Is Microsoft’s Skype Deal Too Big To Handle?

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Microsoft’s acquisition of Skype will give it access to a 170 million-strong user base. But did Microsoft overpay, asks Nicholas Kolakowski

On 10 May, Microsoft signed the largest deal in its history: $8.5 billion for VoIP provider Skype.

Under the terms of the agreement, Skype becomes a business division within Microsoft, headed by Skype CEO Tony Bates. Skype’s services will be meshed with a variety of products in Microsoft’s portfolio, including its Lync unified communications platform, Outlook, and Xbox Live.

That $8.5 billion (£5bn) is a substantial markup from the $2.6 billion eBay agreed to pay for Skype way back in 2005, or the $1.9 billion a team of private investors shelled out in 2009. Did Microsoft overpay?

According to one analyst, the answer’s a definite Yes.

“Wall Street hated the deal when eBay bought it, and they only paid 1/4 of what Microsoft is now paying,” Roger Kay, founder and president of Endpoint Technologies Associates, wrote in an email to me this morning. “In eight years, Skype hasn’t made any money, and even at the operating level, it would take three decades to pay out in cash terms alone.”

Other analysts took a more optimistic perspective.

“Skype refreshes the Microsoft customer base with 170 million early-adopter progressive users,” Ray Wang, principal analyst and CEO at Constellation Research, wrote to me. “Microsoft gets a social platform that accelerates its work on Lync. Microsoft will gain a VoIP platform critical for future unified communications.”

What does Microsoft buy for that $8.5 billion?

Momentum

Skype’s customer base totals around 170 million users, which gives Microsoft considerable influence within the evolving VoIP and video-conferencing market – and momentum to its existing communications offerings. For example, if Microsoft goes through with its plans to bake Skype software into future Windows Phone releases (over the carriers’ screams of bloody murder), it could create a mobile platform strong enough to overshadow Apple’s FaceTime and Android’s anemic video-conferencing offerings. If Microsoft integrates Skype with Xbox Kinect, that could help forward the company’s designs on the living room.

Keep Away

Guess who doesn’t own Skype? Google or Cisco. Either one of those companies seizing Skype’s assets – or initiating some sort of far-reaching partnership – could have placed Microsoft at a sizable disadvantage in the VoIP and video-conferencing arena. Over the past few days, rumours suggested that either Google or Facebook could make some sort of Skype play.

That didn’t exactly play out. Nonetheless, during the May 10 press conference to walk through the deal, Tony Bates neatly dodged the question of whether other companies had been in the running to acquire Skype: “We were very focused on our IPO, we had an unsolicited offer [from Microsoft], we made an evaluation.”

Competitive Strength

“Product-wise, this could be a nice fit,” ABI Research senior analyst Aapo Markkanen wrote in a 10 May research note forwarded to media. “Microsoft has several areas in both consumer and enterprise sectors that will benefit from a top-notch VoIP, video and sharing solution. All of the synergies may never realise, but even the promise of them goes a long way to explaining why the price may not seem that right.”

Windows Phone could also benefit from the acquisition. “A preinstalled, well-integrated Skype client could be a potent differentiator for Windows Phone devices vs. Androids, iPhone and BlackBerry,” Markkanen added.

Personally, I think this deal is complex enough – and Microsoft’s existing offerings overlapping enough – to place a great deal of weight on the tactical execution. If Microsoft can figure out ways to seamlessly integrate Skype with its existing offerings, then the potential benefits could be enormous over the longer term. That being said, I think there are also sizable opportunities to flub an integration this enormous. Whoever Microsoft tasks with digesting Skype, they better be on their game.

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