Microsoft announced yesterday that it plans to acquire Skype, the Internet video telephone company. The price: $8.5 billion. Wow! Is that a good deal or what? Of course it remains to be seen, but obviously Microsoft sees some possibilities.
Just imagine you work at the highest levels of Microsoft in their product planning and strategy groups and you have to construct the next one, three and five year plans. Brutal. As a long time leader in the PC and other computer fields, Microsoft is suffering from some serious competition from the likes of Apple and Google. Those two companies are getting all the attention these days. Steve Ballmer hates that, for sure. There may even be an identity crisis going on at Microsoft.
In any case, what do you do to grow the business in the next few years? Apple is now showing a greater net worth than Microsoft and sales of Windows/Office products are expected to decline in the coming years thanks to the declining desktop and laptop sales caused, in turn, by the unbelievable tablet trend. What is a company to do? On top of that, efforts in the cell phone area have not been all that successful. While there is still some hope for the Nokia-Microsoft deal, Microsoft still needs a win other than Xbox and Kinect. And fast. What better way than an acquisition? Skype is it?
Skype is a Luxemburg-based Internet company that offers free and paid software so you can make free phone calls including video calls over your high speed Internet connection. Skype has been around a few years and while it has been successful in the form of over 170 million active users, it has never made any money. It did bring in a reported $860 million in 2010 but at a loss of $7 million. Microsoft is not buying Skype for the revenue but the potential for ad sales appears to be there as well as plenty of ways to integrate Skype into other products.
Interestingly, EBay bought Skype in 2005 and the hoped for “synergy” never developed. EBay dropped Skype in 2007. In the meantime, Skype has also been trying to figure out what to do next to sustain operations. They filed for an IPO last August that never occurred and apparently have had a variety of discussions with other companies for partnerships or whatever. With no other apparent bidders, Skype probably feels pretty good about the $8.5 billion deal. Hopefully it will be a win-win.
Skype is a Verb
I Skype to keep in touch with my kids and grandkids. It is poor quality video at best but it works pretty well. It can be jerky with dropouts occasionally, but overall a winner. Free is free. And it works across all platforms from Windows laptops to Apple iMacs and most tablets and smartphones. With both front and rear facing cameras in smartphones and tablets becoming commonplace, video phone calls are growing in popularity. It is only going to become more so. So the potential for Skype seems excellent. And Skype certainly has the name recognition.
But what is the business model?
That is what Skype has been searching for over the years. The technology is unique and it works well. But how does that translate into profit? Selling ads seems to be the only way, but with Skype part of the much larger Microsoft scene there may be other ways by using Skype to enhance new and existing products. It appears that Microsoft may incorporate Skype into Windows and maybe some other Office products like Outlook. It will no doubt show up in Xbox and Kinect to let players confer visually and audibly. Cool. It will probably be an app in their newest smartphone OS. It may also have potential in the office teleconferencing field.
Microsoft is serious about expanding its presence in the Internet sector. Their Bing search division is doing OK and it works as well as Google but is just not as well known. Microsoft also tried to buy Yahoo a few years back but was unsuccessful. Skype seems to be the next big Internet push for Microsoft. They have the bucks to do it, now to make it work. It is anyone’s guess how Skype software will match up with Microsoft code. And I have heard that Skype is hacker’s dream come true for mischievousness. Overall it could be software hell. We shall see, but I do wish them success.