On 10 May, Microsoft signed the largest deal in its history: $8.5 billion for VoIP provider Skype.
Under the terms of the agreement, Skype becomes a business division within Microsoft, headed by Skype CEO Tony Bates. Skype’s services will be meshed with a variety of products in Microsoft’s portfolio, including its Lync unified communications platform, Outlook, and Xbox Live.
That $8.5 billion (£5bn) is a substantial markup from the $2.6 billion eBay agreed to pay for Skype way back in 2005, or the $1.9 billion a team of private investors shelled out in 2009. Did Microsoft overpay?
According to one analyst, the answer’s a definite Yes.
Other analysts took a more optimistic perspective.
“Skype refreshes the Microsoft customer base with 170 million early-adopter progressive users,” Ray Wang, principal analyst and CEO at Constellation Research, wrote to me. “Microsoft gets a social platform that accelerates its work on Lync. Microsoft will gain a VoIP platform critical for future unified communications.”
What does Microsoft buy for that $8.5 billion?
Skype’s customer base totals around 170 million users, which gives Microsoft considerable influence within the evolving VoIP and video-conferencing market – and momentum to its existing communications offerings. For example, if Microsoft goes through with its plans to bake Skype software into future Windows Phone releases (over the carriers’ screams of bloody murder), it could create a mobile platform strong enough to overshadow Apple’s FaceTime and Android’s anemic video-conferencing offerings. If Microsoft integrates Skype with Xbox Kinect, that could help forward the company’s designs on the living room.
Guess who doesn’t own Skype? Google or Cisco. Either one of those companies seizing Skype’s assets – or initiating some sort of far-reaching partnership – could have placed Microsoft at a sizable disadvantage in the VoIP and video-conferencing arena. Over the past few days, rumours suggested that either Google or Facebook could make some sort of Skype play.
That didn’t exactly play out. Nonetheless, during the May 10 press conference to walk through the deal, Tony Bates neatly dodged the question of whether other companies had been in the running to acquire Skype: “We were very focused on our IPO, we had an unsolicited offer [from Microsoft], we made an evaluation.”
“Product-wise, this could be a nice fit,” ABI Research senior analyst Aapo Markkanen wrote in a 10 May research note forwarded to media. “Microsoft has several areas in both consumer and enterprise sectors that will benefit from a top-notch VoIP, video and sharing solution. All of the synergies may never realise, but even the promise of them goes a long way to explaining why the price may not seem that right.”
Windows Phone could also benefit from the acquisition. “A preinstalled, well-integrated Skype client could be a potent differentiator for Windows Phone devices vs. Androids, iPhone and BlackBerry,” Markkanen added.
Personally, I think this deal is complex enough – and Microsoft’s existing offerings overlapping enough – to place a great deal of weight on the tactical execution. If Microsoft can figure out ways to seamlessly integrate Skype with its existing offerings, then the potential benefits could be enormous over the longer term. That being said, I think there are also sizable opportunities to flub an integration this enormous. Whoever Microsoft tasks with digesting Skype, they better be on their game.
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The deal between Microsoft and Skype has grabbed a great deal of headlines, not least due the huge dollar signs associated with it. However, once all this fervour dies down, the pressure will immediately be on to deliver the promised ROI and synergies. In order to see this performance, meaningful information reporting and analysis is essential. But with two huge disparate systems on your hands, gleaning this information from this myriad can prove to be a monumental challenge.
It is essential that the organisations implement flexible business intelligence to provide a cross-company perspective of the new systems. This will give Microsoft’s product and sales management the ability to not only identify where the immediate benefits are coming from, but also which areas need addressing. As well as challenges, such an upheaval can also present an opportunity, as this approach enables you to establish which systems are flexible enough to cope the inevitable next time the organisation experiences significant change. This acquisition will undoubtedly present major integration challenges, but with the right approach, it brings a range of opportunities and achieves the benefits the stakeholders are so eagerly awaiting.
Tom Cahill, Vice President EMEA at Jaspersoft