Why Microsoft Might Regret Buying Skype

Microsoft doesn’t need to buy Skype to reap the benefits of its service, says Peter Judge. Could this end up being a very expensive mistake?

We now have it confirmed, that Microsoft is planning to buy Skype for a staggering price. So far most commentators seem to approve. But there are plenty of reasons to think it might not be such a good idea.

A lot of people might balk at the price, which the WSJ reported at $8.5 billion – made up of a price of $7 billion to $8 billion, combined with Skype’s long-term debt of $686 million. That is a lot of money for a company which makes pretty much no profit. On revenue of $860 million, it made a $7 million loss last year.

That much money – a record for a Microsoft acquisition – for a non-profitable company is fuelling talk of a second Internet bubble: Bubble 2.0 if you will.

But analysts looking at the possibilities come up with lots of reasons to like the deal, which could see Skype integrated into Microsoft products, particularly the Lync communications server and Windows Phone.

Skype fits Microsoft’s other products

“For me, this actually looks like a near-perfect fit for Skype,” said Dean Bubley of Disruptive Analysis, quoted in The Guardian. Although Skype has mobile clients, its strength is on the desktop and it is widely used in business, points out Bubley, which matches Microsoft well.

“Skype is undoubtedly the product Microsoft needs to stay in the game,” said Richard Edwards, principal analyst at Ovum, pointing out the need to compete against Apple’s FaceTime. “Skype is arguably the most successful real-time social communication platform on the planet, and its $8bn price tag means that only companies such as Microsoft have any chance of acquiring it.”

If nothing else, it is seen as a blow against Google and Facebook, who are walking over Microsoft in search and social media, and both of whom were reported to be considering buying Skype earlier this week.

The eBay trouble

Skype is tainted in many people’s eyes by its period as a subsidiary of auction site eBay. Emboldened by its successful purchases of PayPal and others, eBay had ambitious plans to add a voice channel to its services, but that came to nothing.

eBay paid $2.6 billion for Skype in 2005, attempted to make a success of it, and then sold 70 percent of it to investors in 2009. The now-independent Skype planned to have a $100 million IPO in 2010, but this kept getting delayed and inflated, with reports earlier this year suggesting the company hoped to raise $1 billion.

Some might be surprised at the big increase on a price which seemed too high in itself. However, it has greatly increased its membership since then. When bought by eBay, Skype had 54 million users, of whom 3 million were online when I wrote my story for Techworld.

Now, it has 663 million users, and more than 25 million of those are online at this moment. Reportedly 8.8 million are paying for Skype services, although most pay only a very small amout per year for the occasional SkypeOut call.

Be that as it may, Skype has scaled up, and on the face of it seems to have gone up in value. It is still the market leader in VoIP, and is the known brand, like “Hoover” is for vacuum cleaners.

So, what is the problem?

I don’t see this deal as a disaster. It is not as insane as Microsoft’s attempt to buy Yahoo.

My doubts are whether Microsoft actually needs to own Skype to get any of the benefits from it, and I think it would be better to work for the same kind of mutual-sharing deal it eventually hit with Yahoo.

Skype is already integrated with Facebook, and Facebook did not have to buy it to make that happen. Microsoft won’t be taking that away, as Skype – like any social media product – loses value without the network effect of multiple users.

So no matter who owns Skype, Microsoft could still have the benefit of building it into Lync, and it already has plans for a Skype client on Windows Mobile phones.

The idea – suggested in some places – that Skype’s mobile version might in future be restricted to Nokia phones, thanks to Microsoft’s deal with Nokia is just mind-bogglingly stupid, and we can discount the idea that Microsoft would be planning that.

Skype has a bit of the walled garden about it – it mostly uses its own proprietary protocol, though it has been forced into the industry standard SIP on its business version.

If its long-term future were as a proprietary near-monopoly on VoIP, then it would be essential to buy it. But its future will increasingly be open, and the rules of social media say Microsoft should be able to do just as well by working with it instead of owning it.