Analysts pick apart Redmond’s options for turning its nearly $8.6 billion acquisition of the voice and video chat application. Why did Microsoft pay 10 times Skype’s revenue?

How can Microsoft monetize Skype?

Microsoft Corp.’s purchase of Internet voice and video company Skype Ltd. has Ross Armstrong scratching his head.

“Facebook and Skype probably would have made the most sense as a platform,” said the lead analyst with Info-Tech Research Group Ltd. in London, Ont.
Integrating voice and video chat into a social networking platform would be a natural, he said, adding, “I think that’s the direction they (Facebook) want to go.”

And Google Inc. would have made a reasonable amount of sense, too. With limited uptake for its own Google voice offering, “why not acquire a company with a massive user base” and a brand that resonates with consumer users of voice and video over IP, he said.

“But Microsoft? I don’t see a fit.”

Microsoft obviously does. The Redmond, Wash.-based software giant shelled out more than $8.5 billion for Skype, about 10 times its annual revenue. Microsoft CEO Steve Ballmer promises to integrate Skype calling features into its office, Xbox and Phone 7 platforms, without pulling the plug on competing platforms and devices.

It wasn’t clear how Microsoft will make Skype any easier to use for non-Microsoft users. But it’s likely that Windows users will be able to fire up a Skype call quickly from within Outlook or Office, for example, or on a Windows phone.

“It’s pretty obvious today that not everyone is doing video, particularly from their phone,” Ballmer said. “That’s an opportunity where there are lots of things that can be done.”

Increased advertising revenue is another key driver for Microsoft, Ballmer said. Skype has just started to run full page ads at the start of video conference calls, and Ballmer hopes to build on that with new advertising opportunities.

“We think advertising is a very power monetization scheme for us,” said Skype CEO Tony Bates, who joined Ballmer on stage.

Armstrong, though, insists that you can’t monetize a consumer-grade, commodity application. He also sruggles to find a reason in Microsoft’s other business areas: Windows Live can already do video and voice chat, and Microsoft’s own Lync, formerly Office Communications Server, is more powerful for enterprise applications than Skype.

“That (Lync) is a pretty solid offering, all things considered,” Armstrong said.

Not everyone dismmisses the enterprise angle. Zeus Kerravala, senior vice-president of research for analyst firm Yankee Group Research Inc., said Skype gives Microsoft a strong product for cloud-based voice services.

Microsoft launched its Office Communications Server anticipating that unified communications would transition away from voice, “but that never happened, so (Microsoft is) still a small voice player,” he said.

“Having Skype allows Microsoft to aggressively push UC to the cloud and catch that transition and take away share that way, and layer Lync on top of that voice foundation,” he said.

But Armstrong notes that the majority of Skype’s 170 million active users are consumers, and only 8.8 million pay for enhanced functionality. “I don’t think they’d appreciate being upsold to a broader offering they don’t need,” Armstrong said.

Joe Campeau, a lecturer in information systems at the University of Western Ontario’s Richard Ivey School of Business, sees the possiblity of a role for Skype in more immersive communications, used in conjunction with Microsoft’s Kinnect motion-sensing interface.

And he doesn’t dismiss the possibility that the buy was a pre-emptive strike against other possible suitors.

“I wouldn’t be surprised if in the next couple of days we find out a couple of companies have been looking at (a Skype acquisition),” Campeau said.

Armstrong said the most logical fit is as a native voice and video client for Windows Phone 7, especially given Microsoft’s recently announced partnership with struggling handset maker Nokia Corp. While Nokia’s CEO Stephen Elop frankly admitted the company was losing the smart phone battle  to its competitors, Armstrong said Nokia’s market share is sliding mostly in the North American and European smart phone markets. In Asia and Latin America, where low-cost smart phones are more popular, Nokia is holding the line.

“I don’t think it’s any coincidence that Microsoft bought Skype so soon after the announcement of the partnership with Nokia,” Armstrong said, though interest from Google and Facebook might have made Microsoft move more quickly than it expected to.

“I don’t know if Microsoft bought Skype at the behest of Nokia, but I’ll bet you dollars to donuts they talked about it.”
 
– With files from Howard Solomon and James Niccolai
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