The curious case of Microsoft’s Skype purchase

Wednesday, June 15th, 2011

Tony Bates of Skype speaking at an announcement of the purchase by Microsoft.After a longer than expected hiatus, Ger Healy returns with to blogging with my comments on the biggest news in tech this year. On 10 May, Microsoft confirmed its acquisition of Skype for an impressive figure of $8.5 billion. While regularity approval is still outstanding on the deal, it is planned that Skype will become a new business unit within Microsoft and will be lead by its former CEO, Tony Bates. This blog post will examine likely reasons behind the purchase and the impact that will have both for the consumer and on the IT industry as a whole.

The deal represents the single largest acquisition (fiscally) that Microsoft has ever completed, although it still pales in comparison to the reported $44 billion that they offered for Yahoo! some years ago. While $8.5 billion may seem like a significant figure for a company this isn’t making a profit (more on that in a moment), an article in the Wall Street Journal has suggested that Microsoft would have had to shell out much more if Skype hadn’t been based in Luxembourg with its lower tax. In essence, Microsoft saved themselves a fortune by completing the deal outside of the US. For one thing they didn’t need to repatriate the money from its holdings outside of the US and lose 35 percent in the process.

With all of this in mind, the most important question remains unanswered – what will Microsoft actually do with Skype? Microsoft have said that they won’t comment until they have received regulatory approval, but a few ideas immediately come to mind. Microsoft already has a number of applications that could integrate quite nicely with Skype and its VoIP technology - Outlook, Windows Live Messenger, Lync, even Xbox and Windows Mobile to name but a few. It must be asked if Microsoft intend to carry on with both Live Messenger and Skype. I suspect that they’ll be merged together at some point in the future.

The question remains how Microsoft will generate a profit from Skype. Skype is continuing to make a loss and its paid user base is only 5 percent, (although this did see a 19 percent growth last year). It is highly unlikely that Microsoft would risk alienating the 500 million odd users by removing the free services. After all, Microsoft have a history of supporting unpaid use of its products – Hotmail, Windows Live, Office Live and an assortment of free applications, e.g. SyncToy. During the press conference announcing the deal, Bates and Microsoft CEO Steve Ballmer, made several references to advertisements and this will likely be their main emphasis in the near future.

So should users be happy. In a word; probably. Microsoft really needs to lay their cards on the table before we truly know but initial thinking on this suggests that the free service will continue although probably ad-supported and the delayed feature enhancements will now come thanks to the financial backing of Microsoft. Time will tell on this one, but I’m backing this move to be a success.

Ultimately this deal went through for three reasons. Firstly, the aforementioned integration with its existing application. Simply put, Skype fits into its ‘push to the cloud’ philosophy of recent years. Secondly, the brand name. Skype has a significant presence and this can be leveraged to push the likes of Lync further. Only Google (’to google’) and Apple (’i…’) have a stronger presence in the conscience of the average user. Finally, this move will also help Microsoft maintain a market lead over the likes of Google, (GChat), Facebook and Yahoo! and with market share comes profit.

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