Why Microsoft Bought Skype

Monday May 23, 2011 – Stewart Wolpin

Socializing with my tech reporting peers at a couple of events this past week, the Microsoft-Skype deal was a popular – and puzzling – topic of conversation. No one could quite grab the love handles on this deal, why Microsoft would spend $8.5 billion on a company that lost a reported $7 million last year and $418 million in 2009.

Most folks say it’s because Skype has nearly 700 million registered users worldwide. Yeah, that’s some of it. Then there’s Skype’s video telephony technology. Yeah, that’s a big part of it.

But I humbly submit Microsoft has finally grokked the Apple success story – it’s the ecosystem, stupid.

As Microsoft CEO Steve Ballmer noted in an interview on CNBC, the megadeal will allow the two companies “to build a strong framework for collaboration” and “one-plus-one is definitely more than two.”

Unlike Apple, Microsoft isn’t really a hardware vendor (other than Xbox), so its ecosystem options have been limited. And we all know the reaction of the Justice Department had when Microsoft tried to piggyback its ecosystem-building software (i.e. Internet Explorer) within Windows.

But Skype poses no such monopoly-laden threat – it’s already been voluntary loaded onto hundreds of millions of – maybe a billion – PCs, as well as some Panasonic and LG connected HDTVs, and new Panasonic connected Blu-ray players.

And nothing else. And therein lies Microsoft’s ecosystem opportunity.

On the phone in the living room

First, turning a Blu-ray player into a video phone is a much better idea than incorporating the capability into TVs. Consumers are far more likely to buy a new $150 Blu-ray player to get video telephony as a Trojan Horse capability than purposely on a $1,500 HDTV. I wouldn’t be surprised if a lot more Blu-ray player makers – prompted by Microsoft – started adding Skype video capabilities to their wares.

Next, Blu-ray player makers have to start bundling the camera/mic combo with the players – right now, the Panasonic’s TY-CC10W array costs more – $170 – than the company’s BDT-210/110 decks it’s designed to work with.

Similarly, TV makers have to start building the Skype telephony camera/mic array into the TV’s bezel, just like they were built into PCs and laptops and tablets and made Skype ubiquitous on these devices – truly a case of if you build it, they will video call.

With Skype video built into more and more TVs, millions of couch potatoes can video chat with the office-bound and laptop road warriors.

Then, there’s smart phones and Microsoft’s ailing (but otherwise excellent) Windows Phone OS. But Microsoft (rightly, IMHO) believes it has a potentially winning product, it merely lacks the killer app and the hardware distribution muscle – and Skype video calling gives them the former, and its deal with Nokia, the world’s leading cell/smart phone seller (and try saying that three times fast), the latter.

So there is now the opportunity to get Skype video telephony onto millions of smart phones, which can call millions of PCs, which can call millions of living rooms.

Finally, there’s the Xbox. Adding Skype video into Microsoft’s ubiquitous game player will allow players to visually chat while playing (and perhaps incorporate each other into games), and to call millions of living rooms and millions of cell phones and millions of PCs and laptops…

In other words – an ecosystem. A video telephony ecosystem.

You may say I’m a dreamer, but that’s why I think Microsoft bought Skype.