Microsoft just spent $8.5 billion to acquire a company that eBay dropped three years ago for $2.75 billion. Skype is a company with a widely used core product that nevertheless suffers from major interface and usability problems, inconsistent call quality, and an inability to convince its (admittedly large) customer base to pay for its services. For Microsoft, which has historically struggled to generate profits in new markets, especially online, it is the biggest acquisition in history (and not coincidently, was announced on the same day as Google's I/O keynote). But was it a smart one?
The acquisition was clearly defensive in nature. Facebook and Google were both sniffing around Skype, and with FaceTime and Google Voice threatening in the VOIP space, the bosses in Redmond thought they needed to get in the game before they got steamrolled on yet another growing market. We'll learn eventually how long this deal was in the works, but I would guess from the amount that Microsoft overpaid, it wasn't long.
That doesn't mean that the necessary synergies for success don't exist. Realistically, it's hard to imagine Microsoft turning Skype into a money-making machine. But the value of the Skype brand and the technologies now under Redmond's control could be huge if properly applied to Microsoft's products. The acquisition offers Microsoft the opportunity to make its brand synonymous with video chat. It gives the company the chance to build Skype's technologies into all of its mobile offerings and create the best Skype experience available across any platforms. Skype integration in the Kinect could be revolutionary for living room computing. It would be a huge boost for Windows Phone 7 to have complete Skype integration right out of the box, and could offer a compelling alternative to Apple's FaceTime standard. And if Microsoft continues to maintain Skype on OS X and iOS, it gives the company a cross-platform presence that Apple can't match. Although users aren't going to begin paying for Skype in large numbers, the brand and technologies could be a huge asset in driving sales of other products.
Of course, for that to happen, Microsoft would have to possess the ability to manage products outside of Windows and Office - an ability its has never demonstrated (with the arguable exception of Xbox). It would have to understand the way that Skype could enhance products beyond the desktop, beyond Microsoft's traditional customer base. It would have to understand the power of Skype's brand as a marketing tool (and as anyone who has ever seen a Microsoft ad can tell you, marketing and Microsoft are not synonymous). And it would have to understand that its competitors are going to continue innovating in the VOIP space, and that it must now keep pace.
Microsoft has the opportunity to use this defensive transaction as an offensive weapon, but it has to understand the value of what it now holds and where it can be most effective in achieving growth in new markets. The acquisition of Skype can't be judged as good or bad as this point, because while the cost was high, the possibilities are numerous. Unfortunately, Microsoft does not have a strong record of successfully leveraging its acquisitions to create new growth, and I am doubtful that they will buck the trend with Skype. If they do, great. If not, well, there's always FaceTime.
Or Google Voice.