Skip to main content

The Globe and Mail

Skype represents new wave of trickle-up technology

The purchase of Skype earlier this month highlighted three important themes: verbs are good, big companies like making money and businesses are getting more consumerized every day.

We've known for years that when a specific consumer brand name becomes the generic equivalent for the entire category (Kleenex, Xerox, Aspirin) that it was worth a lot of money. Products so honoured sell for premium prices and generate premium margins.

New technologies such as search, social, and real-time messaging have taken that to a new level, and turned nouns into verbs. We Google something when we search, we Facebook someone for a social network, and we Twitter when composing our 140 character masterpieces. Each one of those companies is valued for billions or tens of billions of dollars.

Story continues below advertisement

So when an established software company ponied up $8.5-billion (U.S.) for a company with a small loss and revenues of only $860-million, it is right in line with the other verbs. "Skype me" is the default phrase for making a phone or video call on the internet. That level of global brand mindshare is something - based on the comparables - that investors obviously figure is in the $10-billion ballpark.

Now everybody knows that Skype was acquired by a certain Redmond-based software company. But the lessons of this transaction would apply whether Skype had been bought by HP or Cisco or IBM or any large tech company, so I want to avoid talking about the specific buyer as much as possible.

When the deal was first announced, most analysts and commentators were all hot and bothered about where in the acquirer's product portfolio Skype was going to fit. Most focused on the consumer divisions: people playing games or on their cell phones would soon be able to make free IP phone calls. Stop the presses!

But those consumer businesses are only about 12 per cent of revenues and less than 1 per cent of operating profits for the acquirer and neither gamers nor cellular callers look like they would be willing to pay extra for making Skype calls. They'd love to use it for free, of course, but there's not much of an acquisition rationale for that.

On the other hand, the business productivity suite of software represents about half of all operating profits for the acquirer in the last quarter and those buyers are used to paying for things rather than getting them for free. That sort of pattern is true of most tech titans: sales to consumers may be high profile, but the big money usually comes in selling to corporations.

In the two weeks since the deal was announced, analytical consensus has swung around to this view. One article was even titled "Skype buy is about business, not consumers."

The acquirer's business suite already had voice and video calling functionalities, and worked just fine when I have used them. They were developed and refined over years, both internally and in partnership with leading telecommunications companies.

Story continues below advertisement

But it turns out that the Skype product, free for 93.5 per cent of regular users and viewed as primarily a low-end consumer solution rather than "enterprise grade," has its virtues too.

Which kind of makes sense. It has 170 million monthly users, and more than 600 million have used it at least once. Running on every kind of machine and running on every Internet network around the planet, its features have been refined by continuous feedback over the years, and both voice and video have become easy to use for anyone.

(Permit me a brief digression here. A year ago, I needed to do a videoconference presentation to 200 clients in Europe. Deloitte had a multimillion dollar videoconference suite in Toronto, and there was another, equally expensive system in France. We spent two weeks trying to set it up, and never got it to work. So I ended up doing it through Skype.)

Historically, leading-edge technology was pioneered in the enterprise, and then trickled down to consumers over time. At one time, touch tone phones, laser printers or computers were only found in offices.

In 2011, we are seeing the reverse. Having a solution that is robust, well tested, scalable across tens or hundreds of millions, requires minimal training and that users actually like to use turns out to be a good thing. Any multibillion dollar tech company knows a lot about developing software, Skype's buyer included. But "beta testing" on the scale of a global consumer offers a new development model, even for the tech experts.

This consumerization of enterprise information technology is becoming the new normal, at least some of the time. Enterprises are adopting tablets that started as consumer toys and businesses are using Twitter and Facebook for key marketing and customer service tasks.

Story continues below advertisement

Look for more consumer technologies and companies to be adopted and purchased by big tech companies that are primarily business focused.

Duncan Stewart has been researching technology since 1990, and writing about it in the media since 1999. A former pension/mutual/hedge fund manager, he now directs tech research at Deloitte Canada, and lives in Toronto.

His column will appear on every second Thursday.

Report an error
About the Author
Technology columnist

Duncan Stewart is the Director of Deloitte Canada Research in the areas of Technology, Media & Telecommunications (TMT). Duncan has two decades of experience in the TMT industry. As an analyst and portfolio manager, he has provided research or made investments in the entire Canadian technology and telecommunications sector. More

Comments are closed

We have closed comments on this story for legal reasons. For more information on our commenting policies and how our community-based moderation works, please read our Community Guidelines and our Terms and Conditions.