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Why Did Microsoft Buy Skype, and How Might it Affect Current Users?

Ever since the news broke out last Tuesday the internet has been abuzz. Everybody seems to think they know Microsoft’s business better than Microsoft—but seeing as the software giant didn’t rise to where it did without merit, shouldn’t we at least give them the benefit of doubt?

Why did Microsoft buy Skype?

The major criticism is that Microsoft has grossly overpaid for the acquisition.

It’s no secret that, while amassing users by the millions and growing popular enough to have become a verb, the telephony provider has been having a hard time converting this popularity into profit. However, the company has come a long way, with 20% increase in revenue and 40% increase in earnings through 2010. This still didn’t quite bring them over to see a profitable bottom-line, but all in all, they only dipped $6.91 million as opposed to a whopping $368.8 million in 2009—which is a huge improvement. They are further projected to earn 1 billion in 2012, which is expected to be their first profitable year, and Microsoft evidently has faith in this forecast.

Then, though popularity can’t guarantee profit it can certainly be a powerful auxiliary, especially in the hands of a company with products and services that can realize the conversion. Just to put this popularity into context, Skype has had over 100 million connected users every month with 30 million concurrently connected at any given time, and 600,000 new registrations every day. In 2010, the company facilitated a total of 207 billion minutes of voice and video conversations.

This is one huge chunk of the market when directed at the right product.

Microsoft’s CEO Steve Ballmer additionally suggested monetization opportunities that have only been scratched so far, such as premium services and video advertising.

Then, of course there are synergies. Microsoft has many products and services that can readily benefit from the incorporation of voice and video—including Windows Phone 7 products, Xbox, Kinect, and Lync—but perhaps most imminent is integration with their Email service, where they’ve been pushed to the sidelines by the big G.

Google’s Gmail offers a robust one-stop-shop for managing email accounts and document through Google Docs, with integrated chat, voice and even video capabilities. This is one powerhouse of a system.

Microsoft, on the other hand, has its services scattered between Windows Live Mail on the web and Outlooks on the PC, with nothing that can hold a candle to Google’s communications offerings.

Now, Microsoft could start investing time and resources to develop its own VOiP/video service and then attempt to capture a market-share—but that’s an expensive and time consuming process with no guarantees of success. On the other hand, they could do just what they did and buy Skype outright, part-and-parcel with its entire dedicated user-base. Has this been any less expensive? Probably not. But it’s certainly a hell of a lot faster—and the folks at MS must’ve felt that they can afford the cash more than they can afford to lag behind Google any longer.

Buying Skype also landed them with a development team that has pretty much made video-calling what it is today. So if the goal is to keep pushing the boundaries, this definitely gives them a competitive edge.

All this shows that at the very least there’s some method to their madness (if Microsoft has indeed gone mad as suggested)—and perhaps even a good chance the deal will turn out very well for both companies.

How might this affect current users?

Both Steve and Tony Bates (formerly Skype CEO, now head of Skype division at MS) have made it clear that they will continue support and development of Skype on multiple platforms. In fact, Microsoft is one of the only big players that can show a track record of doing this. So if you’re a Mac user and the news got you worried, you can now breathe a sigh of relief.

Next, users might be concerned that the free service offerings will come to an end. But you don’t buy something that works only to mess it up—you buy to build up on it. Microsoft knows that the bulk of Skype users won’t stick around without free calling options, and they’ve just paid an arm and a leg (or at least a finger and a toe) to win these users over. It then stands to reason that rather than billing users for services they’ve gotten used to getting for free, Microsoft will come up with additional premium services and products that incorporate the technology and sell them separately.

Moreover, if a main driving force behind the deal was to stay competitive with Google, there’s simply no way they can start charging for voice or video calling while Google is offering both for free. That would be an economic suicide.

Lastly, consider that with pockets as deep as Microsoft’s, new features and services are likely to come out quickly—and many of them will be geared towards business users.

So rather than getting apprehensive, we should really be excited about what the future holds in store. After all, the biggest gamble here was made by Microsoft. As a user, should you find yourself unhappy with the way things turn out, you’ll always be able to opt out and switch over to the next big thing as it comes along. Microsoft, on the other hand, will left footing an $8.5 Billion dollar bill.

For those interested, here's the conference video:

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posted by Maty Grosman @ 2:41 PM