Skype has certainly been making all the right moves of late, and Monday's announcement that the company will be hiring Cisco (Nasdaq: CSCO ) executive Tony Bates to run the company shows it plans on increasing the company's value even more before its initial public offering.
Growing the consumer business
The hiring of Cisco's former head of enterprise, commercial, and small business is one of many smart business decisions the company has made since being spun off from eBay (Nasdaq: EBAY ) to new majority owner Silver Lake Partners for $1.9 billion earlier this year. Skype has always been a strong player in the low-cost consumer VoIP market because the company offers free computer-to-computer calls, and calls from computer-to-phone cost $0.01 to $0.02 per minute. The company has recently been working on creating valuable partnerships to distinguish it even more in this segment. The company is in talks with Facebook to allow Skype to be run through the popular social networking site. This will allow Skype to have access to Facebook's 500 million users. Another recent partnership with Verizon (NYSE: VZ ) has given the company's smartphone application a needed boost on the Verizon network.
Looking for enterprise growth
However, the company knows it must grow its enterprise business, especially as Google (Nasdaq: GOOG ) has begun to offer free video calling through its Gmail email platform. Skype has more than 124 million users per month. However, only 8 million of those customers actually pay for the service. With that said, Skype is on pace to make more than $1 billion in revenues next year. So far this year the company has earned $13 million, with revenues of $406 million.
Skype wrote in the company's recent IPO statement, "We believe the business communications market represents a large opportunity for Skype. Approximately 37% of over 40,000 of our connected users surveyed in the first quarter of 2010 told us that they use our product platform occasionally or often for business-related purposes."
So the key for Skype is to convert these business users into paying business or enterprise users by offering more specialized service, better connectivity, and better technology. So perhaps this is where Cisco comes in.
Let's make a deal
The rumors of a Cisco scooping up Skype have long hung over the investing ether. The hiring of a former Cisco executive to run Skype has not helped to squelch the rumors. So does it make sense?
Skype has certainly cannibalized some of Cisco's enterprise business. As companies have continued to cut back costs over the last few years, pricey teleconferencing equipment and technology were no longer a must have at offices, especially when less expensive and free services were becoming more readily available.
Skype has not been the only company to cut into Cisco's businesses. Fierce competition continues to dominate the landscape of the traditional teleconferencing industry. Juniper Networks (NYSE: JNPR ) and Polycom (Nasdaq: PLCM ) have recently partnered up to form their own teleconference alliance to counter Cisco's purchase of Tandberg.
With this business expected to remain tight, Cisco would do well to diversify itself from these other hardware and network heavy competitors by acquiring a strong brand name that dominates the PC VoIP space in Skype. On the other side of the table, Cisco could offer Skype a smooth transition into the crowded enterprise space, as well as improve the companies efficiency and profitability through existing interoperability and partnerships with software specialists such as Microsoft (Nasdaq: MSFT ) and IBM (NYSE: IBM ) . An acquisition would also reward shareholders of Skype early, instead of going into a volatile market via IPO.
An acquisition seems to make sense for both Cisco and Skype, and the hiring of Tony Bates has certainly added fuel to the acquisition fire.
Do you think Skype will be acquired by Cisco, and how do you think a deal would work out? Let us know in the comment box below.
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