Microsoft Makes Right Organizational Move With Skype

Last Updated May 24, 2011 10:21 AM EDT

Microsoft has been criticized for clumsy acquisitions, missed opportunities, and botched market advantage. But in its $8.5 billion acquisition of Skype, Microsoft got the first step right, a move other companies can go to school on.

Instead of having the new team report to an existing MSFT unit, CEO Steve Ballmer carved Skype out as its own independent business unit, of equal stature with the entertainment and devices unit, online services unit, and business unit. Skype CEO Tony Bates serves as president and reports directly to Ballmer.

Folding a new acquisition into an existing unit makes sense when the when the organizations make complementary products -- PepsiCo and its many food brands, for example. It also makes sense when the merger is done so the acquirer can fill a technology hole, such as Hewlett Packard's 2010 purchase of Palm and its webOS, which was folded into the Personal Systems Group.

But Skype and Microsoft are such dissimilar enterprises that the marriage might very well have been scuttled before the pair returned from their honeymoon in the Seychelles.

Think about it. Microsoft is a company and culture designed around selling high-margin products and services to millions of customers. Skype has more than 200 million users, but only a small fraction of them pay for the service--Skype is essentially free. The company earns a relatively small amount on advertising and premium services. Immediately trying to assimilate Skype into Microsoft would have been disaster, reminiscent of when Microsoft decided that the still entrepreneurial Internet Explorer group should be made part of the Windows team.

Remaining as a quasi-independent unit (no one is truly independent when Ballmer is your boss) means Skype employees don't have to worry too much about integrating into the Microsoft organization (at least not yet), and they don't have to worry about things such as fighting it out with other units for resources and creating internecine rivalries in the process.

So what will the organizational roadmap be for Microsoft to integrate Skype offerings into its flagship products and create new services? David J. Bryce, a professor of strategy at Brigham Young University's Marriott School of Management, sees this possibility:

"One approach is to coordinate the work of the Skype revenue team with other revenue teams in the company such as those responsible for Bing revenues," Bryce writes on HBR.org. "This leads to broader, more integrative thinking about revenue sources across product platforms. Leave the Skype unit to promote product development and user growth. Meanwhile, allow development teams to integrate Skype -- like communications functionality into products but require them to coordinate with Skype development teams to be sure that revenue models and brand usage don't negatively affect the free user base."

How do you think Microsoft needs to handle Skype from a management perspective to make this megadeal pay off?

Related Reading

(Photo by Ryan Fanshaw Photography, CC 2.0)
  • Sean Silverthorne

    Sean Silverthorne is the editor of HBS Working Knowledge, which provides a first look at the research and ideas of Harvard Business School faculty. Working Knowledge, which won a Webby award in 2007, currently records 4 million unique visitors a year. He has been with HBS since 2001.

    Silverthorne has 28 years experience in print and online journalism. Before arriving at HBS, he was a senior editor at CNET and executive editor of ZDNET News. While at At Ziff-Davis, Silverthorne also worked on the daily technology TV show The Site, and was a senior editor at PC Week Inside, which chronicled the business of the technology industry. He has held several reporting and editing roles on a variety of newspapers, and was Investor Business Daily's first journalist based in Silicon Valley.