Inside Cisco's Anti-Skype Gambit

| About: Cisco Systems, (CSCO)
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Open source advocates are giving surprisingly little love to Cisco's (NASDAQ:CSCO) appeal of Microsoft's (NASDAQ:MSFT) Skype acquisition before the European Commission.

Cisco doesn't want to stop the merger. It just wants Microsoft to support open standards after the merger, to make such support a condition of approval. This would let Cisco routers interoperate with Skype services.

So far this year Cisco has increased 11.6% in value, while Microsoft is up over 18%. The earnings multiple for MSFT is still just 11.6, against 15.6 for CSCO, so this is a trend that has room to run.

The reason for the move is clear. Microsoft plans to fully integrate Skype into all its products. This includes its enterprise communications product, Lync. The result could be to shut Cisco out of deals with companies that are Microsoft-centric.

Which is why Microsoft bid $8.5 billion for a company that had previously been bought by eBay (NASDAQ:EBAY) for $2.5 billion and valued on eBay's books, as late as last year, at $2 billion. (Most of the company had been sold to Silver Lake Partners, a private equity firm, and Microsoft's deal was with Silver Lake.)

Now that the trap has been sprung, with Microsoft making its intentions public and grabbing Cisco talent as it does so, Cisco and its stock have a sad story. After all, the company argues, Microsoft had demanded interoperability when Cisco bought Tandberg in 2010, and it should do the same this time.

But why aren't open source advocates pounding the table on Cisco's behalf? Two reasons:

  1. Cisco doesn't mean it. Cisco is arguing from a point of narrow self-interest, not principle. The company fears losing videoconferencing business to Lync, after a decade of following the technology down the cost curve, often at a loss. The company tends to keep open source at arms-length and was, until 2009, said to be in violation of open source licenses.

  2. We don't expect Microsoft to get away with it. Cisco's view of open source changed because of business necessity, specifically the cloud. Cloud computing requires open standards, and interoperability. Open source advocates don't really see Microsoft as much of a threat.

To the open source community, Microsoft's ability to use Skype as a proprietary effort in the conferencing space is not news and is limited to that industry. Cisco's last-ditch effort to impose conditions on the merger is likely to fail, and is negative for CSCO stock.

As to MSFT, it's bullish in the short term, but most in the open source community expects it will come around to standards when it's in its own best-interest, as it has before.

Disclosure: I am long MSFT.