Is Microsoft paying too much for Skype? No

OK, you might have seen the rumours about Microsoft buying Skype. Microsoft is apparently offering $7 billion dollars for the VoIP service — which sounds like silly money. In fact, this might be the biggest acquisition that Microsoft has ever done. However the details lie in the partnerships this can enable for Microsoft.

Skype is the world’s dominant long-distance call and video-calling platform. Statistics show that Skype handled 24.7% of all minutes spent on international phone calls last year and 40% of calls between Skype users were video. This looks like a very lucrative market, especially for Microsoft. Not too long ago MSN Messenger was very popular for video chatting but that quickly lost appeal once people realised that great failure of interoperability between IM providers. Skype quickly took that place because you could simply tell someone “let’s Skype!” I’m pretty sure that people who video chat predominantly use only Skype.

Now despite Skype’s popularity, it is not exactly a money machine. In fact, financially it is not doing too well. A few years ago eBay bought Skype, only to sell it off later after realising it does not make any money. eBay paid $2.6 billion for Skype, believing that its integration with its e-commerce site would enhance their services. Well that idea failed, with eBay then selling off 70% of its stock in Skype in 2009. What makes the Microsoft purchase price even more ridiculous is that their 2010 revenue (not profit) only amounted to $860 million, with the company still having $686 million in debts. So is Microsoft drinking crazy pills?

The thing is Microsoft really needs a hit in the mobile and communication markets — for a long time their rollouts in the mobile space trailed other more innovative players like Google and Apple. They finally did release Windows Phone 7, which is a stunningly polished operating system, which many hailed as the comeback for Microsoft in the mobile space. Uptake has been slow however, but luckily Microsoft made a deal with Nokia to be their primary OS supplier in future smartphones.

As mobile phones are becoming more data-centric, the use of traditional voice calls will probably decline in future. Mobile operators have to at some point realise that they are just supplying the pipes and that users want to use whatever method they want to contact people. Data costs are always declining whereas voice call costs tend to stay constant. The line where a Skype call over 3G is becoming cheaper than traditional operator-handled phone calls is dangerously close. In fact I wouldn’t be surprised if it has already reached that point in some cases.

Microsoft is betting big bucks on this. I reckon they will see it as a loss leader sector inside the business and that they believe Skype will become the dominant calling method in future. Skype already started making big shifts into the mobile space last year with a lot of emphasis on cross-platform calling and the use of video on mobile calls as well, which they ignored until recently. Skype is now available on most smart phones, in fact I am pretty sure most iPhone and Android users already have that blue icon hiding somewhere. Apple recently brought out Face Time, which works well, but only works on iPhones. I have a feeling it will suffer the same fate as MSN and most other IMs — you need interoperability. Skype does just that.

Microsoft would not be ignoring their desktop base however. Skype’s ease of use has quickly moved into business as well, with many workplaces using it as long-distance communication or as an instant-messaging tool. This is the market Microsoft tried to approach with Lync, which ties nicely together with its Office suite. As a user of both of these products, I can honestly say that Skype is a lot more useful just because everyone else has it already. Microsoft’s major profits lie in the Enterprise desktop market, so enabling Enterprise-wide use of Skype might be the one way Microsoft can make a lot of money out of Skype.

Microsoft’s other big hope is to dominate the home entertainment market and they are pushing their Xbox and Kinect offerings in this space. You can see in this video how they are showing off Kinect Video, which really does look like a great product. Think about it, you can video chat using your big-screen TV without picking up any peripherals. But the big downer is that you can only chat to Xbox Live and MSN users. Yugh. Skype would sweeten that deal a lot though … it makes that whole futuristic vision of the big screen in the living room which you use to chat to people one step closer. And Xbox would be the way to do it.

At the end of the day Microsoft is paying for the footprint that Skype will give them. Skype might not be financially valuable but it’s the standard the world uses and that is just the way Microsoft likes it. In fact it might even be a bargain for them …