Why did Microsoft buy Skype?

So, yesterday’s big rumour that Microsoft would acquire Skype actually materialized to be true.

Microsoft took a bold step in the battle for control of the consumer internet on Tuesday with a $8.5bn (€5.9bn) acquisition of online telephone service Skype, its biggest acquisition and a deal that broadens its competition with Google and Apple. (Financial Times, 10 May 2011)

From what I’ve been able to gather the general consensus seems to be behind the acquisition but not the price paid. It is clear that Microsoft needed to do something dramatic in order to stay competitive in the Internet space. Although, Microsoft already has very similar products it has not been able to develop these services to the same level as Skype. Especially in the sector of video calls where Skype has been ruling the mindshare and that Apple is heavily emphasizing in their latest products with FaceTime. It was widely rumoured that Facebook and Google were also in talks with Skype. Although we don’t know this for sure it seems likely that part of the reasons why Microsoft was willing to pay such a huge premium was to keep Skype from falling into the hands of Google. In many ways keeping an asset like Skype away from Google might by itself already have been worth the 5.9bn euro price tag.

Naturally 5.9bn euro is a huge amount of money, but for a company like Microsoft, that spends billions in R&D every year, it’s pocket change. Actually, 5.9bn euro is just 17% of the cash Microsoft had on their balance sheet at the end of the quarter. In fact Microsoft made more money in Q1 than what they spend on Skype. Even if they would make no money from this deal at all, they would still only loose the sales of just one quarter.

Yes, the deal was expensive but like Microsoft CEO Steve Ballmer put it “be more ambitious, do more things.” It all depends on how Microsoft is planning to use Skype. It seems very likely that Microsoft will integrate Skype into the Windows Phone OS to compete with Apple’s FaceTime and whatever Google will come up with. At the moment Nokia’s N900 is the best example of Skype integration done right. Hopefully Microsoft will take note and excel on that.

There have been analysts who have said that this deal will not affect or benefit Nokia. If Microsoft bought Skype in order to integrate it into WP, I say those analysts are completely wrong. Skype integration will make WP as a platform stronger and more appealing. And at the moment Nokia is Microsoft’s Windows Phone strategy. How can a more appealing Windows Phone OS not have a positive impact on Nokia? After all Windows Phone is all about creating a third ecosystem.