Roopam Jain's Blog

Microsoft Acquires Skype

10 May 2011 | by Roopam Jain
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For the last several days, the rumor mill was abuzz with possibilities of a Skype acquisition.  Microsoft’s announcement this morning that it is acquiring Skype for $8.5B in cash seems aggressive and risky from a financial point of view but could be a game changer for communications.  This acquisition could make Microsoft a serious contender in the cloud and will help Skype overcome the huge challenge of credibility among enterprise users. However, all this comes at a high cost for Microsoft, a company not known for acquisitions.

Skype, with over 600 million registered users in 2010, had only 8.8 million paying users. It made $860 million in revenues in 2010 and had long-term debt of $686 million. That’s the part that leaves many scratching their heads. It is a huge acquisition by any means of a web-based company - looking at the price-to-sales ratio of the acquisition Microsoft is paying about eight times the revenues.  Do the possibilities of integrating Skype in Microsoft’s portfolio give Microsoft the competitive advantage (over Google, Apple and Cisco) and the income generating potential in the long term?

Microsoft will integrate Skype’s capabilities into its enterprise products (voice, video, etc.) and also into Xbox/Kinect for video calling.  However, there is significant overlap as several of Skype’s capabilities are already available today through Lync and Live Messenger. Microsoft’s Kirk Koenigsbauer demoed Lync videoconferencing over Kinect at Enterprise Connect in March. Having said that, Skype is a way better IM and voice/video calling client than Live Messenger.  Additionally, Microsoft will integrate Skype into Windows Phones which can possibly help narrow the huge gap between Windows Phones and iPhone and Android.  And there’s the speculation that Facebook will get access to Skype as part of Microsoft's partnership with Facebook.  Indeed Skype’s vast reach today can open a world of new opportunities for Microsoft but how and when Microsoft will make money on Skype is hard to see yet.

From a UC perspective, this will truly give Microsoft the network and the reach to take UC to the cloud at a large scale. Since Skype made significant changes last year, there was anticipation already about Skype becoming a serious contender for voice and video for mainstream businesses. However, the biggest concerns were around user perception that Skype is a free consumer-grade service and not yet enterprise-ready from a security and reliability perspective. That’s where the Microsoft Skype marriage can make some true market changing moves. Additionally, Microsoft which has been struggling to get into the SMB market can clearly access that now with Skype. Although, from a financial point of view it is not clear immediately how Skype, which posted a loss of $7 million in 2010, can help Microsoft’s huge money losing online services division.

What does this mean for Microsoft’s competitors?  On the enterprise collaboration side, Microsoft’s competitors have been challenged by its fast emerging UC portfolio and Microsoft's market disruptive prices. Skype as a low-cost provider will only increase the headache for Microsoft’s competitors. The announcement made by Skype and Citrix Online in March also looks questionable now.

Given all the above it’s not hard to see why Microsoft made this acquisition. Like any major acquisition it will be a while before we see the integrations and there will be organizational and execution challenges along the way. But there are several interesting possibilities that will unfold with time, possibilities and opportunities that come at a very high cost for Microsoft.  The angle might as well have been to keep Skype out of Google and Cisco’s hands.

On a personal note, I like my Skype the way it is and I like it free and I am hoping Microsoft doesn’t mess with that.