Microsoft, Skype Deal Takes Aim at Google, Apple

Microsoft's proposed Skype acquisition radically changes the VOIP and video-conferencing game, and maybe alters its competition with the likes of Google and Apple.

Should Microsoft make good on its intentions to acquire voice over IP provider Skype for $8.5 billion, it will surely boost the company's competitive stakes with both Google and Apple.

Under the terms of the agreement, Skype will become 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. On a more strategic level, Skype's huge customer base could give Microsoft considerable influence within the evolving VOIP and video-conferencing market.

In a May 10 press conference, Microsoft CEO Steve Ballmer suggested that his company would continue to support Skype on "non-Microsoft client platforms."

He also painted the deal, the biggest in Microsoft's history, as fundamentally in keeping with the company's DNA: "This Skype acquisition is entirely in keeping with our ambitious, forward-looking, irrepressible nature."

While rumors have circulated for days that Skype was eyeing a partnership or acquisition with another tech giant, Bates-onstage beside Ballmer-sidestepped the question whether Google or a similar player had made a deal for the company: "We were very focused on our IPO, we had an unsolicited offer [from Microsoft], we made an evaluation."

According to Ballmer, Skype services will find their way onto everything from television screens, thanks to integration with Xbox Kinect, to smaller smartphone displays via Windows Phone-all pending regulatory approval, of course.

The Skype acquisition also places Microsoft on yet another collision course with Google, which also offers VOIP services. In May 2010, Google purchased Global IP Solutions, or GIPS, which makes software for processing high-definition audio and video over the Web, for $68.2 million. A few months later, the search-engine giant rolled out a service allowing its customers to make phone calls via Gmail.

Apple also offers video conferencing via its FaceTime service for iOS. The combination of Skype, Google and Apple has lifted the number of American adults participating in online video calls to nearly 20 percent, according to a 2010 survey conducted by the Pew Research Center's Internet & American Life Project.

Some analysts believe there's synergy in Microsoft's and Skype's respective offerings. "Product-wise, this could be a nice fit," ABI Research Senior Analyst Aapo Markkanen wrote in a May 10 research note. "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 realize, but even the promise of them goes a long way [toward] explaining why the price may not seem that right."

Skype may also help Microsoft in its battle for smartphone market share. "A preinstalled, well-integrated Skype client could be a potent differentiator for Windows Phone devices vs. Androids, iPhone and BlackBerry," Markkanen added.

Skype previously found itself an acquisition target in 2005, when eBay agreed to pay $2.6 billion in cash and stock for the then two-year-old company. Four years later, the auction site announced it would resell a majority of its Skype holdings to a team of private investors for $1.9 billion in cash. By the second half of 2010, Skype boasted an average of 124 million connected users a month, and was reportedly trying to raise money for an IPO. However, that offering was delayed after the company appointed Bates to the CEO role in October.

By snatching up Skype, Microsoft also prevents another player in the space, such as Google, from making its own acquisition attempt. "This is as much a -deny' as an -acquire,'" Rob Enderle, principal analyst of the Enderle Group, told eWEEK May 10. "Microsoft does not want Google to get core capabilities."

But other analysts nonetheless see some weaknesses in the deal.

"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."

However the acquisition pans out, though, it's undeniable that Microsoft has made a bold move.