Microsoft’s Purchase of Skype Won’t Change Company

Late Sunday it was announced that Microsoft purchased Internet phone service provider, Skype, for $8.5 billion.  In my opinion, the ultimate effect for Microsoft will be neutral.  Let me explain.

1.  Skype is a wonderful service, and their founder and CEO is one of my favorite executives across business.  I saw him present at an industry conference over ten years ago and was blown away by his business model, persistence, acumen, vision and intelligence.  My whole family uses Skype quite readily and happily.  But let’s look at why we use Skype.

Primarily we use Skype for two reasons: video calls, and it’s free.  Video calls are really wonderful when you travel a lot or are separated far apart from a loved one.  However, because of the power of video calling, it can be expected that all telecommunications in the future will be of the video variety.

Let me ask one of my favorite existential questions for new technologies: can you imagine a future 50 years from now where video calling is not the preferred and regular mode of communication?  No.  To survive therefore, every telecom company is going to have to provide video calling.  There will be a rough transition period where other firms struggle to provide the service.  During this period – like right now – Skype will dominate.  That gives Skype a short to medium-term competitive advantage.  Think: Microsoft’s own dominance of desktop computer software.

In the long-term (10+ years from now), however, I expect that the battle will be over packaging.  Huh, what does that mean?  The genius of the way that Apple has competed with Microsoft over the past ten years – after having received bailout monies from Microsoft, by the way – is that Microsoft so dominated software, that Apple was only left to compete in the hardware space.

Microsoft was the slut of software, meaning that it was computer neutral.  Microsoft software could be found on nearly every computer, whether it was a Hewlett-Packard, Compaq, IBM, Acer, Gateway or whatever computer.  Heck, eventually even Apple modified its operating system to allow for Microsoft software to run on it.  Apple software meanwhile was stuck on Apple hardware, not able to bridge over to the so-called IBM-architecture, or Intel-architecture.  Apple played with the cards it was dealt and did so very, very, very well.

You know the story: Apple made sexy, ultra-ergonomic hardware and then put super simple, elegant software on its computers.  Then Apple started created all kinds of crazy hardware that hummed the same mantras of beauty and ease of use.  Maybe you own an Apple computer, but most likely what you own is some sort of other piece of Apple hardware, like an iPod, iPad, iPhone or something else.

By contrast what kind of Microsoft hardware do you own?  Maybe an xBox, but name one other piece of Microsoft hardware?  I can’t name one.  Microsoft is a software business and this brings me to my first important point.

Microsoft’s emphasis in buying Skype is on selling software – in fact, it has stated that it wants to interweave Skype into its software to sell to make Microsoft software sexier.  But once all calls are video calls, then the real competition will switch not to the pure, raw functionality of video calls, it will switch to the trappings: ease of use, and hardware.  Here Microsoft has demonstrated the same amount of innovation in ergonomics that the old Soviet-bloc used to show in architectural beauty.

If Microsoft were smart – and as a long-time suffering user of Microsoft products, I don’t think they are particularly smart – they would start putting Skype everywhere, not worry about whether Skype software were interwoven with Microsoft software, and they would instead, focus on creating beautiful hardware and elegant ease of use around Skype.  Why is Microsoft so interested in Skype?

The company is so interested because it has been walking around with the equivalent of a limp the last ten years from the repeated butt-kicking it has received from Apple.  But buying Skype the way they are doing it, is the equivalent of getting a newer, sexier cane.  That is, Microsoft will still have the same limp – bad, complicated, unreliable software – but the thing they use to walk around – Skype – will be prettier.  What Microsoft needs to do is to re-learn how to defend itself – software that is more Apple-like and sexier hardware – and then re-learn how to walk.

Has Microsoft done this?  No.  In fact, its vision of Skype is basically “more of the same.”  Right now Skype has such a huge lead on any other video phone technology that Microsoft could, if it had the vision to, permanently destroy the competition the way Apple has destroyed any competition for the iPod.  But Microsoft has not done the same thing here.  Effectively, they are going to put brakes on Skype so that it can integrate it into its ailing, Goliath-structure.  But the reverse is what is needed.  Microsoft needs to integrate itself into Skype.

2.  Free.  How can you beat free?  Yes, Skype has a pay call service.  Yet, the free service is still so rockin’ that I have never even considered signing up for the pay-service.  I have not seen Skype’s usage statistics, but I am guessing that the overwhelming majority of its customers are using the free service.  Genius.  Skype has established a user base of over 170 million.  But now what?

Microsoft is hoping to emphasize Skype to a business community that will want higher call quality and thus, is more likely to pay for it as a way of reducing telephony costs, but increasing functionality.  Not a bad strategy.  But Microsoft is a huge, huge company.  My guess is that it will be 3-5 years until Microsoft sees a big difference in its bottom line.  And the real question is: how quickly can they sell into big business before the big telecom companies have their own offerings for corporate clientele?

Microsoft seems to be counting on the fact that the big telecoms don’t want Skype-like technology to take root and fear cannibalizing their current traditional telephony.  That is probably a smart assumption.  However, if Microsoft begins to slice off a piece of the business telecoms pie, you can bet that the likes of Verizon, Qwest, and the others will get religion quickly.

As for the consumer side of things, let me ask this question: what is the barrier to entry right now for someone wanting to compete with Skype?  Yes, there are some logistical issues, like server capacity, but primarily it is the familiarity of the Skype brand.  What happens if someone offers a better call quality than Skype and for free in order to siphon off Skype’s user base?  What can Skype do?  Improve its quality.  This could go back and forth, but then its a race to the bottom in terms of potential profitability.  How does Microsoft make money on Skype from you and me and enough to make a dent on its vast income statement?

Lastly, and this is actually the strongest reason for why I think that Microsoft will fail with Skype: Microsoft sucks.  And by ‘sucks,’ I mean that they suck the life blood out of the fun of computing.  They never offer anything innovative.  They have constant security breaches that require nearly constant software downloads to compensate for; and this takes tons of time and slows down computer performance.  Their software is always bloated so that it takes up tons of RAM and is slow.  They bundle together everything and offer no freedom of choice.  They never provide recompense for the crap that they create.  And I could go on.

You see I am that rare computer user that began on Apples and had them for well over ten years.  I got tired of the fact that Apple never had any software for sale when I would go to Barnes & Noble 20 years ago.  It was always a 6:1 ratio in favor of non-Apple software.  So I switched to IBM architecture and Microsoft.  That was never a problem for me until 4 years ago when I got my new laptop which runs Windows Vista, or should I say: my computer limps around with Windows Vista.

Microsoft always finds a way to screw stuff up because of the bureaucracy of its operations.  For Microsoft to truly benefit from buying Skype it needs to change how it does everything and I just don’t think that is what is going to happen.  It will be interesting to see just how long Skype’s founder sticks around.  That will be the litmus test for Microsoft being flexible enough to change.

In conclusion: Microsoft’s purchase of Skype won’t change Microsoft much, but it will change Skype.  That is, brakes have been put on Skype that will slow it down to a speed where others will now be able to compete with Skype, whereas before it was a race long-since won by Skype.

Jason