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Why Microsoft Paid $8.5bn For Skype

With Xbox Skype will unify gaming and transform the console into a wider communications platform, pulling the legs from under the VoIP apps (including Skype) bundled with many Smart TVs. With Kinect it gives Microsoft a far superior home interface, especially with the technology inevitably being built into the next generation Xbox console.

This unites with Hotmail and Windows Live Messenger effectively creating a web based Skype that can be accessed in any browser. Integrate this with Microsoft Office – including Office online – and since this software still dominates business life it creates a universal, international communications system for the business world.

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Then comes arguably the biggest asset: Windows Phone. We all know that the future of telcos is ultimately as dumb pipes. The obliteration of daft, overly complex minute and text tariffs in favour of all you can eat data packages where VoIP (and particularly its international cost benefits) thrives. When you buy your mobile phone of the future it will need a built in VoIP service and what better than the biggest VoIP service in the world? A service already populated with all your contacts and integrated with your email, Office suite and games console.

Microsoft's deal with Nokia fits in well here as well. Nokia has long championed Skype. It controversially built the service into its handsets in back in February 2009. A move which saw its flagship N97 (below) ostracised by Orange and O2, the same fear of VoIP saw Vodafone block Skype apps. The tide is turning though, the shoots of which were seen when 3 introduced free unconditional Skype access to all customers.


On the flip side all this promise is ultimately reactionary. For all its revenue Skype made only $264m in operating profits and it lost $6.9m last year overall. It is also $686m in debt. £8.5bn in these circumstances is one heck of a price.

But ultimately Microsoft is having to spend, and spend big, because the company has lost so much ground on its rivals. It had no choice. The Nokia deal is a reaction to its weakened grip on the smartphone market and the purchase of Skype, while of long term benefit, is hugely overpriced out of fear that Facebook, Google Voice and Apple's FaceTime services could do what is outlined above. Worst still Facebook, Google or Apple could buy Skype and block off that avenue completely. Yes Microsoft is lucky that while it has slipped behind its rivals its core business remains strong enough that it can afford to buy back lost market share.

The hope for Microsoft will be that the Nokia and Skype deals finally bring it back into alignment with the competition. They need to. Microsoft cannot afford to do deals like this forever…

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