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In 2011, Microsoft (NASDAQ: MSFT ) paid $8.5 billion to eBay and private-equity and venture-capital investors to acquire Skype, an Internet-based calling and messaging service. Despite now being associated with Microsoft, Skype remains, at best, an ancillary service to mainstream consumers. Recent public spotlight that shined on several mobile messaging start-ups may force Microsoft to find ways to brighten Skype's prospects, especially after the highlighted $19 billion WhatsApp acquisition by Facebook (NASDAQ: FB ) .
Skype's lackluster past
Skype has features and texting functions that are better than what other popular mobile messaging apps can offer, but it has yet to build a meaningful position in the Internet-based text messaging market. While other messaging apps such as WhatsApp require both the sender and receiver to register with the service, Skype allows users to text or call anyone, even if the recipient is not registered with Skype. However, if more Internet-based messaging services become available and claim a share of this alternative texting market, Microsoft risks losing its Skype investment without calling out a serious response.
If Microsoft's recent $7.2 billion purchase of Nokia's handset business is deemed excessive, as Fitch Ratings has stated, its spending of $1.3 billion more on Skype would have been considered extravagant. Subsequent running of the Skype business hasn't been impressive, and the former head of the underperforming unit is no longer with the company. The expensive Skype acquisition has yet to be justified by the unit's financial performance.
Skype's current state
The division that includes Skype was second-to-last in revenue contribution for 2013 , only ahead of Microsoft's beleaguered online services division, featuring Bing, Bing Ads, and MSN. On the other hand, the server and tools division, comprised of enterprise and cloud business and previously led by CEO Nadella, was No. 2 in revenue contribution, close behind top seller Microsoft Office.
Skype's weak performance may have been the result of a premature acquisition. In 2011, Microsoft had yet to formulate a clear strategy for mobile communication and was probably trying to leverage Skype's Internet-based communication capability through desktops. But, PCs would soon be convincingly taken over by mobile handsets.
Today, Microsoft still seems uncertain about how to better align Skype with its other offerings. On the company's website, Skype is grouped into services along with Bing, MSN, and Outlook.com, even though as a communication application, Skype is not just another online service. In the company's financial reporting, Skype falls within the device division that includes Xbox and Windows Phone. Bundling Skype (a software application) into the device division actually makes better sense, considering that any computing product or service is the result of hardware and software indivisible in one package.
Microsoft failed to foresee the trend in Internet-based mobile text messaging, even though it has had such a messaging app within Skype since 2011. Now, various messaging-app start-ups are leading the trend. Microsoft has missed out on something both when it wasn't in the mix of the handset business and when it was in the play for the mobile messaging service.
Now with its Windows Phone coming on the scene, Microsoft could use it as launching pad to move forward with its three-year-old Skype acquisition. Integrating Skype with Windows Phone could produce a business synergy that wasn't there before, potentially making Skype a more widely adopted Internet-based mobile text-messaging platform. Pre-installing Skype on Windows Phone may give Microsoft an advantage over other competing mobile messaging-app companies.
Without intricate social-network features as seen in other apps, Skype offers a simple and easy-to-use messaging platform. For example, Google Voice requires the use of a separate Google Voice phone number, which potentially places all communication under Google's watch. Social features for short and quick mobile texting may not even preferable for some users because of privacy concerns.
Getting Skype into mainstream use would be a boon to Windows Phone. Without adding competitive features to its Windows mobile platform, Microsoft risks seeing its Windows phone becoming irrelevant someday when iPhone, Android, and even BlackBerry all have a wealth of supporting features and applications.
Microsoft may eventually make good on both Skype and Nokia acquisitions, worth $15.7 billion in combined value. With comparable pricing and features beyond messaging, Skype could position itself competitively among other mobile messaging app services. In the long run, Microsoft may look to the possibility of a mobile handset with built-in, Internet-enabled calling and messaging capabilities. Such a device could potentially render useless today's mobile messaging apps and upend Facebook's $19 billion purchase of WhatsApp.
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