Microsoft's Skype Deal Opens Broad Consumer Audience

Microsoft's Skype acquisition would give the company access to a broad consumer audience and a brand name heavily associated with communications. But did Microsoft overpay?

The day after Microsoft announced it would acquire Skype for $8.5 billion, bloggers and pundits continued to dissect the deal's ramifications for both the companies involved and the tech industry as a whole.

Once the deal is closed, Skype will become a Microsoft division headed by Skype CEO Tony Bates, its services will be meshed with a variety of products in Microsoft's portfolio, including its Lync unified-communications platform, Outlook, and Xbox Live. In a May 10 press conference, Microsoft CEO Steve Ballmer suggested that the deal, the biggest in Microsoft's history, is the sort of bold move needed as his company faces competition on multiple fronts: "This Skype acquisition is entirely in keeping with our ambitious, forward-looking, irrepressible nature."

Skype previously found itself an acquisition target in 2005, when eBay paid $2.6 billion in cash and stock for the then two-year-old 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, of course, represents a substantial markup, leading analysts to parse out what exactly the company is getting for that hefty amount of cash.

"Google and Apple and Skype have dominant consumerization brands," Forrester analyst Ted Schadler wrote in a May 10 blog posting. "Microsoft does not. Until now. As a bonus, Google doesn't get to buy Skype. And more importantly, neither does Cisco."

Of perhaps greater importance to Microsoft, though, is the ability to sell Skype's services. "While it's true that Skype has been slow to make money off its service, the potential is there," Schadler added. "Local phone numbers, three-way video conferencing, business administration, and making calls to real phone numbers are all things that people will pay for." This could bolster Microsoft's bottom line at a time when its traditional source of revenue, desktop-based hardware, has become increasingly overshadowed by the cloud; Microsoft's own cloud-based offerings, including Windows Azure, have yet to generate significant profits.

Skype could also boost the capabilities of Microsoft's Lync unified-communications platform, expanding the company's reach beyond business-to-business conferencing and into the consumer realm.

"Skype's vision of cross device communication has been proven in recent years, with video and voice calling made possible across both PCs and mobile phones," Matthew Casey and Allan Krans, analysts with Technology Business Research, wrote in a May 11 research note. "TBR expects Microsoft will utilize Skype's established communication platform to generate traffic across all three arenas [PCs, mobile phones, and the living room], by attracting consumers with an unprecedented communication opportunity." By continuing to support Skype's non-Microsoft client platforms, Microsoft will also have the ability to cross-sell its products to a broad audience.

Meanwhile, Ben Horowitz, co-founder and partner of Andreessen Horowitz, took to his blog to trumpet Skype's ability to repulse "full frontal assaults" from Google and Apple.

Specifically, he cites Google's attempt to market a similar VOIP (voice-over-IP) offering to Skype's via its Gmail service. "What was the result of this effort?" he wrote in a 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."

Horowitz also praised Microsoft's decision-perhaps unsurprising, considering how much money he stands to make off the deal. "By acquiring Skype, Microsoft becomes a much stronger player in mobile and the clear market leader in Internet voice and video communications," he concluded. "More importantly, Microsoft gets a team, ably lead by the exceptional Tony Bates, that can compete with anyone."

But some analysts aren't quite convinced by the deal's potential upsides, especially considering the amount of cash Microsoft paid to make it happen.

"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."