This morning, Microsoft announced that it is acquiring Skype for the princely sum of $8.5 billion. Skype is undoubtedly the most successful consumer phone and video conferencing provider worldwide, but that’s an awful lot of billions for a company that likely didn’t even break one billion in revenue last year. What’s up with the big money, and why Microsoft?
First, Microsoft is in deal-making mode this year. The Windows-Office goldmine that they’ve sat astride for so many years may be sustainable for many more, but it isn’t likely to provide enough long-term growth to please investors. Office and Windows have precious little purchase in the most rapidly growing technology sector, mobile. Redmond is watching market share being eaten away from below by Google’s free alternatives and from above with Apple’s tablets, phones and laptops.
Even worse, Microsoft no longer seems to be an innovator in a broad sense. Standouts like the XBOX (and the brilliant Kinect) and a pretty slick Windows Phone 7 OS are anomalies in a corporation that has largely stagnated, happy to rest on a massively profitable software and licensing revenue stream.
So, why not look outside? The first big move by Microsoft was the Nokia alliance, announced in February of this year. In that case, both companies desperately needed a sea change in mobile strategy, and Nokia had consistently failed to deliver a high-quality smartphone OS. Putting Windows Phone on Nokia devices made good sense for both companies – Microsoft pushes a fledgling operating system out to a much larger audience, and Nokia acquires a slick smartphone UI and access to a broader range of traditional computing services than they were capable of building in house. As a bonus, a strong third player mixing things up in the iOS-Android arena benefits all of us. Healthy competition accelerates innovation.
The Skype purchase isn’t immediately obvious as a victory for both parties. Skype has a large established user base, but Skype’s technology isn’t anything particularly innovative or special. Apple, Microsoft and many others have delivered reliable, high-quality audio and video communication products at the consumer level, and big vendors like Cisco and Siemens dominate conferencing and “unified communications” at the corporate level.
So, what, exactly, is it that Microsoft is getting out of this deal? First, a brand and a subscriber/user base. Skype is the most recognized consumer brand in the world for this type of communication product, so the value of the brand itself is important to Microsoft (whether Microsoft plans to preserve that brand permanently is unknown at this point). Skype also has over half a billion users worldwide by some counts, so Microsoft gains access to that user base. Who knows exactly what they’ll do with it.
Second, Microsoft will integrate Skype into a number of existing and future platforms. Expect tight integration with Microsoft’s XBOX Live service and Kinect – quick videoconferencing from your living room with any Skype user worldwide will be a strong selling point for having the XBOX dominate your living room technology. Also, Skype will likely be positioned directly against Apple’s FaceTime as the video chat application for Windows Phone smartphones of all stripes.
Where else? Skype could be integrated directly with Bing – remember that all of Google’s services sprang from nothing more than search engine market share, and Microsoft is very serious about stealing search market share from Google any way they can. I wouldn’t be surprised if Microsoft largely abandoned (or at least stopped promoting) the “Office Live” brand and services to consumers and bundled more consumer-friendly free services like Bing and Skype all together under a single consumer brand or package. Microsoft can no longer leverage everything off the Office/Windows brands. They need compelling services (like XBOX Live) that stand on their own.
Of course, implementation and delivery of all this goodness will be the real challenge. eBay was unable to integrate Skype technology (and, perhaps more importantly, Skype culture) into its services or company, so there could be underlying issues that might make the acquisition and integration difficult. And Microsoft is dropping a ton of scratch on this deal, so expectations are going to be very high. If they don’t generate something pretty special out of the acquisition, a lot of investors and analysts are going to be disappointed. If Microsoft cannot innovate its way to solid growth, and it can’t acquire its way there either, expect a lot of doomsaying over the next few years.