Strategic Implications of the Microsoft/Skype Deal

Microsoft’s recent acquisition of Skype is the largest the company has ever made, and it’s raised many questions in the process. This research note examines Skype’s overall value and where it fits strategically into the world of Microsoft.

From Office 365 and Bing to Xbox Kinect and Windows Phone, there are numerous ways in which Microsoft can leverage the functionality of its newest addition — and numerous risks it could incur in the process. It will take about two years to fully judge the wisdom and execution of Microsoft’s acquiring Skype. There is tremendous potential: Skype may be the critical mass required for Microsoft to transition from a packaged software business to a real-time cloud communications leader. But the wisdom of the acquisition will be determined not by the actual purchase decision but by Microsoft’s implementation and stewardship, which is yet to be witnessed.

An $8.5 billion price tag is huge, but that number only represents about 17 percent of Microsoft’s available cash. Skype is certainly a compelling acquisition, probably better than having all that money in the bank. The question isn't whether Microsoft paid too much; the question is, will the purchase yield a positive return (and when)? Products such as Windows Phone won’t succeed or die based on any one decision. Microsoft needs to swiftly and adeptly leverage Skype into its offerings. Doing so successfully will increase the relevance Microsoft plays in the next wave of communications and collaboration.