Microsoft’s Skype Deal Makes Sense

Microsoft (NASDAQ:MSFT) ratcheted up its two-front war against Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) by agreeing to buy Skype – the world’s most popular real-time communications service. The deal, valued at $8.5 billion, includes assumed debt and is Microsoft’s costliest acquisition so far.

Several analysts say the deal is costly and is a defensive move by Microsoft. However, there is much to recommend about the company’s move.

The most attractive part about Skype is its massive user base. In 2010, Skype CEO Josh Silverman said the service had 560 million users who had logged in 250 billion minutes.

However, engaged users are only part of the equation. Skype was a unified communications service way before it became fashionable to be one. Thus, people could message, call, or video chat using a single tool. Its popularity led to suite of supporting applications that, among other things, ensured mobility across operating systems (a must for any service to succeed now) and expanded the company’s offerings in the small business segment. This includes Skype Connect, which allows business customers to make cheap calls. For small businesses, the service can be a significant cost-saver.

And this might just turn out to be Skype’s most compelling value proposition. Unified communications service is already expected to be big in the future, and Skype is expected to bolster Microsoft against Apple’s Facetime and Google Voice.

In addition, Skype adds further value to Microsoft’s business software and could, possibly, be used in a permutation of choices.   For example, it could bundle Skype with its web-based office productivity software. Alternatively, Office products, without the usual bells and whistles, could be offered as a service for standalone Skype users.

Similarly, the move could also potentially benefit Microsoft investments, such as Facebook, because it will further strengthen and diversify Facebook chat offerings. Interestingly, the social media company was rumored to be a potential buyer for Skype until Microsoft stepped up. Similarly, Skype’s tie-ups with Verizon (NYSE:VZ), which integrates the service on smartphones, should provide an additional distribution channel for Microsoft products.

However, Microsoft may need to iron out several other problems. 

For example, how will Skype co-exist with Microsoft’s Windows Live? Microsoft may be able to eliminate redundancy by integrating features between both products and shifting development and resources to market Skype at the expense of Windows Live.

Then there is the problem with operating margins. The acquisition will further erode Microsoft’s already shrinking operating margins, which might affect its stock price, at least temporarily.

The deal is certainly a headline-grabber, but its success depends on how Microsoft leverages Skype’s strengths.

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