In Retrospect: Will the Skype Buy-out Really Change Microsoft’s Position in the Communication Tools Market

Microsoft bought Skype for US$ 8.5 billion in May 2011. “Communication is perhaps the most fundamental area in which technology can be transformative”, said Microsoft CEO Steve Ballmer, commenting on the acquisition.

From the technological advancement point of view Skype brings a lot of value addition to the Microsoft stable. But, for a moment let us step back and examine the issue from a larger business perspective…Microsoft’s Live Messenger has almost all the capabilities of Skype and has a current user base of 300 million which is 76% more than that of Skype. For businesses, Microsoft provides Lync, a communication platform, which comes with the functionalities of Live Messenger but is packed with many more features for enterprise users. Microsoft’s Live Messenger and Lync use Client-Server architecture whereas Skype employs a peer-to-peer communication model, which requires more resources and consumes more Internet bandwidth. While Skype’s overall user base is smaller than Live Messenger’s, the number of users logged in at any given time on Skype is considerably larger – Live Messenger is stated to have a limitation of 40 million concurrent users. Skype is also said to be adding 600,000 registered users a day. Microsoft plans to integrate Skype into a wide range of products viz., Xbox Kinect, Windows mobile OS and may also look to embed Skype with Microsoft Outlook, the popular desktop email client.

 

Windows phones with Skype app

Microsoft may ship the Skype client with the windows mobile OS. Through this measure, Microsoft would be able to market a mobile phone, which appeals to the large user base of Skype users. It can be expected that Nokia handsets running on Windows Phone OS will very likely come with a preinstalled Skype app.

 

Advertising in Skype

On 7th March 2011, Skype launched an advertising opportunity for brands to take advantage of Skype’s huge user base. The advertisement space is provided in the Skype software client itself. Nokia, Groupon, Visa and Universal Pictures were the first advertisers to sign up. Skype decided to show ads in the US, UK and Germany only. Skype hasn’t made very substantial advertising revenues as such, since it has only been two months since the launch of the feature. Microsoft can capitalize on this service and restrict the in-application advertising to their products and partners only. This can prove to be a significant blow to the companies (or competitors) who had hoped to advertise their products to Skype users worldwide.

 

From another view, if Microsoft continues to allow advertisements from third party business organisations on Skype, this may prove to be a quantum leap for its online search and advertising business. Prior to the Skype acquisition, Microsoft’s competitive offering in the space was through its search engine Bing, which had seen limited success in Microsoft’s battle to gain a larger share of online search advertising, where Google is a giant.

 

To sum things up, Microsoft already has a communication tool in the form of Live Messenger, which has more users worldwide, is superior in terms of resource utilization and internet bandwidth consumption, and is well known, though not as popular as Skype. Acquiring Skype may have fulfilled Microsoft’s dream of entering into the low cost web-based communication tools market, but from a technological perspective buying Skype for its superior user experience can have its implications and will call for further investments in R&D.

 

Taking a balanced view of the above facts, it looks like Microsoft bought Skype mainly as a defensive tactic to keep the platform out of the reach of its competitors in the Internet communications, online search and advertising space. Thus, this deal may be viewed in retrospect as essentially being an aggressive business tactic on the part of Microsoft to deprive competitors of one of the leading online communications technology platforms of the day.

 

 

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