Skype: Three Ways Microsoft Can Blow It

Microsoft's massive acquisition of Skype will end in failure if they try any of these strategies.

Dave Methvin

May 16, 2011

5 Min Read
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Microsoft's stunning $8.5 billion offer for Skype has the industry talking. Just as they got out from under the consent decree imposed by the U.S. Department of Justice as a settlement for antitrust practices, Microsoft made its biggest acquisition play ever.

Microsoft has no shortage of cash at the moment, so perhaps this will be the beginning of a huge buying spree in Redmond. The Microsoft of a decade ago dominated the industry, but today's Microsoft has been playing catch-up to companies like Apple and Google that are flying high, particularly in the mobile market. Developing new products from scratch takes time, and time isn't on Microsoft's side. Yet buying your way into a market isn't a sure path to success either, and it can be expensive.

Considering that eBay sold Skype to an investment company back in 2009 for less than $2 billion, Microsoft's offer is quite a return on its investment. Microsoft should have bought Skype back in 2009, eh? Skype's investors may have the DOJ restrictions to thank for their multi-billion-dollar windfall. Despite the high price tag, there's no guarantee that this deal will be good for Microsoft. In the business world, the story plays out again and again: When a big fish swallows a little fish, the big fish gets heartburn.

Microsoft's offer for VOIP-leader Skype has much of the industry wondering exactly what the company is planning to do with its fresh catch. Clearly Microsoft must have some grand plans for Skype that justify a stratospheric price tag like that. Let's face it though, a lot of the speculation revolves around how this will be the death of Skype. Who knows, perhaps those speculators are right, but if so, exactly what will go wrong? I can think of a few things that Microsoft could do that would almost guarantee failure.

Bonehead strategy 1: Abandon the other mobile Skype clients. No doubt, Microsoft will want to have a great Windows Phone 7 Skype client. That doesn't change the fact that today, the iPhone, Android, and BlackBerry dominate the mobile world. So if Microsoft wants to remain relevant in today's mobile market, they need to make a competitive Skype client for those platforms. It's the same reason that Willie Sutton supposedly robbed banks: "Because that's where the money is."

It's not as if Skype has great mobile clients at the moment, either, at least on Android. When I installed the Skype client on my Android phone, it caused several quirky behaviors and seemed to drain battery life faster as well. It also wasn't a good sign that Skype was the largest application installed on the phone by a factor of two. Clearly Skype (or Microsoft) has a lot of work to do in improving the quality of its software.

Bonehead strategy 2: Make Skype work only in the Microsoft world: This is the carried-to-extremes extension of Strategy 1 outlined above. Microsoft's own statement said: "Skype will support Microsoft devices like Xbox and Kinect, Windows Phone, and a wide array of Windows devices, and Microsoft will connect Skype users with Lync, Outlook, Xbox Live, and other communities. Microsoft will continue to invest in and support Skype clients on non-Microsoft platforms."

It makes perfect sense to integrate Skype functionality into those Microsoft products, particularly since Skype provides connections into the existing telephone network that Microsoft lacks with its existing voice offerings such as Messenger and Lync. But if Microsoft kills the Skype client and makes everyone use Windows Phone, Messenger, and Xbox for voice, it will be the death of what we know as Skype. It's one thing to make the software work best on Windows, but it's another thing entirely to deny support to other platforms. Not everyone believes Microsoft when it comes to supporting non-Microsoft platforms, including InformationWeek's own Paul McDougall, and it's hard to blame them. But there are past cases, such as Microsoft's support of Office on the Apple platform, that could give an optimist hope.

Bonehead strategy 3: Bend to the will of cellphone carriers. With its ability to provide both voice and messaging, Skype is a threat to the profits of cellphone carriers. A Microsoft-owned Skype has a different set of priorities. For one, Microsoft is a player against Apple and Google in the phone market. The carriers may "ask" Microsoft to change or cripple the product in order to preserve their own profits in voice, messaging, or data. Microsoft may be inclined to comply if it can get more favorable marketing for Windows Phone products by the carriers. None of that would be good for consumers, and I would say it could be just as disastrous for Skype's future as well.

Skype's lead could evaporate quickly if Microsoft makes the wrong moves. The heat source is most likely to be Microsoft's familiar nemesis, Google. Although some analysts say that Microsoft bought Skype to keep it out of Google's hands, I tend to agree with others that there was no good reason for Google to want Skype. Especially at these prices.

Google already has its own Google Voice service, based off its acquisition of GrandCentral back in 2009. In addition to the PC-based VOIP service, it integrates with both cellphones and landlines and offers features like simultaneous ring and voice transcription to SMS or email. Google Voice already offers more services than Skype and is a very well-built offering, but it doesn't have Skype's large user base. If Microsoft follows one or more of the strategies outlined above, they can solve that problem for Google.

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