Skype: has Microsoft's $8.5bn spending paid off yet – and can it? - The Guardian

In May 2011, when Microsoft announced its planned purchase of Skype for $8.5bn (£5,5bn), I called it "a gamble unlikely to pay off".

Just over two years later, has the gamble in fact paid off – or does it show signs of doing so?

In my analysis at the time, I argued that

After paying $8.5bn for Skype, what will Microsoft end up with? In a few years, I forecast it will be this: $8.5bn less in its bank accounts, a cats-in-a-bag fight between its Office division and its Online Services division over integration of the service, little – if any – kudos from consumers, and no appreciable effect on its bottom line.

I also argued that the bad parts of the integration would be that
• Mobile carriers would not like the threat to their voice business from data calls, nor the threat of phones that ran Skype becoming "superpeers" and affecting bandwidth

• Problems monetising it: revenues at the time – $860m for the year, losses of $7m – amounted to just $1.30 per user per year

• Difficulties integrating it into other Microsoft products and divisions

• Strategically, it didn't fit into other Microsoft offerings for consumer or enterprise – apart from the possibility of integrating it into Office and business switchboards which use VOIP services

• Being peer-to-peer, it's inherently unreliable; not a good fit for Microsoft, which big businesses rely on

• Microsoft already had two VOIP offerings – through Xbox Live (30m accounts then) and Microsoft Messenger (260m accounts then). Crunching them all together into a single user account looked like a hellish task which wouldn't be welcomed by users

• Skype is a consumer brand, but traded on its "upstart" nature; trying to monetise it too rapidly or thoroughly would turn people off.

So let's look at the picture now.

Financially

It's impossible to know how Skype is performing financially, because all of its figures have been rolled into the Entertainment & Devices unit (which housed the Xbox and Windows Phone divisions, among others), and individual numbers haven't been broken out for the company.

Microsoft Entertainment & Devices division revenue by quarter, from July-Sep 2009, showing date where Skype joined

Looking at a graph of the E&D division's revenues since mid-2009, you'd be hard-pressed to say where Skype joined it. There's no noticeable change in the revenues beyond the seasonal one (when the Xbox tends to sell well). If Skype added $200m per quarter to the E&D division revenues, it managed to hide it well. (In fact, it's reckoned that patent licensing from Android handsets and tablets is generating a billion dollars a year for E&D – a tidier revenue stream than Skype, since it is virtually all profit.)

Microsoft wouldn't offer any financial details when I contacted it this week. "For Q4 FY13 [which ended in June 2013], Skype users made more than 162bn minutes of calls, an increase of 41% from the prior year's fourth [fiscal] quarter," a spokesman said. No words on how many of those are SkypeOut (paid) calls which would generate revenues.

Conclusion: no sign that Skype has made any positive (or particularly negative) impact on Microsoft's business.

Usage

How about usage? "Since joining Microsoft, the number of users connecting each month has gone from 196 million to 300 million," the company said.

And what's more: "Skype users made 2bn minutes of calls in one day in spring 2013."

So clearly, more use is being made of Skype. But is it growing faster, the same, or slower now it's inside Microsoft? That 196m-to-300m growth looks promising; it's 53% up since October 2011 (when the acquisition closed).

In 2012, there were unofficial reports via Techcrunch that Skype was seeing strong growth: a peak of 45.5 million users concurrently in September 2012, "part of a strong run … [which] has seen an increase in concurrent users of 70% so far in 2012, compared to growth of around 30% for the same period in 2011."

That kept going, until earlier this month Skype seemed to have 70 million people online concurrently. That would be 53% growth (coincidentally) from that September 2012 figure.

But that might not be what it seems, according to the the Skype Numerology blog, where the author, Jean Mercier, reckons that

The phenomenal growth of the Skype concurrent users online (see the number at the bottom of your Skype client window for older versions or the Skype RSS feed here) is clearly due to the availability of Skype through Outlook.com (the former hotmail service of Microsoft) as announced some days ago here.

But –

if I understand it well, everybody (from a limited amount of very important countries) has Skype enabled whenever they go into their Outlook.com account. Therefore they come online without really asking for it!

Second, some people have probably not merged their Skype account and their Outlook.com (or Microsoft) account. Therefore they are twice online on Skype . This is therefore (temporarily?) inflating the real number of persons online.

Mercier thinks those numbers are therefore inflated by some double counting. We also don't have strong historic numbers for Skype growth (there's lots of confusion between registered users, concurrent users, and monthly users; all are offered, but none consistently).

Certainly, Skype is bigger than ever before. But that might be expected. Being added to Outlook can't have hurt.

Integration
Microsoft told me this week: "Generally speaking, Skype should be thought of as a critical component of our 'devices and services' strategy that Steve outlined in detail in last year's shareholder letter. As Steve said in his recent memo when announcing changes to the way the company is organised: 'The bedrock of our new strategy is innovation in deep, rich, high-value experiences and activities. It's the starting point for differentiated devices integrated with services.'

"That of course involves having an expanding base of first-class, integrated services, particularly in the increasingly critical realm of real-time communications. Skype is a vital part of that."

Skype, the company points out, now connects directly into Office 365, Xbox, Windows 8, Bing, Microsoft Messenger, Windows Phone and Lync, its business-oriented VOIP solution, and soon into Outlook.com for everyone.

"In fact, the Lync and Skype engineering teams were brought together some time ago, which enables us to further build a first-class communication experience for Skype and Lync users," Microsoft says. "The overall strategy and goal for the future is to continue to introduce new ways for people to connect and to push the field of communications to benefit both consumers and organisations and businesses. We wouldn't be in the position we are today, with a lot of great current and future offerings, if it weren't for Skype."

Certainly, integration of Skype into all those offerings is what the purchase should have been about. And it does look as though Microsoft has pulled it off.

Integration into Office 365 is a key achievement. It means that Skype becomes part of both the office and consumer environment – important for Microsoft in trying to become part of the fabric of our lives.

But has it pulled off $8.5bn worth of integration? The deal closed on 14 October 2011; at that time, Microsoft was worth $229.3bn on the stock market.

Fast forward to today, and it is worth $277.1bn – an advance of $47.8bn. Part of that will include cash accrued through Windows and Office sales.

But you could certainly argue that even though Microsoft can't point to cash coming through the door from Skype, it has managed to integrate it into products and so leverage what was a breakthrough technology.

Moreover, acquiring Skype has had a strategic – and competitive – benefit. It has put Microsoft into the middle of communication between people, unobtrusively. And it has also left Google obliged to come up with its own video technology, in the form of "Hangouts" – which it has been obliged to push hard in seeking to reach the public. The problem with Hangouts is that pretty much nobody in the world outside Google, or technology, has heard of them.

Skype, by contrast, is pervasive, known by old and young alike: One Direction's Zayn Malik shares "romantic chats on the internet" with his fiancee Perrie Edwards (it says here): "We miss each other. We've got Skype as well. That helps," he told Metro.

In that, Microsoft has succeeded in making Skype useful to its own business in a way that eBay, which bought and then sold it earlier in the century, never did. People always expected that eBay would build Skype into auction pages for instant calls; but that overlooked the reality that sellers didn't actually want queries from buyers.

Microsoft, by contrast, doesn't have to force Skype on anyone. Just owning it is a strategic benefit.

Conclusion

Has Microsoft made Skype pay off? It's been less than two years since the acquisition – but it has moved fast. It would be unreasonable to expect $8.5bn of value to appear that rapidly.

But it clearly hasn't been wasted, unlike other high-profile acquisitions – notably aQuantive, an ad business which Microsoft bought in its second-largest takeover for $6bn in 2007. In July 2012, it was forced to write down $6.2bn of aQuantive's value – forcing it into net loss for the quarter.

With 10 years behind it, there's every possibility that Skype will have at least another 10 in front – and almost certainly inside Microsoft.