Microsoft’s $8.5bn Catch-up Gamble

Microsoft today announced that it will acquire Skype, the leading Internet communications company, for $8.5 billion in cash from the investor group led by Silver Lake. Skype has 663 million people across the world registered to use its voice-over-internet-protocol (VoIP) communications, is available on personal computers and mobile phones with exception of Microsoft’s Windows Phone operating system. Though it is set to change quickly as Skype post-acquisition is expected to support Microsoft devices like Xbox and Kinect, Windows Phone and a wide array of Windows devices. Microsoft already has three other VoIP offerings, via MSN Messenger, Xbox Live and Lync, used in its Office division. Microsoft promised to connect Skype users with Lync, Outlook, Xbox Live and other communities while also continuing to invest in and support Skype clients on non-Microsoft platforms.

This is Microsoft’s biggest ever acquisition at staggering price tag of $8.5bn. The price appears further bloated when you consider that Skype has never made a profit: in 2010 it recorded a loss of $7m on revenues of $860m. But it is one of popular brands for people on the move with 663 million people as registered users. Skype off course has been here before. In October 2005 it was bought by eBay for $2.5bn, but was 70% sold in October 2009 to a consortium of private equity and venture capitalists. So though a popular consumer brand which Skype is why would Microsoft buy it at such a staggering price and when it already had not one but three similar products in it’s portfolio?

The answer lies in the question – “Consumer Brand”. If you put this acquisition in the context of recent business and revenue trends at Microsoft it may not appear that strange. Google, Facebook and Apple have clearly taken the lead over Microsoft in last few years in terms of consumer popularity. Each of the three companies have carved a niche for themselves; Google in Search, Facebook in Social Media and Apple in intuitive mobile devices. They have taken a commanding position based on high quality offerings which are translating into dynamically increasing revenue, profits and admiration from technology consumers. This is hurting Microsoft as combination of Social Media, Smart Mobile Devices, Intuitive User Interfaces are driving next generation (and current if I may add) to move away from comparable Microsoft offerings. Microsoft Bing Search, Zune media device and Windows Mobile devices are clearly lagging behind Google Search, Apple iPhone, Google Android. The MSN is far behind Facebook in popularity and adoption. Investors fear that new gadgets, led by Apple’s iPad, are the thin end of the wedge that will one day separate Microsoft from its core customers. Apple’s iPad, along with a handful of tablets running Google’s Android system, are starting to eat at the edges of Microsoft’s domination of personal computers. Read more on latest Microsoft financial results.

So with above context it should not come as a surprise that Microsoft clearly is looking for some new strategies, new winning horses, new breakthrough in it’s portfolio. Skype though is loss-making belongs to similar popular consumer brands such as Google and Facebook. More importantly, Microsoft can now start embedding Skype in its Windows mobile devices to boost it’s popularity. However this may upset Microsoft Network partners such as AT&T, Verizon as they may perceive this as threat to carriers voice and data revenue. And Microsoft does need carriers on it’s side if it were to push more Windows Mobile devices in the Marketplace. So the success of this acquisition lies in how well Microsoft integrates Skype into it’s portfolio and how quickly. And can it take it’s newly formed partners such as Nokia and carriers along this journey. The vision is good and action is bold. But it will take some serious integration efforts and branding expertise and master class to make this $8.5bn investment work for Microsoft. It is a gamble to catch up on it’s smart social media, devices competition but if anyone can pull it off it will be Microsoft. It has already succeeded in preventing Facebook or Google from buying Skype so this is good start! Stay tuned for more…