It’s been a little over a year since Microsoft announced it was plunking down $8.5 billion for VoIP pioneer Skype. At the time, the size of the deal surprised industry watchers. Sure, Skype had traction as a VoIP platform with well over 100 million users, particularly in international markets. But the company had failed to add spark to eBay when the online auction house acquired it in 2005 for $4.1 billion. For years, eBay struggled to find a way to leverage Skype and eventually gave up, selling off most of the company to private equity firms for a under $2 billion in 2009.
What made Skype worth $8.5 billion to Microsoft? And, a year after the deal was announced, what does Microsoft have to show for the deal?
Let it be
In executing the deal, Microsoft indicated that it intended to operate Skype in a more-or-less hands-off manner: Let the company continue doing what it does, with an eye towards integrating some of its services into Microsoft products where appropriate. And so far Skype seems to have kept some of its independence. Although Skype is now a fully-owned subsidiary of Microsoft, its headquarters are in Silicon Valley rather than Microsoft’s Seattle-area amalgamation, and in a New York Times piece Skype president Tony Bates is emphatic about how Skype has retained its identity after the Microsoft acquisition — down to using keycards with the Skype logo, rather than the Microsoft moniker.
And Skype hasn’t been sitting on its heels. Although the Microsoft acquisition raised fears that Redmond would kill off or deprecate Skype clients for non-Microsoft platforms, Skype has been busy augmenting its clients for Android and iOS (both the iPhone and iPad). Skype has also launched clients for the Sony PlayStation Vita handheld and (just two weeks ago) started rolling out Skype for Xfinity to Comcast customers in a handful of initial markets. And, of course, Skype has teamed up with Facebook to offer Skype-to-Facebook video calling.
Skype has also been rolling out updates to its mainstream desktop apps: Skype 5.8 for Windows rolled in Facebook calling support, push-to-talk support aimed at gamers, and it includes the Bing Bar , which is more-or-less browser bloatware from Microsoft rolled into the Skype installation. (Skype 5.9 for Windows — essentially just fixes — appeared earlier this month.) On the Mac, Skype has fared less well: Skype 5’s interface for Mac OS X rubbed so many people the wrong way that many Mac users refused to upgrade. Although the direction for Skype 5 on Mac was set before the Microsoft acquisition, being folded into the Redmond giant doesn’t seem to have helped.
And then there’s Skype for Windows Phone — which has been described as essentially useless. Why? No multitasking support. Unless the app is running, users don’t get call or message notifications — which means users who want to receive communications from Skype have to leave the app running on their Windows Phone device 24/7. Skype says it will address the issue at some point in the future. And Skype didn’t seem to get the memo about Microsoft’s high-stakes partnership with Nokia — Skype for Windows Phone has been pulled altogether from the Windows Phone Marketplace on the Nokia Lumia 610. Why? It has only 256MB of RAM, where Skype says that one-app-all-the-time client for Windows Phone needs at least 512MB.
Behind the scenes
Despite stumbles, Skype’s raw numbers continue to grow. According to the New York Times, Skype has seen its raw number of users grow 26 percent to nearly 250 million people in just the last seven months — which would be the time since the Microsoft acquisition closed, rather than the full year since it was announced. The piece reports Skype’s traffic is up even more, with the number of minutes of calls handled during the first quarter of 2012 a full 40 percent higher than during the first quarter of 2011. In April, Skype celebrated having 40 million concurrent users for the first time. Apparently, interest in VoIP calling remains strong — although there’s no indication how much of that is free Skype-to-Skype calling or Skype-to-mobile or Skype-to-landline calling using purchased minutes.
Part of the improvements might come from infrastructure upgrades that Skype is receiving via Microsoft. Remember the Skype crisis at the end of 2010 when millions of users were unable to connect? (There was another, somewhat smaller repeat in mid-2011 while the deal was in process.) Skype’s technology is built on peer-to-peer networking, and nodes with high bandwidth and serving capacity sometimes would get nominated as one of several thousand “supernodes” tasked with handling large amounts of Skype traffic. Those Skype outages were caused by updates that took out some supernodes, leaving many users unable to connect.
Behind the scenes, Microsoft has been overhauling Skype’s infrastructure so it relies less on end-user nodes outside its control and more on hardened, dedicated servers living in data centers — part of Microsoft’s broader cloud services infrastructure. There are three benefits. The first is that Skype service is far less dependent on borrowed bandwidth and computing resources from ordinary people using its services. Second — directly related — it makes Skype technology more appealing to enterprises and organizations, who were loath to permit their users from using Skype for fear of finding themselves (and their network bandwidth) effectively serving as part of Skype’s back-end services. Third, it improves security. After all, if someone found a way to distribute malware via Skype, a great way to distribute it would be to set yourself up so you get nominated as a supernode and exchange data with tens of thousands of other Skype users. By controlling the server platform, Microsoft and Skype can run a far tighter ship.
Big plans for everybody
Besides revamping Skype’s infrastructure, Microsoft has finally begun to move on making Skype a more ubiquitous part of its ecosystem. Just this week Microsoft started offering Skype to computer makers as an optional installation component for Windows 7. You may be thinking, “Windows 7 is so yesterday,” but it is what computer makers are putting on machines right now, and the operating system will continue to be available for some time. Giving computer makers the option put Skype on PCs as part of Windows is the kind of product placement most companies only dream about. And adding Skype is optional because, if Microsoft made it a default part of Windows, they would run afoul of antitrust regulators. Skype also can’t be pre-installed on Windows 7 PCs shipping to China.
Since announcing the acquisition, Microsoft has touted integrating Skype services with its product line. Of course, this has included Microsoft Office and Lync, the company’s all-in-one communications “solution” for business and enterprise. That hasn’t happened yet.
Of more interest to consumers, perhaps, would be integration with the Xbox 360 gaming console. That hasn’t happened yet either. The New York Times reports that such integration isn’t likely during 2012 — and that might even make it a feature exclusive to the Xbox 720 or whatever Microsoft’s follow-on to the Xbox 360 might be called. It may seem foolish for Microsoft to leave the existing Xbox 360 off the Skype bandwagon, but remember: Skype can’t seem to make a client for Windows Phone that runs in less than 512MB of RAM — which happens to be how much memory is in an Xbox 360 console. Skype could probably make an Xbox 360 client, but would it be a client that could run while playing games or watching video? Maybe not.
Of course, Skype will be available for Windows 8. However, that’s not really any sign of Microsoft integration: that’s simply par for the course. Skype has always made strong efforts to support the latest version of Windows. However, this time around, Microsoft may make Skype an optional component that PC makers can install with Windows 8 from day one — and that, undoubtedly, will help ensure Skype gets an even large foothold in the Windows desktop world.
A bigger question might be about Skype on Windows RT — the Metro-only version for ARM-based tablets. There’s little doubt that Microsoft will make a version of Skype for Windows RT, but reports have Skype working in the same sandboxed restrictions as other Windows RT developers. Right now, nobody knows whether Skype will be available for Windows RT when it ships. Industry watchers also believe Skype is working on a version of its service built using HTML5 technologies. In theory, that could work in any standards-supporting HTML5 browser, whether on desktop, mobile, or a tablet.
With all that, it would seem that Skype is on pretty solid footing: Close to 250 million users, clients available for a wide variety of platforms (even if some of them aren’t that great), a major presence on iOS (where it’s one of the top-downloaded apps of all time), and prime positioning for Microsoft’s consumer and business ecosystems. What’s not to love?
Skype still faces significant hurdles in the mobile industry. Carriers, for instance, aren’t fans. Remember that Google Voice was initially blocked on the iPhone because AT&T thought it would put too much strain on their network. Although that particular bugaboo has long since been resolved, the bottom line remains that mobile operators view Skype as an application that competes with their core services — voice and their very lucrative SMS and MMS messages businesses. That may seem like an old-school attitude, but it’s still prevalent: Nokia CEO Stephen Elop — a former Microsoft exec, mind you — recently noted that operators don’t like Skype, and have pressured Microsoft to make sure Skype is not pre-installed on Windows Phone devices.
Perhaps more significant, however, is Skype’s fundamental business model: It sells minutes. Skype was able to become a popular messaging platform in part because it offered both basic instant messaging and free Skype-to-Skype calling. The only time Skype costs anyone any money is if they want to Skype to someone on a landline or mobile. If you can keep the connection Internet-only, the call is free. Otherwise, Skype has per-minute rate plans for connecting to landline and mobile phones systems that vary by country.
Reach out landlines and mobiles will continue to be a viable business for years to come. But as mobile and fixed broadband becomes more ubiquitous — particularly in emerging economies where Skype enjoys significant popularity — the number of people who need to use Skype to connect to traditional phone systems will go down, and a greater number of calls will be data-only.
Skype could turn to advertising, and in some regard it already has. Shortly before Microsoft moved in to acquire the company it started rolling out ads on the home tab for Skype for Windows. If revenue from purchased minutes declines, Microsoft may look to tie Skype in with its own advertising services.
However, Skype’s biggest threat may be creeping featurism. It doesn’t take more than a minute or two using a Skype client to be struck by how fiddly and obtuse Skype has become over the years. Skype started out as a relatively simple program that offered messaging and calling capabilities. Increasingly, Skype now seems to want to be all things to all people all the time — which makes for a complicated interface, difficult configuration, and an often-bewildering user experience. Simply trying to discover whether particular contacts are available via Skype can be a hair-pulling experience.
The result? The door is wide open for upstarts like WhatsApp and Viber. Both apps are more limited in that they are strictly available for mobile, but they offer a far cleaner solution to many users’ mobile messaging needs than the current incarnation of Skype. Similarly, Facebook Messenger has become a de facto messaging standard for mobile users who are obsessing over their Facebook status, and of course Google Voice can’t be discounted: and Google wastes no opportunity to promote it to not just Android users, but desktop and iOS users as well.
It’s only been seven months since Microsoft closed the Skype acquisition, so it’s too early to rule on its long-term ramifications. However, Microsoft spent $8.5 billion to bring Skype into the fold — that’s Microsoft’s largest acquisition to date. Investors are going to want to know when they can see benefits to the acquisition — apart from Skype producing a questionable Windows Phone client and having Microsoft build it a better infrastructure. If Skype doesn’t start showing tangible benefits to Microsoft soon, it may find itself as another bullet point of questionable things Microsoft has done during Steve Ballmer’s tenure as CEO.