What Microsoft Should--and Shouldn't--Do With Skype

Instant Scale Advantage Over Google Voice and Killer Feature For xBox Kinect

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On the Microsoft acquisition of internet video/phone provider Skype, let's first applaud eBay for….nothing. eBay paid $2.6 billion for Skype in 2005, but never really knew what to do with it – though at least they knew what NOT to do with it: roll Skype up into the parent company.

It might've been luck, it might've been fear of failure, it might've merely been incompetence or procrastination, but in the end it turned out to be smart -- eBay left Skype to its own devices as its own entity, and now they've reaped the rewards. Who wouldn't happily take triple digit percentage investment growth of $5.9 billion over six years during the dot-boom days, much less now?

Microsoft, however, has rarely been so fingerprint free, and considering their spotty-at-best track record for acquisitions (Massive, WebTV, Danger/Sidekick, LinkExchange, Avenue A| Razorfish, etc., etc.), it's not surprising that at the press conference announcing Redmond's largest acquisition ever, CEO Steve Ballmer went out of his way to pronounce that Skype will continue to support non-Microsoft platforms and operate as a separate Microsoft division. That makes the most sense, and we'll see if it lasts.

But as an active user of Skype, I have mixed feelings about the purchase that mirror my business and personal perspectives.

From a B2B perspective, this was a canny strategic move. It begins to position Microsoft against Telecommunications giants like Cisco, making Skype the product through which Microsoft can start building interesting new technologies that will help connect businesses. Skype can be positioned as an easy-to-install product, and as long as they continue to innovate around the technologies, Microsoft may yet make a big play and start competing head on with Cisco.

From a consumer perspective, though, I'm praying that Microsoft keeps the product simple and does not try to cram everything from Bing to any number of other extraneous products into it. The key will be for them to continue to enhance the product, and allow Skype management teams to be entrepreneurs who will find ways to create better experiences. If they start with Kinect and the XBox, for example, they'll be heading in the right direction -- it would be cool to integrate Skype into Kinect and actually see my bowling or boxing opponents and speak with them -- Who doesn't like talking trash?

The deal also reveals Microsoft's tacit acknowledgement that Google is their biggest existential threat, and they will make a concentrated effort to compete with them in every place Google gains a foothold. Bing is the most obvious example, with the Windows 7 phone vs Android (and IOS) another high-profile challenge. The days of Zune spitting in the wind against the iPod are long gone; this isn't about flicking off a nuisance like Apple escapism anymore -- we're talking about a battle for long-term survival against an opponent that 's got a bullseye on pretty much everything Microsoft does.

With Skype, Microsoft instantly acquires a market share advantage over Google Video and Google Voice. It wouldn't be surprising to see them extend Skype's functionality to include assigned phone numbers, call forwarding, voice mail services, and possibly mobile video chat. You can bet Google will be moving in at least some of those areas and probably all.

But it's also worth noting that somebody else is getting ready to put a piece on the chessboard. Last week,TechCrunch scooped/shafted their parent company when it reported AOL was on the verge of releasing its own video chat service, dubbed "AV." It could quickly undercut Skype's value because:

  • No account creation is needed
  • There's no client to install (as long as you have Flash)
  • It's incredibly simple to use (that 's super-important, right grandma?)
  • It offers free four-way video chat (vs. paid for multiple feeds via Skype)
  • All you have to do to get someone on board is send them a URL

AV's not a de facto Skype replacement by any means, but it does have the potential to take Skype's primary casual user draw and make it simpler. Probably the biggest thing working against it is that it's from AOL, which has a brand reputation that makes Microsoft's look like, uh, Google, but maybe they can slap Arianna's face on it somehow and make it trendy.

Daniel Khabie is CEO of Digitaria, the digital unit of JWT.
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