Microsoft Overpays for Skype?

Microsoft is paying $8.5 billion to acquire Skype, the voice and video chat service. Plenty of investors and analysts, including The New York Times, think Microsoft is overpaying. I tend to agree. That's an extraordinary amount of money, and it's also hard for me to see how Microsoft recoups its investment.

If you think about computing at the most basic level, there are only three dimensions: processing (CPU), storage (memory, disk, etc.), and input/output (networking, communications, etc.) It's a historical accident, really, that the price of processing and storage collapsed earlier and faster than the price of global networking. Skype is a byproduct of the collapse in networking costs. What used to be extremely expensive -- a long distance call between, say, New York and Istanbul -- is now almost free. Skype competes against the classic telephone networks which were (and in some cases still are) national monopolies. A few countries have tried to ban Skype in a futile attempt to protect those monopoly rents.

The asymmetric price collapse in these three dimensions of computing helped foster the PC revolution, "client/server" computing, and similar styles of computing. The motivation was simple: processing (especially) and storage were very cheap, and networking was very expensive, so why not deploy those two computing dimensions everywhere and de-centralize? And that cost-driven pattern caused many people to question the whole premise of mainframe computing, in particular. With more years of hindsight, though, we now know better.

If you can capitalize on and, better yet, lead a rapid change in economics, shaking up an entire industry, that's a great business to be in while the adjustment happens. However, is Skype "sticky"? Do consumers find Skype essential? I don't think so. Google Voice and Chat, Yahoo! Messenger, Apple FaceTime, Fring, Lotus Sametime (now available for System z), and scores of other services offer the same or better options. As I write this blog entry, I'm listening to a colleague in Russia talk with a colleague in Australia, and I'm not using Skype, but I am using voice over IP. Therein lies the problem: it's easy for somebody else to enter the same market.

Another problem is that most people still buy mobile carrier-subsidized handsets. Microsoft has been trying to break into the mobile device market with Windows Phone and inked a big deal with Nokia. Microsoft is openly talking about putting Skype in every Windows Phone device. That's fine technically, but the mobile carriers will hate the idea and will be extremely resistant to distributing Windows Phone mobile devices. Maybe the mobile carriers are fighting a losing battle, but that battle isn't over yet, and Microsoft has an investment to recoup.

by Timothy Sipples May 11, 2011 in Current Affairs, Economics


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I hope Skype's quality doesn't drop with Microsoft in it and only becomes more effective. Systems like skype are quite sensitive. Skype really deserves something because it makes the communication so easier. There is no match for skype at the moment in the electronic communications industry.


Posted by: eagle | May 11, 2011 8:40:48 AM

I like apple's face time but its such a waste Facebook doesn't incorporate it in their network. Its would be totally cool to chat with friends like that, I mean Skype is pretty nice and idiot friendly. Nevertheless I'm looking forward for MS innovation.

Posted by: outsourcingcompany | May 12, 2011 5:33:06 AM

I have to agree with eagle and his concerns about the quality of Skype and if it is going to drop. Skype is really simple to use by just about anyone and there lies its biggest advantage.

Posted by: call Iraq | Oct 10, 2011 6:12:54 AM

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