Skype Acquisition a indicator of desperate tactics at Microsoft to stay good in consumer internet space
As the dust settles, there are increasing questions on the $8.5 billion that Microsoft spent buying out Skype. This beats Google’s quote of $4 billion by Google. While Microsoft with its huge cash reserves and earnings will make good on its investment of $8.5bn in 50 days free capital flow, this doesn’t make sense at all as a financial investment. There’s no way Microsoft is going to generate enough revenue and profit from Skype to compensate. Last year Skype had $860 million in revenue, and a net loss of $7 million, according to its initial public offering filing.
Unless there are other factors for Microsoft to bid for Skype. The supporting reasons for the rather desperate bid for Skype are as follows:
1. Skype’s user base
Skype has a strong and loyal base of more than 170 million active users across multiple platforms. Microsoft will get instant access to Skype’s network, which represents a huge influx of customers and a big leap in Microsoft’s presence as a consumer Internet company.
2. Skype and the enterprise
Of course, it’s not all about consumers. Skype has been aggressively pursuing the enterprise market in recent years and has made some solid progress there. Microsoft likely sees this purchase as a win for both its consumer and business product lines, and we can expect to see Skype integration coming soon in all manner of Microsoft products and platforms. Already promised is Skype support for Xbox (and Xbox Live), Kinect, Office, Lync, Outlook, Hotmail, and Windows Phone.
3. Windows Phone integration
Along those lines, perhaps the most obvious outcome will be Skype’s integration into future versions of Windows Phone. This will allow Microsoft to compete squarely with Apple’s Facetime and Google Voice. Expect to see Skype on a Nokia Windows Phone in the near future.
4. International long distance
Interestingly, one of Skype’s biggest strengths was barely mentioned in the press conference announcing the deal: the massive amount of minutes Skype users represent on the public telephone network. Skype’s been in an all-out war with the entrenched telecom carriers since its inception — the carriers despise Skype and rightly see it as a major threat to their business model. According to Alec Saunders, a telecom vet and ex-Microsoft employee, with this purchase Microsoft instantly becomes the world’s largest carrier of international long distance minutes. How Microsoft will take advantage of this, and what impact it will have on their existing carrier relationships, is one of the open questions around this deal.
5. Blocking the competition
Let’s not forget another angle that surely motivated Microsoft to pursue Skype — keeping it away from the competition. It’s been common knowledge that Skype’s investors have been looking for a buyer for some time. Skype was on a rocky road to an IPO, and it sounds like the investors who bought Skype from eBay were concerned about the viability of that process and eager to get their returns sooner rather than later. When Google came to the table, you can bet the deal-makers in Redmond started some serious number crunching.
From a technical perspective, Microsoft has already developed much of the same functionality that Skype provides. Windows Live Messenger offers free instant messaging and voice and video chat, it already works with Lync and Office, and Microsoft had previously announced plans to integrate Messenger into Windows Phone.They have lost confidence. Microsoft no longer believes it controls or even can control the game. Worse still, they don’t have confidence that they even know the rules. So they’ve adopted a defensive posture and this Skype acquisition is more of a block than anything else.
Put it straight, Microsoft bought Skype to keep Google from buying Skype. And we havent spoken about Apple yet!
This is just in: Microsoft agrees to buy Skype for $8.5 billion. This is the largest deal in Microsoft 36 year old history. This acquisition solidifies Microsoft multi platform strategy.
An interesting history update of Skype: Invented in Estonia, founded by Swedes, incorporated in Luxembourg, bought by eBay, sold to Silver Lake, bought by Microsoft.
The price tag of $8.5 billion (@35% Premium) reflects Microsoft’s determination to rival Facebook and others in social networking wars. Akype’s global reach will be attractive and carrier support (notably Verizon) has validated the service. Microsoft must clarify how Skype will fit with services such as Windows Live Messenger and Lync as well as Xbox, Kinect and other Windows Devices. (Did they miss the Kin devices in that list?). The Skype deal gives Microsoft a recognized brand name on the Internet at a time when it is struggling to get more traction in the consumer market.
Om Malik, in his blog mentions the “plusses” for Microsoft in the Skype deal.
1.Skype gives Microsoft a boost in the enterprise collaboration market, thanks to Skype’s voice, video and sharing capabilities, especially when competing with Cisco and Google.
2.It gives Microsoft a working relationship with carriers, many of them looking to partner with Skype as they start to transition to LTE-based networks.
3.It would give them a must-have application/service that can help with the adoption of the future versions of Windows Mobile operating system.
4.However, the biggest reason for Microsoft to buy Skype is Windows Phone 7 (Mobile OS) and Nokia. The software giant needs a competitive offering to Google Voice and Apple’s emerging communication platform, Facetime.
Beyond this, Microsoft also leverages the Skype experience and expertise across many other platforms:
5.Skype has a lot of relationships with SMBs and enterprises that will complement Microsoft’s wares. By the way, Microsoft’s Lync unified communications system looks like a strong product line.
6.With Skype, Microsoft will have a major say—and could be the trendsetter—in video conferencing standards.
7.Skype can support Xbox and Kinect, Windows Phone, Lync, Outlook and other properties.
Interestingly, this deal between Microsoft and Skype could be a win-all for Facebook in the long term. Facebook was never a serious contender to buy out Skype but with Microsoft’s backing (MS has stakes in FB), Facebook could use Skype’s peer-to-peer network to offer video and voice services to the users of Facebook Chat. If the company had to use conventional methods and offer voice and video service to its 600 million plus customers, the cost and overhead of operating the infrastructure would be prohibitive.
Skype on a go alone basis lacked steam to power its revenue. Sources believe that Skype’s revenues has stalled. The company had bet heavily on is video sharing service. The premium version of video calling and sharing was a way for Skype to increase its average revenue per user and move into the enterprise market. However, given Skype’s DNA is that of a consumer Internet company, the challenges are not a surprise. (A challenge to Apple’s Facetime video chat service)
Google recently unveiled its VOIP (Voice over IP) service on Gmail which will now enable its users to make phone calls over the Internet. With this move, Google takes Skype head on in the VOIP space. Google already has a video chat facility for its gives users an audio and visual experience online. This new calling Feature, allows users to dial phone numbers directly through the mail interface. Thus Google now pushes the communication interface from Computer-Computer to Computer-Phone space. Users can click “Call phone” at the top of their chat list and enter a number or a contact name.
So, does Google have the muscle to make Gmail a Skype killer?
Skype, a 7-year-old company, is used by individuals and companies to make video and voice calls over the Internet. According to Skype, its users made 6.4 billion minutes of calls in the first half of 2010. While Google may be starting out behind in this competition, it has the benefit of its large Gmail user base.
Skype could get hurt by this. Skype has been offering the ability to call land lines and cell phones for years now. But having it integrated into Google’s Gmail and, assumedly, their other offerings down the road, is quite an extension for Google.
Google, has always been on the lookout for new streams of revenue, and is looking to expand its reach over their customers and to move into complementary markets that will draw more revenue.Adding voice calls to their existing product set enhances the user experience and keeps people using Google apps longer and more frequently. It also keeps people from using another service like Skype, and it certainly may prompt some defections from Skype. Google definitely has the scale and reach to put a big dent in Skype if Google can deliver on the service side.
The voice calling feature is expected to be rolled out to U.S.-based users over the next few days, according to Google. Users will need to install Google’s voice and video plug-in and watch for the “Call Phones” button to appear on their chat list.
The MWC (Mobile world Congress) was a spectacle this year as well (as every year!). The Mobile world had a sneak peek into New Technologies, new devices, new services and new partnerships happening around.
One of the most promising partnerships annpounced was that of Nokia and Skype.According to this partnerships, Nokia would integrate the Skype VoIP software with its N Series flagship N 97 on the S 60 platform for its consumers in Q3,2009. This would enable consumers to sync their phone address book with their Skype contacts and make calls over VoIP to them. A computer call would be free and users will pay Skype for voice calls to Cell phones or landlines. Skype as an application is free for download to cell phones. However it would require a 3G service or a Wi Fi zone to allow this service better.
This is a classic case of convergence media being offered to consumers (who now have a choice of making a call through their cellular operator as well as VoIP). Skype is the biggest beneficiary of this partnership as it piggy backs Nokia’s reach in geographies where the lap top will take some more time to estanblish itself. Thus Skype, Internet and VoIP will leap frog emergence of lap tops to tap into the VoIP technology. However there is an unexpected backlash from UK operators, O2 and Orange who obviously view this partnership and the technology ofered being disruptive in nature. The sources cited state that the partnership of Nokia and Skype would wrest away control of their consumers by offering easy access to an application that could hurt their call revenues.
To quote verbatim: Mobiletoday.co.uk’s source said to them that this was yet “another example of [Nokia] trying to build an ecosystem that is all about Nokia and reduces the operator to a dumb pipe…But if you spend upwards of £40 million per year building your brand, you don’t want to be just a dumb pipe do you?” The source added, “Nokia have tried several ways to own the customer over the years and operators have had to say no.”
The adjectives to describe the operator outrage are “furious” and “venting their anger” amongst others. Operators have also stated that they wouldnot stock up Nokia devices if Nokia doesnot strip the application. Thus we have an interesting situation out here, since Nokia wouldnot want to walk back on its MWC partnership with Skype for fear of a loss of face. However inability to do so, may jinx the N 97, a device where Nokia is betting a lot to fight back on the smartphone platform. It doesnot have a US carrier for N 97. Not having a UK carrier could be worse for them. It needs the operators to subsidize the N 97 for the smartphone users. We may see Nokia walking back on the Skype partnership after all, at the end of it. PS: One would remember Nokia’s earlier attempts at trying to have a eco system of consumers all for itself without sharing it with its eco systems partners. An earlier example was the Comes with Music service which it started short circuiting the operators (who also saw this as a competition to their own music stores).