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.

Podcast: Play in new window | Download

This should be my 2010 predictions column and it is, sort of, but if you’ve noticed I’m writing shorter columns these days but posting more frequently. There’s no way I can do a comprehensive predictions column in less than 3000 words. So what I propose to do instead is to write several prediction columns today, tomorrow, and maybe even the next day, covering in some depth what I think is happening and where we are going in the coming year as a technological culture. This first 2010 prediction column deals with Microsoft.

In the simplest terms what we’ll see from Microsoft in 2010 is more of the same. The company will continue to push its strengths, which are Office, with a new release, Windows 7, with an upcoming service pack and tablet support, the Bing “decision engine,” xBox, which has become a clear winner, Sync, the automobile technology that should expand beyond Ford, and a number of other products and technologies that are less visible but just as important to Microsoft. All these developments follow a theme that I think has been generally missed in the press and that is the continued maturing of Microsoft into its ideal — IBM.

IBM doesn’t even make PCs, remember? They sold that business to Lenovo for not very much money because it hadn’t made any profit for Big Blue in many  years. Yet IBM continues to thrive by offering a broad menu of products and services for its core customers. Microsoft does, too.

At this point I wouldn’t say Microsoft has many serious business vulnerabilities. Their efforts to diversify their business seem to be going in the right direction.

For every corporate desktop, Microsoft gets:

$50 for Windows, give or take

$200 per PC for Office per year

$2200 per Windows server

$30 per user Client Access License (CAL) to access the Windows server

$3700 per Exchange server

$65 per user CAL to access their Exchange server.

For any company with lots of employees, these numbers — which don’t even include any client or workstation apps other than Office –  quickly add up to a lot of money.

For a company with 10,000 employees, setting them up to use Microsoft technology will cost you $3,360,000. Over half of that will be for Office and you’ll pay that Office tax every year.

These are enterprise sales — a market that Apple, for the most part, doesn’t even address. So in the popular scheme of Apple nuking Microsoft, no Apple nukes yet exist in this space so they can hardly be a threat… yet.

Yes, there is strong motivation for corporations to cut costs and if good alternatives to Microsoft products existed, they’d jump all over them. The problem is there are few good alternatives and no comprehensive ones. The quality of Microsoft software is now pretty good. It works for the most part. Microsoft is supporting its products pretty well, too. For corporations to switch there needs to be a cost savings, a quality alternative, and low risk.

Open Office is getting progressively better, but it is not there yet. Red Hat and its Linux competitors do not offer a comprehensive alternative for enterprises. Understand, however, that Linux already dominates industrial-strength Internet applications and is likely to continue to do so.  In that space Microsoft is the little guy and unlikely to get bigger.

Apple has too many holes in their product line to adequately replace Microsoft at this time, nor do they appear to be making any serious attempts to address the enterprise market.

Microsoft CEO Steve Ballmer knows his first obligation is to these enterprise customers. That doesn’t mean, however, that Microsoft lacks ambition in the client and consumer spaces. Look at Bing for example. It is nice to see some creativity and innovation coming from Redmond. Even if you never use Bing, it will still help you, giving Google an incentive to try even harder.

Where Microsoft appears most vulnerable is in the mobile space as I wrote a few days ago. Windows 7 Phone (Windows Phone 7?) may not be enough.  A Microsoft purchase of Palm would be interesting, especially if they let WebOS live and grow. Or they could buy Palm to kill it, too. We know all about that Microsoft technique. A more aggressive move would be Microsoft buying Research In Motion (RIM). I see this as unlikely but not impossible and I’d frankly love to see it happen, not just to shake up the smart phone market, but also to throw some Waterloo DNA into Redmond.

As far as standalone and client applications are concerned, it is a whole new ballgame thanks to Apple’s App Store archetype. If the new platforms will be smart phones and netbooks, then they will need new applications. It will be hard to use the old applications on these new platforms. The iPhone gives us a good view of the future of applications, what works and what doesn’t.

Another area where Microsoft has been quiet of late is communication services. This begs an interesting question — when do the telcos become irrelevant? As Google and Microsoft (and Yahoo?) bulk up their ability to support smart devices, what value add does an AT&T or Verizon really offer? What if Microsoft (or Google) bought, say, Sprint and converted their network to purely data? They could use VoIP with QoS for all voice calls. They could hook their giant information and application infrastructure directly to the data network. It could change the game.

In one sense such a bold move is more likely from Google or even Apple than Microsoft except for one thing — its likely negative effect on earnings and stock price. Neither Google nor Apple can afford the hit of absorbing Sprint’s lousy profit margins. But Microsoft, whose stock has trailed the market for much of a decade, probably wouldn’t be hurt as much by such an acquisition. Heck, it might even be viewed as a bold move despite the earnings hit and drive Microsoft shares up.

These latter ideas require scale and financial muscle and I think that fairly characterizes where Microsoft is headed. Bill Gates is gone and Redmond is settling into a comfortable middle age. While this may not be good it was probably inevitable as Steve Ballmer rebuilds the company in his own image. What’s sad is it probably means an end to changing Microsoft strategy over a weekend and sending the company into a tizzy as Gates liked to do. Recent layoffs at Microsoft, for example, have much more to do with remaking the internals of the company in a new, more pinstriped model, than with cost savings.

Mature companies don’t have tizzies and Microsoft is becoming just that — a mature company — but they’ll remain a significant player for another decade at least.

Next Topic — Homeland Security.