saying one thing and meaning another. In this case, had Cisco, as the market leader in networking, wanted to drive true interoperability, it had the power to do so by embracing open standards, licensing technology and using software from third parties who could move between vendors. But Cisco's margins are tied to the proprietary nature of its solutions and its fortunes are tied to videoconferencing systems being proprietary. It isn't against the merger, it is against Microsoft driving Skype as a standard, and its efforts are focused and timed to block the acceptance of Skype.

 

I seem to recall that AT&T tried to block the use of third-party devices on its network as well and that didn't end so well for that company. Since I actually do want this stuff to interoperate, my hope is that Skype or some other hardware-independent standard does win out so that the promise of low-cost and ubiquitous telepresence solutions becomes real in my lifetime.



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