Microsoft's Skype Deal Approved by Feds: The Hard Part Begins

 
 
By Nicholas Kolakowski  |  Posted 2011-06-20
 
 
 

The U.S. Department of Justice has approved Microsoft's $8.5 billion acquisition of Skype.

Now the fun part begins.

Once the deal is closed, Skype will become a Microsoft division headed by Skype CEO Tony Bates, with its services meshed with a variety of Microsoft products such as the Lync unified communications platform, Outlook, and Xbox Live.

This isn't Skype's first time on the acquisition block. In 2005, eBay paid some $2.6 billion in cash and stock for the then two-year-old communications company. Four years later, the auction site sold a majority of its Skype holdings to a team of private investors (including Silver Lake Partners and Andreessen Horowitz) for $1.9 billion in cash. Microsoft's $8.5 billion represents a substantial markup, but CEO Steve Ballmer and his executives evidently thought the price was right-especially if the company can commoditize Skype's services.

"While it's true that Skype has been slow to make money off its service, the potential is there," Forrester analyst Ted Schadler wrote in a May 10 blog posting. "Local phone numbers, three-way video conferencing, business administration, and making calls to real phone numbers are all things that people will pay for." It could also boost the consumer appeal of Microsoft's more business-centric products, notably Lync.

Soon after the deal was originally announced, Ben Horowitz, co-founder and partner of Andreessen Horowitz, used his blog to trumpet Skype's ability to repulse "full frontal assaults" from Google and Apple.

Specifically, he cited Google's attempt to market a similar VOIP (voice-over-IP) offering via its Gmail service. "What was the result of this effort?" he wrote in that May 10 posting. "Skype new users and usage growth has accelerated since Google's launch."

Apple's FaceTime, he added, also failed to blunt Skype's momentum: "How did that impact Skype's usage on the iPhone? 50 million users have downloaded Skype's iPhone product since the release of Apple's FaceTime."

But some analysts seemed down on Skype's potential benefits to Microsoft.

"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 a May 10 email to eWEEK. "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."

Profitability (or not) aside, Microsoft now faces the singular challenge of digesting Skype's assets and incorporating them into products that span the breadth of a massive company-and monetize them in ways that don't send Skype's built-in audience, so used to paying little-or-nothing for VoIP and video calling, fleeing for the hills.

At least that's a challenge Microsoft can tackle with effective management and a whole lot of elegant engineering work. On a more problematic front, Microsoft will need to find a way to preserve Skype's immense brand equity-that's a big part of why they paid the $8.5 billion, after all-amidst that wholesale integration of its assets: big enterprises have an unnerving habit of acquiring startups and smaller companies, only to smother everything that made the latter so appealing in the first place. If Microsoft tarnishes the Skype brand, that would dampen its ability to position itself as a strong alternative to Apple and Google.

According to Bloomberg, itself citing unnamed "people familiar with the matter," Skype has already started firing senior executives ahead of the Microsoft deal closing. And surely Microsoft is making its own preparations for bringing Skype into the family. But in many ways, the biggest challenges are just beginning.    

Editor's Note: A line of this story has been corrected to state that the U.S. Department of Justice, and not the FTC, approved Microsoft's acquisition of Skype. 

 
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