Should Skype Be Cisco’s Gateway Drug?

Free? Forever? Hmm.... Credit: Malthe Sigurdsson

Skype is apparently up for sale, with Cisco (s csco) the likely buyer. True or false, Cisco makes a great deal of sense as a buyer, because it can monetize Skype’s user base in a way that Skype never could. With 560 million registered users (124 million of which are active), but only 8.1 million paying customers, Skype could use some help.

This may sound like heresy to acolytes of Silicon Valley economics. After all, the new economics of software go something like this: Give great stuff away, then charge for advanced features for the few who need them.  In open source we call it “Open Core.” For Silicon Valley Web entrepreneurs, it’s “freemium.”

In both cases, it’s sub-optimal.

No, it’s not because of skewed ideas of user freedom, but because it ends up being difficult talking out of both sides of one’s mouth. A marketing message that reads “This is a great product! (Just not for you…)” is tough to articulate and maintain.

Yes, it can be done. However, it’s very hard.

Now consider Cisco and Skype. Cisco doesn’t have any problems getting paid for its software, hardware, and services. It sold $40 billion worth of both last year. What Cisco doesn’t have is a low-cost/free option to drive adoption of its technologies.

Enter Skype.

Skype, as stated, has lots of user adoption. While Skype is no chump at $406 million in annual sales — and it seems to be getting better at up-selling its user base– it will be easier for Cisco to negotiate an “upgrade to x” deal than it will for Skype with its new Connect services.

At Alfresco, my previous employer, the company was highly distributed, and we used Skype extensively to connect our home workers and remote offices. While I paid to use SkypeOut when I needed to call home while in London, I may have been the only one in the company to pay Skype any money.

Net income to Skype for our company of 100 employees, all of whom were active users of Skype? Maybe $2.00 per month.

Skype was good enough for 99 percent of the employees, so why would we pay?

Cisco can offer plenty of reasons. Companies like Alfresco grow up. When they do, they need more sophisticated video and phone conferencing solutions than Skype can provide. Cisco has them covered. Start with Skype, then move to Cisco gear.

It becomes even more interesting if Cisco finds a way to integrate Skype calls with its more expensive hardware and software solutions: something like Vidyo, which does just that. (Another possible acquisition, Cisco?)

This blending of free services, both open- and proprietary, with separate, paid offerings is the winning business model going forward. Google (s goog) does it. Facebook does it. Red Hat (s rht) does it.

Cisco looks likely to do it, too, with a Skype acquisition. Cisco-plus-Skype appears to be the perfect example of how to accelerate a business using a free complement. “Free” can mean a great deal of cash, done right.

Related content from GigaOM Pro (sub req’d):

Report: The Enterprise Videoconference Lanscape, 2010 – 2015