Skype: $8.5 billion, is it worth it?

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The announcement of Microsoft’s acquisition of Skype for $8.5 billion has generally received a bad press from the investment community. They point to Skype’s failure to deliver profits since the company’s foundation in 2003. They relate Skype’s revenues to the purchase price, and draw unfavourable conclusions. And they question the viability of converting an essentially free video service to a fee paying regime.

What the investment community has failed to grasp is the role of video in the unified communications experience that Microsoft is building – and the inherent value of a user base that is independent of hardware. When the full potential of the acquisition is fully realised, its value to a company trying to play catch-up might be better appreciated.

Justifications

In its official news release, Microsoft pointed to the acquisition increasing “the accessibility of real-time video and voice communications, bringing benefits to both consumers and enterprise users and generating significant new business and revenue opportunities”.  With a user community running to hundreds of millions and business usage growing exponentially it doesn’t take much working out to see that the ‘revenue opportunities’ involve charging for the service – albeit for multi-party and other premium services as an initial move.

Microsoft’s second justification for parting with $8.5 billion is that the move will both consolidate and extend the software giant’s reach in the field of unified communications platforms. Microsoft was late coming to Unified Communications and missed the boat on social networking entirely. The existing deal between Skype and Facebook, for example, will kick-start Microsoft in social networking while providing a base of 170 million connected users for the company’s existing portfolio of real-time communications products and services.

Microsoft has a long-standing focus and investment in real-time communications across its various platforms, including Lync (which saw 30 percent revenue growth in Q3 last year), Outlook, Messenger, Hotmail and Xbox LIVE.  Skype will support Microsoft devices like Xbox and Kinect, Windows Phone and a wide array of Windows devices. Microsoft will connect Skype users with Lync, Outlook, Xbox Live and other communities (although Microsoft says it will continue to invest in and support Skype clients on non-Microsoft platforms.)

Reactions

Investors aside, the reaction from players in the VC space has been generally positive. Polycom issued a policy statement in which Andy Miller, president and CEO, said:

“We view Microsoft’s acquisition of Skype as great news on many fronts. It takes Skype out of the competitive equation and places it with one of our closest strategic partners. The integration of Microsoft Lync and Skype is also positive for Polycom, because the better Lync performs, the greater our opportunity in terms of video endpoints, software and infrastructure sales.”

“While Skype is consumer grade, Polycom has the only enterprise-grade open standards-based technology and is key to Lync’s success. Polycom offers the only path to secure, fully interoperable and open video that transcends enterprise, SMB, mobile and the consumer world. The acquisition also presents us an excellent opportunity with Service Providers, who are critical partners in Polycom’s Cloud Strategy and growth. Microsoft will continue to be a key strategic partner for Polycom and our partnership will only grow stronger.”

A spokesperson for LifeSize said that:

“This deal is further evidence of Skype’s move into solid business applications (which will benefit small businesses in particular). In the last month, LifeSize has announced deals with both companies further evidence of how serious Microsoft and Skype both are to increase their street credibility in the SMB video conferencing market. This is because LifeSize will help them improve the stability, interoperability and cost effectiveness of their services. This is a further blurring of VC platforms – users, both consumer and business, don’t want to worry about which platform they’re plugging into. They just want to know that it’ll work.”

ABI Research believes that the telecommunications companies are likely to be less enthusiastic:

“Telcos won’t be happy to see another over-the-top front opening, but they have surely seen it coming. Just witness Telefonica’s (Jajah) and Deutsche Telekom’s (Bobsled) moves in this space – they’re trying hard to make VoIP work for them rather than against them. But having said that, if they wished that the Nokisoft tie-up would result in a leading yet still operator-friendlier ecosystem they will be disappointed.”

Conclusions

Our view is that Skype is a better fit with Microsoft than the investment community appreciates. The OS market leader has several areas in both consumer and enterprise sectors that will benefit from a VoIP, video and sharing solution. In particular, Skype may strengthen Microsoft’s Lync, which ties together email, instant messaging, and voice communications into a single offering.  It has to be a lot better than fighting competition and the regulators over operating systems and web browsers – both of which are now two-a-penny.

In the mobile communications market, a preinstalled, well integrated Skype client could be a potent differentiator for Windows Phone devices in the battle with Android phones. iPhone and BlackBerry devices. Look out for Nokia and other Windows Phone licensees picking up some premium features from Skype, with video calling being the obvious one,


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