Wednesday, May 11, 2011

Microsoft and Skype: Reaching for the Clouds, Holding on to Software

Microsoft has a fundamental problem. It's revenues are tied largely to software that's good at creating printable documents and that can store and create stuff on PCs. Yet in computers and networking, most technologies and services are moving away from these core Microsoft strengths. It isn't just that people are not printing things out as much as they used to; they're not even getting to the point of creating things that need to be printed in many of their communications. Be it social media, texting, videos or mobile communications, we're far more able to make decisions and become productive today well before anyone even thinks about creating something that gets stored on a PC or a server as a document.

This fundamental problem is the rationale behind Microsoft's $8.5 billion acquisition of Skype, the popular communications service that delivers voice, video and text chat for millions of people worldwide. Though a good $3 billion of Skype's acquisition costs go to paying down its debt service and it's barely at break-even in its financials, Skype is a universal tool for people in business and personal settings, a "good enough" method for person-to-person and group communications that is in fact much better than good enough more often than not. With the Microsoft imprimatur, Skype is likely to get more official blessing by enterprises that they service today with their software and emerging cloud infrastructure, which is certain to lead to more positive cash flow for Skype, albeit at a level that makes it hard in the short run to justify the acquisition.

But the "easter egg" in this acquisition may be more subtle than some have realized. Unlike services like Google Talk, which work within a Web browser without installed software components, Skype functions via software that's installed on a user's PC, mobile phone or tablet. Especially for PCs, this is a key factor. Although it's doubtful that Google's emerging Chrome OS laptops are going to push Windows-based PCs out of many major enterprises any time soon, new installations of Windows are crawling forward at best, now. Even as Microsoft pushes its cloud-based Office 365 productivity services, it has positioned those services to support the licensing of existing Microsoft software for PCs and enterprise servers. So although in many ways Skype's strengths are about the cloud, in fact at its essence it's a network service that relies on installed software - in other words, one more reason to hang on to your PC. Score one for new ways that Microsoft can prop up the value of its legacy products and services.

Beyond keeping its legacy products shored up, though, the Skype acquisition offers Microsoft a number of interesting and powerful strengths in areas where they have little or nothing to show for their efforts so far:

  • A global network of valuable user IDs. One of the most annoying things about using Microsoft's Office 365 service is that I was forced to use yet another login ID that means nothing to me and most certainly means nothing to anyone else. With millions of people already used to saying "Skype me" who are equipped with easy-to-share user IDs, Microsoft just acquired one of the last large and independent sources of social media logins. It may not be Facebook, but that's nothing to sneeze at - and could form the core of Microsoft's social and mobile identity for many of its products and services. With cloud-based services like's Chatter messagging beginning to challenge in enterprise social media and communications, those IDs can help Microsoft on both enterprise and consumer fronts.
  • A telecommunications platform to bypass the carriers. It's no secret that Microsoft is struggling to have any sort of impact in mobile communications, in spite of having launched a much-improved Windows Phone 7 operating system. If Microsoft is going to lag in mobile platforms, it cannot afford to lag in mobile software, with or without WP7. Skype gives Microsoft a social communications presence that will be found on virtually every smart phone around. In the not-so-long run, it may also give Microsoft a new way of approaching mobile communications services for its customers. While it's looking at Google over one shoulder, HP's recent alliance with U.S. mobile carrier Sprint, which promises to deliver enterprise-grade mobile services to its customers, looms over the other shoulder. Skype can give Microsoft a lever through which to compete with HP and others for cloud-first mobile communications services that leave the telephone paradigm in the dust. It's another point of inflection which argues for more mobile carrier services becoming raw pipelines for integrated services from companies like Microsoft, HP and Google. It's one more factor that's likely to kill traditional mobile voice services sooner rather than later.
  • A way back into home communications. Sure, you could use your Kinect device attached to your kid's Xbox 360 for video calling today, but who's going to do that? Not many, apparently. With a Skype ID attached to Xbox, there's yet another reason to use this controller, which, in anticipation of the PC's waning influence in family rooms, is becoming increasingly the focus of Microsoft's in-home experience hopes. Kinect is a powerful technology, but as shown at the recent Google I/O conference, Google has its own motion-detection services for Android that are coming soon. Microsoft has a limited window of opportunity to "wow" developers with the potential combination of Xbox and Skype, but it could be a strong combination for some. 
On the whole, you have to rate this a very strong acquisition for Microsoft. The financials of the deal don't stand up on their own merits, but when you look at the range of issues that Microsoft had to address to keep itself from falling off the tech radar in many key  arenas, this was certainly a move that both shored up revenues from existing platforms while opening up major opportunities in mobile, social, enterprise and in-home communications. The primary problem that Microsoft continues to have, though, is that while companies like Apple and Google are pushing new operating systems and platforms for their initiatives with relatively little legacy product to hold them back, Microsoft doesn't have a single platform on which it can pin its hopes for the future in a completely competitive way. Skype can give them the glue for the right services on those platforms, but the underlying bricks of Microsoft won't stand on their own as the result of this acquisition. But there are more chapters to come in this story; for now, the opening paragraphs are promising.

Shore's Peter Propp and I also discussed this deal recently on our 10-Minute Strategy video series:

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