Paul Sakuma
Microsoft CEO Steve Ballmer gestures during a news conference in San Francisco Tuesday, May 10, 2011, to announce Microsoft's acquisition of Skype.
A once cutting-edge technology company spends yet another fortune to snatch up yet another innovative but unprofitable business.
Yawn.
Yet news Tuesday that Microsoft Corp. plopped down $8.3 billion to snag phone-by-Internet company Skype speaks to business and technology trends as tangled as the cords snaking from the back of your desktop computer.
The trend could change the ways you phone people and the ways in which wireless carriers such as Overland Park-based Sprint Nextel make a buck.
“It’s just more handwriting on the wall that everything’s going to be digitized into bits,” said Donna Jaegers, a telecommunications analyst for D.A. Davidson & Co. “Microsoft is playing catch-up here.”
The deal — perhaps driven by a desire to keep Skype away from Google or Facebook — is Microsoft’s biggest acquisition to date. It gobbles up Skype Technologies SA in what the companies said would “extend Skype’s world-class brand and the reach of its networked platform, while enhancing Microsoft’s existing portfolio of real-time communications products and services.”
Put another way, Skype is coming to your Xbox 360, your Kinect game station and your desktop Outlook and Lync programs. In doing so, it could multiply the ways in which consumers sidestep their landline phones and even their cellphone voice networks to make calls far cheaper.
Skype is the most popular of a series of so-called voice over Internet protocol services that use the Internet to carry voice calls and videoconferencing. Instead of using traditional telephone networks, voice over Internet protocol, or VOIP, converts calls into computer-friendly ones and zeros so they can travel over Internet connections.
Calls from one Skype number to another — separated by a block or by an ocean — are free. Calls from a Skype account to a landline or cellphone account cost just a fraction of the conventional connection. There can be a time lag that makes conversations awkward, but the price is hard to beat.
It’s as if Skype has found a way to navigate around all those telecom toll roads.
The company, founded in 2003, was eventually swallowed by eBay. It sold Skype to an investment group led by Silver Lake in 2009 for about $2 billion.
Pending regulatory approval, the company will become a new division of Microsoft led by current Skype chief executive Tony Bates.
Analysts debated whether it was a smart buy for Microsoft — the Redmond, Wash., company has a spotty record for putting the firms it acquires to profitable use — but it was seen as a move to give Skype and Microsoft the combined muscle to battle Google and the Facetime video chat function from the Apple iPhone.
Microsoft stock slipped 0.6 percent Tuesday, to $25.67 a share.
Microsoft was much criticized a decade ago for being slow to recognize the importance of the Web in the use of computers.
Now the software publisher is dinged for being slow to see how the Web has become mobile — on smartphones and electronic tablets.
Along with the still-dominant Windows operating system, versions of Skype software work with Apple computers, the iPhone, on Google’s Android mobile operating system, on BlackBerry devices and Nokia’s Symbian phones. On Tuesday, Microsoft chief executive Steve Ballmer said “we will continue to invest in Skype on non-Microsoft client platforms.”
And that promises increasingly cheaper telephone calls to consumers, and the pain of technological change to phone companies.
Rather than burn through their monthly minutes on cellphones, people who use Skype can route their calls through its cheap or free alternatives. With Microsoft winds blowing into Skype’s sails, analysts say, the move to VOIP calling will pick up speed.
And wireless carriers will have to adjust, seeing less traffic over their conventional voice networks and more on the data networks that would carry the calls over the Internet. The marriage of Internet connections to phone calls means they won’t so much be losing voice revenue as gaining money from data.
“The million-dollar question then becomes: Is the voice customer more valuable than the data customer? We don’t know yet,” said Rick Franklin, a telecommunications analyst for Edward Jones & Co. “In time you’ll see the economics. Somebody will have to pay.”
Indeed, it’s not like you’ll be able to dump your cell bill entirely. You’ll need to pay somebody to ship your call over the Internet. Telecommunication analyst Roger Entner of Recon Analytics imagines a day when “you’ll be able to buy naked data on your cellphone” — a plan with no voice minutes.
“The moment you can do that,” he said, Skype and similar programs “become very competitive with the way you buy minutes now.”
That only increases already mounting pressure on Sprint, Verizon, AT&T and the rest to build broader-reaching wireless broadband networks.
Today, Sprint has the most fully deployed 4G, or fourth-generation, wireless broadband service. Under ideal conditions it can move data at the speeds most people experience with their home Internet connections. In part because it has not been as successful as its competitors in landing customers, it also has more unused capacity on its network.
That’s part of the reason Sprint has marketed unlimited data plans for smartphones, while its competitors generally put caps on data usage or charge higher rates for more gigabytes.
Sprint declined to comment on “a deal between two other companies” on Tuesday.
Sprint has also championed phones using Google’s Android operating system. And this month it allowed customers to use their Sprint phone numbers as their Google Voice numbers.
Google Voice is much like Skype. It allows users in the United States to make domestic calls for free, and offers cut-rate overseas calls, by routing calls over the Internet. The service, which has only automated customer service support, also lets users receive calls to that single Google Voice number on more than one phone.
Google had been rumored as a possible suitor to Skype. Such a purchase would have let the search engine company corral a competitor to Google Voice. With Microsoft as its new owner, and with Skype already available on the Windows Phone 7 mobile operating system, Skype stands a better chance of fending off any challenge from Google Voice.
Yet to be worth its sizable price tag, Skype will some day need to make money. On revenues of $860 million last year largely from the minority of calls on which customers pay a toll, Skype lost $7 million.
In revealing the acquisition by Microsoft, Skype executives said they were developing full-screen advertising to be shown either during calls or before connections are made. In fact, analysts see it as a way to draw more customers to its various advertising platforms, like the Bing search engine that still trails far behind Google.
For Microsoft, said Edward Jones technology analyst Josh Olson, Skype might be a quick way to catch up with the competition on smartphones and tablets like the iPad.
“You’re going to see (more) demand for video chat on mobile devices,” he said. “This helps them be a part of that.”
Demand already exists. Dan Norburg, who runs a swimming pool maintenance and remodeling company in Kansas City, was seduced by Skype a year ago when his daughter spent a college semester in Spain. Skype was way to see and talk with her, for free.
“It was pretty easy,” he said. “If I can do it, a blind monkey could do it.”
Yet he can’t see a Microsoft push to integrate Skype into a game console or electronic tablet making him more likely to use the service.
Still, he has a friend who uses Skype to call Norburg from around the globe.
“And he just calls me on my phone,” Norburg said. “It’s great.”
To reach Scott Canon, call 816-234-4754 or send email to scanon@kcstar.com.
Posted in: microsoft,skype,Technology News
