Microsoft and Skype: The Twenty-First Century Phone Company

This morning Microsoft announced plans to acquire Skype for $8.5 billion, roughly the amount Verizon paid to acquire MCI back in 2005.

Home at last?

This is Microsoft’s largest acquisition to date.  Skype, as many will recall, was also acquired in 2005, in a transaction that left many mystified.  The purchaser was eBay and almost everyone wondered out loud as to what plans eBay had for the company since the Skype business model didn’t seem to fit eBay’s.  The purchase price in 2005 was $2.6 billion.

EBay partially divested itself of Skype in 2009, selling off 65% of the company to an investor group for $1.9 billion amidst some degree of controvery relating to Skype’s founders and patents.  EBay did do one thing right, however: it pretty much left Skype alone to innovate and grow, and this hands-off approach made Skype a valuable asset (eBay will walk away from this deal with several billion at the closing).

Today’s transaction is what should have happened back in 2005, namely that Skype will be acquired by a tech company with significant collaboration and communications offerings.  Skype will become a separate business unit within Microsoft and the first wave of Skype integration will be with a mixture of enterprise tools such as Lync and Outlook as well as consumer tools such as Hotmail, Messenger, and Xbox Live.

By acquiring Skype, Microsoft deprived Facebook and Google from either acquiring the company and, absent such a deal, possibly integrating Skype’s technology deeper into their own respective platforms.  Skype’s CEO Tony Bates noted at the press conference that 40% of current Skype traffic is video and Skype’s prowess in this area could bring more video into the office environment with Microsoft at the helm.  He also commented on Skype’s relative ubiquity, noting the use of Skype as a “verb” (as in to Skype someone).

The acquisition will give Skype sorely needed credibility in the enterprise space where, despite the fact that it’s used by many knowledge workers, it is not viewed as an enterprise-class tool.

What Microsoft gets is a twenty-first century telephone company, a company that in 2009 accounted for 12% of the world’s international calling minutes.  What the company now needs is the vision to leverage Skype so that the service works in concert with other consumer and enterprise tools.  Skype has always been the kind of application that works well in standalone mode but some work will be required to integrate it into other environments.

Jonathan B. Spira is CEO and Chief Analyst at Basex.

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