Last month’s announcement of Microsoft’s acquisition of Skype certainly triggered speculation, misplaced blame and other conspiracy theories on the blogosphere. It often sounds like a reporter wants to use Microsoft as the most convenient excuse for a post or article. It’s superficial, to say the least. Until Microsoft completes the acquisition, Skype operates as an independent but fully operational company, complete with warts.

Having participated in the major restructuring of a NASDAQ-listed company (and some subsequent acquisitions) and the acquisition of one of my previous clients by a NASDAQ-listed companies (as well as having supplied due diligence information for acquisitions of some of my previous employers’ customers) I’ve had a chance to walk through these exercises.

This post is simply my perspective on the challenges involved in closing such a deal and the short term benchmarks I am looking for in order to measure the impact of the acquisition.

First, some public facts,

• Last fall Skype announced the appointment of Tony Bates as its new CEO. Tony brings many years of business leadership experience with a major (and disruptive) player in the IP-communications space. He has certainly participated in, or been an observer to, some of Cisco’s acquisitions.
• Skype signed a long term lease for new office space in Palo Alto and moved there last December.
• Skype has been on a hiring spree for the Palo Alto office with respect to product managers and developers/engineers.
• On May 10, 2011 Microsoft and Skype announced that Microsoft would be acquiring Skype for $8.5 billion, acquiring a Luxembourg-based company, using cash that Microsoft has kept in Europe (or at least has not repatriated to the U.S.).
• Microsoft has built up a significant Bay Area presence at its Mountain View campus and is in the same time zone as Redmond.
• Last week the FTC filed a notice of early termination, without comment, effectively announcing there would be no objection on their part to closing of the deal.
• Until the deal closes, Skype CEO Tony Bates is and remains in charge, making the key decisions re ongoing business operations; it’s still an independent company reporting to its current investors. (Microsoft could incur legal liability were they to interfere in Skype’s decisions prior to the close.)

Today has seen a plethora of third party posts about executive changes at Skype. However, in the course of an acquisition by a publicly listed company, Skype’s hands are tied by the securities regulators as to what they can say. The only response has been “As part of a recent internal shift, Skype has made some management changes”. On the other hand my first hint of change came when one executive wrote two weeks ago, in his Skype Mood Message, to the effect that he would not be anywhere near Palo Alto at least until August 1.

We spoke with one [current investor] just now who reiterated what other unnamed investors have said in the press this morning: That the decision was 100% Tony Bates’ call. Until the Microsoft deal closes, he has to run Skype like a stand alone company, and these were all executives he’d been considering firing for performance for some time. The timing had more to do with how long it took to go through the process than anything else, this investor said.

And, he noted, that these were all people on the business side of the house, not the technical side of the house. That indicates he was trying to fix part of the company [that] wasn’t working, rather than a wholesale firing of people who stood to get big payouts.

But I’ve seen all this before at other restructurings and acquisitions. In the course of closing the transaction C-level management figures out – some before the close, some after:

• the resources you need and what is duplication, what needs to be merged
  • what is critical to maintaining Skype as an independent business unit and the internal business relationship with other Microsoft business operations
  • how to maintain a culture that encourages innovation and nurtures employee morale
• what policies need to be brought into line with respect to human resources, financial reporting, IT services. marketing and other corporate infrastructure services
• performance of due diligence on all contracts, agreements and outstanding legal disputes – this is the most challenging aspect as these will always raise issues that need to be resolved before closing – and
• clearing regulatory hurtles. While the U.S. FTC has cleared the transaction, there would have to be some EU regulatory clearance required, given that the actual transaction will occur between a European registered company (Skype LLC) and a European subsidiary of Microsoft.

But overriding through all this is the need to not only continue the Skype business operations but also determine how to put together the team and resources that will grow the business. Of significant importance is ensuring the ongoing business operations – as measured by revenues and expenses – do not impact the initial financial basis for the transaction at the time of close.  When I was involved in a restructuring and an acquisition the final question that had to be answered for any of my proposals was the impact on sustaining and growing the business.

In particular, Microsoft CEO Steve Ballmer will be under tremendous pressure to have success with Skype. After all, there is an $8.5 billion investment – the goal has to be both to recover this amount as profits and to generate shareholder return on the investment. This is achieved by not only continuing and enhancing the current user experiences vertically with upgrades and new services but also leveraging Skype technology through horizontal integration  into Microsoft Office, Lync, and Windows Live offerings. The bottom line is that any decisions during the transition and going forward will have to provide answers to that ultimate goal. And, if Tony Bates is to remain President of the Skype business unit at Microsoft after the close, he is going to have to live with his decisions during the closing period.

My real short term benchmarks will be Skype’s delivery of new and upgraded products over the next few months. Here’s what’s on the line:

• Developing a Skype for Mac 5.x that addresses a plethora of user interface issues, the most important of which is making the user interface consistent with the Skype for Windows 5.x user interface.
  • Skype Journal has an update on the Skype for Mac chat style contest.
• Evolution of Skype for Windows – beta version 5.5 with deeper FaceBook integration announced this morning.
• Launch of Skype for iPad – an iPad-specific version that takes full advantage of the iPad’s display format and iPad 2’s video features – a heavily used Google search keyword is “Skype for iPad” -  demonstrating the demand and expectation is there.
• Upgrades to Skype for iPhone (restoration of the keypad on Skype-to-Skype calls) and Skype for Android.
• Launch of Skype for Windows Mobile 7
• Launch of third party applications and hardware that incorporate SkypeKit
• Skype for Business customer success stories; we simply have not seen any since the Skype Connect launch last fall.
• Actual launch of announced services such as: Go To Meeting integration for collaborative desktop sharing, Skype for TV for Comcast cable customers.

Bottom line: It’s real easy, and naive, to blame Microsoft for recent outages and other Skype service interruptions.  When it comes to the Microsoft acquisition of Skype, we are simply going to have to wait out the process – securities regulations place limits on how much information can be made public. Investors and users have to hope the right business decisions are being made during this period; it’s really a matter of C-level management bringing the appropriate skills and experience to the table. This is a situation where trust in the C-level executives to make the right decisions is paramount. In the interim, Skype remains an independent business operation with its CEO in total charge.

But at least the above benchmarks provide some short term benchmarks that are indicators of how Skype will continue to support and upgrade services to its user base. And these benchmarks contribute to passing the ”AmberMac” test.

Update: Shel Israel expresses his perspective in Microsoft Acquires Skype.

Related articles

• Steve Ballmer & Tony Bates Talk About Skype-Microsoft Deal (gigaom.com)

The opening day of CES 2011 was a banner day for Skype announcements and activity. It started with a morning press conference where new Skype CEO Tony Bates built his message around the themes of “Universal, Useful. Wonderful”:

He covered recent Skype activity and accomplishments:

• From the recent Skype outage, they learned much about Skype’s pervasiveness and users’ reliance on Skype as a critical real time communications service in addition to addressing the technical issues that led to the outage.
• In its annual report on international long distance minutes by service provider, Telegeography had reported earlier in the day that, in 2010, Skype had increased its market share of international calling minutes from 12% in 2009 to 24.7% in 2010. This represents an average of 520 million minutes per day and over 190 billion minutes for the year.
• Video calling has increased to 40% of all calls in 2010.
• When Skype for iPhone 3.0 launched last week, it triggered over 4 million downloads on the Apple app store and over 1 million Skype mobile video calls on the first day.

Tony then went on to make some announcements:

• Completion of an agreement earlier in the day to acquire Qik, a popular live video streaming service, to complement its video technology resources; from Tony’s blog post linked above:
  

  Skype and Qik share a common purpose of enriching communications with video, and the acquisition of Qik will help to accelerate our leadership in video by adding recording, sharing and storing capabilities to our product portfolio.

  Through this acquisition, we’ll also be able to take advantage of the engineering expertise that is behind Qik’s Smart Streaming technology, which optimizes video transmission over wireless networks.

• Launch of Group Calling on Skype. Group calling on Skype for Windows 5.1 has gone “Gold”. It’s being offered as part of a Skype Premium offering that includes Live Chat Support for a monthly $8.99 subscription fee (with discounts for 3 and 12 month subscriptions). While group video calling supports up to ten participants on a call, only the call host requires a subscription.
• More Skype access from the living room involving Skype for TV becoming available later this year on newly introduced Skype-enabled Sony BRAVIA and VIZIO VIA TV’s; Skype has also announced a partnership with Panasonic and Sony to introduce Skype-enabled Blu-ray Players in the near future.
• Opening up SkypeKit beta to any legitimate developer for building third party applications embedding Skype.

Early Thursday afternoon Skype CEO Tony Bates appeared at the Verizon 4GLTE press conference to announce Skype mobile Video that will be appearing within the main feature set of four Android smartphones that will be amongst the initial featured devices supporting Verizon’s new 4G/LTE network. Whereas the current Skype mobile on Verizon uses Skype’s thin-client architecture, the Skype mobile Video will use a true Skype IP client.

For the first time in several years, Skype has a small booth at the rear of the Upper South Hall featuring video calling on iPhones as well as group video calling. But it’s been drawing crowds for the presentations.

Bottom line: speculation can abound as to what new services the Qik acquisition will bring and how they can complement existing Skype services. While the Skype’s user base continues to grow, usage has accelerated significantly when it comes to Skype’s key feature: free international calling. The introduction of a Skype Premium service  with a fee encompassing group video calling and live chat support adds the first potentially significant new revenue stream since the launch of Skype Out and Skype Online numbers many years ago. (Coincidental that it comes at the time of filings for a new IPO?)

Note that coincidental with the Group Video calling announcement Skype released Skype for Windows 5.1 that also address a couple of related issues.

Here’s the full morning press conference video:

Related articles

• TNW Interview with Skype at CES: The next generation of video and why the Kinect is so cool (thenextweb.com)
• Skype Buys Qik Mobile Video Streaming Service (pcworld.com)
• Skype Soon To Be On Sony BRAVIA and VIZIO VIA TVs (socialtimes.com)
• Skype buys Qik mobile video streaming service (macworld.com)
• WATCH: Skype To Acquire Qik (huffingtonpost.com)
• At CES, Skype gets serious about video with Qik buyout (e27.sg)

OK, now I have your attention with a headline different from the “Skype sold for $2.75 billion” headlines so rampant in the blogosphere yesterday….

By now the web has been saturated with stories about yesterday’s announcement of the forthcoming acquisition of a 65% controlling interest in Skype by a consortium of investors, led by SilverLake Management LLC and including a $300MM infusion from the Canada Pension Plan Investment Board. At this point the main story is “old” news but a few comments:

Who is Canada Pension Plan Investment Board?

Since 1965 every employed Canadian contributes a % of their employment income (up to an annual income cap of about $37,000) to the Canada Pension Plan (“CPP”). Between the age of 60 and 65 qualifying Canadians can elect to receive a (taxable) monthly payment from this plan until death along with a “death benefit” to the deceased’s estate. The Canada Pension Plan Investment Board …

… is a professional investment management organization based in Toronto. Our purpose is to invest the assets of the Canada Pension Plan in a way that maximizes returns without undue risk of loss. The CPP Fund is $116.6 billion. Canada’s Chief Actuary estimates that CPP contributions will exceed annual benefits paid through to the end of 2019. Thereafter a portion of the CPP Fund’s investment income would be needed to help pay CPP benefits.

Over 17 million Canadians currently participate in the Canada Pension Plan either as contributors or recipients. So we each effectively have a $16.75 investment in Skype.

And Canada, with its own geographical challenge of servicing a market where 90% of the population lives within 160 km (100 miles) of the 6,000 km (4,000 mile) long Canada-US border, continues its long history of having an interest in communications innovation.

Why was there no Skype-eBay synergy?

Meg Whitman made the same mistake I witnessed at a previous employer where the CEO and Board bought up companies but never got “buy-in” within the acquiring company of any major acquisition that required a rethinking of the overall company business focus and execution.

As a result there were no internal champions within eBay for executing on the stated intentions of the Skype acquisition. And the statements of the day demonstrated that eBay senior executives (and Board) did not understand a basic principle of auctions – there is no role for “conversational negotiations” during an auction; this is critical to maintaining the integrity of the auction process. You see the goods and make a decision as to whether or not you want them badly enough to pay the final auction price; the auction process itself is the “negotiation” of a price. Bidders have no opportunity (and do not want) to communicate with sellers; the auctioneer (in this case eBay) is simply a neutral third party who moderates the transaction to establish a price.

Why is eBay still an investor?

Back in the spring when a potential IPO was announced, we learned that eBay expected to continue to have a minority interest in Skype. With a $1.9 million cash infusion and a remaining 35% interest, eBay can still hope to recover, over time, the approximately $3+ billion it has to date spent on the Skype investment four years ago. At the same time it allows eBay executives to focus totally on getting their struggling “markets” business back into a growth mode.

With this strategy eBay can assuage Om’s concerns in Skype Sale Nears: Why eBay Shareholders Should Be Mad. As a sequel, once the sale was confirmed, Om states:

So Donahue gets to say that he got the higher valuation of Skype, got rid of a potential legal nightmare and can get any upside that comes with the initial public offering of the stock. Seems like a win-win, but that IPO — don’t count on it. To be honest, this deal makes much more sense compared to all the rumors that were floating around earlier. [My italics]

What are the positives about the acquisition?

#1 – Keeping the current executive management team. In his eighteen months as President of Skype, Josh Silverman has brought a lot of business process and experience into the company with the result that business processes and programs are being built to build sustainable and increasing revenue streams. Two recent examples of this are the availability of the FREETALK Everyman headset designed to improve the user calling experience at a very low cost and yesterday’s launch of Skype for Asterisk. Expect much more activity and announcements along these lines of building a stronger Skype ecosystem during the fall. This momentum can only be sustained with a continuation of the current executive team. Skype needs to focus on execution at this point; it does not need any further high level restructuring activity to distract from execution.

Two statements confirm this is the case:

• Josh’s own post, A new chapter, concludes describing “a new group of owners who believe passionately in our mission and in the ability of our team to deliver on it”.
• Egon Durban, Managing Director at SilverLake, states: “Josh Silverman has done a strong job leading the company and we look forward to working with Josh and his team to grow the Skype franchise.”

While there are some “technology heavyweights” becoming involved as investors, the real challenge is to build an effective and synergistic relationship between those “heavyweights” (who will probably become board members and/or advisors) and the current management team. This is where corporate culture and value sets, as established at the executive level, can play a strong role in leaving individual managers the freedom to execute on their goals most effectively.

What are the gotcha’s?

• Resolution of the patent dispute with JoltID. No deal would have been done without some understanding of the part of the new investors of the outstanding issues and prospects for how this issue can be resolved. On the other hand, with the experience of the various new investors, many heads can be brought into the negotiation of a resolution. My take: this will never reach the High Court trial scheduled for next spring.
• Why the $125 million note? My guess: it’s escrow funds to cover costs arising with any litigation issues that may arise in closing the deal. Is a first guestimate of a settlement with JoltiID in the range of $100MM? Can Skype develop a replacement for JoltID’s  infrastructure technology so critical to Skype’s business model for under $125MM? Again from Om:
  

  If you think about it, what Donahoe just did was follow the golden rule of business: If you’ve got a problem, make it someone else’s problem. And the problem for the new buyers is that the legal issues of Skype are not going away. Some of my smart friends think that Skype can sidestep these problems by switching to a SIP-based infrastructure, but I won’t hold my breath.

  Any SIP-based infrastructure would sharply increase the need for building a massive global infrastructure. It would also mean working with partners (that make Skype devices) to re-configure their products and getting 400 million-plus users to switch to a massive new model. In other words — like skating in the middle of a semi-frozen lake underneath a brightly shining sun.

• Employee motivation: what will be the stock option opportunities for employees now that Skype has effectively gone private?
• Financial reporting news: by effectively going private, Skype also has no investor reporting obligations. On the other hand if these investors intend to exit via an IPO in a couple of years, they must provide some level of financial reporting. (By being a minority investor, eBay no longer needs to report on its Skype investment any more that it does on its craigslist investment.)

What do Canadians want?

Now that 17 million Canadians have an investment in Skype can we expect to get;

• Skype Online numbers? Canada’s 911 regulations provide a roadblock. (Note to CRTC – when lightning struck my home’s Rogers and Bell communications lines two weeks ago, for four days Skype was my only landline service.)
• Skype for iPhone? Requires resolution of a G729 codec patent issue. (Sorry folks, it’s not a Rogers issue.)
• Skype for BlackBerry? Given that Research in Motion has become Canada’s leading technology company.

Bottom Line: With this acquisition Skype is finally free of what Andy Abramson describes as “an extremely conservative, bank-like culture”. Yes, Andy, “Skype is about the democratization of voice”; I would extend this to say that “Skype is about the democratization of conversations – whether voice, chat and video”. I certainly look forward to innovation and a much stronger Skype ecosystem as a result of this change of ownership.

Other posts of note:

• Omar El Akkad provides a great summary overview in today’s Globe and Mail: EBay hangs up on Skype Strategy.
• Globe and Mail Report on Business: What is Skype and Why is it important?
• Om Malik on GigaOm: Skype Sold for $2.75 Billion
• Andy Abramson at VoIP Watch: (after the announcement) Skype Sold, JoltID Suit Still Remains In Place As of Now; (adding to speculation prior to the announcement) Is Skype in Play?
• Update Sept. 4: Dan York, on returning from IT Expo adds his comments in Onward the disruption – Skype’s sale to private investors is a great step; includes Phil Wolff’s Skype Journal graphic showing the ownership post-acquisition based on Om’s reported numbers.

And previous Voice On The Web Posts;

• The Skype IPO: “It Ain’t Over ‘til It’s Over”
• Skype – eBay: Passive Separation

Related articles by Zemanta

• Skype sold: it’s all about risk mitigation. (saunderslog.com)
• EBay’s Statement Announcing Skype Deal (blogs.wsj.com)
• The Skype sale: Hot Buzz and No Response (skypejournal.com)
• Skype – eBay: Passive Separation (voiceontheweb.biz)
• Stealthing Skype into Larger Businesses (voiceontheweb.biz)

Josh Silverman joined Skype as President early in the spring of 2008; since then he has been reviewing Skype’s opportunities and building a team of experienced executives who can bring to Skype the products, programs and team building expertise required to operate a business with a run rate of $600MM per year, 20% contribution margins to eBay and growing at 380,000 new account registrations per day (with “real user” growth also increasing significantly).

Summarizing the past executive appointment announcements we can clearly start to see the evolution of a business structure, along with each unit’s responsibilities:

• Operations: Product, Marketing, Customer Care, Support
• Technology: Engineering, Platform, Development Community
• Strategy: Partnerships, Strategic Alliances, Acquisitions
• Administration: Global Communications Human Resources. Finance, and Legal round out the top executive team.

During our interview at CES 2009 with Skype COO Scott Durchslag, he outlined details of his restructuring of Skype’s Operations team along two axes: product and geography under the mantra of providing “Skype Everywhere”.

Global product offerings will encompass three divisions: consumer, business and mobile, each responsible for developing products. Each of these groups will be interacting with members of CTO Daniel Berg’s technology teams to convert their technology developments into marketable global product offerings and to adapt the technology to meet product marketing needs.

• Consumer will involve the current Skype client desktop offerings along with hardware, such as Skype phones.
• Business starts with the current Skype Business Control Panel but intends to expand well beyond this starting point into a range of offerings, such as Skype for Asterisk and the recently announced IBM LotusLive developments, addressing the small-to-medium business market.
• Mobile involves current products such as Skype for Windows Mobile, Skypephone (in conjunction with iSkoot), the recently launched Skype Lite (including Skype for Android) as well as any upcoming offerings for the iPhone and BlackBerry

In addition each of these divisions will be responsible for developing appropriate customer care and support programs appropriate to market demands. For instance, the business unit will come up with ongoing support programs relevant to supporting sustainable business operations of its products’ users. Ideally these programs would follow the model of Red Hat for Linux or Digium for Asterisk and build up a network of resellers and VARS who would provide relevant and timely end user support. While Dan Berg’s technology team will be responsible for third party developer partner support, an additional challenge for the Business products group will be to assist with marketing of business applications offered by these developer partners.

While Skype veteran Stefan Oberg is heading up the Business unit, announcements re appointments to head up Consumer and Mobile are pending.

Along the geography axis is a recognition that, while the Products divisions have a global mandate, there are different market needs within different regions of the world. For instance, in many Asian market wireless carriers do not subsidize mobile phones as is the North American practice. This requires a differentiated approach to these markets with respect to how easily innovations, especially around reduced calling costs, can be introduced to these markets.

The geographical market responsibilities are:

• Americas: Don Albert becomes General Manager, Americas. Don has had North America responsibility for a couple of years and will now be responsible for both North and South America. With respect to the latter he is looking forward to building on all the Skype activity in Brazil, for instance. (And, yes, once again at CES Don was made aware we are awaiting SkypeIn and a Skype Store for Canada)
• Europe, Middle East, Africa (EMEA): appointment pending
• Asia/Pacific: Yesterday we saw an announcement of the appointment of Dan Neary as General Manager, Skype Asia Pacific. One of Dan’s initial responsibilities will be to build and monitor closer relationships with partners such as TOMSkype to avoid embarrassments such as that created by the TOM Skype privacy breach we have reported on last fall.

Outstanding executive appointments are expected shortly; at this point it’s becoming all about execution. The next six months will tell the story.

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During our conversations with Skype COO Scott Durchslag last week at CES, Scott outlined Skype’s criteria for its software development going forward.

First was the emphasis on “liquid communications” through statements such as “Skype Whenever, Wherever”. Just as today you can pick up any PC or mobile platform and find all the Google Tools (Search, Maps, News, Reader, etc.) Skype wants to be on virtually any platform or device.

Pick up a smartphone, find the Skype button. Turn on the TV, find a Skype button, have a conversation. Open a web browser; start a Skype session. All this to complement Skype on the desktop. Today, besides on the desktop, you can find Skype on over 200 mobile phone handsets, several (Sony) mobile devices, Skypephone and Apple TV. But Scott emphasized, this is only the beginning. It will only start to get real when we see Skype on higher profile devices such as the iPhone and BlackBerry or when we start to see Skype seriously back into the hardware device business with vendors such as Philips and iPevo.

Then Scott outlined four benchmark criteria that every implementation of a Skype on any platform or device must meet:

• High call quality
• Simple and easy user interface
• Consideration for battery life
• Security

Last week’s hotfix upgrade of Skype for Windows 4 beta 3 included the first implementation of Skype’s three year effort to develop the SILK codec, increasing the audio bandwidth to 12 KHz while effectively reducing the Internet bandwidth consumed during a Skype call.

A key reason for Skype’s rapid and widespread adoption has been associated with its ease-of-use. Yet Scott says the Skype conversation user experience needs to be even easier to encourage adoption by a broader user base. Developing a more effective user interface has certainly been a focus of the Skype for Windows 4 beta program. At the Skype CES press conference Scott reported that, in a recent survey of users, 88% preferred the new UI to the previous Skype for Windows 3.8. But I’m still wondering if the Skype for Windows team could take a look at Skype for Mac and implement a “drawer” type interface to manage and select the active conversation. For the longer term evolution of Skype clients hopefully Skype also has a look at Dan York’s post on Skype’s fragmented product strategy.

Battery life on smartphones was a key issue that prevented Truphone, who uses a native VoIP client for calls over WiFi, from launching a native VoIP smartphone client running over 3G networks. Instead they launched Truphone Anywhere that takes advantage of the underlying network 3G GSM voice channel and uses the data channel to set up a call via a server that, in turn, sets up a VoIP client. That voice channel tends to make much less use of the device battery than a constantly compressing/decompressing VoIP client that devours the underlying processor activity. Addressing the battery life issue is a major reason why we see Skype using a similar calling architecture when launching the Skype Lite Java client on over 100 Java-enabled cell phones, including those based on Google Android.

Security is an issue that I’ll leave to Dan York and others who are able to cover this issue more knowledgeably and effectively. Suffice it to say that we would expect security to continue to be a feature of all Skype products, including those that use the mobile voice channel for placing calls from mobile phones.

Two take-aways from these statements:

• Fundamentally we should expect Skype, going forward, to be a provider of real time conversation-enabling software on desktop, web, TV and mobile platforms. To use an old telegraphy term: Full Stop! For instance, rather than developing their own social network, we should expect Skype to seek out agreements with other social network service providers, such as the MySpace agreement. Skype is an enabler of real time conversations; it is not in the community building or social networking business. Facebook, Twitter and MySpace, amongst others have already captured that space and done an excellent job at it.
• These benchmarks also provide a basis not only for deciding what product offerings Skype will develop but also when they are in a position to release a product.

The new Skype executive team is finally starting to set some benchmarks and guidelines against which we can not only measure executed performance but also have a better understanding of where Skype wants to go.

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There’s a “new sheriff in town” when it come to running Skype; CES 2009 was a “coming out” event for the new executive team.

CES 2009 provided an opportunity to catch up personally with many of the vendors we have covered in Skype Journal including Skype, Truphone, SlingMedia, Philips and Research in Motion (BlackBerry). I also had a chance to attend a most informative afternoon session of Jeff Pulver’s Social Media Jungle event. Unfortunately Palm closed their suite after only two days of CES; thus, I missed an opportunity to learn more about the Palm Pre on Saturday. As Palm had just been awarded a CES “Best of Show” award, that was a “Huh?” moment when there was only a security guard at the suite’s door.. I also wanted to catch iPevo and Nokia but did not have time to get to their booths.

With respect to Skype we had three activities: the Skype press conference, an interview with new COO Scott Durchslag and Skype’s first reception event Friday evening. It was our first opportunity to observe the new Skype executive team in action. While I will be providing some more detailed posts, here are a few observations:

• For the first time, a senior C-level Skype executive personally acknowledged Skype Journal’s participation as a playing a significant role in the Skype ecosystem. Scott thanked us for our loyalty to Skype through all the challenges of the past two years. (That does not mean we’ll always be cheerleaders; it’s important that we maintain a skeptical and critical viewpoint within the context of the overall IP-based communications space.)

While we have had co-operation in the past,  usually via Skype’s public relations agency, from many Skype employees at an operating level, it’s important for the media to be able to communicate regularly and openly with those at the C-level who are providing overall direction and developing high level strategy. Josh has initiated such openness through his blogging and interviews; now we are seeing it on a person-to-person basis..

• On the other hand many times, last week in both the press conference and our discussions, Scott acknowledged the existence of several previous controversial issues, such as technical support, platform development, the role of partners and internal management structure issues as requiring attention by the new management team. The newly recruited management team will be introducing a new level of experience and maturity to address these issues; execution over the next few months now becomes critical.
• One future post will cover Skype’s new operating and management structure focused on products and geographical markets.
• Another will cover Skype’s overall focus as a software platform developer and the standards being set for these developments. Within this context I’ll provide my perspective on what is meant by “liquid communications”.
• We’ll soon have a follow up post about our discussion with Scott of what Skype’s new executive team learned from the TOM-Skype privacy breach last fall and how it became a bonding exercise within Skype as well as establishing some new operating parameters to avoid a repeat.
• Skype is NOT shoving its partners under the bus. The new executive team is determining what innovation Skype will drive and what innovation they can expect partners to drive. Andy Abramson articulates his perspective on the issue:

Most of all, Skype is not sitting back. The are pushing the envelope, but at the same time sending mixed messages externally to partners and developers. But that too will change. Some recent hires have brought maturity to the table.

• We learned the answer to “Will There Be a Skype Client on the iPhone?”
• Finally, for the first time since I have been writing about Skype, we can see some well-articulated high level vision for where Skype is heading, where they need to focus and how they want to play in the real time communications market space at a strategic level.

Looking forward to writing about the evolution of Skype as it grows from a $500MM per year operation with 500 employees into a business with a revenue level and valuation that finally justifies eBay’s initial investment in Skype.

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Over the past few months, announcements have been few and far between with respect to Skype product news. But at the same time I have often discussed Skype’s restructuring moves; the first official disclosure of a restructuring was disclosed in our September interview with Skype’s new President Josh Silverman. Well it appears that Josh has been busy doing interviews; today three top level appointments were announced:

Daniel Berg, previously Sun’s London-based Chief Technology Officer for Global Sales and Services as well as Vice-President of Systems Engineering for EMEA, has been appointed as Skype’s Chief Technology Officer, starting January 2, 2009. In a summary statement from Skype’s blog post:.

As CTO, Daniel Berg’s primary responsibility will be to drive innovation and ensure Skype continues to develop great software. With a mandate covering Skype’s full range of products, he will develop and maintain a global team of more than 300 staff.

Daniel has authored several books. But since he has not made any statements on his appointment yet, we could paraphrase a statement he made about his Sun activities last April in a post entitled “Travel, Talk, Repeat” on Sun’s “Contrarion Minds” blog:

So he travels. A lot.

“I actually spend 25 percent of my working day, on average, in the air,” says Berg, who is based in the U.K. “That’s not going to the airport, not coming home from airport, that’s in the air.”

He knows this because he sticks to a time budget.

“I know I need to be spending this much time with customers and this much with organizational matters and this much with employee development, to make sure I’m staying focused and balanced,” he explains.

His biggest challenge?

“Articulating the value Sun [Skype] has,” Berg replies. “I know this has been said before, but I’ve been at Sun 15 years and this is the best lineup of technology, products, and offerings we’ve ever had. Yet when I go talk to customers, one of the first things they say is, ‘Oh, I didn’t know you guys did that.’”

So we’ll be expecting you to become one of the more “public” faces of Skype. And that those air miles will keep on building up.

The second appointment is Christopher S. Dean as Chief Strategy Officer. From his LinkedIn profile, Christopher has a long history of working with startups, including periods on the venture capital side in Silicon Valley, most recently as co-founder of Texada Capital. At one point he and Skype’s GM Audio and Video Jonathan Christensen were colleagues in a San Francisco-based venture capital firm called Sweetwater Partners, whose Internet traces seem to have disappeared. From the Skype blog post announcement:

Christopher S. Dean will focus on Skype’s strategy, including the development of partnerships and strategic alliances with other like-minded organisations and the acquisition of companies and technologies for Skype. His team will act as the incubator and strategic planning hub for new ideas and projects which support Skype’s technology vision and long term corporate goals.

It appears that Christopher will be based out of Skype’s San Jose office; his responsibilities will be a key to driving Skype from a $500MM per year revenue business into the the multi-billion dollar revenues needed to justify eBay’s initial investment in Skype. Why the “S.”? I assume that Christopher is trying to avoid confusion with the U.K.’s Olympic Ice Dancing multiple Medallist Christopher Dean.

The final appointment, another key to ensuring Skype hires and maintains appropriately skilled and motivated employees, is the appointment of Anne Gillespie, whose long history of EMEA positions with Compaq and HP, brings the experience required to serve as head of Skype Human Resources.

There’s still one more major executive move I am expecting – a Chief Marketing Officer who bring the badly needed messaging and market communications strategies and disciplines required for a business that’s expected to attract sufficient usage to generate those multi-billion dollar sales.

And I’m sure Lee Dryburgh has no problem with my publicly inviting Dan and Christopher to join the rest of the Emerging Communications community at eComm 2009; after all Skype is a Platinum sponsor.

Best wishes for success, Dan, Christopher and Anne from Skype Journal.

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This is the fourth in a series of posts resulting from an interview a week ago Friday with Josh Silverman, Skype’s recently appointed President. In this post we talk about directions for the Skype platform and partner programs.

When I first attended a Skype developer event in June 2006, there was lots of enthusiasm for the Skype partner program and for its integration into various third party applications and service offerings. Several of the feature requests, such as call transfer and access to the voice stream, that had come to the surface by the time of this event, have since been implemented. In December 2006 Skype announced the Skype Extras program for which there are over 100 offerings available, mostly for the consumer user but the list also includes about ten in the small-to-medium business space. Most importantly, partners have been asking not only for a platform roadmap but also for execution on that roadmap.Skype Extras included a publishing and transaction platform, yet to date, only PamConsult has taken full advantage of these feature for its well received (and award winning) PamFax offering. On the other hand, OnState has been able to figure out how to provide a friction-free full services program for its call center customer base. However, over the past eight months market visibility of any significance for the entire Skype partner program has just not been there. Yet we see “Skype access” continue to be built into various platforms such as Ribbit and Voxeo. Skype Certification exists for only seventeen offerings. InnerPass has received Skype Certification two weeks ago (review). At IT Expo last week in Los Angeles I came across several service providers and application developers who wanted to have a Skype presence in their offerings.

On the hardware side there have been many innovative offerings; I have experienced many of them. As confirmed by 3 executives at last Thursday’s Mobilize 08 event, the Skypephone has met with phenomenal acceptance in the nine countries serviced by 3. Yet several hardware partners have drifted away to the point where we only see limited visibility for Philips, GE and IPevo dual mode (Skype and landline) phones and a few accessory products, such as the FreeTalk Wireless Stereo Headset, from InStoreSolutions (who largely address the European market). Beyond the Skype Store availability, WalMart is carrying Skype hardware in the U.S. (and I found some at Fry’s in Sunnyvale this past Saturday).

Frankly, sorting out its platform strategy and partner relationships, and giving them appropriate visibility, is perhaps one of the biggest challenges that Josh and his team face in sustaining Skype’s presence in the IP-based conversation space. In our interview with Josh it became quite apparent that these issues have not missed Josh’s scrutiny leading up to the business reorganization we have been discussing in the various posts in this series:

SJ: In your interview with Om Malik yesterday you mentioned as one of your key growth initiatives “Skype as a platform, embedding Skype as the conversation infrastructure for devices and services”. Tell use more:

JS: We’re incredibly lucky that almost everyone in the world wants to do something with us. That’s fortunate because we need to be everywhere. For Skype to be successful and to fulfill its full potential we need to be part of every device and every communications experience. and we can’t do that on our own .so we need a really robust platform that allows us to be part of other people’s experiences or devices and allow other people to be part of us. We all recognize that we have a long way to get from where we are today to there. With the relatively small program we have and small investment we have made we have 15,000 partners who have signed up for our program today. I think that’s a great indication that if we really invest behind this we can do something magical.

SJ: What would that future platform look like?

JS: What we want to do is lay out a set of principles around the platform that say:

• we want people to be able to incorporate Skype into their experience.
• It should be the full Skype stack of functionality
• it should include all of our feature set and not just hive off one piece or two pieces.
• When you use Skype you should know you’re using Skype and
• you should have a SkypeID which works across all of our experiences,

So somebody who wants to take Skype and build it into their experience but create a walled garden of “only within their experience” doesn’t build value for the greater ecosystem. If you start with Skype on one experience and then you go to another experience with another platform partner, you still need to be able to communicate. There needs to be one SkypeID that works everywhere and then it needs to hold true to some basic sense of brand principles around what the Skype brand should be. Beyond those principles we really want to allow people to innovate and use Skype and do what they will to extend the functionality for our users.

SJ: Has the architecture for this started?

JS: Right now we have created the job of GM of Platform; I hope to very soon name a GM of Platform. That person is going to have to really work on what does the architecture need to look like to support this, what are the API’s are going to be – reference UI’s, technical documentation – as well as evangelizing to the broader community forming some of our partnerships, so we have some work to do.

SJ: Is the job posted on your job board?

JS: Not yet, we have some candidates; but if there are folks in your community that are excited by this and we haven’t already filled this in the coming days [faded away but implication was to apply].

SJ: Is there a timeline?

JS: I don’t want to speculate too much. We do have a API [set] today, we do have lots of people working with the API’s so we have something to build from. I’m not an expert. I wouldn’t be able to lay out a timeline but we are going to get an expert who can lay out a timeline. … As with everything at Skype, we want to be fast but also make sure we do it well, in particular with a platform. It’s got to be well thought through so we support our partners really well. We know there’s a big responsibility in there and we take it seriously.

SJ: Would you be looking at getting the partners involved in helping designing that platform and getting some feedback on it?

JS:I think that would be essential. One of the things I’m pretty passionate about is always bringing the voice of the customer in early to anything we’re trying to do and I think that, for the platform, that would be absolutely essential.

SJ: What are you looking at to address ongoing partner communications issues with respect to the partner program?

JS: I take the partner program really seriously and we’re aware that we’ve not invested adequately behind it and want to do more. The first thing we are going to do is hire an experienced, capable leader of that organization who will pull together for me a plan for what resources do we need to invest in — engineering, partner support, evangelism, technical documentation — to make sure we build an organization that can support our partners robustly.

What I don’t want to do is over promise. Step one is, when you get somebody good in, lay out a plan and then when we’re ready to announce some more forward looking things we’ll do that.

Changes are not going to happen overnight when Skype is acquiring 300,000 new registrations per day and profitable. But, based on the strategy and principles outlined by Josh in this interview, going forward we should be looking to see within a three to six month timeframe:

• Announcements of the appointment of two key senior executives who bring along experience in building platforms and partnerships
• A platform architecture and developer roadmap
• Revamped plans for Skype’s hardware and software partner programs

It will also be most interesting to see what forums or other means Skype provides for input into the platform architecture and developer roadmap strategy. Execution is everything, especially at this stage of Skype’s growth within the IP-based conversation space.

(For background on Skype’s partner program history check out: A Primer for Skype’s Direction – Skype’s Extras Gallery and Developer Partner Program. And for an example of what attracts developers to Skype as an ecosystem check out “On Spotlight: Don Kennedy AKA TheUberOverLord”.)

Next: Markets: Business and Geographical

Over the past two weeks there have been several announcements and activities related to the personal conversation space:

• Skype announced its Skype 4.0 beta program trialing a “full desktop” interface.
• SightSpeed announced an improved SightSpeed client with many engineering improvements to enhance video and audio quality
• SightSpeed for Business announced a 9-party video conferencing capability
• iotum launched its rebranded CalliFlower voice conferencing platform
• Dell announced their new Studio line of prosumer laptops incorporating Dell Video Chat powered by SightSpeed.

And the combination of these announcements, along with my own experience in using these services, hit home once again that it’s all about the user experience. This market needs to remain competitive through innovation but at the same time it’s also measured against performance, process and marketing. Skype and iotum have set some standards to be met, including:

• High Quality Video that has turned my lethargy about video calling into an enthusiastic user whenever feasible. Its 640 x 480 @ 30 frames per second over widely available (cable and DSL) broadband connections, along with top quality webcam optics, sets the standard I am looking for.
• Echo cancellation: while I continue to use a headset for privacy and courtesy reasons, most of my Skype calls are to contacts who are using the basic microphone and speakers provided as the basic configuration of a PC.
• Wideband or HD audio: provides an clarity of sound that constantly amazes. Unfortunately, our legacy phone system makes compromises that we have to live with but when it comes to VoIP-based services I want that HD voice.
• Complementary services: iotum’s interactive participant interface richly enhances the voice conference call experience.
• Upgrades: when I do an upgrade I just want the new version to work. No hangups, no PC freezes. Whereas upgrades could be the cause of much angst ten to fifteen years ago, upgrades offered to the public today – especially if enforced – need to “just work”. And these days I find most offerings meet that standard.
• Auxiliary services such as conversation archiving and file transfer.
• Beta programs are just that: programs to try out new concepts and get user feedback. Pre-Internet I ran software beta programs out of the public eye; today many services and offerings tend to leave their offering in a state of “constant beta” in the public eye such that users don’t realize that beta means provide feedback and check out the various phases as the offering evolves. But please don’t equate beta with the “officially released” product.

And my “like-to-have” list includes:

• Multi-party video conferencing
• Improved conversation management; switch readily between multiple conversations and see a record of all activities with a contact.
• Improved marketing at all the service providers: give us the straight goods, what is the benefit to the user? Forget the technology accomplishments, yes we appreciate – it’s about the user uptake and experience.

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Caution: Skype 4.0 for Wiindows Beta 1 is about improving the User Interface but it is not a replacement for your ongoing Skype conversations on your primary PC and should only be used on a secondary PC to provide user feedback.

While over the years, over 300 million have figured out how to download and install Skype, it’s become apparent that, in the end, it’s the user experience that will drive more massive Skype adoption. Finding those initial contacts, getting the speaker/mic working properly, ensuring you have a good Internet connection and determining what hardware is optimal for a good Skype experience is all part of Skype’s ongoing research and development. And perhaps the most important of these is having a user interface that “delights the user”. Certainly new Skype President Josh Silverman has indicated this as a primary goal for Skype.

In working towards this end Skype has made available an early beta version of Skype 4.0 for Windows with the primary goal of making Skype easier:

• for new users who are just starting up with Skype
• for ongoing users to manage, archive and recall their Skype conversations
• to improve the quality of certain aspects of conversations but especially with how video is displayed during video calls.

Check out the videos provided by Skype that Phil has posted to get a more dynamic overview. A key to understanding release 1 of the Skype 4.0 beta is that its development is at a stage where the Skype product team needs some outside user feedback. As a result they expect the Skype 4.0 beta activity to last through the summer prior to releasing for general use in, say, September, 2008 (a speculative release date, not an official one).

On the other hand at this stage it is an EARLY beta and is missing some features available in the current Skype 3.8 for Windows client. As a result I recommend that you only try it on a secondary PC while keeping Skype 3.8 on your primary PC used for Skype conversations, especially if Skype is mission critical to your conversations. From Product Manager Mike Bartlett’s post today:

We’re sharing this beta with you a little earlier than normal because we know it’s a big change, and sometimes change can take some getting used to. We’re going to spend the whole summer listening to your feedback and making changes so that when we do launch the final version, we’ll make sure it’s perfect. Because we’re releasing it early, a few little things aren’t available in today’s beta: full history and contact groups are two examples.

I can add Call Transfer and PayPal integration as two more 3.8 features missing from this Beta 1. Check out the full Release Notes, identifying the missing features. Via a “Contact Customer Support” Help menu item you can provide your feedback where they’re specifically requesting your “comment, feedback or frustration”.

If you’re into beta testing; if you have a secondary or back-up PC on which you can try this out, give it a try (download here). There is going to be a learning curve to get familiar with the new interface — keep in mind that, with Skype 4.0, it’s more about the user experience than the technology (although technology performance bugs should also be reported). As the beta releases progress we’ll advise you when it’s ready to try out as your primary Skype client. And, as we get more experience with it, we’ll be posting our comments.

Around the blogosphere:

Andy Abramson: VoIP Watch: Skype 4.0 Beta Comes To Life

As a basis for making new revenue, it shows me that Skype is looking beyond just selling cheap minutes. For now think of 4.0 as a canvas, that’s only been outlined. The real version is weeks away and likely will incorporate more feedback from users.

Om Malik: GigaOm: Video Makes Skype 4.0 Grow Bigger, Wider

The real reason for the redesign, however, is Skype Video, which desperately needed a new layout because it requires an ease-of-use that eludes the current client. As I pointed out a few weeks ago, video communication (which accounts for about 28 percent of total Skype calls) has been one of the fastest-growing features on Skype, thanks to the easy availability of built-in cameras, especially in devices used by mobile workers.

Dan York: Disruptive Telephony: Skype 4.0 seriously disrupts the Skype UI – is this a good thing? Dan hits on the core of this beta program:

I’ll also be curious to see how well Skype balances “simplifying” the user experience for new users while maintaining the functionality that “power users” have come to expect. It’s a tough balancing act and it will be interesting to see how Skype does.

New York Times: A Redesign at Skype (registration required)

Sten Tamkivi: siekatsu: Skype 4.0 beta 1 is out! (Full disclosure: Sten is Skype’s General Manager of its Estonia operations which includes the Skype development teams.)