MicroSkype – $8 Billion Later

Last week when all the rumours about a bidding war for Skype between giants Facebook and Google were flying around the web, I, like many people, was envisioning a Skype module built into Facebook in order to enhance their existing (and rather rudimentary) chat application. The marketer in me was also salivating over the prospect of being able to add web video ads via the Facebook ads platform- my firm has been producing web video for some time, and has been chomping at the bit to get those opportunities integrated into the social media world in a seamless manner.

Microsoft really came out of the blue with the purchase deal for Skype. Very few analysts were dropping the M-word in the discussion of rumours about a private purchase of Skype. The $8 billion dollar deal may or may not be high- the end value of Skype now really depends on what Microsoft does with it in the long run- if Microsoft can turn it into a revenue powerhouse as a standalone product, or integrate the technology and infrastructure into other products, $8 billion may turn out to be a bargain. One thing’s for sure, the price tag Microsoft paid will inevitably cause the analysts who were highly critical of eBay’s $2.6 billion dollar purchase of Skype a few years ago to stop and ponder (I admit that I was a bit skeptical about it at the time, but my view softened when Skype was spun out of eBay and flourished on its own- clearly a good team and solid vision were part of the value).

The real strength of this deal for Microsoft was in the strategic move, however. By purchasing Skype, Microsoft can integrate its technology into the Windows Phone 7 OS. Normally, I’d say ‘So what?’ but in this case, the move comes after the announcement of Microsoft’s strategic partnership with Nokia (Nokia has all but dropped its Symbian OS- all Nokia smartphones will ship with Windows Phone 7 beginning next year). In North America, Nokia’s share of the handset market is pretty dismal (they’ve been all but shut out in the past few years by RIM, Apple, and the Android-backed HTC); but Nokia does still have a sizable market share in Eurasia and developing markets (though Samsung recently overtook Nokia in western Europe as the number one seller of handsets). If Microsoft had attempted to integrate Skype into Windows Phone 7 without the Nokia partnership in place, it may have faced significant backlash from carriers worried about declining airtime revenues due to Skype (especially in advanced markets, where WiFi hotspots are everywhere). As the handset market current stands, any carrier could drop a handset running Windows Phone 7 without adverse effect on its revenues- but dropping the entire line of Nokia phones would be more problematic (though Microsoft may still face some resistance if they proceed with this tactic).

Only time will tell whether or not this deal can improve Microsoft’s less than encouraging performance in the wireless device market. And though the deal may have been a solid strategic move for CEO Steve Ballmer, there are still some challenges on the horizon re: integrating the two corporate cultures- Microsoft’s is notoriously difficult to integrate into for outsiders in mid-level and higher executive positions; a fact that even Nokia’s Canadian-born CEO would surely admit to if asked (before taking the helm of Nokia, he was a senior-level ‘imported’ executive at Microsoft).

And what will happen to the core Skype product (the web-based software version that boasts 137 million active users)? In the short-term, probably not much. Though the core product offering doesn’t generate a lot of revenue (comparatively speaking), Microsoft would be foolish to risk alienating a user base that is now wary of their freebie videochat fun being taken away. If the core Skype product remains intact over the next year, it’s likely that we’ll see the introduction of web-video based advertisements before and after users engage in Skype chat sessions (Microsoft has invested a lot of capital into its Bing ad network over the last eighteen months, which has an integrated high quality video-based advertising feature).

That alone might be enough for me to take a closer look at media buys on the Bing network (in the past, I’ve heavily favoured Google and social media platforms for client campaigns).


Disclosure: at time of writing, I did not own an equity position in any of the companies mentioned in this article.

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