With the announcement today of Microsoft acquiring Skype, reactions range from extreme skepticism by some on Wall Street to near elation from users of Skype and Microsoft products. Why? This is Microsoft’s largest acquisition in terms of a cash outlay; and the last time they pulled the trigger on a >$5B deal for aQuantive, consensus from insiders and outsiders alike is that they overpaid and failed during integration efforts to realize the full value of the potential of the acquired company. But this isn’t some online advertising firm that needs to be massaged into its search platform - Skype is much different.
What does this mean?
In addition to integrating Skype into its Bing search platform (click to IM/talk/SMS could revolutionize search and increase the value of online advertising), Microsoft can integrate Skype into its Windows Phone mobile platform, Kinect/Xbox, and into its Enterprise offering. Those of us who currently utilize Skype for business side-by-side with Microsoft Office products realize already how this could revolutionize collaboration. This is especially true for small and medium businesses who cannot afford the capital outlay of enterprise class collaborative solutions.
In addition to integrating Skype into existing Microsoft platforms, by acquiring Skype, current Microsoft partners and customers such as Facebook and Mobile Network Operators (MNOs) will benefit from the marriage.
How big is Skype?
With nearly 700 million registered users, Skype is the original social network. But it has evolved. From its early days of delivering jittery and often echo-prone free peer-to-peer calling, it now offers HD (High- Definition) quality voice services. When you break down its 660+ million registered users, it has 145 million “active users” who use Skype sparingly and mostly for free. Of that number, 8.8 million were paying users accounting for nearly $900M in revenue in 2010.
How will partners benefit?
Although they’ve got an incredible market cap, Facebook probably couldn’t afford to acquire Skype on its own unless Skype was public and it did a stock swap. However it needs Skype badly. It needs to integrate Skype’s peer-to-peer services into its platform to deliver Voice and Video to its user base. Current Facebook chat (IM) services don’t cut the mustard. With Microsoft acquiring Skype, Facebook will be able to continue its tight integration with Skype and may even receive privileged rights that Microsoft competitors may not.MNOs who are launching high-speed LTE networks are committed to delivering voice services by using VoIP. The can differentiate their services by offering HD voice and video services. Microsoft (with Skype) may now move up the list ahead of “do it yourself” HD VoIP services for some MNOs. With the recent formal partnership between Nokia and Microsoft, Nokia also becomes a major beneficiary of the Skype acquisition. By integrating Skype into the Windows Phone 7 (Mobile OS), Nokia inherits a competitive offering to RIM and its Blackberry Messenger service, Android and Google Voice integration, and Apple/iPhone with Facetime.
The last word.
While Microsoft spent a WHOLE LOT more than eBay did 5 ½ years ago, if you add all things up, tangible and intangible, Microsoft probably didn’t pay too much. A Microsoft/Skype makes a lot more sense than an eBay/Skype. Because there are strong Enterprise and Consumer use cases at Microsoft for the technology and because this makes Microsoft a stronger ally with Nokia, Facebook, and MNOs searching for HD voice solutions, all Microsoft has to worry about is execution. Microsoft can’t create another product silo and let organizational and political challenges stifle what is the biggest acquisition in the history of Microsoft. With a >$250B market capitalization and >$50B in cash and short-term investments, we believe that the acquisition of Skype is a better use of its money than a one-time dividend or stock buy-back. Kudos go out to Ballmer for continuing to look at the company as a growth company.
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