There is so much to write about but I’ll begin with Microsoft buying Skype for $8.5 billion. The pundits are debating whether this move by Microsoft CEO Steve Ballmer makes good business sense, but that’s the wrong way to look at it. The better approach is to wonder what would have happened had Microsoft not bought Skype? Based on the high price alone I’m fairly confident that Ballmer felt he had no choice but to buy. In fact I’m fairly certain he felt that not buying could have doomed Microsoft.
Remember eBay bought Skype a few years ago for $2.6 billion, failed to make a go of it, then took a big write-off and sold much of the rest of the company to private equity firms. Skype was changing hands at a discount to the old eBay price only a year ago, so what had changed so remarkably to make Skype suddenly worth more than three times as much? Nothing had changed operationally. In terms of pure financial performance Skype isn’t worth anything like $8.5 billion. But the corporate chess board has changed quite a bit in the last couple years so it is possible to see where this acquisition might make strategic sense to Microsoft.
Ballmer and his company are at a tipping-point and he knows it. Microsoft is still big and powerful and rich, but no longer is it the biggest, most powerful, and richest. It is no coincidence that Department of Justice oversight of Microsoft’s anti-trust consent decree ended this week, because Redmond is nowhere near the threat to competitors that it used to be. The company can go from here either up or down and Ballmer’s fear is that the direction will be down, down, down. Microsoft will still make plenty of money but that might be from milking declining markets.
Ballmer needs a new market to milk.
Maybe that new market is telecom. Here is where I might write a paragraph about the Microsoft vision of unified communication where they’ll suck market share and market cap from the old telcos. That’s happening already and if someone is going to benefit, why not Microsoft? But I’m not writing that paragraph because I don’t think Ballmer or Microsoft are actually that smart. They have lost confidence. Microsoft no longer believes it controls or even can control the game. Worse still, they don’t have confidence that they even know the rules. So they’ve adopted a defensive posture and this Skype acquisition is more of a block than anything else.
Microsoft bought Skype to keep Google from buying Skype.
Notice I didn’t mention Apple. In terms of being the baddest MoFo in the market Apple has no peer, but Apple is following its own very different course. Apple isn’t the next Microsoft, you see. Apple is not the next anything because the role it aspires to transcends anything imaginable by Microsoft, ever. Google is the next Microsoft, so Google is seen by Ballmer as the immediate threat — the one he has a hope in hell of actually doing something about.
In the end Apple will probably beat both Google and Microsoft, but that’s not a story for today.
Were Google to buy Skype they’d convert those 663 million Skype subscriptions to Google Voice and Gmail and in a swoop make parts of Yahoo and MSN irrelevant. They’d build a brilliant Skype client right into the DNA of Android, draining telco revenue and maybe killing smaller players like Windows Phone. They’d cut deals with equipment makers like Cisco (Linksys) and NetGear and steal voice revenue from telcos and cable companies alike. That’s all Redmondesque behavior and if anyone is going to be behaving that way, Ballmer feels, it had darned well better be Redmond.
If Microsoft is to continue to grow and have an existence post-PC it has to be first or second in the mobile market, Ballmer knows that. Buying Skype doesn’t guarantee Microsoft that success, but NOT buying Skype would have practically guaranteed Microsoft’s failure.
And the $8.5 billion price? That was effectively set by Google, not Microsoft. Ballmer would have paid anything for Skype. $8.5 billion is just the price at which Google feels it is better for them to build rather than buy.
So look for heavy activity in this space as Microsoft assimilates and Google constructs. More acquisitions will come for both companies along with any number of strategic realignments. But remember that neither is actually in control. The conclusion is not only far from certain, there’s still a chance that neither company will dominate.
This is not an end-game, not yet.