How will you communicate, now Microsoft has swallowed Skype?

Melbourne Herald Sun, Friday May 20, 2011

My family is widely scattered. My mum's in Italy, while there's a daughter in Berlin and a son in Shanghai. So I discovered Skype pretty early, soon after they started in 2003.

This wonderful internet phone service allowed me to talk to my kids, computer to computer, for free. At a time when the phone services were charging 50 cents a minute.

These days the service connects with 170 million users and offers teleconferencing, video calls, text messages and much more. All for free or for very low cost compared to the carriers.

But free calls don't mean no value. Last week Skype was sold to Microsoft for eight billion dollars.

This completes a remarkable world circuit. The program was devised in Tallinn, Estonia, of all unlikely places. The developers sold it after two years for $3.6 billion to eBay (not a bad return for two years' work, I remarked at the time).

But they weren't the only sharp boys around. In 2009, after eBay had lost considerable money on the deal, they happily sold two thirds of the company to venture capitalists Silver Lake and the likes of Andreessen Horowitz (remember Netscape?) for a mere $2 billion.

Now, another two years on, lay down the royal flush. Silver Lake clinched the deal for $8 billion. An even better profit for two years' work. Boy, how money flows when you're in the right place.

So what are Microsoft going to do with it? For a start, Skype came with massive losses, it has never made money. That's always a problem when you give your service away for free.

Oh sure, some of their products are paid for, like Skypeout which allows users to connect with actual land lines or mobiles anywhere in the world. But these were never enough to wipe out the huge losses. As it was, it came with $600 million debt.

Of course to Microsoft this is just peanuts when their objective is elephants.

They are aiming primarily at Google, which they see as their biggest threat. Google has been adding services at a dizzying speed. The mobile phone system Android is a direct competitor with the Windows 7 mobile phone. Google Chrome is building against Internet Explorer.

But with Skype, Microsoft can now compete with Google Video and Voice. Both sides will be hard at work building up their capacities.

The most sensible thing eBay did was to leave Skype to its own devices. Under the corporate umbrella, but without the corporate straitjacket, Skype flourished and developed its huge range of services and cloud farms.

Microsoft boss Steve Ballmer says he plans to connect Skype to Microsoft's Outlook e-mail, Xbox game console, Windows mobile phones and corporate-phone software. But will he allow his new Skype division the freedom it needs to flourish, or will it be smothered in the Redmond embrace?

At the press conference announcing Microsoft's biggest ever takeover bite, CEO Steve Ballmer went out of his way to promise that Skype will continue to support non-Microsoft platforms and operate as a separate Microsoft division.

Well will it? We can expect to see a longer-term objective with Microsoft making serious competition with the likes of Cisco, AT&T and locally, Telstra. These are much deeper waters than the Skype team has ever fished in. They are going to need all of their parent's muscle and resources to stay afloat.

Which of course leaves the question, how long can Skype continue to be free? Forever, we hope - but I don't know how much I'd bet on it. Somehow the bean counters will want to see some repayment of that eight billion bucks - and a hefty profit on top.


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