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Microsoft digs a grave for Skype by buying it

Microsoft this week bought Skype for a staggering $8

By PETER WHITE

Published: 12 May, 2011

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Microsoft this week bought Skype for a staggering $8.5 billion, outbidding other suitors, and by most accounts paying around $3 billion more than the nearest rival bid. Its only response has been to have everyone ask the same question, “Did Microsoft pay too much? Now a huge weight of expectation lies on Skype, that it cannot possibly fulfill.

Obviously a company is worth what someone will pay for it, and wasting billions of dollars has been a forte of Microsoft’s for some time. At Faultline we can’t see why investors haven’t blanched at its strategy before and put in new management – the current crop is reactive, lacks both innovation and confidence, and yet the company remains, for the time being at least, inviolate.

The commentators are right, it’s hard to imagine how Skype’s value has risen in the past year from the $2.5 billion valuation that it enjoyed when the company was bought out from under eBay, to the position this week when Microsoft agreed to pay $8.5 billion for it. Only in the context of Skype being embedded into an operating system, either tablet or smartphone or even PC, or all three, and partnered with a search engine like Bing, does it turn Skype into what some might consider a weapon against Google.

Google is the single most hated enemy of Microsoft, just ahead of Apple, and only when there is an obvious Google play does Microsoft lose its understanding of what money is worth.

Steve Ballmer stood in front of news cameras for the world’s press and said the combination of Microsoft and Skype will give it the competitive heft to combat Google Voice and Apple Facetime. This is of course patent nonsense.

Let’s imagine for a second that we are on the Microsoft team – let’s try to justify the outlay. Well we might say that it could be integrated into all of our operating systems and devices such as the Xbox and any Windows phones to come out of WP7. We might say that, but the truth is that Microsoft has its own Instant Messenger, and it’s already been ported to handsets and sits inside all of its OS products. It offers a pure IP route on and off the device and this includes VoIP and can be used already for voice in Xbox, handsets and PCs.

We might argue that it is not so well architected and that it eats local processing power and needs remote switching servers, and that costs money. Okay Skype has a P2P architecture that eliminates server power, but Microsoft already knows how to build P2P, it’s not outside of its capabilities to take that step. And anyway Google Voice uses all of the colossal server power that Google has, which is probably why the voice quality and reliability of Google Voice is so much better than Skype.

We might also argue that Microsoft can integrate Skype with all of its enterprise apps and pay for the $8.5 billion in enterprise licenses. But the VoIP in its IM is already a standard for use in Enterprise, and additionally it has its Lync services, Live Meeting, Roundtable (video conferencing) and these all work with Office and Sharepoint services and the Microsoft Office Communication Server. They are all already integrated. All of this strategy is in place for the enterprise and it charges a small fortune for enterprise licensing for Live Meeting and other software, so why would it swap it for Skype and lose perhaps another $8.5 billion in lost revenues over the next few years. If Ballmer thinks that’s a way forward he’s mad.

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