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What’s Behind Microsoft’s Decision to Buy Skype?

May 10, 2011 at 12:00 AM EST
Microsoft announced Tuesday it was purchasing the Internet telephone service Skype in a deal valued at $8.5 billion. Jeffrey Brown discusses the deal with The Washington Post's Technology Reporter Cecilia Kang.
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JEFFREY BROWN: Finally tonight, what’s behind Microsoft’s decision to buy Skype? The giant tech company announced today it was purchasing the Internet telephone service for $8.5 billion, the largest deal in Microsoft’s 36-year history.

In doing so, it will get access to Skype’s millions of users worldwide who log on to communicate by video or phone over the Web.

To walk us through the deal, we turn to Cecilia Kang, technology reporter for The Washington Post.

Welcome back.

CECILIA KANG, The Washington Post: Thank you.

JEFFREY BROWN: Eight-and-a-half billion dollars, that sounds like a lot of money.

CECILIA KANG: It is a big chunk of change.

JEFFREY BROWN: What is — it is. What is behind Microsoft’s move here? What are they after generally?

CECILIA KANG: Right.

Well, Microsoft has dominated in the 1990s the P.C. It’s the software giant for the P.C., the personal computer generation. But it wants to be more relevant for the Internet. And it particularly wants to be more relevant for smartphones and tablets and the services offered up from these new devices that Google and Apple are dominating.

So, this is really a play into the next platform, the next generation of devices for communications in the future.

JEFFREY BROWN: All right. So, to help us understand this play, first, we have to understand what Skype is. So, for those not familiar, what exactly is Skype?

CECILIA KANG: Skype is basically a phone or a videoconferencing service for the Internet.

So, instead of placing a phone call through copper wires, what this allows you to do, Skype allows you to do — and it provides this for 170 million users across the world — is, it allows you to place a phone call over the Internet to anyone else who is also a Skype user for free or for very cheap, usually much less than your provider, your long-distance or your wireless provider, is offering you.

JEFFREY BROWN: All right. Now, I’m familiar with that. And I also know the free part.

CECILIA KANG: Yes.

JEFFREY BROWN: So, how does it — it doesn’t make money, right? Or it makes money, but it — but it doesn’t make enough money.

CECILIA KANG: That’s right. That’s why a lot of people are questioning the price tag. This is a really big price tag on an acquisition, the biggest, as you mentioned, that Microsoft has ever made.

But what Microsoft is buying for this service is really the brand Skype. Skype is really one of the only or the few web companies that personifies the service that it provides. Like Google, Google is a verb. People say, we’re going to Google or search for something. People say I’m going to go Skype somebody. I’m going to call them. It’s become that recognizable to consumers around the world.

JEFFREY BROWN: But then how does — how does Microsoft incorporate Skype into what it does and especially what it wants to do to compete with these other companies?

CECILIA KANG: Sure.

So, what Microsoft hopes to do is to weave Skype through its various, very diverse product lines, from the Office suite of business applications, to its Xbox console, to its smartphones.

So, imagine you’re playing “Halo” on the Xbox. Hopefully, you will choose to also press a button that says Skype and do a videoconference call with, say, a cousin in Rome and who will play with you alongside, and you can watch that person real-time on videoconferencing. So, that’s some of the things that you can imagine this — this acquisition can bring about.

JEFFREY BROWN: So, a better experience, which attracts more users…

CECILIA KANG: Yes.

JEFFREY BROWN: … which somehow brings in money, because you still haven’t explained — we still don’t see quite how…

CECILIA KANG: Sure.

JEFFREY BROWN: … if Skype doesn’t make a profit, or much of a profit, how does Microsoft see getting to that?

CECILIA KANG: Right.

So, aside from exactly attracting people to more of their products, Microsoft actually hopes to charge for Skype within some of its products within the next — the first year. Microsoft wants to actually close a deal within this year and expects that it will produce products — I mean — excuse me — profits for the overall company within a year after its acquisition.

So, imagine, if you are using e-mail, Office e-mail, and you have the Skype function, maybe Microsoft will ask you, if you — will you pay maybe two or three dollars more for the Skype functionality that is incorporated in our Office e-mail? Those are the sort of things that Microsoft over in Redmond, Wash., is hoping will come out of this deal.

JEFFREY BROWN: You know, your examples go to the — it’s this larger context you’re talking about, right, is this convergence of information, communication and entertainment. That is the larger context and the larger battle here, right?

CECILIA KANG: That is absolutely right.

And you see big, multibillion-dollar companies that are scrambling who are making these big business plan adjustments, just like Microsoft is. You see Comcast also with convergence, buying NBC Universal to be more of a media player. They did it this year.

AT&T wants to fortify and be the biggest wireless provider in the country. So, they’re going to buy T-Mobile. What’s happening is the Internet has really disrupted so many business plans when it comes to the entertainment industry, the communications industry and the high-tech industry.

And all these companies, Apple, Google and now Microsoft, are really making very big, disruptive, fundamental changes to their businesses and big purchases, big risks, to make sure that they are ahead of everyone else when — to get those consumers to buy their products and services.

JEFFREY BROWN: And you see part of it playing out, of course, in the phone, in the mobile phones, right? And that’s where — that’s an area where Microsoft has lagged.

CECILIA KANG: Microsoft has certainly lagged. It’s been very late to the table on this one.

Apple, with its iPhone, Google with its suite of, its line of Android-based phones, has really dominated what’s known as the smartphone market, the sort of — the mini-mobile computers, and also the tablet market. Microsoft has for years actually tried to bring out a smartphone that would have the same sort of resonance with consumers that the iPhone has, but it — can you actually name a single Windows 7 for — that — that has that kind of resonance with consumers? Probably not. Most people can’t.

So, Microsoft has been late. And they’re hoping that, with Skype, a user will walk into a retail store or go online and say, you know what? That Windows Microsoft phone has this great Skype service that only is available on this particular phone. I might have my particular sort of way of using Skype. That might bring me in as a customer for a Microsoft phone. That’s one of the hopes.

JEFFREY BROWN: And this — just briefly, so, this has to go through still regulatory and antitrust…

CECILIA KANG: It certainly does.

JEFFREY BROWN: Yes.

CECILIA KANG: It has to go through either the Justice Department or the Federal Trade Commission to make sure that all the competitive aspects of this deal are in check and that there aren’t too many anti-competitive ramifications.

But most analysts I have talked to say that they expect the deal will pass, as Microsoft hopes, by the end of this year, because there’s not a lot of overlapping business between Microsoft and Skype.

JEFFREY BROWN: All right, Cecilia Kang of The Washington Post, thank you very much.

CECILIA KANG: Thank you.