On July 6th, Zuckeberg announced the integration of Skype with Facebook. This did not come as a revelation; rumours had been flying around for weeks, if not months.

In a nutshell, the service provides users one-click voice and video communication with their entire Facebook address book.This complements Facebook Messages to close the communications loop: asynchronous communication (email, instant messaging and SMS), and now synchronous communication (voice and video).

Both for Facebook and Skype, the deal was imperative. Facebook's vision to become the social infrastructure of the internet required to include voice and video communication. These services will increase user engagement: now there is one less reason to leave Facebook-land, and create new opportunities to generate revenues. In addition to Facebook's current revenue generating streams: adds, applications and credits, there could be new revenue sharing streams attached to this partnership:

1. Skype premium services consumed from Facebook (Skype In, Out, SMS, voicemail, multi-party video conferences, etc.)
2. New, premium voice/video services designed specifically for gaming, including a transaction fee for exchanging Skype Credits into Facebook Credits and viceversa
3. User calls (frequency, duration, etc.) could be used as a measure of the strength of a social relationship, which could in turn be used to refine the social graph and improve add targeting

On top of these opportunities, let's not forget that this deal also had a defensive component against Google+ and its Hangouts feature.

Rationale for Skype:

Despite the fact that there is a significant overlap between Facebook's and Skype's address books, this is a phenomenal opportunity for Skype to secure its dominance in the consumer VoIP market via:

1. Lowering barriers to adoption: integrating and simplifying services always increases user adoption and usage. One of the key barriers to adopting Skype was the need to create a Skype account, and to have to add your friends' Skype IDs to user Skype address book. With the integration with Facebook, this will no longer be required. Moreover, the Skype interface for the past few years has been cluttered and unintuitive. 
2. Winning the battle for mindshare: with this deal, Skype ensures its mid-term future as the most recognisable consumer internet telephony company worldwide.

Skype's two-front strategy to disrupt the telco industry, both for residential and businesses

Power is shifting from telecom operators to Over The Top (OTT) players. OTTs are those that use network operators' infrastructure to provide their own services e.g. Skype, Netflix, etc. However, only recently have OTTs begun to compete directly with network operators, gradually eroding their margins and, most importantly, building parallel billing relationships with consumers. Telco's greatest assets - in order of importance - are its customers' relationships and networks. The partnership between Facebook and Skype is large enough to create a new kind of telco and, thus, we should expect telcos to take steps to fight back this threat ... or maybe embrace it (?) to create new opportunities for all parties.

What is certain is that Skype is fighting a two-front war with network operators, both in the residential and business segments. 

Still, how truly disruptive is Facebook+Skype? Wait for mobile to kick in.

With all the noise created by Google+, few in the Internet world (let alone the rest of the planet) have realised the magnitude of the Facebook/Skype partnership will have in the consumer communications market.

The future of this industry rests on three pillars: social, mobility and video communication.

1. Facebook has reached the 750 million user milestone: remember Metcalfe's law? The value of a network is proportional to the square of connected users. Usage is accelerating, not slowing down.
2. Global mobile data traffic grew 2.6-fold in 2010, nearly tripling for the third year in a row. It is expected to increase 26-fold between 2010 and 2015.
3. Mobile video traffic will exceed 50 percent of total mobile traffic for the first time in 2011, and mobile video will more than double every year between 2010 and 2015.

As soon as Facebook and Skype decide to launch a decent mobile application, the impact on operators' mobile voice revenues could be devastating.

My favourite feature: simple and effective virality

Video calling is not new; it has been around for years. However, the virality of the Fabook-Skype call is remarkable. Any user can receive a call, whether he/she has the Facebook-Skype software installed or not. If the answer is not, the user is prompted to install it - a process that takes around 30 seconds. Stupidly simple.

One caveat: Skype lacks focus and the predicted conversion-to-premium will not occur

Firstly Companies cannot master all things - becoming a jack of all trades is not a viable strategy in an age of globalisation and extreme competition. Customers are demanding and will not accept middle of the road products and services. Only the best will do, and no one can excel at everything.

I understand Skype's motive: the incentives for capturing the largest market share as possible are great, and the costs of doing so diminish dramatically the more customers Skype can attract. However, I believe that Skype is spreading itself too thinly, and now with the acquisition by Microsoft, it will wear itself out in the mindless pursuit of synergies with Lync, XBox, etc.. It is not about money, but intense focus and clarity.

Secondly, everyone repeats that with Facebook, Skype's reach and thus premium customer base will increase dramatically as a result of more users trying Skype's premium services (Skype In, Out, group video calling, voicemail, ...).

I think this is only true in the short term. With multiple free communication channels, I see no need to use Skype's paying features. Moreover, with the rise of smartphones and push notifications there is no market for Skype In or Out:

a) Tom wants to call Jerry

b) However, Jerry is not on logged on to Facebook (either PC or mobile)

c) Thus,Tom uses Facebook Messages if he is willing to wait, or calls him via Facebook if he wants to speak to Jerry straight away

d) Jerry gets a push notification stating that Tom wants to get in touch with him and whether he wants to take the call

e) Jerry accepts the call and he is automatically logged on into Facebook

f) The voice/video call takes place for free

Conclusion: no need to use Skype In or Skype Out.

Who's next? LinkedIn, but not for a while

A partnership between LinkedIn and Skype would be very interesting. Because LinkedIn has become the business contacts' address book, people would be willing to pay for additional channels of communication and supporting features. Context is everything, and in the context of business people are used to and willing to pay.

However, I don't see Skype embarking on this adventure any time soon. They will focus on making the partnership with Facebook work brilliantly and try to exploit all possible integration features before partnering with LinkedIn.

Key takeaways

1. The borderline between telco and IT has been smashed by Internet companies. The integration of telco and IT is unstoppable; its convergence, inevitable.

2. By partnering with Skype, Facebook becomes the unified communications platform for all your social contacts. 

3. By partnering with Facebook, Skype reinforces its position as the #1 consumer VoIP brand; however, this does not solve Skype's lack of focus or revenue model problems.

4. While Internet companies are constantly trying new things (succeeding, failing, but always rapidly iterating), telcos by general are working on "business as usual" mode; watching and debating, but rarely doing anything unique or innovative. "Defend at all costs" is an attitude that will not provide new growth opportunities for operators.

Mobile operators are facing a relentless attack on their core business model: revenues from traditional mobile voice service and SMS are gradually being eroded by competing data services such as Voice over IP (VoIP) and Instant Messaging (IM).

Undoubtedly, Apple's launch of iMessage accelerates the negative impact that data communication has over voice and SMS. However, and against what a number of people have stated, Apple does not have anything against WhatsApp or Skype; they simply developed FaceTime and iMessage to keep users permanently within their ecosystem.

This responds to Apple's desire to control the end-to-end user experience; to lock in customers and have them engage with as many Apple products as possible, always focusing on maximizing consumer share of mind.

How should Telcos react to WhatsApp and iMessage?

Are telcos scared? They'd better do something. In five years, voice and SMS revenue will be close to zero and data will be all that is left.

So what are the options that telcos have? One is to follow KPN's example, the incumbent telco provider in The Netherlands.

In May 2011, KPN announced that it would introduce an additional charge for services such as web browsing, mobile VoIP, IM, and video. KPN is particularly concerned about WhatsApp, which is in 85% of KPN's Android smartphones; other applications, such as eBuddy, Skype, Google Talk, Ping, and Viber were also mentioned.

KPN intends to use Deep Packet Inspection (DPI) to analyse mobile data flows and identify the application being used. If the application is a VoIP or IM service and the subscriber has not paid for these services, the data flows would be blocked.

Dutch techies immediately reacted to this move by KPN by threatening to abandon en masse and moving to T-Mobile Netherlands and Vodafone Netherlands (obviously, both players have not taken a clear position yet and are waiting to see how the mass market reacts).

And I ask: will content providers also take action against KPN? If KPN levies an additional tax on Skype's or YouTube's services, could Microsoft and Google make exclusive deals with KPN's competitors or even leave KPN out of the loop altogether?

I do not believe that we should move to a model where consumers pay for network access to specific services. The beauty of the Internet is to have all the worlds data at one's fingertips. I would strongly advocate for developing new, dynamic data plans where subscribers pay for the amount of data they use. If a subscriber wants to simply use mail and other low data applications, he should pay only his share of data consumption. On the other hand, if a subscriber wants to use data intensive applications, such as video or music streaming, then he should pay accordingly. To summarise: let subscribers consume data and pay for it.

On the 6th of June, 2001, Apple unveiled iMessage: a mobile IM client for for all iOS 5 users.

Its key features include:

• Send unlimited text messages via Wi-Fi or 3G from an iPad, iPhone or iPod Touch to anyone of those devices.
• iMessage is built into the Messages app, so that users can send text, photos, videos, locations and contacts.
• Allows tracking of messages with delivery receipts and optional read receipts. 

So is iMessage different from other mobile messaging apps like WhatsApp?  No, with iMessage, Apple was playing catchup and replicating the functionality that has become standard in other mobile messaging apps.

However, this announcement has caused a lot of concern to both mobile carriers and mobile messaging app developers.

Implications for mobile messaging app developers

For WhatsApp et al, this represents a clear threat for two reasons:

1. iMessages is integrated in iOS 5, while WhatsApp needs to be searched, paid for and downloaded (warning do not underestimate the path of least resistance to drive adoption)
2. iMessages will also send messages to iPads and iPod Touch devices connected to the network over 3G or WiFi.

On the other hand, WhatsApp has a fundamental advantage: it works cross-platform. Now, with the emergence of Android as the dominant mobile OS, would you want to be limited to only iOS communication? Personally, I believe that if WhatsApp continues to innovate and adds voice communication too, it will outpace iMessage.

Implications for telco operators

Mobile operators are facing a core attack on their business model: revenues from traditional mobile voice service and SMS are gradually being eroded by competing data services such as Voice over IP (VoIP) and Instant Messaging (IM).

But what this chart does not show is profits (closely guarded by telco operators). Voice and SMS account for an even larger percentage of profit generation.

In conclusion, Apple's launch of iMessage does not bring bring anything revolutionary to the table; however, it will accelerate the cannibalisation of voice and SMS by data, when data can neither generate the equivalent revenues nor profits.

Why did Microsoft buy Skype?

From a consumer perspective ...

Firstly, Microsoft needed a competitive offer in its Windows Phone 7, creating a serious a alternative to Apple's FaceTime on iOS and Google's Google Talk on Android phones. Until today, Microsoft could only sell Windows Phone 7 licenses to handset makers, but now Microsoft can gain more direct involvement at the network level with Windows Phone 7, which could open up new revenue streams. 

Secondly, we know that Microsoft wants to make the Xbox the centre of the digital home; a hub that integrates entertainment, search and communication. Thus, Skype fits this vision perfectly and could replace the home landline phone and displace telco operators as the voice relationship owner.

Thirdly, adding Skype's 600 million users to Hotmail's 360 million and Bing results in a phenomenal user base that can be monetised through multiple ways.

Finally, Microsoft could use Skype to build its own social network. Microsoft will firstly focus on creating the largest gaming social network, and then move beyond that. They now have over 30 million members in its social gaming platform and the combination of Xbox + Kinect + Skype, makes the community and gaming experience incomparable. Gaming and virtual goods are among the fastest growing and most profitable Internet segments ... if you have any doubts, ask Zynga.

From an enterprise perspective ...

Microsoft has openly stated that they want to eventually become a full PBX replacement. Skype will boost Microsoft's Office 365 proposition in the enterprise collaboration market, making them stand shoulder to shoulder with Cisco and Google. By integrating Skype with Office 365, Microsoft will accelerate Lync's ability to make and receive voice calls from the telephone network. Furthermore, Microsoft will benefit from Skype's already established relationships with telcos across the world for call termination. These calls will now be originated directly from a myriad of sources: the Office Communicator client, Outlook or SharePoint (and maybe in the future Windows / Explorer / Office integration?). Moreover, with Skype's VoIP network, Microsoft could even differentiate by offering free/cheap calls to Windows Phone 7 handsets and tablets. These scenarios should be carefully assessed by operators.

Another outcome of this acquisition could be the ousting of JaJah as the VoIP platform powering Office 365. Note that JaJah was acquired by Telefonica in 2009.

However, even with this acquisition, supporting enterprise voice is difficult because of the complexity of the following requirements: E911, service availability and voice quality (remember Skype's global outage in Dec. 2010?). Moreover, using Skype over a wireless connection is extremely unreliable, although I expect this will change with the roll out of LTE.

My view is that Microsoft / Skype will overcome these obstacles. Maybe, with Microsoft's distribution prowess, Skype will get a larger adoption in SMEs. Full integration of Skype with Outlook would be very powerful, but even then, SMEs will mostly use Skype for PC-to-PC, internal, non-critical calls. I believe that changing users' perceptions that Skype is not only a cool consumer product, but a reliable enterprise tool will be challenging. 

Why did Facebook not acquire Skype?

Facebook and Google were not serious candidates to buy Skype. I think they were used by Skype to push up the price of the acquisition.

If Facebook had IPO'd, perhaps they would have considered purchasing Skype. It is well known that Zuckerberg wants to make Facebook a social platform that integrates all forms of communication e.g. Facebook Messages. 

Skype's value lies in its user base. And, my view is that there is a significant amount of overlap between Skype's and Facebook's customer base. Consequently, this significantly reduces the attractiveness of the deal for Facebook. 

Lastly, Facebook's focus is on improving monetisation of their current core business. Acquiring and integrating Skype would have been a costly distraction. And, just in case, Microsoft is an investor in Facebook, so a door is always open.

Interesting fact - Marc Andreessen

• Marc Andreessen, Netscape co-founder, joined eBay's board of directors in 2008.
• In 2009, eBay sells 65% of Skype to a group of private investors, including Andreessen's VC fund (Andreessen Horowitz).
• In 2010, Andreessen Horowitz invests in Facebook.
• In 2011, Microsoft (an investor in Facebook) acquires Skype 

In this "alignment of interest" strategy, the tone is set for Microsoft and Facebook to battle Google.

Why did Google not acquire Skype?

From a product perspective, Google already has Google Voice. Likewise, Google has stated that it is more interested in cloud-storage and cloud-capable technologies, and Skype’s old-school peer-to-peer communication methods were outdated in an age where Chrome OS and Chromebooks all rely on centralized services operated by Google to function.

However, had Google bought Skype, they could have added 600 million Skype subscriptions to Google Voice and integrated them with Gmail. This would have truly hurt Microsoft and Yahoo.

What is the impact for telecom operators?

Operators make the vast majority of their profits from low-bandwidth services like voice and text, but those services are easily arbitraged by using the data network, as prices per megabyte are much lower.

Consequently, operators will need to continue to test different pricing schemes and offer traffic management solutions that will allow them to monetise the surge in data and the decline in voice traffic. Network quality and stupendous and localised/personalised customer care will become ever more important.

1. A gradual but unstoppable decline in traditional voice.
2. A diminishing growth in the number of mobile and broadband subscribers > as penetration in matured markets reaches saturation, the only way to grow is to acquire customers from your competitors, which tend to be between 3 and 5 times more expensive than acquiring a brand new customer.
3. Rapidly decreasing ARPUs (average revenue per user) in mobile and broadband due to increased competition, mostly based on continual price reductions and lack of differentiation between competitors.

But I think that you are right in saying that infrastructure is still a key differentiator. Undeniably, power has shifted away from operators towards handset manufacturers, content providers and application developers; however, no matter how beautiful the handset is or how incredible the applications are, they are worthless if the data network does not provide the required speed and quality of service (e.g. ask AT&T ...)

I came across the question "What is the future for telcos" in Quora, and I saw some very gloomy answers about the role of telcos with the advent of mobile Internet.

I could not disagree more. I do not believe that telcos will become dumb pipes, but play an increasingly important role in the future of the digital industry ... as long as they get their act together and stop trying to become everything for everyone.

Undoubtedly, there are some major challenges:

1. Internet players are going mobile, shifting the balance of power and bypassing telcos to own client relationships and billing.
2. Data traffic is growing exponentially but not its revenue, leading to congestion and requiring massive infrastructure investments.
3. Voice revenue is declining due to new VoIP services; data revenue does not compensate.

As a result, most telcos are making the mistake of:

• Competing mostly on price, which results in accelerated commoditisation of their services and brands and declining margins.
• Trying to replicate what Internet players are doing e.g. creating app stores, etc. - sorry Tinniam but I do not think that telcos can beat Apple or Google in this race (see the debacle of Vodafone 360).

But telcos do not have to become dumb pipes; their infrastructure makes them indispensable. Wrongly, we mostly see telcos as providers of basic access and distribution services, and yet their are ideally placed to offer intelligent connectivity and monetisation management services.

To differentiate and succeed they have multiple options:

1. Offer varying degrees of flexibility on their service: maximum bandwidth per user or per application.
2. Introduce service priority: per user admission priority or maximum throughput per user.
3. Offer varying but guaranteed service levels.
4. Enhance user experience through content optimization, adaptation and caching.

How many times have you carried out a task that you knew was incorrect or implemented an initiative that was guaranteed to fail just because your boss told you to so and you were too afraid to challenge him/her?

Increasing competitive pressures and economic turmoil have resulted in greater job precarity. As a result, employees will almost do and say anything to please their bosses and secure next month’s paycheck. Sadly, as managers, the tendency is to surround ourselves with “yes” men and women; teams that will praise and reinforce our judgments. It is rare to come across leaders who have the self-confidence to hire people who are as good – if not better – than them at certain tasks. But doing this would be risky; we would become vulnerable, and so, gradually but inexorably, we adopt dictatorial management policies. We erase all trace of sincerity and independence from our employees, and this handicap is translated into numbers: in countries were hierarchy is too rigid, too oppressive for employees to openly voice concerns and opinions, innovation and consequently, competitiveness declines.

But would you not want true, honest feedback from your employees? What if we could come up with a solution that could help employers obtain feedback, but sparing the feeling of confrontation and humiliation? How truly valuable would these sincere comments and opinions be? Would they not help you become a better manager? Would they not help you to learn and continuously improve, as opposed to stagnate in blissful ignorance?

A convertible note is simply a loan (a debt obligation) that can be turned into equity (stock ownership), generally upon the occurrence of future financing (after a price round).

But why would you, as an entrepreneur, even consider a convertible note? The answer is for three reasons:

1. A convertible note is an excellent way to secure investment funds without setting a valuation on a company--an uncertain and disruptive process for the early-stage or pre-revenue company--that can protect early investors from dilution in the next round of financing.
2. From an admin perspective, they do not cost as much as a price round as they require less paperwork and time (e.g. roughly $5,000 for a convertible note vs. $10,000 - 25,000 for an equity price round).
3. It does not require all investors to agree: convertible note is an instrument between one investor and the entrepreneur; and the entrepreneur can make available to other investors, but he does not have to. And the money comes in immediately. A price round is an agreement between all participants. All investors on the table need to agree on the price of the round.

It is worth noting that convertible notes are usually offered at a discount upon conversion into equity (usually between 20% and 25%).

More recently, convertible notes come with a a cap on valuation to ensure that the original investor gets some minimum share of ownership.

Some people have recently described convertible notes will become the preferred financing structure: see Paul Graham. However, there are numerous detractors. For more information on both the benefits and drawbacks of convertible notes:

1. Fred Wilson
2. Mark Suster
3. Entrepreneur.com
4. Instigatorblog.com

D.

My product or service is:

• An idea that I've been toying with for a while
• Currently under development, backed by solid market research and a business plan
• Finally a working prototype being tested by potential customers
• Now generating revenues

Structure of VC firms

Typically, venture capital funds are structured as limited partnerships. Investors such as high net worth individuals and institutions with large amounts of available capital (e.g. pension funds, university financial endowments, foundations, insurance companies, etc.) are limited partners (LPs); they do not take part in the management of the fund and their liability is limited to the amount of their investment.

On the other hand, the managers of the fund are called general partners (GPs). In the best cases, general partners have a stake in the fund to ensure their alignment with limited partners.

Fund structure

Most venture capital funds have a Fixed life of 10 years, with the possibility of a few years of extensions to allow for private companies still seeking liquidity. The investing cycle for most funds is generally three to five years, after which the focus is managing and making follow-on investments in an existing portfolio. Occasionally, the limited partnership will have investments that run beyond the fund's life. In this case, partnerships can be extended to ensure that all investments are realised. When all investments are fully divested, a limited partnership can be terminated or 'wound up'.

However, not all funds have a fixed life; Evergreen funds automatically reinvest the returns generated by their investments insteadunds in which the returns generated by its investments are automatically channelled back into the fund rather than being distributed back to investors. The aim is to keep a continuous supply of capital available for further investments.

Raising a fund

It can take anywhere from a month or so to several years for venture capitalists to raise money from limited partners for their fund. At the time when all of the money has been raised, the fund is said to be closed and the 10 year lifetime begins. Some funds have partial closes when one half (or some other amount) of the fund has been raised. Vintage year generally refers to the year in which the fund was closed and may serve as a means to stratify VC funds for comparison.

Compensation

Venture capitalists are compensated through a combination of management fees and carried interest (often referred to as a "two and 20" arrangement):

Management fees – this is the annual fee paid to the general partners. It is typically a percentage of limited partners' commitments to the fund and is meant to cover the basic costs of running and administering a fund. Management fees tend to run in the 1.5 per cent to 2.5 per cent range, and often scale down in the later years of a partnership to reflect the GP's reduced workload. The management fee is not intended to incentivise the investment team - carried interest rewards managers for performance..

Carried interest - a share of the profits of the fund (typically 20%), paid to the private equity fund’s management company as a performance incentive. The remaining 80% of the profits are paid to the fund's investors Strong Limited Partner interest in top-tier venture firms has led to a general trend toward terms more favorable to the venture partnership, and certain groups are able to command carried interest of 25-30% on their funds.

Because a fund may run out of capital prior to the end of its life, larger venture capital firms usually have several overlapping funds at the same time; this lets the larger firm keep specialists in all stages of the development of firms almost constantly engaged. Smaller firms tend to thrive or fail with their initial industry contacts; by the time the fund cashes out, an entirely-new generation of technologies and people is ascending, whom the general partners may not know well, and so it is prudent to reassess and shift industries or personnel rather than attempt to simply invest more in the industry or people the partners already know.