Still Think Microsoft Overpaid for Skype?

It's been nearly two years since Microsoft (NASDAQ: MSFT  ) paid a whopping $8.5 billion for the VoIP service Skype, its largest acquisition ever. Naturally, a deal of that magnitude elicited its share of questions: How do you monetize Skype to warrant that kind of price tag? How will Skype integrate with Microsoft's other enterprise-related services? And, most of all, when will investors begin to see a return on Microsoft's investment? Thankfully for shareholders, Microsoft is beginning to answer some of those questions.

A few answers
It's too early for Microsoft to answer all the concerns surrounding its Skype purchase, but a recent report detailing the growth in international phone traffic should help appease some of the naysayers. According to telecom research firm TeleGeography, international calls increased 5% in 2012, to 490 billion minutes. But overseas calls don't take into account VoIP or messaging apps, like Microsoft's Skype; and this is where the numbers get interesting.

As large a market as the international telecom sector is, its growth pales in comparison to Microsoft's service. Skype's international voice and video traffic rose to 167 billion minutes in 2012, a 44% increase compared to 2011. To put that in perspective, the growth in Skype's usage last year was more than double that of traditional international phone carriers combined. Better still, international calls, including group video and select business features, actually generate revenue for Microsoft, unlike the free Skype-to-Skype calls many of us are used to.

Microsoft didn't provide revenue details of its Entertainment and Devices unit last quarter. However, Microsoft's Xbox unit sales did drop 2 8% compared to a year-ago, equating to a $1.1 billion decrease in revenues for the unit. But, even with the decline in Xbox sales, Microsoft's entertainment and devices revenues of $4.15 billion were comparatively flat compared to 2011.

Where did Microsoft's entertainment and devices revenue come from, if not Xbox sales? Even factoring in a number of one-time charges last quarter, there's more going on here than simple accounting -- one look at the staggering growth in Skype usage speaks to that. Microsoft CEO Steve Ballmer is notoriously mum when it comes to providing specific sales results, but it's not a stretch to infer a 44% jump in Skype usage – especially usage that generates revenues – played a part in making up for its lack of Xbox sales.

Not alone
Microsoft is hardly alone in the VoIP and video conferencing space, and the primary players are significant. But with the kind of growth Microsoft is seeing in its Skype unit, you can bet the gloves are coming off at Google (NASDAQ: GOOGL  ) , and even its current VoIP partner, Facebook (NASDAQ: FB  ) .

With an expected $15.4 billion in revenue generated in the VoIP market this year, Google's Voice service is going to get some serious attention from CEO Larry Page. Google has already announced its VoIP service will remain free in 2013 for the U.S. and Canada markets, but will charge for overseas calls. Revenues are always nice, but for Google, Voice is (yet) another means of seamlessly running apps, and retaining customers, on its plethora of Android OS devices. And if Google's good at anything, it's keeping users around long enough to generate advertising revenues.

Facebook is the most intriguing competitor for Skype, in large part because of its partnership with Microsoft. Microsoft provides Facebook users' out-of-network searches using Bing, which doesn't pose a conflict, at least until the full capabilities of Facebook's Graph Search come to fruition. But Facebook's Jan. 16 announcement of its new iOS Messenger domestic calling feature raises all sorts of questions. With over a billion users, Facebook can throw some serious weight around. Skype may be the leader in VoIP services today, but Facebook and all those users can't be overlooked.

The market for Skype is new enough that Microsoft can find more ways to maximize its revenue potential, particularly as the service is utilized by more commercial customers. And news that Microsoft is going to step-up its scheduled transition for its Messenger customers to shift to Skype should give the already growing service a shot in the arm.

In the meantime, Microsoft's new Windows 8 will provide it the opportunity to seamlessly meld Skype with search, smartphones, tablets, Office 365, and a host of other services, into a nice, tidy package. With incredible growth and massive potential, Microsoft shareholders will find the $8.5 billion price tag for Skype might not have been as bad an idea as they had originally thought, after all.

With the release of Microsoft's own tablet, its burgeoning enterprise business, along with the widely anticipated Windows 8 operating system, the company is looking to make a splash in new markets. In this brand-new premium report on Microsoft, our analyst explains that, while the opportunity is huge, the challenges are many. He's also providing regular updates as key events occur, so make sure to claim a copy of this report now, by clicking here.


Read/Post Comments (4) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 16, 2013, at 5:25 AM, 4melody wrote:

    Skype, Windows 8, Xbox, Office 365 what's not to like!! Future looking positive for Mr. Softy.

    ~ mkp

  • Report this Comment On February 16, 2013, at 11:18 AM, Rake80 wrote:

    My personal experienc: Skype got worse in the last few years. Just compare skype quality with facetime, and you will know what a good VoIP looks like.

  • Report this Comment On February 16, 2013, at 2:46 PM, avj401 wrote:

    of late any good news about MSFT , in the end there has to 10x negative about MSFT.

    Ohh I forgot , in every msft news article , all these writers need to pay homage about how good google is and how google competing product will gain mkt share.

    Are all these writers so afraid of google banishing their articles to a lowest rank in their search algo.

    there seems to be relentless bashing of msft and now they have added apple to their list.

  • Report this Comment On February 17, 2013, at 10:49 PM, pryan37bb wrote:

    avj401: "Ohh I forgot , in every msft news article , all these writers need to pay homage about how good google is and how google competing product will gain mkt share.

    Are all these writers so afraid of google banishing their articles to a lowest rank in their search algo."

    That's the dumbest thing I've ever heard (or at least in the last few weeks). Do you really think the majority of readers find these articles by Googling them? No, they're either Fool members, or they were directed here because a stock they're watching was tagged. I highly doubt the authors give a rat's behind what Google thinks about their content.

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