Microsoft Buys Skype: Solving Some of Their Mobile Woes.

Microsoft has a few ways it goes about building out a presence in a market. The first, and the most rare, is that the develop a product in house from scratch to compete directly in a market that’s currently booming. The most recent examples of these sorts of products are the Xbox and the Zune both wholly developed by Microsoft to compete in the gaming and portable music player industries respectively. The second way they establish themselves in a market is to buy out either the top competitor or one of the more successful competitors as they did for things like Softricity who were the leaders in application virtualization software. Lastly sometimes they’ll say they’re getting into a market but will never make any serious attempt to do so just to kill off any potential competition, which they attempted to do back when the iPad was still a rumor and they announced the Courier tablet which failed to materialize.

Whatever strategy they adopt to establish themselves in a chosen market there’s always one common theme to their approach: throw money at the problem until it becomes successful. Now this isn’t a strategy that every company can adopt (realistically only a minority can) but Microsoft is usually so flush with cash that they can afford years of losses without it posing any sort of risk to their core business. Most notably they did this for a good 7 years with the Xbox division before it managed to turn a profit, sinking billions of dollars into the product before it actually made them any sort of money. They also continue to do it for products like the Zune which continues to languish behind Apple’s iPod but that’s still got a couple years before it reaches the 7 year mark that the Xbox did, but there’s really little hope for that product.

Their latest endeavor which is seemingly flush with cash is their Windows Phone 7 product. Whilst the sales of the devices haven’t been that stellar they’ve still managed to take a small percentage of the smart phone market. Their partnership with Nokia sets the scene for them to become a potential juggernaut in this sector but they’ve got a long uphill battle ahead of them and the gamble isn’t a sure thing for either side. Microsoft now appears to be looking to strengthen their WP7 offering even further by shelling out a cool $8.5 billion dollars for everyone’s favorite communications app, Skype:

The deal is doneMicrosoft is buying Skypefor $8.5 billion in cash in its first sizeable acquisition since August 2008, when the Redmond software giant spent $486 million onGreenfield Online.

In fact, this is Microsoft’s biggest financial bet to date in terms of M&A, trumping its $6 billion+ purchase of aQuantive, which dates back to May 2007, in size.

The purchase price includes the assumption of Skype’s debt.

The agreement has been approved by the boards of directors of both Microsoft and Skype.

Whilst the acquisition is not solely dedicated to the WP7 product line it’s still the one that has the most to gain from it. WP7 doesn’t currently support any form of video calling like Apple’s FaceTime or Google’s Video Chat does and Skype could provide a good chunk of the underlying infrastructure, saving Microsoft a lot of work. Skype’s vision of being available everywhere lines up quite well with Microsoft’s three screens idea and I’m sure they’ll be looking to leverage Skype’s vast network to push their cloud products further. Still one has to wonder if the $8.5 billion price tag they paid for Skype is worth it, considering its Microsoft’s biggest acquisition to date.

When I first heard of the news that Microsoft had bought Skype my first reaction was that this was a maneuver to deny Facebook the chance at getting it. There were rumors of Facebook testing the waters of an acquisition for a while but it seems that in the end the only serious bidders were Microsoft and Google. It then becomes clear that Microsoft simply did not want the Skype network in the hands of one of its largest competitors and Facebook was probably not that interested in the first place, especially if Microsoft (who owns 1.6% of Facebook) was going to pony up the cash for them anyway. Google might not have been completely serious about their offer anyway since they already have most of what Skype has to offer and might have just been making sure Microsoft spent more than it had to (hey they’ve done it before).

It will be interesting to see how Microsoft leverages this investment, especially with its current product lines that have direct synergies with Skype. They’ve certainly been doing all they can to make sure their mobile sector succeeds and if Gartner is to be believed then we’re less than 4 years away from them becoming the dominant platform. I’m not so sure about that idea but I do know that Microsoft does have the resources to throw at this problem until they become big in this sector, and the Skype acquisition is a testament to that fact.

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