Microsoft And Skype - No Joke To Google

Microsoft announced on Tuesday that it bought Skype for $8.5 billion. Skype was scheduled to go public soon, but its IPO kept getting delayed, as it was probably courted by companies like Google, Cisco, and Facebook.

The market might be jazzed up about the deal, as NASDAQ advanced 1%, but it set Microsoft back ~0.6% as the street thought it was too pricey, since the estimated IPO price for Skype was only for ~$4 billion.

This is good news for eBay though, as eBay still holds about one third of Skype.

Without delay, jokes on the deal started soon after the deal was announced, as people questioned Microsoft’s execution of the deal. However, for all the jokes I had read, none seems to question the synergy between the two companies.

In fact, with Skype, Microsoft had gained a potent weapon in expanding or revitalizing some of their products. There may be a lot of VoIP technologies floating around, but Skype is the clear market leader in the pack. And as a Skype user, I can attest that no other VoIP services can compare with the quality that Skype offers. With Skype, Microsoft can now enhance many of its offerings. Among them are:

XBox Live
With the Kinect system, a lot of XBox players are already equipped with a camera. With Skype, the XBox Live players can do real time chat with high quality voice and video, enhancing the gaming experience tremendously.

Hotmail
Hotmail might have been losing market share to Google’s Gmail and Yahoo Mail, and it’s getting stale, but it still has a ton of users. Its IM client is well designed, but like any other IM client, its technology is notably inferior than Skype’s. With Skype massive installed space, Microsoft can now push its other services such as Bing onto the IM client. This is surely not very good news to Google.

Enterprise Communication
WebEx had been the leader for a long time in remote conferencing, and its acquisition by Cisco helped secure Cisco’s place in the enterprise. Now with Skype, Microsoft instantly gets the best VoIP and Video technology for its Lync Server, not to mention Skype’s large installed space for enterprise users.

Mobile Phone Platform
While Skype may supplement Microsoft’s other services, it is now almost guaranteed that Skype will be part of the offering on Phone 7 or its future version. This is perhaps the biggest reason Microsoft needed to buy Skype, since mobile platform is an area Microsoft must be able to compete in order to shed its badly damaged image to consumers. While Skype will likely be supported on other mobile platforms, Microsoft will likely have its own enriched version of Skype on Phone 7. It also gives Microsoft a good entry point to offer services voice search, voice navigation, etc. on iPhone and Android as well, since Skype is one of the top communication app on those platforms. This probably has less impact on iPhone, as its entire ecosystem is tightly controlled by Apple, and will likely upset Android most.

As stated in the last article, Microsoft is very persistent in keep trying and trying to crack a new market, and it will not and cannot afford to give up the mobile market. The addition of Skype to its war chest will allow it to provide a superior product to its own mobile platform, and secure a place in other platforms as well.

One area that is not nearly analysed for this merger is how Microsoft can make use of this in China, the largest mobile phone market. VoIP is tightly regulated in China, and it will be a challenge for Microsoft to secure a place for Skype over there. However, consider the other major players: Apple and Google, for the Chinese market, it is probably a better bet on Microsoft in collaboration with Nokia to be successful on this they are the most friendly to the government. If indeed Microsoft can crack the VoIP war with China, the future can be very bright for both Microsoft and Nokia.

Daniel Ho is the founder of 10xreturn.com, a financial portal providing financial information and market statistics for investment professionals.

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