Does the Skype acquisition signal a new risk-taking market-making Microsoft?

Whether the Skype deal ultimately ends up being a coup for Microsoft depends in large part on what the company does with the technology.

When I first heard the news that Microsoft had decided to acquire VoIP service Skype for $8.5 billion, I reacted in much the way I might if my husband came home and told me he was going to buy a Lamborghini: "You're going to spend how much for what?" It seems I wasn't the only one who felt that way, as most of the early commentary used adjectives such as "whooping" and astronomical."

In a Mashable poll that asked whether the price was right, just shy of one week following the announcement 63.56% of those responding said the company paid too much. Only a little over 6.5% thought Microsoft got a great deal (paid too little). You can cast your own vote here.

From tech pundits to business analysts to Microsoft shareholders to current Skype users to many members of the general public who "don't have a dog in that hunt," everybody's talking about the acquisition, which is Microsoft's biggest ever. According to a Reuters report filed the day the deal was announced, investors were "puzzled" and generally critical of the decision, and Microsoft's stock fell 1.4%. However, the Wall Street Journal noted that the overall Dow Jones Industrial average climbed 44 points, attributing it to investors being encouraged by the Skype deal. Sorting through all the reactions has been an interesting and educational exercise.

What made Skype an attractive acquisition target?

I understand the allure of a Lamborghini. It looks great, it goes fast, and it's cool to own something that everybody else wants but most can't have. Recent rumors had both Google and Facebook interested in buying Skype. Some are speculating that the only (or primary) reason Microsoft made the purchase was to keep it out of the hands of Google and/or Facebook, like some overly possessive little kid who doesn't want the ball, but doesn't want anyone else to play with it, either. While this might have been a factor, you have to consider why Microsoft's competitors would have wanted it in the first place. Any company that attracts the interest of three of the top technology giants has to have a lot going for it.

In the modern business world, growth is king. And Skype, in its updated S-1 statement filed March 4, 2011, reported that between December 2009 and December 2010, the number of monthly connected users grew by 38% and the number of paying users grew by 19%, with total registered users growing from 474 million to 663 million. Net revenues increased from $719 million to $860 million. That's the good news. The bad news is that even with all that revenue, the company still had a net loss of $7 million in 2010. On the other hand, that's in comparison to a $418 million net loss in 2009.

Skype has been around since 2003 and is by far the most popular computer-based VoIP service (as distinguished from VoIP services such as Vonage and Lingo, which use an ATA (Analog Telephone Adapter) box that connects directly to your network router and can be connected to the building's telephone wiring).

Another advantage for Microsoft was that Skype is located in the small European country of Luxembourg. This allowed them to pay billions more for the deal because they didn't have to pay U.S. corporate taxes on the money they used to buy the company. The Wall Street Journal called this a "brilliant, legal tax dodge." As a matter of fact, if the tax implications are taken into consideration, it seems Microsoft effectively paid the equivalent of $5.5 billion - a number that's more in keeping with what Skype has been valued at by analysts.

Fear of the future

Whether or not the move was brilliant, online forum discussions immediately following the acquisition announcement were full of FUD - fear, uncertainty and doubt - from current Skype users. Many expressed fears that Microsoft would make changes that will ruin the service they love, make it too expensive for them to use, or even shut down the service altogether. Many are afraid the free service will disappear and Skype will become "for pay" only. They say (and it makes sense at first blush) that surely a huge, profit-motivated corporation is going to want the service to start making money sooner rather than later.

But others point out all the consumer services that Microsoft currently provides for no cost now, such as Windows Messenger, Hotmail, the Windows Live SkyDrive online storage service, Office Web Apps, and so forth. Some of those fear that Skype's fate is to become stuffed full of advertising, making the user experience less pleasant. But ads don't have to be "in your face." The Windows Live Messenger interface currently includes ads, but they don't get in the way of using the service.

Others fear that Microsoft will turn Skype into a Windows-only entity that will no longer be usable by those running other operating systems such as Mac OS X or Linux. In the press conference where they made the official announcement, Steve Ballmer said Microsoft will continue to support Skype on other platforms, including mobile platforms such as iOS and Android.

Still, popular social networks have been all a'twitter with 140 character (or less) proclamations of gloom and despair. A web search returned numerous articles and blog posts with the same title: Will Microsoft ruin Skype? Many of those, though, when you actually read them, conclude that the answer is either "no" or "we don't know." Still, the fears aren't completely irrational if you look at the acquisition in the context of some past experiences.

Making the deal!

Does the past portend Danger?

The well-known saying that "insanity is doing the same thing over and over and expecting different results" has been attributed to a number of different famous people. Whoever said it, it resonates. One thing that has Skype users and some of Microsoft's shareholders nervous about the deal is the past record - on both Skype's and Microsoft's sides. This isn't the first time Skype has been acquired; eBay bought it in 2005 for $2.6 billion. In 2007, they sold off most of their stake in the company, never having done much with it.

And on the Microsoft side, previous large acquisitions haven't always worked out so well. They paid $6 billion for the aQuantive advertising company (Razorfish) in 2007 and then turned around and sold it in 2009, having failed to turn it into the hoped-for producer of big online ad revenues.

Perhaps the most high profile example, though, was the purchase of Danger, the maker of the T-Mobile Sidekick smartphone, for a rumored $500 million in 2008. Most of the original Danger employees left within a year, and the project they worked on was the Kin "social" phone, which turned out to be a PR disaster for Microsoft when it was discontinued in June 2010 only 48 days after its release. Then in March of this year, it was announced that the Danger data service for existing Sidekick owners would be discontinued at the end of this month (May 31, 2011).

Then there was the Yahoo acquisition - or rather, then there wasn't a Yahoo acquisition. After making a $44 billion offer in 2008, followed by months of talks that resulted in the company raising its bid by $5 billion, it all fell apart when Yahoo rejected that amount as too low.

Can Microsoft make the Skype acquisition pay off better than some of its previous deals? Perhaps the company is following the advice of the even more famous saying: "If at first you don't succeed, try, try again."

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How can Microsoft make this a win-win situation?

In approving the deal, Microsoft's board of directors obviously see the potential for a big win in the company's acquisition of Skype. And it's not just those inside the company who are enthusiastic. A number of analysts - even some of those who opined that the price was too high - see Skype as a good fit with Microsoft's current products and the direction in which the company wants to go.

As arguably one of the most popular cloud-based services, Skype fits nicely into Microsoft's current push "to the cloud." Consumers and businesses alike are still not completely sure about many aspects of cloud computing. Many are reluctant to put their data into cloud storage. Many don't trust the cloud to deliver their mission-critical productivity applications. Many are still uncertain about the true bottom line cost of ditching the corporate IT department and putting their users completely into the hands of public cloud providers.

But VoIP is more of a "native" cloud application, and Skype has generally built a reputation among its users for delivering a reliable, high quality user experience at a reasonable cost - although it has suffered some outages that left users in the lurch and raised doubts about its dependability.

If Microsoft leaves the present pricing structure alone (while perhaps adding more options) and shores up the reliability of Skype's network by addressing the problems inherent in the dependency on "supernodes" hosted by users, there is a good chance that they can move Skype into profit-making mode over the next few years.

If they find a way to monetize the service without changing much (such as through non-intrusive advertising), Skype could become a really valuable asset. But if they take more dramatic (and riskier) action to truly integrate Skype into their other products so that it works seamlessly with them, Skype could turn into the pot of gold at the end of Microsoft's rainbow and bring the company's stock out of the doldrums it's been in for the last few years.

What I'd like to see

What kinds of really innovative ideas could move Skype into the position of making Microsoft the "comeback kid?" I'd like to see Skype technology spread across both the consumer and enterprise spaces and integrated into such products as Lync, Windows Live Messenger and Kinect Video.

I love the way it's already integrated into Internet Explorer, so that in IE 9 the phone numbers on web sites (or even in search results) show up as click-to-call links. With a touch of the mouse button, Skype opens and dials the number. I'm hoping to be able to do the same thing from within Outlook and/or Hotmail: open up a contact, click on the phone number and have Skype dial the number - quick, easy, simple and cheap.

It's also possible, since Microsoft owns an interest in Facebook, that the company will further integrate Skype into the social networking site as it integrated its Office Live Docs into Facebook's messaging platform. And of course, integration with the Windows Live suite would be great; how cool would it be if I could simply click to send a video I've created in Windows Live Movie Maker to one of my Skype contacts, in the same way I can currently publish it to one of my Windows Live Messenger groups?

I'm eager to see what Microsoft does with Skype on the Windows Phone platform. Currently Skype Mobile on my Android phone is severely crippled by the wireless carrier, to the point where it's not very useful.

If Microsoft could work a deal where they can offer a fully functional version of Skype on Windows Phone (one that could be used to place calls over 3G without incurring carrier charges, or at least one that would work over Wi-Fi), that could become a huge selling point for Windows Phone. Microsoft could use Skype to give Windows Phone devices the same type of video calling capability that iPhone 4 users have with FaceTime - only better.

Skype integration with Xbox would allow you to engage in video chats with your fellow gamers, and perhaps there's even a way it could be integrated into Windows Media Center to allow you to call phone numbers embedded into commercials. Or how about integrating the call translation technology that was demonstrated by Microsoft Research at TechFest 2010 so that you get an automatically generated transcript of the call, as well as translated speech synthesized in your native language during a Skype call?

I'm sure there are many more innovative ways to combine Skype with existing and future Microsoft products and services that I haven't even considered.

My take

Whether the Skype deal ultimately ends up being a coup for Microsoft depends in large part on what the company does with the technology. So far there has been no official answer to that question, but the possibilities have many in the industry anxiously perched on the edges of their chairs. One question that's still up in the air (or perhaps more accurately, up in the cloud) is how the acquisition will impact services that directly compete with Skype, such as Yahoo Chat, Google Chat and smaller players such as ooVoo.

Steve Ballmer has already gone on record as saying that the next version of Windows (commonly referred to in the media as Windows 8) will be Microsoft's "riskiest product bet." Many see the Skype acquisition as a big risk, too. Could it be that the company that has come to be seen as staid, boring and conservative is in a risk-taking mood lately? Maybe they've been listening to the words of Jawaharlal Nehru, the first prime minister of India (also known for the 1960s fashion statement called the Nehru jacket). His best-known quote: "The policy of being too cautious is the greatest risk of all."

After a week of reflection, I'm glad to see Microsoft taking some big risks. I hope it results in good things for the company and, most of all, for its customers.

Additional information


Debra Littlejohn Shinder, MCSE, MVP is a technology consultant, trainer, and writer who has authored a number of books on computer operating systems, networking, and security. Deb is a tech editor, developmental editor, and contributor to over 20 add...

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