News Analysis

Analysis: What does Microsoft's Skype acquisition mean for businesses?

Warwick Ashford

Microsoft's planned acquisition of internet telephony services firm Skype for $8.5bn has caused quite a stir in the consumer world, but what will it mean for business?

Many businesses, particularly at the lower end of the scale, see Skype's services as a way of boosting collaboration and cutting costs. Many of these companies are set to gain or lose by any changes Microsoft's ownership may bring.

"Skype is used by millions of consumers around the world to make free internet telephone calls and cheap calls to landlines, but we should not forget that Skype for Business also exists, making it an attractive, low-cost option for smaller companies looking for voice and video conferencing capabilities," said Ovum principal analyst Richard Edwards.

For enterprises, Edwards says, Skype Connect lets organisations integrate Skype with their SIP-enabled PBXs (private telephone switchboards). Skype Manager enables the business to track, trace and manage the use of this facility by employees.

But, with Microsoft soon to be in the driving seat, is Skype likely to become more or less business friendly?

The planned acquisition is seen by many as a consumer play, but it also stands to have interesting connotations for business users, says Richard Ellis, director of IT services firm 2e2.

Skype could tie in with Microsoft's future Unified Communications offerings, such as its Microsoft Lync Server, he says.

"Many organisations, despite having Microsoft on the desktop, currently use Skype as their messaging/VoIP client, so I can envisage much tighter integration with desktop applications such as Office," said Ellis.

In announcing the deal, Microsoft did not provide any details, but certainly hinted in this direction, saying the acquisition will increase accessibility of real-time video and voice communications, bringing benefits to consumers and enterprise users.

Microsoft is effectively buying its way into cloud telephony and is giving the impressing that cloud is applicable to all types of business, so the acquisition of Skype could bring positive benefits for small, medium and large business customers.

Considering Google provides enterprise e-mail, there is no reason Microsoft Skype cannot provide enterprise voice, says Ellis.

Research firm Gartner views the acquisition as primarily a consumer play, where Microsoft gets access to the most respected brand for consumer internet voice and video calling, but research vice-president Leif-Olof Wallin concedes the combination of Microsoft Live and Skype could be compelling.

Although he believes cannibalisation on Lync, for example, is unlikely, Wallin says a lot of the Live services - such as hotmail - are available for free and then in a premium version targeted at SMBs - which fits well with the Skype model of free calls and then premium services such as Skype-out.

Skype is Microsoft's biggest acquisition, so the odds are it will try to get the most value out of the deal by integrating the technology with existing products. Microsoft chief Steve Ballmer has indicated in initial interviews that tight integration is the path he intends to follow.

Skype's infrastructure would make a valuable addition to Microsoft Messenger and its Lync unified communications platform, and could also work well with Exchange 2010, say analysts. The biggest integration play, however, is likely to be adding Skype functionality to Windows Phone to provide integrated VoIP support around the world.

But with Microsoft directing so much attention to integration with Skype and developing new lines of business, could this mean fewer resources will be allocated to research and development (R&D) for existing enterprise products?

Not likely, says Ellis, because the technology world is going to continue to evolve fast and R&D will remain crucial to stay in the game, even though development of Skype-related services will need a huge R&D spend.

"We shouldn't confuse R&D with how business will consume the technology. Just because Microsoft won't be signing lots of enterprise agreements, does not mean the cloud services will not need a huge amount of development," he says.

Microsoft is also unlikely to be able to scale back R&D on enterprise products any time soon, given that current Skype revenue per customer is only around $1.30 a year, Ellis points out. On this point, Gartner believes a lot of the future revenue will probably be related to advertising.

Despite the opportunities for integration with existing products, is there a danger that Microsoft is straying too far from its core business as Cisco did with the acquisition of the Flip video camera business and a host of other non-core consumer related businesses?

Cisco chief executive John Chambers has resorted to restructuring the company and cutting back consumer divisions after the company lost around $50bn in market value in the past year.

According to Ellis, Microsoft is unlikely to run into the same difficulties. "Cisco is hooked on customer-premises equipment (CPE) sales and have a big loyalty to a channel that is in the same boat. Its strategy is based on delivering higher and higher levels of service to maintain the per seat price," he says.

Microsoft, by contrast, does not have the same legacy in the voice world, says Ellis, so if it can take significant market share at far lower per seat costs, but still at acceptable profitability.

Brenon Daly, head of the 451 Group M&A analyst team, says Microsoft's move reflects the reality that business software is increasingly less relevant, which is backed up by the fact that Windows revenues have declined for three quarters for this fiscal year.

"Yes, there are some OS shift considerations, but more concerning is the rise of other platforms and devices where Microsoft hasn't had success, and yet I wouldn't equate this acquisition with the consumer plays made by Cisco," he says.

Microsoft already has entertainment and communications offerings, with the Xbox business worth more than $1bn, but Cisco's purchase of Scientific-Atlanta and, to a smaller degree, Flip were outright consumer plays by a purely enterprise shop.

"No surprise it didn't work out, and that Cisco shuttered Flip last month," he says.

Microsoft may be in a relatively stronger position than Cisco, but there is still concern that the acquisition was driven more out of necessity or a desperate bid to shut out competitors like Google and Facebook rather than a carefully thought-out strategy.

"With Apple FaceTime now available on the Mac, iPhone 4, iPad 2 and the new iPod touch, it is definitely now or never for Microsoft," says Ovum's Richard Edwards.

There are other products and companies out there that offer a much better fit architecturally than Skype and they come with a much cheaper price tag too, he says, but Skype is undoubtedly the product Microsoft needs to stay in the game.

The 451 Group's Brenon Daly sees the deal as being very much out of character for Microsoft as the company typically does smaller acquisitions and not reactive ones.

"But Skype was in play and Microsoft had to pay. That explains the eye-popping price tag," Daly says.

Despite these misgivings, and that fact that Microsoft has so far given very little indications of what it plans to do with Skype, the outlook for business is generally positive.

Richard Ellis of 2e2 says the acquisition may well bring a whole lot of new businesses into the world of Skype. "Those organisations that have been reticent to allow employee usage of Skype due to security concerns may now start to reconsider their stance once it comes under the Microsoft banner," he says.

Ultimately, says Ellis, for business customers the opportunity essentially relies on how well Microsoft can integrate with Skype. The challenge, say analysts, will be creating an enterprise grade Skype-based service that small and medium businesses will be willing to pay for, especially after Skype outages in late 2010 raised doubts about Skype's suitability for business use.

The good news is that Microsoft is arguably one of the few companies that has the resources to handle that integration process successfully, even though industry executives and analysts say it could prove to be quite challenging.


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