Brainstorm Tech video: Inside the Skype deal

July 21, 2011: 3:17 PM ET

Tony Bates, CEO of Skype, discussed his company's acquisition by Microsoft with Silver Lake managing director Egon Durban, Andreessen Horowitz co-founder Ben Horowitz and Fortune's Adam Lashinsky.

Below is an unedited transcript from the interview. For more, see Dan Primack's story Skype CEO checked his list.

ADAM LASHINSKY:  We have in the Skype story a story that has everything that excites us at Fortune magazine, and you in our audience.  We have consumer technology.  We have deep, geeky technology, and we have money, lots of it.  This is the story of how Skype went from a $2.5 billion investment to an $8 billion investment in two years, and we have with us today all three of the principals involved in that deal.

So, please welcome to the stage Tony Bates, the CEO of Skype; Egon Durbin, managing director of Silver Lake; and Ben Horowitz, co-founder of Andreessen Horowitz Venture Capital Firm.

Welcome, gentlemen.  This is an experiment for me standing up here talking to you.  So, thanks for being my guinea pig.

Tony, just quick facts, remind us, would you, when the Microsoft (MSFT) acquisition is expected to close.

TONY BATES:  Yes.  We hope, again, subject to regulatory approval.  I think many of you know, we already got through the U.S. side of it.  We still have Europe.  So, it's anyone's guess, but I would say we've got a couple of months more here.  Maybe sort of October timeframe would be my guess.  But we have to work through the normally processes and procedures.

ADAM LASHINSKY:  So, in that timeframe, you run the company with your investors continuing to own the company.  And what levels of engagement can Microsoft, does Microsoft have during that period?

TONY BATES:  Yes.  The way the governance rule is set up is absolutely we're an independent company.  We work with the investors; two of the primary investors are here on the stage with me.  We do have part of the agreement, as with anything, when you're in this stage, for those of who hope to get to go through this, between signing and closing, if there are material issues within there, we do run those by Microsoft.  But, we run the company completely independently, the way we run the strategy, the way we run the business, the way we operate the management team, and so on.  And that's the way all the way through to closing.

ADAM LASHINSKY:  Great.  So, I want to attempt to take us through this chronologically, Egon.  So, it's 2008, correct?  I want to understand what first gave you the notion that this interesting company owned by eBay (EBAY) would make for a good acquisition?  Kevin Maney in a story in Fortune magazine compared Skype to Kurt Cobain, wildly popular and deeply troubled.

EGON DURBAN:  Yes.  That's a great analogy for it.  I think all of us, and Ben can speak for himself, sort of watched Skype with great fascination, truly one of the great consumer Internet brands and success stories, particularly in Europe.  And when Donahoe took over the CEO reins.

ADAM LASHINSKY:  And Donahoe took over from Meg Whitman.

EGON DURBAN:  --took over from Meg, one of the first things he did was decide what was core and non-core, and publicly disclosed that they were going to think about alternatives for Skype.  So, you kind of get a sense there that they were working on kind of a standalone path to spin out the company.  And through that several folks had made approaches.

The history around Skype, though, it is sort of a coin of two sides, where you've got this phenomenal brand assets, tremendous engineering talent in Estonia, but on the other hand this kind of deeply troubled history starting with eBay being widely criticized by their shareholders and analysts for paying way too much for the asset.  Subsequently writing down the value of their acquisition.  The founders leaving, the founders going through a litigation process with the company around an intellectual property dispute.  You'd gone through multiple management changes at the company.

Yet, through all of this, there was this terrific asset that continued to perform, fantastic network effects, continued to produce great product, and sort of resilient notwithstanding.  And it was a unique situation where we, together, in the summer of 2009 were able to enter into discussions with eBay and really see if there was an alternative to help them solve the complexity around the dispute, which had escalated into full-blown litigation with the two founders.

ADAM LASHINSKY:  The dispute being that they held the key intellectual property that they developed when they invented Skype.

EGON DURBAN:  Correct.

ADAM LASHINSKY:  That's a whole other story why they were still holding that IP, right?

EGON DURBAN:  Yes.

ADAM LASHINSKY:  And you had to figure out a way.  You were obviously only going to be interested in buying Skype if you could have Skype, right?

EGON DURBAN:  If you could ultimately figure out a path through the morass where you ended up owning ‑‑ the analogy we always used was, if we could buy the engine to go with the car.

ADAM LASHINSKY:  Now, in our article, we suggested that the involvement with Andreessen Horowitz was a one-two punch.  First Silver Lake was invested, and you went to Andreessen Horowitz and said, we have some good reasons why we should be together.  Is that accurate or was it more simultaneous?

BEN HOROWITZ:  Completely simultaneous.  We went through the exercise, hand-holding, and it's such a unique situation where we thought, you're doing a carve out.  It was the first LBO that was done post-Lehman at the biggest debt issuance that had been done post-Lehman.  Complicated carve out, significant management restructuring, cultural invigoration, and some of the things that our firm focuses on, and has a tremendous amount of experience.  In a lot of respects, there were elements of a turn around inside of a super high growth opportunity, and marrying that with Ben and Marc and their firm, which is their first investment of all things.

ADAM LASHINSKY:  Your very first investment.

BEN HOROWITZ:  Yes.

ADAM LASHINSKY:  And not only was it your first investment, but it's not the kind of ‑‑ it was not the dollar size that most people would call venture capital, correct?  It was $50 million.

BEN HOROWITZ:  Well, value wasn't the size, but it wasn't a venture capital deal.  The pre-money on Skype was zero.  There was nothing venture capital about it.  But, for us, the whole theory of the firm is, we wanted to invest in the most important technology companies that were going to be the biggest franchises.  And things like Skype just don't come for sale very often.  You can't buy Twitter.  You can't buy Facebook.  You can't buy Google.  You never could, at any point.  And Skype was for sale due to reasons that Egon pointed out, which it was just a very unusual circumstance.  And so we thought that might be a good idea for us.

EGON DURBIN:  And this control aspect together is incredibly important, because everyone focuses on how much money we invest in and how much money we take out.  But, the reality is eBay stayed as a significant partner throughout the discussions, continually upped their ownership percentage.  So, at the time of signing they retained 35 percent, which is the largest stake that has ever been retained by a corporate in one of these divestitures of a non-core asset.  That gave us together the flexibility and ultimately the control, working with eBay as a partner, to effectively make quick decisions all of which culminated ultimately in Tony being brought in.

ADAM LASHINSKY:  Yes, I want to come to that in a moment and I think what I appreciate you pointing out is that the private equity world sometimes gets negative headlines, or your pillagers and rapists, rapists and pillagers, whatever the expression is, slash and burn, whatever, this is a good example of you invested money, you changed around the company, you grew it, you built it up, there's more employees now, not fewer, there's more deals now not fewer.  Ben, bring us up to speed on the key deal point, which was the key deal point, which was getting Niklas and Janus, I never know if I'm saying their names correctly, back in the fold.

BEN HOROWITZ:  Yes.  So, getting them back in the fold was step two.  Getting them kind of settling the litigation was step one.  And we sort of put those two steps together.  That was the real kind of magic/challenge of the deal.  So, when we did, I would say other people who would have wanted to buy Skype couldn't believe that we would bid with the litigation still outstanding.  So, most of the other theories on how you would buy it would be settled through the litigation and then by the company.

This is where I think the partnership with Egon and us, and Silver Lake really paid dividends in that between us they really could assess the full risk of the litigation and then we could really assess the motivation of the founders, and the likelihood that it's a horrible cataclysmic outcome would actually come to fruition.  And I think at the end of the day we all thought, yes, we would settle it.  There would be a price.  The price has some variance.  But, we were confident as a team that we could settle it.  And that enabled us to do the deal.  And then although it was thrilling at times, we were able to settle the litigation and do it in a way that got the founders back involved in the company.

ADAM LASHINSKY:  Thrilling sounds like a euphemism for something.

So, a two-part question for the two of you, Egon, how did you find Tony and after you answer that, Tony, you've been rumored as an heir apparent at Cisco, it has worked out very well for you.  But, what gave you the confidence to leave this very senior job at Cisco for this wildly popular, but deeply troubled company?

EGON DURBIN:  The most critical information that we had to implement was fundamentally changing the company to become a product and engineering led company.  I'll spare you the long version of it, but it was not that when we acquired it.  My favorite stat is five people who touched product and wrote code for every lawyer in the company.

ADAM LASHINSKY:  Really?

EGON DURBIN:  Yes, that ratio is now 25 to 1 and going up every day.

ADAM LASHINSKY:  I thought there were all these, famously, this great Estonian engineering team, right, sitting in a dark room writing code, and where were the lawyers?

EGON DURBIN:  In London.

ADAM LASHINSKY:  Okay and probably elsewhere, right.

EGON DURBIN:  So, the opportunity with Tony was that we were looking for someone who could operate globally, had grown up as an engineer and could be the hero to the engineer CEO.  The Estonians had survived three nuclear winters of management changes.  And wouldn't really listen or respect anyone who wasn't one of them in a deep and granular, and technical way.  And as we went through kind of the universe of potential candidates Tony is very ‑‑ he's just a unique property.

There are not many folks who have global experience managing 15,000 engineers in a multi-geographic setting, have built important parts of Cisco, developed real products, and could sort of grab the reins, or kind of grab the horse and actually the horse would let it ride.  In that transformation, and Tony will take you through some of the things he's done, it really enabled the outcome that most people deem to be quite successful, but a lot happened in his six months that fundamentally changed the slope of the line.

ADAM LASHINSKY:  So, first, Tony, was it a no-brainer to take this job?

TONY BATES:  Yes, I think it was a no-brainer, but the journey to that no-brainer took a little time and I'll just give you a couple of sort of personal facts relative to your question.  I'm very goal driven and my wife and I write down goals every year.  One of the two goals I wrote down was I wanted to be a CEO before I was 45.  And I wrote down four companies, and one of those companies is Skype.

ADAM LASHINSKY:  Really, this was before any of this?

TONY BATES:  Yes, this was four years ago, actually.

ADAM LASHINSKY:  How old are you now, by the way?

TONY BATES:  I'm 44.

ADAM LASHINSKY:  Okay.  Congratulations.

TONY BATES:  I'm 43, soon to be 44, so we're getting there.  So, it worked.  So, that was key for me.  I studied Skype for a long time.  I met Niklas and Janus very early on when I was at Cisco.  I had always been impressed with what they'd done.  So, on the technology side of it that seemed like a no-brainer.  As was mentioned, there are just very few of these opportunities.  Just to kind of put it in perspective, how many companies are there that really have over 100 million active users a month, and by the way, 100 minutes of engagement per user per month.  I mean you can count them on one hand.  Skype was one of them.

So, from that point of view it was very exciting.  I would tell you though; as I went through this I was nervous.  I knew a lot about the previous buy-out and obviously I'd studied it from afar.  I'd known many people that were involved in it, ex-Cisco people, for example.  And I knew this was going to be an interesting meeting of the minds, that it was a complex board, a broad consortium of folks.

But, I would say, as soon as I kind of got through the first set of meetings, I met Egon first, it was clear that this was not, as you described, a case of just sort of strip the company down to bare bones, kind of put a nice financial wrapper on it and then resell it.  It was we want to go with the right product.  That's what excited me the most about it.  I knew they had great talent, but could we really get the product engine fired up.

ADAM LASHINSKY:  Of course, from a financial perspective, there was something very traditional about this deal, in that Silver Lake controls the company, period, after the transaction.

TONY BATES:  Yes, that was very clear to me.

ADAM LASHINSKY:  But, I mean, that can be bad, but it also can be good in that you said there was a complicated board, but it wasn't that complicated after the transaction?

TONY BATES:  No, in terms of the board makeup, though, the complexity is, when you go in there seemed like a lot of board members, and a lot of potentially different incentives.  But, actually, when we started talking, it wasn't just that Silver Lake was the primary owner, there was great alignment about what to do with the company, which was start cleaning up the one to five ratio, start investing heavily in products.

We've shipped more products in the last six weeks, by the way, than we shipped in the two years from that transition.  So, that was the focus.

ADAM LASHINSKY:  Tell me, what is your favorite technology innovation that Skype has done since you've been in charge?

TONY BATES:  Number one for me was our iPhone app, and then potentially where we take that.  When I joined the company, I joined in August, and I saw a prototype.  And there was this sort of ‑‑ and the team had been working on it, the board had really been trying to change that product's engineering focus.  And I said, this is fantastic, when are we going to ship?  And they said, we're going to ship in April of this year.  I said, no, we're going to deliver this product to the marketplace as a present for everyone on New Year's Eve.  And I went and talked to the board about it, and that's exactly what we did.

It's the fastest growing part of this place for us.  We focused on mobile.  That day, we delivered seven million downloads so people could actually experience new Year's Eve, where one of them will be on a desktop at home looking after the kid, and the other would be in New York, Times Square, using the application.  And that created this sort of belief system, particularly around the Estonian team, and frankly the Stockholm team, that we don't talk enough about, who are absolutely well-qualified in terms of audio/visual technology, that here was a leader who wanted to take risk, and drive from the top.  And that is really, I think, the thing that everyone on the board was looking to see if I could make as a cultural change.

ADAM LASHINSKY:  How do you speed up a software product by four months?

TONY BATES:  It's simple, you focus the resources, you put the top level focus of the company behind it, and you take away all the barriers.  I created very quickly sort of four cultural elements for the company.  I just talk about the number one, which we already touched on, which is product engineering is king.  That is the fact inside Skype.

And there are some sub-headlines.  If you're in a product team, and you're not an engineer or product manager, your job is to basically make life easier for them.  And if you can't do that, you get out of the way.  We've been able to do that.  And we've fully embraced agile as well.  Agile, for those who don't know, basically says we ship every month.  We essentially create a rhythm, and a cadence, and a culture that does that.  And you've seen that in some of the announcements we put out.

We also said we're going to partner on key strategic partners.  That foundation has been laid down.  And I think, for the Estonians in particular, it was sort of a breath of fresh air.  They were worried about that, and I was able to change that quickly.

ADAM LASHINSKY:  So, let's shift the business.  Stick with the iPhone app, and explain how ‑‑ you cited your download figure.  How does Skype make money on that?

TONY BATES:  Well, so just broadly speaking, so people understand Skype, obviously the primary business that we're in is the communications services business.  We drive Skype network effects as a way to increase our base.  So, we have Skype-to-Skype, and if it's Skype-to-Skype for voice and video, it's a free service.

The legacy of it started off on the desktop.  We've very rapidly taken that to mobile phones, smart phones in particular, tablets coming, and frankly we also believe the living room is a very key part of the strategy.  We're actually already pre-installed on 50 million TVs.  You name the top brands, we're on it.  It's the highest end of those brands, 3D TV, so Samsung, LG, Panasonic, we're there today.

The primary business is, we deliver the lowest cost communications service when you're using Skype as a client to talk to landlines or other mobile phones that are not Skype enabled.  Now, of course, at some point you would say, well, if you lit up a billion people, which is what we want to do end point, with Skype, how do we make money?  Well, of course, we have this incredibly high level of engagement in the way people use Skype across the broad cohort list, and I think many people know the use cases.

We have grandmas who talk to grandkids.  We have overseas folks.  We have people getting married remotely.  I just talked to someone who works for Fortune who, unfortunately, but was able to say goodbye to their father who passed away because of Skype, because they were remote.  So, we have all of these ways that people connect.  That gives us a very rich level of engagement.

So, we've introduced two other monetization strategies.  One is what we call a premium strategy.  We know people love the Skype experience and want to pay for that.  So, we have a group chat service today.  We also think that Skype is about these magical moments.  So, people will want to capture that magic moment and store it, particularly around mobile.  We see this happening more and more.  That's a second premium service, which is an ability for people to pay for a subscription, it could be on disk space, it could be on messages, and so on.  But we obviously think that there's a very rich long-term advertising play as well.

ADAM LASHINSKY:  So, on something like the iPhone app, does the revenue mirror what Web revenue would be?

TONY BATES:  It does.

ADAM LASHINSKY:  So what percentage of people make paid calls from their iPhone app?

TONY BATES:  So, we monetize roughly, of the overall base, just to give you some numbers, at the end of this year, we'll probably be at 200 million MAUs, monthly active users.

ADAM LASHINSKY:  How many?

TONY BATES:  Two hundred million.  We're about 170 right now.  We're on a very nice, consistent growth rate.  That growth rate has not changed.  It's been about 40 percent year on year, month on month, happening at the same rate.  We monetize around 10 million of our user base today with the current basis of it.  We've started an entree into the advertising space.

Today we have a sort of home page model, home page takeover model, like YouTube, but we think there's a much more interesting place out there.  The one I will just tease for everyone to think about is, we actually think there is a big play in in-call advertising, because if you think about it, Adam, you and I could be in a call for 40 minutes, maybe an hour.  It's very intimate, especially on video.  Our average call length on video is going up.  It's something like 27 minutes right now.  So, it's a very long time.  You do things, you take actions in there.  You're not always just looking at me.  So, we have a lot of opportunities.

ADAM LASHINSKY:  Are you saying, I may like want to order a pizza while I'm ‑‑

TONY BATES:  Why not?  How about at the end of the call we share something because we have that intimate relationship.  I share an ad with you.  So, watch this space.  We think this is going to be a very exciting area for us.

ADAM LASHINSKY:  Interesting.

So, Ben, you spent, I would call it, your formative years in Silicon Valley working for Netscape.  You didn't really have a warm relationship with Microsoft during that time.  Your partner Marc Andreessen, who also never had a warm relationship with Microsoft, made a funny comment in our article, which was, he's very happy about this deal.  He also wouldn't cry if the deal fell apart.  Meaning that you could continue to own Skype.

So, I want to ask you, Ben, do you think that Microsoft is going to make a go of owning Skype?

BEN HOROWITZ:  Oh, yes.  I definitely think they will.  In fact, if you think about all the things that Microsoft could possibly buy, Skype was probably top two smartest moves they could make.  One, they got an implicit discount, because they used offshore cash, so that's like a 30 percent discount right off the bat.

Secondly, they really struggled in both mobile and in social, and Skype is an unbelievable solution to both of those.  So, how do you put life in to Windows Mobile?  Well, how about a Skype phone.  I mean, really, like, obviously powerful combination.  And then, if you're Microsoft, and this is something that people with strong operational background don't quite understand, there are very few companies that you can buy where you get an executive who is an executive who you would have had at the top of your hiring list, and so, the fact that Skype came with Tony, who immediately becomes one of the top executives at Microsoft, it's a magical opportunity for them.

ADAM LASHINSKY:  And what is your deal, by the way, Tony?  I assume this is public.  What have you stated that is your commitment to Microsoft?

TONY BATES:  I haven't stated publicly a commitment.

ADAM LASHINSKY:  Okay, well, now is a good time.

TONY BATES:  Let me maybe frame it.  I think we couldn't have a better opportunity in the way things were set up.  For those of you that have tracked it, we're doing unprecedented things in terms of an acquisition into Microsoft.  First, we're our own division, never been done before in an acquisition, any acquisition, with inside Microsoft.  I'm a peer president to the other five presidents that run the businesses.

ADAM LASHINSKY:  Interesting.

TONY BATES:  Secondarily, a major commitment to multi-platform.  And there's a lot of skepticism about it.  You'll hear me talk about it, or hear Steve talk about it.  We'll continue to talk about it.  He understood the value of Skype, what Ben was talking about is, it brings obviously power to mobile and social, but it's the multi-platform nature of what we do, it's the fact that you can talk between a desktop, a phone, and the TV that really is the power of Skype, and you won't lose that.  So, I feel like we're set up the best.  While we drive that way, I'm totally committed to working with Microsoft.

ADAM LASHINSKY:  Ben sort of flagged this as you being critical to the deal.  So, you have a deal regarding how long you're committed to staying after this deal closes.

TONY BATES:  As with everything, there's as commitment in there.  But, I'm more committed to the strategy of the product, frankly.  As long as they're committed to that, I'm committed to them.

ADAM LASHINSKY:  And, okay, good.  Artful dodge on that.

Ben, you said that Skype was one of the two companies that Microsoft should be buying.  What's the other one?

BEN HOROWITZ:  Well, I just said one of the two.  I didn't actually have another one in mind.  That's a good question, but I'm not going to answer that.

ADAM LASHINSKY:  And, Tony, what were the other three companies on your wish list?

TONY BATES:  I'm not telling you that either.

ADAM LASHINSKY:  All right.  I'm failing here.  Who wants to ask a question ‑‑

TONY BATES:  I guess I would tell you that they we're all in the consumer space, not in the enterprise space.

ADAM LASHINSKY:  Really.  And so you spent your career in the enterprise space, and you said ‑‑

TONY BATES:  Yes.  The fact that ‑‑ just on the record, I haven't spent my whole career in the enterprise space.  I ran enterprise at Cisco (CSCO) for the last 18 months.  I grew up really building the Internet and the infrastructure space, and doing the carrier business.  I think what ‑‑

ADAM LASHINSKY:  At Cisco you mean.

TONY BATES:  At Cisco.  What got me very excited about consumer, I was on the board of YouTube, for those of you who don't know, and what was really compelling, and I assume these guys get to see this, is companies like Skype, and that's the viral nature of what they do, they become platforms when they get to a certain scale, and they become platforms of expression.  YouTube did that.  We know there's a few others out there that can do that and that's, for me, personally the most exciting thing to work with.

ADAM LASHINSKY:  Quick questions.  Okay.  First, right here please identify yourself.

QUESTION:  Douglas Warshaw, Fortune.  Can consumers expect to see any sort of re-branding, any different look, any different feel to the applications as we move forward?

TONY BATES:  No, one of the things we've discussed, and again everything is subject to the close, so we can't talk too much about the future.  Clearly, Microsoft is buying great product technology, but also, frankly, one of the greatest brands in the consumer Internet space.  It is a verb.  People talk about it in that way.  They say Skype me.  Sometimes they maybe even using iChat and they're actually saying Skype me.  So, that's very important for them.

So, you can expect no change.  I think we've touched on it, how we use the brand and some of the integration, whether it's, as Ben alluded to on the phone, what we do with Xbox, what we might do with some of the other clients remains to be seen.  But, you can expect strong commitment to the brand.

ADAM LASHINSKY:  Back here, please.

QUESTION:  Hi, Dan Fromac with Fortune, one question for Egon and one for Tony.  Egon, would you cry if the deal fell apart.  And Tony, for you, I'm curious, you talked so much about what Silver Lake and Andreessen Horowitz has brought to Skype since they bought it, how they've helped so much turn it around.  They're going to be exiting as part of this, I'm curious, do you have any concerns that the two organizations that have really helped you turn Skype around aren't going to be there for the next ‑‑ well, going forward.

EGON DURBIN:  I'll go first.  I may cry with joy.  There are probably, we talk about it all the time, every other day we have some twinge of seller's remorse.  You can just pull up LinkedIn's stock price (LNKD) and you'll understand why.  We basically sold the company where it was hitting an inflection point, not just that product, but the advertising opportunity from a monetization standpoint is probably greater than the existing revenue stream today.  But, in the current environment we live in, it felt like the right risk-reward decision for us as investors.

TONY BATES:  Yes, I mean it was a very interesting journey.  Egon and I talk about this a lot.  We sort of did the IPO prep.  Many people know that.  It was a great experience and then not getting to ring the bell, that's kind of a bittersweet moment for a CEO.  On the other hand, when I look at the sort of opportunity we have for Skype, and I think I'm representing Skype the company and its brand, and its product technology, I just see a great opportunity.

In terms of missing these guys, yes, I tell entrepreneurs and CEOs, there's people that think about companies on boards, maybe once a quarter when they show up for the board meeting.  There's people that think about it once a month.  There are people who think about it every day.  And there are people who think about it every second.  These are guys who think about it every second.  And I'm going to miss the tutelage and the mentorship and the piece of that.  But, I think we'll stay in touch, and I think Microsoft really believes in it and we'll see this transition.

ADAM LASHINSKY:  How many times a day did Egon call you?

EGON DURBIN:  How many times a day did Tony call me?

TONY BATES:  Yes, we have this stat at Skype that 50 percent ‑‑ at peak over 50 percent of all our traffic is video.  It's sort of a tight analogy between the two of us.  I don't know, maybe 10 times a day.

ADAM LASHINSKY:  We're going to do a trifecta of Fortune questions here, I think.

QUESTION:  Tony, what are the opportunities for Skype for the enterprise, and isn't that something that Microsoft is going to be focusing on, and isn't that going to be putting you competing squarely against tele-presence?

TONY BATES:  Yes, so you know, I think the way I see the enterprise opportunity for Skype, just briefly, is if you think about what Skype really is, it's the largest C2C communications network in consumer to consumer today.  And by definition with the fact that all consumers are ‑‑ the consumerization of IT and want to bring their own devices, it will become, and I believe already is, the largest B2C network in the world.  I think the next step is taking the power of B2B, offering like Lync that Microsoft has today, and linking them together.

Where we are really the strongest, though, to your question on tele-presence, is really in the S of SMB, right.  It's people that have very little IT expertise, who want to set up things quickly.  So, I think it's less competition on that side of the house.  It's much more about enabling great communications for small companies and then putting that into the Microsoft ‑‑

ADAM LASHINSKY:  Did you hear how he plugged the Microsoft product?  That was good, wasn't it?

Last question and a quick one, and a quick one please.  We'll get the Microsoft to you right here.  It's on its way.  Here's your mike.

QUESTION:  Thank you.  Michael Stroud from NextTech.  I've thought many times about using Skype as my primary telecommunications device, but the bottom line is there are still too many cut outs, too much static, and I just can't do it.  So, in order for you to really get big I think you'd need to address that.  And what do you plan to do?

TONY BATES:  I think obviously Skype relies fundamentally on the broadband network itself for most of what it does.  I think we are very focused on reliability.  There are some lessons learned.  We are the largest scale network in the world.  People sometimes miss that.  We're 25 percent of all long-distance traffic.  You see big numbers from telcos, but you don't see the aggregate piece of that.  So, with that scale comes some sort of ‑‑ I would say some challenges around maybe some quality that you may expect.

I would tell you, though, anecdotally 35 percent of our base is small businesses that use it as their primary communications line, with a fall back on the other side, because the cost piece of it is so compelling.

So, we'll continue to improve on that and continue to work on that.  I think for many people it is mission critical right now and it's just a big area of focus for us moving forward.

EGON DURBIN:  And you'll get, I'll do this for Tony, integrated address book and messaging, which I think will transform it from the by-appointment experience that most people have between cheap long-distance and high-def video.  You've got the address book.

TONY BATES:  We've got the address book and we certainly have the enterprise, so it will come.  It will be something that I think will change a lot of the way people think about it.  It is true today; it is a bit of a by-appointment for a lot of people.  Part of it is the address book.  Part of it is how we integrate, I think, into policy that people care about in their businesses, and those will be things that we'll be focused very heavily with Microsoft on.

ADAM LASHINSKY:  Okay.  So, before I thank these gentlemen I'm going to bring Andy Serwer up.  We're so delighted to see so many people in the room for the end of the conference.  Just give us a few minutes to thank all of you properly.  But, first, thank you to the three of you for being here today.  It was really great.  (Applause.)


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