Microsoft goes on the defensive with Skype acquisition

Microsoft has all the technical assets it needs to compete with Skype, but will gain a big user base

Microsoft's $8.5 billion acquisition of Skype is largely seen as a defensive move by analysts, as the company struggles to keep up with the likes of Google and Facebook on the Internet.

There is a huge battle that only continues to intensify over where users go on the Internet for their services. Companies including Google, Apple, Facebook and Microsoft need to attract users, and that is what a deal to acquire Skype is all about, according to Paolo Pescatore, analyst at CCS Insight.

THE DEAL: Microsoft to acquire Skype for $8.5 billion

Microsoft seems to feel it needs to fight back, and the deal looks like a largely defensive move to prevent its rivals from acquiring Skype, Pescatore said. Microsoft doesn't really need to make the acquisition, because it has all the technical assets it needs to compete with Skype.

Skype's main asset, though, is its customer base, according to Magnus Rehle, managing partner at Greenwich Consulting Nordic.

Skype had an average of 124 million connected users per month in the second quarter of 2010. At peak times, 23 million users are online together. Users made voice and video calls totalling 95 billion minutes in the first half of 2010, using video approximately 40 percent of the time, according to Skype's website.

The cost of keeping one of its competitors from buying that user base will be high for Microsoft: $8.5 billion. But when Skype comes up for sale there always seems to be a lot of money involved, said Katja Ruud, research director at Gartner.

Back in December, CCS Insight noted that acquiring Skype would have provided Facebook with a huge group of users that complements its own, allowing the site to quickly add voice or video calling functionality alongside the text messaging capabilities already offered by its site.

For Google, buying Skype would also have made sense. The search giants competing services, including Talk and Voice, haven't been nearly as successful as Skype's, Leif-Olof Wallin, research vice president at Gartner, said.

The challenge for Microsoft is that there will be a lot of overlap between its products and those of Skype, which includes Windows Live Messenger, a product that also allows users to make calls over the Internet. Skype and Microsoft also target businesses with their communications offerings. Microsoft has a server-based unified communications tool that connects PCs to a PBX to offer VoIP calling, instant messaging and videoconferencing. Previously called Communications Server, it is now branded Lync, while Lync Online is a cloud-based service offering similar functionality. Skype Connect, meanwhile, is a service that allows businesses to connect their PBX to Skype to handle incoming and outgoing calls. A management tool, Skype Manager, allows businesses to control call costs.

Skype is no longer seen as the threat it used to be by mobile and fixed-line operators, according to Ben Wood, director of research at CCS Insight. Although Skype has caused considerable price erosion, the two worlds seem to co-exist, he said.

Skype's deal with Verizon Wireless, which integrates Skype on some of the smartphones it offers, made Skype a more interesting acquisition target, according to Wood. But the relationship with operators is still something Microsoft will have to take into consideration, he said.

Skype's deal with 3 in the U.K. has demonstrated high usage for the service among its subscribers, and in some cases driven usage of other services that the operator's other offers, according to Pescatore.

Skype, founded in 2003, was acquired by eBay in 2005 for $2.6 billion. In November 2009, an investor group led by Silver Lake, and includes Andreessen Horowitz, the Canada Pension Plan Investment Board (CPPIB), Joltid Limited and founders Niklas Zennström and Janus Friis acquired 70 percent of the company. The deal valued Skype at $2.75 billion.

In August, the company also announced plans for an IPO.

(Tomas Zirn at Computer Sweden contributed to this report)

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