Skype's the Limit…

With news that Microsoft will snag Skype for a whopping $8.5 billion, the only question is why it would pay so much money for an unprofitable Internet voice/video service that already faces considerable competition and, frankly, will probably face more, not less, in the future. To be sure, Google already has a pretty robust Video Chat service, and Apple has been getting good reviews for its Facetime feature, which right now is restricted to iPhone 4s and iPad 2s but could easily expand its reach at some point (Of course, with Apple, don’t bet on it). Cable ops and telcos could easily incorporate video chat into new set-tops as well. Why pay so much for Skype when it’s so easily duplicated? Maybe because Microsoft still feels the sting of its attempts to duplicate Apple’s success in music. Not so easy, eh?  

 

Even Google, which is no slouch in the R&D department, recently toyed with purchasing Skype for $3-4 billion. Then Microsoft swooped in and doubled it. To some, this seems like a desperate move by a cash-soaked dinosaur (Microsoft has $50 billion in cash reserves) that has been trounced in mobile, music and search but continues to churn out billions from its Office software, the XBox gaming system and its Windows operating system for PCs. Those strong businesses have kept Microsoft fat and happy even as it faces potential irrelevance in other areas. And Microsoft has a history of overpaying for things just to keep others from buying them. Skype is, perhaps, a line in the sand of sorts. Microsoft is telling the world that it won’t let the “next big thing” pass it by. But again, $8.5 billion? Either Microsoft sees the potential for serious growth in Skype’s business, or it’s being careless with its cash.

 

One bet by Microsoft is that Skype is poised to capitalize on Web 2.0 and the potential licensing deals it could accrue through multiple platforms and devices. That’s already taking shape. For example, lackluster sales of 3DTVs last year has pushed TV makers to go searching for a new pot of gold, which at the moment seems to be “Smart TV.” And those TV makers have neither the skill nor the desire to create their own apps. They are therefore partnering with existing brands, technologies and communities like YouTube, Facebook, Netflix and Skype. By buying an established video conferencing/chat player, Microsoft gains automatic entrée into the living room through Smart TV—something it has been trying to do for years on its own with zero success. It can use that foot in the door to push other products. Don’t forget that Microsoft is still struggling to get its mobile platform off the ground with Nokia, which while faltering still has a good global presence. Incorporating Skype into its mobile platform could get interesting.

 

The cable industry needs to watch this market carefully. One conundrum for the majors like Comcast and Time Warner Cable is whether to do deals with the Skypes of the world or simply create proprietary technology from scratch. Microsoft has voted with its pocketbook. As Smart TVs continue to encroach on the set-top and lure viewers away from its navigation interface, cable ops may want to think long and hard about video chat, especially considering that more and more viewers watch shows while using other devices to tweet, text, Facebook and video chat with their friends elsewhere. Video chat—if presented seamlessly through a TV set and/or set-top—could offer an innovative way for people to watch shows “together” even from remote locations. Perhaps this is part of Microsoft’s calculus in buying Skype. Perhaps not. But no company pays $8.5 billion unless it’s got something up its sleeve. Cable would do well to keep an eye on this one.