European Communications

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Microsoft gambling on Skype?

By Priscilla Awde

Microsoft has moved deeper into the telecoms sector with the $8.5 billion (€5.9 billion) acquisition of VoIP specialist Skype. Microsoft has spent more than three times the $2.6 billion eBay paid for Skype in 2006, before it in turn sold a 70% stake to a private-equity-led consortium for $2 billion in 2009.

While this is a relative drop in the ocean for the computer giant that reportedly has cash reserves of $50 billion plus other short-term investments, it is the biggest acquisition Microsoft has ever made and represents a gamble given Skype’s recent performance. Skype made a reported net loss of $7million on revenues of $860 million in 2010 and its debts amount to $686 million that Microsoft will take on.

Following approval of the deal, Microsoft Skype will become a separate business division headed by Skype CEO Tony Bates who will report directly to Microsoft CEO Steve Ballmer.

The deal gives Microsoft access to the 663 million registered users worldwide who regularly use Skype for freevoice and video calls. Importantly, it also blocks Google from gaining a valuable platform that would significantly boost its abilities, says Gartner analyst Leif-Olof Wallin. However, while high, Wallin believes this is a fair market price for buying such a large consumer base – especially as there was likely to have been serious competition. Facebook, Google and Cisco were all rumoured to be interested.

“Consumer uptake on Skype has been disgustingly successful for internet voice and video communications,” continues Wallin. “One in ten people has a Skype account, which is the root of the excitement about this deal. Also, it is avery complementary technology to Hotmail and has the potential to be integrated into other Microsoft platforms.”

Skype already runs on all the major mobile phone operating systems including Apple, Android and RIM. Certainly mobile video is becoming a must have application as demonstrated by their success so Microsoft is expected to lose little time in accelerating plans to add Skype to its Windows Phone 7 platform.

This acquisition will also give Microsoft an attractive proposition for residential users as Skype can be integrated into its gaming Kinect and Xbox platforms, HD televisions and Office software. Marry that with video and suddenly the potential bristles with interesting domestic applications.

Despite losing money, Skype has grown into an invaluable tool especially for business travellers and consumers giving them free or low cost voice and video communications from desktops and mobile devices. Its range of business applications makes it easily integrated intoexisting systems giving companies cheaper and reliable voice and video links around the world, while its voice, video and sharing facilities are likely to add to Microsoft’s ability to play in the enterprise collaboration sector.

In its quest to corner the online marketplace, Microsoft will hope for better success with Skype  than it has had with its Bing search engine, which has lost around $8 billion in the last six years. Although its Lync VoIP product is part of the Microsoft Office division and one of its biggest profit centres, Skype users will be connected to Lync, Outlook as well as Xbox Live communications services.

This move will also give Microsoft an attractive solution to offer telcos as they migrate over to next generation 4G LTE networks.

It is early days yet but Microsoft is betting that it will be able to make more of Skype than its predecessors and that this acquisition will deliver some interesting tools to compete against the over-the-top players.