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Cisco/Skype marriage would face a major hurdle

By David Goldman, staff writer

NEW YORK (CNNMoney.com) -- Cisco's rumored bid for Skype would make a great deal of strategic sense for the networking giant, but the pairing faces one major obstacle that might prevent the deal from getting done.

Buying a phone service would put Cisco into competition with its largest customer base: telecommunications companies.

"If they were to own that, they'd scare all of the phone carriers in the world," said Ken Dulaney, an analyst at Gartner. "Skype is in the business of selling cut-rate phone service, and Cisco sells all of its equipment to carriers. That would seem like a bad idea."

Dulaney said he thought the deal was unlikely to happen because of the conflict of interest Cisco would face.

It's also not the kind of deal that Cisco typically does. Skype's sales topped $700 million last year, and the company would likely sell for several billion dollars. The vast majority of Cisco's acquisitions are for much smaller companies. However, when there's a technology that it really likes, Cisco has been known to make rare exceptions. Last year, it even did it twice, paying $3 billion each for videoconferencing systems maker Tandberg and networking products company Starent Networks.

Other analysts think that the deal is too good for Cisco to pass up.

Skype would seem like a natural fit. Cisco chief John Chambers and his team are making a big push into video and voice-over-IP collaboration tools, and that's exactly what Skype offers.

TechCrunch reported Sunday that Cisco had made a bid for Skype, citing a source it deemed reliable. The Internet phone company filed last month for a $100 million public offering, but Cisco certainly has the cash to make a better deal. Neither company would comment on the rumors.

Skype would bring to Cisco a customer base of more than 550 million worldwide users. It's a consumer product, which would play well with Cisco's attempts to move beyond its networking roots and become a more broad-based, consumer-friendly IT company.

Many Americans already have a Cisco product or two in their home -- even if they don't know it. Last year, Cisco (CSCO, Fortune 500) bought Flip video player maker Pure Digital. The company already makes the popular Linksys-branded Wi-Fi routers for consumers and small businesses, and in March, it unveiled a consumer-friendly wireless router line called Valet.

Skype is attractive bait: Cisco CEO John Chambers has called the collaboration market a $34 billion opportunity, and acquiring Skype would position Cisco even better to cash in on that market.

"The only sticking point to this deal is that Cisco would go into competition with its customers," said Brian White, analyst at Ticonderoga Securities. "Cisco is one of the savviest tech companies out there, so they must be able to find a way where it wouldn't be so threatening."

Suppressing the threat may not be as big of a deal as it seems, as telecoms are beginning to play nicely with Internet phone services. Verizon allows its customers to use Skype on their smartphones, and a Google Voice app is available on a growing number of smartphones (though, notably, not the iPhone).

Cisco is already involved to some degree in "coopetition" with its customers. The company's WebEx online conferencing software uses voice-over-IP technology that bypasses the need to use a telephone for virtual meetings.

"There's a good chance the deal will get done," said Erik Suppiger, a senior research analyst at Signal Hill Capital. "Skype certainly feeds into Cisco's vision, so the deal makes a good deal of sense." To top of page

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