Business News

Microsoft Corp. announced that it would acquire Internet video and chat service Skype Global S.à r.l. for $8.5 billion. In other business news, Cisco Systems, Inc. announced disappointing results for the third quarter of its fiscal year 2011, while Rackspace Hosting, Inc. reported positive financials for the first quarter of 2011.

Focal Points:

• Microsoft and Skype have entered into a definitive agreement under which Microsoft will purchase Skype for $8.5 billion in cash from the investor group led by Silver Lake. This equates to $14.70 per user for Skype, down from the per-user price of $45.60 that eBay Inc. paid for Skype back in 2005. According to Microsoft, the acquisition will benefit both consumers and enterprise users, and generate new business and revenue opportunities.  Microsoft expects to make money back in operating cash flow from the acquisition in 116 days. Instead of integrating Skype into a Microsoft division, Microsoft has decided to keep Skype as a separate business unit, with Skype CEO Tony Bates as the President. Bates will report directly into Microsoft CEO Steve Ballmer, Microsoft added. Per the announcement, Skype will support Windows Phone, Xbox and Kinect, and a wide array of Windows devices. Additionally, Microsoft will connect Skype users with Lync, Outlook, Xbox Live, and other communities. Microsoft also said that it would continue to invest in and support Skype clients on non-Microsoft platforms. However, Microsoft offered no timetable or further details as to when and how it will make Skype available as part of any of its incumbent product offerings.
• Cisco reported that total revenues for the third quarter 2011 only rose 5 percent year-over-year to $10.9 billion. Sales from products increased 2.8 percent compared to the same period last year to $8.67 billion, while sales from services increased 13.7 percent to $2.2 billion. Specifically, revenues from switches fell nine percent compared to the third quarter 2010 to $3.3 billion. Meanwhile, the router business remained strong, and sales were up seven percent for the quarter to $1.86 billion, Cisco added. Unfortunately, net income for the quarter fell 17.2 percent compared to last year to $1.81 billion, making this Cisco's fourth consecutive quarter of disappointing earnings. As a result, the company announced that it would be going through a significant corporate reorganization. Cisco COO Gary Moore said that the company would eliminate $1 billion in costs out of its annual run rate from a baseline that would be set in the fourth quarter, which ends July 31. Neither Moore nor Cisco's chairman and CEO John Chambers would elaborate on layoffs or product eliminations, although Chambers said that in any market segment where Cisco cannot eventually be number one or two it will make cuts. The executives added said that a comprehensive portfolio review is already underway. The review will take about three months, and Cisco would elaborate during its fourth-quarter financial call.
• Rackspace announced total revenues for the first quarter of $230 million, up 28.6 percent compared to the same period last year. Managed hosting represented $192.9 million in revenues, up 20.9 percent compared to 2010, while cloud revenues soared 92.6 percent to $37.1 million, the vendor reported. Rackspace President and CEO Lanham Napier said that approximately 20 percent of the dedicated hosting customer base purchased cloud services in the quarter. As such, the company plans to push growth in 2011 by selling into its base of existing customers, selling clouds to hosting service buyers and additional cloud services to those who buy an initial virtual server slice. These new cloud services include Cloud Load Balancers for doing load balancing as a service across nodes on Rackspace's network, Critical Sites higher service level agreement (SLA) levels, and RackConnect networking between dedicated servers and clouds. According to the company, net income for the quarter also rose 40.9 percent year-over-year to $13.8 million. Rackspace also added more than 12,000 new customers in the first quarter, a record level for the company. Rackspace ended the quarter with 142,441 total customers, up 43 percent year-over-year. 

Experton Group believes Microsoft's Skype acquisition has the potential to provide the company with billions of new revenue opportunities and leverage the company into markets it has not yet been successful in, if played right. However, Microsoft's acquisition track record is spotty at best. Meanwhile, Cisco remains stalled and unable to get kicking again on all cylinders.

IT executives can expect Avaya Inc., Hewlett-Packard Co. and Juniper Networks Inc. to continue to aggressively work to take added market share from Cisco with lower cost products. This will force Cisco to refocus on its core markets and drop out of or reduce commitments to other markets. Cisco's UCS converged infrastructure business has been growing (almost $1 billion in annual revenues) rapidly but investment may take a hit as the company is forced to retrench. IT executives considering or committed to UCS (directly or through its partnership in VCE) need to discuss Cisco's UCS roadmap and strategy once the vendor has its new plans in place. Rackspace is nicely leveraging its existing business to expand into cloud market segments. IT executives should expect other managed service providers to do the same. However, IT executives must ensure that what is being sold as cloud services are truly that and that they are not paying additional fees without receiving the perceived value proposition.