Microsoft Buys Skype and a Future in Telecommunications

Last Updated May 10, 2011 10:16 AM EDT

Once, you could use a public telephone for a dime. Today, Microsoft (MSFT) announced it would acquire Internet communications company Skype for $8.5 billion. Imagine the size coin slot necessary for that payment.

The InstAnalysis has already begun: The deal is about regaining standing in online communications. Microsoft could work with carriers that want to include Skype in their next-generation phone and data networks. Microsoft has a mixed history record with large acquisitions and might blow this one. All of that is true, but falls short of the real significance of the announcement. Microsoft has enormous plans for the Skype acquisition, and the move exposes some serious strategy in action.

Skype is more than chatting
Skype has had its problems, both as an operating business, which last year managed to lose $7 million on $860 million in revenue, and as an acquisition. (Just ask eBay.) However, it's a big mistake to look at Skype as a glorified chatting service that overlaps what Microsoft already has in Windows Live Messenger. Here's why:

  • Skype is important in telecommunications -- The company has a service that the telecom industry cannot ignore. In 2010, Skype carried almost 25 percent of all international calling minutes. Its international traffic has grown at twice the rate of traditional voice call carriers.
  • Carriers already want Skype -- The wireless service providers look to partner with Skype as they move to LTE networks. LTE means faster data transmission, and people will want to use the Internet to make free calls. Better to embrace a rival than see your subscription business go to competitors that will even if you won't. Owning something badly wanted by carriers puts Microsoft into a better position to move Windows Phone.
  • Skype has big brand -- Talk to people about placing phone calls over computers and hear them use Skype as a verb, the way Xerox once meant photocopying. It's far more prominent than Google Voice and even has millions of paying customers, which further proves brand strength.
Skype may not have been the best business, but it has incredible value.

Long-term plans
You can only analyze this deal the way Microsoft thinks: in long terms. Microsoft may fail in a market, but not for want of trying, and it has a long planning horizon. Skype is not for next week's or even next year's financial results, but for what the acquisition can do for Microsoft over the next decade.

Various people have speculated that Skype is a must-have service to help with future Windows adoption or a corporate collaborative platform. Think bigger. Microsoft has said some of the places it wants to use Skype:

  • Xbox 360 and Kinect
  • Windows Phone
  • other Windows devices (just wait for integration of television, Kinect-like movement control, and video calling)
  • such Microsoft services as Lync (the company's unified communications system), Outlook (and, presumably, Exchange), and Xbox Live
  • non-Microsoft clients, which would let the company potentially make money off millions who don't want to use Microsoft operating systems
Skype could tie together many seemingly disparate services, and it's a foot in the door to important markets. Integrating Skype into other products or services is a potentially effective approach: just ask any teen who regularly plays Xbox games and talks with other players over Microsoft networks. The company captures a major telecommunications service whose use grows at a dazzling pace, and the technology already fits what Microsoft does.

Buying Skype keeps the company out of Google's hands, and Microsoft can license the service to one of its investments, Facebook, tweaking Google's nose even more. Finally, the move continues Microsoft's important financial diversification strategy, which has helped it do what might have been unthinkable a few years ago: weather an upset in Windows client sales. Even if $8.5 billion seems like a lot, this is potentially one of the smarter moves that the company has made in a long time.

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Phone booth image: morgueFile user dharder, site standard license. Photo editing: Erik Sherman.
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    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.