Why Microsoft had to buy Skype, at virtually any price

Why Microsoft had to buy Skype, at virtually any price

People are scratching their heads about Microsoft’s acquisition of Skype and the price they paid. They shouldn’t be. Microsoft had to purchase Skype and in our view they would have paid even more to do it. It was a must-have strategic acquisition.

Google is running circles around Microsoft in cloud-based office-productivity and communications tool adoption by small-businesses. If you’re starting a company (or have a small company), Google will provide, at no cost:

  • E-mail (for up to 10 users) on GMail (used to be 50 up until yesterday)
  • Basic word-processing, spreadsheet apps
  • Chat, messaging, video-conferencing via Google Chat
  • Mobile computing via Android
  • Telephone services via Google Voice

It’s free as long as you’re willing to accept some advertising and you can pay $50 a year per person to remove the advertising. All of this takes about 15 minutes to set up for 5 people. Why would anyone want to deal with their telephone company again, or buy and set up a Microsoft-Exchange server, or buy and install Microsoft Office on 5 PCs. All you need is a PC or an Android phone and some form of internet connectivity.

There’s a race underway between Microsoft and Google to attract small and medium sized businesses and provide a full-range of office productivity and communication tools. The company that wins will generate the same sort of network-effect revenues that Microsoft has enjoyed for decades from the wide-spread adoption of Windows and Office by businesses of all sizes. Once individuals begin to use a set of tools it’s tough to make them switch to an equivalent unless the new features are compelling.

24 months from now, 20% of all US businesses, and 80% of new startups will be paying either Microsoft or Google $50-$100 a year per employee to provide the basic suite of office-productivity and communication tools.

Microsoft killed ResponsePoint last year, that was their small-business/VoIP offering, but it wasn’t really successful. They had to acquire Skype because if they didn’t they would be missing the last piece of the puzzle. Adoption rates for Hotmail and Micorosoft Office in the cloud would be minimal. Microsoft AdCenter would remain an also-ran to Google AdWords.

With Skype, they’ve got a recognizable brand for the next few years in Internet telephony, and the infrastructure and user base to build on.

For the moment though, Skype is a cheap way for consumers and road-warriors to make calls. Microsoft will have to extend Skype’s features and re-align its brand to appeal to a wider array of businesses and increase adoption in the office.

Google Voice already has a rich feature set, I’ll point out just two that people love:

  • Google Voice will transcribe voice-mails into text, so you can read voice-mails without having to listen to the message (you have to use it just once to understand how much quicker it is)
  • Google Voice will ring all your phones, in sequence or simultaneously when someone calls your Google Voice number if you want it to.

Google doesn’t really need anything Skype has to offer, they’re already on their way. The reason Google bid for Skype is on the off-chance they could buy it, migrate everyone to Google Voice and shut Skype down. If they’d succeeded, Microsoft would have had to build the VoIP in the cloud offering from scratch, which would have meant a two year lag.

Following the standard M.O., Google is offering all these services to colleges and schools for free. So the next generation will already be comfortable using them when they arrive at their first job.

The folks who should be really worried are telephone companies because their value-added phone-based services for businesses are going to be radically disrupted by VoIP combined with cloud-based features. PBX manufacturers and vendors should be worried as well, because all the switching technology and features they’ve spent decades developing into customized physical equipment and offering to small businesses via large sales-forces is going to become largely obsolete. What’s worse for the telcos is that this competition is coming from the two software companies with the deepest pockets and biggest cash-generation engines out there. Lawyering up or Lobbying up won’t work.

As of this article’s publication date, Washington Square Capital Management and its clients currently hold positions in Microsoft which may be subject to change. We  may in the future acquire positions in other companies mentioned in this post. This article is not an recommendation to buy, sell or hold any securities mentioned.

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