/ 13 May 2011

Microsoft takes a gamble on Skype

Microsoft’s acquisition of Skype, its biggest, is an $8.5-billion gamble to try to catch up with Apple and Google.

The software company, once so dominant, has been left behind by its more fleet-footed competitors as the pace of technological change — especially in mobile telecoms — has outstripped its ability to innovate.

Analysts saw the deal as a sign of Microsoft’s ambition to become a bigger force in the consumer and smartphone market. They also interpreted it as a sign that Microsoft intends to broaden its appeal to businesses by using Skype to offer cheaper services than existing phone companies.

Skype, which has 663?million people across the world registered to use its voice-over-internet-protocol communications, is available on personal computers and mobile phones — and soon on Microsoft’s new Windows Phone operating system. The deal will see it established as a separate business inside Microsoft, dubbed Microsoft Skype.

Tony Bates, the Skype chief executive, will become president of Microsoft Skype and report directly to Microsoft’s chief executive, Steve Ballmer. Ballmer said: “Together we will create the future of real-time communications so people can easily stay connected to family, friends, clients and colleagues anywhere in the world.”

Others highlighted the difficulty Microsoft faces in monetising Skype, whose telephony service is free between users. “It doesn’t make sense at all as a financial investment,” said analyst Andrew Bartels. “There’s no way Microsoft is going to generate enough revenue and profit from Skype to compensate.”

Michael Clendenin, managing director of RedTech, said: “If you consider Skype was just valued at about $2.5-billion 18 months ago when a chunk was sold off, then $8.5-billion seems generous and means Microsoft has a high wall to climb to prove to investors that Skype is a necessary linchpin for the company’s online and mobile strategy.”

But despite Skype never having turned a profit, analysts were enthusiastic. Horace Dediu, of Asymco consultancy, said: “Voice is the next frontier both in IP-based communications and in user interfaces. Skype happens to have a very large pool of users who can be engaged with multiple services besides voice, [which] can be the root of new business models.” —