by Erik Sherman
May 10, 2011
Once, you could use a public telephone for a dime.
Today, Microsoft (MSFT) announced it would
acquire Internet communications company Skype
for $8.5 billion. Imagine the size coin slot necessary for that payment.
The InstAnalysis has already begun:
The deal is about regaining standing in
Microsoft could work with carriers that want to
include Skype in their next-generation phone and data networks.
has a mixed history record with large acquisitions and might blow this one.
All of that is true, but falls short of the real significance of the
Microsoft has enormous plans for the Skype
acquisition, and the move exposes some serious strategy in action.
Skype is more than
Skype has had its problems, both as an operating business, which last year
managed to lose $7 million on $860 million in revenue, and as an
acquisition. (Just ask eBay.)
However, it’s a big mistake to look at Skype as
a glorified chatting service that overlaps what Microsoft already has in
Windows Live Messenger.
Skype is important in telecommunications
- The company has a service that the telecom industry cannot ignore.
In 2010, Skype carried almost 25 percent of all international
calling minutes. Its international traffic has grown at twice the
rate of traditional voice call carriers.
Carriers already want Skype - The
wireless service providers look to partner with Skype as they move
LTE networks. LTE means faster data transmission, and people will
want to use the Internet to make free calls. Better to embrace a
rival than see your subscription business go to competitors that
will even if you won’t. Owning something badly wanted by carriers
puts Microsoft into a better position to move Windows Phone.
Skype has big brand - Talk to people
about placing phone calls over computers and hear them use Skype as
a verb, the way Xerox once meant photocopying. It’s far more
prominent than Google Voice and even has millions of paying
customers, which further proves brand strength.
Skype may not have been the best business, but
it has incredible value.
You can only analyze this deal the way Microsoft thinks: in long terms.
Microsoft may fail in a market, but not for want
of trying, and it has a long planning horizon. Skype is not for next week’s
or even next year’s financial results, but for what the acquisition can do
for Microsoft over the next decade.
Various people have speculated that Skype is a must-have service to help
with future Windows adoption or a corporate collaborative platform.
Think bigger. Microsoft has said some of the
places it wants to use Skype:
Xbox 360 and Kinect
other Windows devices (just wait for
integration of television, Kinect-like movement control, and video
such Microsoft services as Lync (the
company’s unified communications system), Outlook (and, presumably,
Exchange), and Xbox Live
non-Microsoft clients, which would let
the company potentially make money off millions who don’t want to
use Microsoft operating systems
Skype could tie together many seemingly
disparate services, and it’s a foot in the door to important markets.
Integrating Skype into other products or
services is a potentially effective approach: just ask any teen who
regularly plays Xbox games and talks with other players over Microsoft
networks. The company captures a major telecommunications service whose use
grows at a dazzling pace, and the technology already fits what Microsoft
Buying Skype keeps the company out of Google’s hands, and Microsoft can
license the service to one of its investments,
nose even more.
Finally, the move continues Microsoft’s
important financial diversification strategy, which has helped it do what
might have been unthinkable a few years ago: weather an upset in Windows
Even if $8.5 billion seems like a lot, this is
potentially one of the smarter moves that the company has made in a long