In a recent article, I talked about the rise and fall of empires. I mentioned how history class taught me not only do empires seldom last, but they are un-restorable once they have fallen. In the corporate world, however, I left the question pretty much open-ended and wondered if it was possible. To illustrate my point, we discussed Microsoft’s (NASDAQ:MSFT) dominant empirical rise from the mid 1970s to the early 2000s and contrasted its now languishing existence. This did not sit well with many Microsoft fans. I alluded to the supposed “death of the PC” as the root cause for my concern as well as the growing popularity of smart phones. Essentially what is the future need for software?
I summarized the article with the following:
“Playing video games this weekend with my son made me realize that Microsoft still has growth potential. Microsoft came out with a game add-on for the Xbox 360 called the Kinect, which allows gamers to play without any controllers. In essence, your body is the controller. The device responds to how you move; whether you need to kick, run, jump or swing, you only need to make the motion. I have to admit, it had me captivated. Microsoft can still innovate, imagine that.”
Today, I realized that Microsoft had the same vision upon learning that it had just acquired Skype, the voice-over-Internet company for a reported $8.5 billion in cash. Much has been speculated regarding this deal. What does it mean for Skype and what does it mean for Microsoft? I think it’s a marriage made in heaven and Microsoft absolutely needed to pull this off, especially after its failed attempt to buy Yahoo (NASDAQ:YHOO) several years ago. This acquisition now makes the fledging software giant a “player” once again.
It is worth noting that this deal should not have come as a surprise. Skype has been up for sale for quite some time. It was once owned by Ebay (NASDAQ:EBAY), which purchased it for $2.6 billion in 2005. After realizing that combination was not going to work, eBay sold a 65% stake in Skype for $1.9 billion in 2009 to Silver Lake Partners, which was not comfortable with the progression of Skype’s anticipated IPO.
What Does This Mean for Microsoft?
I think this is the $8.5 billion question here. As mentioned above, I think clearly this drastically improves the value proposition the Xbox360 as well as the Kinect device. However, on a long term basis, Skype gives Microsoft a drastic injection in the enterprise collaboration space. This has primarily to do with not only Skype’s voice, but also its video and sharing capabilities as well; a space that is now dominated by Google (NASDAQ:GOOG) and Cisco (NASDAQ:CSCO).
There are many more immediate benefits to this deal, but I suspect the primary rationale for this acquisition is for Microsoft’s Windows Phone 7 and it pending partnership with Nokia (NYSE:NOK). It is no secret where Microsoft ranks in the mobile devices market, and this deal can potentially increase not only the trajectory of its rise but also the speed at which the company regains some relevance.
With Skype’s approximately 663 million registered users, Microsoft will also be able to capitalize on an opportunity to enter the social media space.
What makes this even more remarkable for Microsoft, as Todd Bishop of GeekWire noted, there are over 10 million "Microsoft cameras connected to television screens in homes around the world" - thanks to Xbox 360 Kinect sensors. This is the future of Skype, now that it has been acquired by Microsoft. Skype will be much more widely used on your mobile and in your home.
This has been precisely the advantage discussed from the previous article as it relates to the popularity of Kinect, which evolved from the Xbox 360 console. But it is indisputable that the future of Skype will be in video, which makes Microsoft the perfect parent. According to CNNMoney, early reports indicate that Skype will become a new business unit within Microsoft, to be run by current Skype CEO Tony Bates. He will report directly to Microsoft boss Steve Ballmer.
According to Om Malik of GiGaOM, Skype had filed for an IPO and was going to do about a billion dollars in revenues and was on its way to becoming profitable. So why sell? Silver Lake and eBay were both getting impatient and wanted to lock in their profits. Some sources also believe that Skype’s revenues had stalled.
The company had bet heavily on its video sharing service. The premium version of video calling and sharing was a way for Skype to increase its average revenue per user and move into the enterprise market. However, given Skype’s DNA is that of a consumer Internet company, the challenges are not a surprise.
It has been rumored that the biggest winner of this deal could actually be Facebook. Though they were said to have been interested in acquiring Skype, they simply could not afford it. But what they wanted the most was to keep Skype from being acquired by Google. Now that Skype is going to be in “friendly hands” since Microsoft is one of its chief investors, Facebook will be able to leverage that relationship to access Skype’s peer-to-peer network, an obvious value addition to the already growing popularity of the social network giant.
So clearly, not only has this deal created significant benefits for Microsoft, it has positioned them to enter a space where they previously had no clout. Microsoft has once again gone on the offensive to acquire possibly the biggest “game-changing” product to not only revolutionize its future but also position the company for prominence. This might be its biggest acquisition since, wait a minute, MS-DOS?
Disclosure: I am long MSFT, CSCO.