Microsoft's Skype Deal May Be Emperor's New Clothes

All the fuss over Microsoft's $8.5 billion acquisition of Skype from analysts and media misses some big issues which make the deal's outcome anything but a sure bet. The most pointed question: How long will it take the software giant to destroy Skype's unique value proposition?

Media and tech giants generally do a bad job of integrating and leveraging the progressive independent companies they acquire -- whose specialized services they can't replicate and usually don't fully understand.

It's just a matter of time before Microsoft demonstrates that in spades -- unless it respects Skype's autonomous service, even to rivals, while thoughtfully incorporating it into its core enterprise, operating system and Xbox businesses.

Microsoft CEO Steve Ballmer could not articulate a clear strategy other than to babble about "communications" and how "Skype" is a verb. Does that justify Microsoft paying 40% more than Skype's own estimated valuation for video talk technology it already has? (Launched in 2003, Skype posted a $7 million net loss, after debt payments, on $860 million in revenues in 2010.)



It is reminiscent of Time Warner's agreement to merge with AOL a decade ago, hoping the then-dominant Internet portal would assure its 2.0 transformation. Instead, the dysfunctional union destroyed $250 billion in shareholder value as it disintegrated into an agonizing breakup.

News Corp.'s $580 million acquisition of MySpace in 2005 has proven to be such a disaster. The once-preeminent social network is losing users and advertising revenues faster than it can unload it for a double-digit price.

And then there is former eBay CEO Meg Whitman buying Skype for $2.6 billion upfront in 2005 and another $1.5 billion in deferred performance-based payments made just before it flipped 70% of the Internet talk company to private equity SilverLake Partners. eBay's buying rationale at the time also hinged on vague references to communications.

"Online shopping depends on a number of factors to function well. Communications, like payments and shipping, is critical. ... Skype will streamline and improve communications between buyers and sellers," eBay stated at the time, although it had previously failed to encourage such real-time rapport among its Internet-savvy user base. Maybe then, as now, many consumers prefer the anonymity and simplicity of just texting, especially given the security risks already being flagged by deal opponents.

Video conferences, Webcasts and real-time video game collaboration are now more commonplace even in Microsoft's own products (think Windows Live Messenger and Kinect integrated video and voice). Microsoft's challenge is to execute Skype-enhancements of its latest iteration of Windows, Xbox's advanced home hub platform, advanced enterprise office applications and even Bing search without compromising the largely free service embraced by 633 million users.

If Microsoft's mobile ambitions are the real focus of the deal, to compete with Apple's FaceTime and Google Voice, there are potentially more problems. It would be nice to think that Microsoft will leverage Skype in its strategic minority equity partnership with Facebook, which no longer must resort to buying the largest long-distance service for a more exclusive hold on its technology.

That would require creatively mining individual connectivity and putting Skype's many patents to work in a consumer- and cost-friendly way -- something Facebook is more likely to get. If Microsoft genuinely grasped real-time video communications, it would be relying on technology it has to organically advance the cause.

Microsoft hardly demonstrates an inclination to "open vast new markets in telecom," as The New York Times recently declared. While Skype immediately gives Microsoft scale in the Internet phone market and in telecom in general, there are no guarantees it knows what to do with it, despite having Windows partners, such as Nokia and Samsung.

There is a reason why some sideline observers are referring to the arrogant Microsoft as the General Motors of the Internet, which historically was awash in cash but woefully lacking in innovation. Lumbering under the weight of its complex structure, it ends up shuttering many of the small, novel Internet companies it buys, such as Web TV and Sidekick.

The reasons for failure are almost always the same among media and tech giant buyers: clashing corporate cultures, entrepreneurial versus to-the-line operations, the lack of creative mindset and rudimentary cost concerns.

But the real red flag was Wall Street mostly celebrating the deal for the way Microsoft has repatriated revenues by acquiring the Luxembourg-based Skype, although it still could tap its remaining cash hoard to pay a handsome onetime dividend to shareholders. For its part, eBay will make a profit of about $1.4 billion on the deal, flipping its remaining 30% stake. But none of this has anything to do with stealth innovation.

More optimistic observers contend Microsoft will be able to speed mainstream adoption of video communications. Let's hope it doesn't mimic Cisco, which tried to do that before slashing $1 billion in a widespread restructuring that included video-connected home services weakened by the recession - on the heels of shutting down its Flip phone business. How quickly we forget.


1 comment about "Microsoft's Skype Deal May Be Emperor's New Clothes".
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  1. Brian Hayashi from ConnectMe 360, May 17, 2011 at 6:03 p.m.

    While I've done my fair share of MSFT-bashing in the past, I'm inclined to give them a pass on this for the time being.

    From my limited vantage point, the big trends are in facilitating mobile-based video activity, whether from a handset, tablet, or some sort of business setting (conference room, etc.) Right now Apple is bashing everyone's heads in with an industrial design process that has mastered the art of releasing products with a $400 price point and riding it all the way down to $100, making money all the way. So all of the guys who are releasing iPad-killers right now (HP, Blackberry, Samsung) are really dead men walking, since they will not be able to simultaneously sustain roughly equal value while keeping pace with Apple falling price points.

    MSFT is conspicuously absent from the tablet discussions. It has its own haptic control system, Surface, which if combined with Skype and XBox, could be a formidable iPad competitor on a number of fronts.

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