Bad Call? Microsoft buys Skype

Software titan Microsoft just purchased Skype, whose voip-based services have made it one of the largest players in the web telecommunications space. The deal, for $8.5 billion in cash, provides a major benefit to Microsoft, which has struggled to remain competitive with their Live Meeting offerings and significantly expands their consumer base, but also indirectly provides benefits to Facebook, a Microsoft investee - by marrying Skype capabilities with Facebook's core systems, Facebook can get a significant leg up on phone connectivity between its members significantly expanding its standing as a social communications medium.

For Skype, the acquisition by Microsoft also places the company into a position where they can expand their offerings into the enterprise space that Microsoft has a major presence in, a market that Skype had difficulty penetrating before. This in turn provides a direct challenge both to Google, which has been trying to expand its Google Voice offerings to do the same (in conjunction with Google Docs and their email services), as well as Cisco's enterprise VOIP and virtual meeting software and hardware.

What I find intriguing about this particular buyout is that Skype will in effect become a separate division of Microsoft, one reporting directly to Steve Ballmer. Not only does this put one of their divisions almost completely in Silicon Valley, where Microsoft has had but a token presence until now, but it also emphasizes the underlying realization by the company that VOIP has become a major pillar and diffentiator for the largest software concerns, and needs to be treated as more than a minor offshot to their office strategy.

This last year has also seen an increasing validation of a strategy to try to keep companies intact with only a secondary ancillary branding as a Microsoft entity. This can be seen in Facebook, which bears little outward mark of being a Microsoft invested company, and ironically, if (and it's a big if) Microsoft can get Facebook and Skype to play well together, there may be some advantages to be had.

At the same time, the acquisition of Skype may also be a case of Ballmer chasing after brand and market share rather than technology, an approach which has burned him more than once. VOIP is reasonably well understood at this stage, and Skype's been sold once before because it couldn't make the revenue match predictions (it was losing money in its PC to PC communications, which of course was its prime attraction). Admittedly, it was still outcompeting Live Meeting, but there's a major question about whether the effort to integrate Skype into the Microsoft line-up (and the costs attendant with any such reorganization) may ultimately make this a losing proposition. If Microsoft reduces its service offerings there, it also reduces the appeal of the Skype service, and given the fairly mature state of the VOIP market, the primary paying customers may very well end up sticking with their dedicated providers.

In the end, I suspect that this will be modestly successful, but not a major game changer. The buyout helps Microsoft recover lost market share in a critical market if the integration remains minimal, but if Ballmer tries to bring Skype too much into the Microsoft fold he risks both customer and employee defections. Moreover, while voip should be a major part of a company strategy for a company the size of Microsoft, it may also prove a distraction to those areas where it needs to be far more focused, such as the related mobile market space, and even with a fair amount of cash still in the books, the cost of acquisition and integration is going to eat up a not insignificant part of that at a time when other markets are likely to be more profitable long term.

Moreover, there's the question of whether this deal was motivated more by the need for Ballmer to show himself as being aggressive in the marketplace than it was for the stockholders. Ballmer has been far less aggressive in the market space than Gates was, and has often been swayed more by the desire to get the hottest properties rather than the ones that made the most competitive sense for the company. Skype was an old maid - it had been sitting out in the marketplace for a while, represents older technologies, and really was most valuable for its installed customer base - most of which were looking to pay as little as possible to use its services. This doesn't really bode well for Ballmer moving forward - indeed, it may prove to be the final misstep in a series of questionable buyouts and investments.