Microsoft's Skype deal all about stopping others using it against them

WIRED:Microsoft clearly benefits from Skype not being in the clutches of its competitors

WHAT ARE we to make of Microsoft’s purchase of internet videophone service provider Skype for $8.5 billion (€5.98 billion)? Market analysts are claiming the stock market liked it, with gains across the board. The verdict of internet discussion boards seems to be that Microsoft has bought a clunker with the loss-making Skype, but then the Deep Internets were never great fans of Microsoft. Ben Horowitz, of investment fund Andreessen Horowitz, thinks it’s a good move, but then he would: he was part of the team that bought 65 per cent of the company from eBay for $2.75 billion in 2009.

By far the most unexpected analysis, though, came from author Steven Levy, whose fascinating insider story of Google, In the Plex, was published last month. Levy recounted a discussion with an engineer at Google, Wesley Chan, who claimed it was he and Sergey Brin who hatched an internal plot to sabotage Google's board plans to purchase Skype in 2009. Both Brin and Chan agreed it would be ridiculous to bring Skype, a technology that depended on decentralised peer-to-peer data transmission, to Google, a company whose expertise lay in centralised cloud storage and communication.

In order to sabotage the merger, which had majority support, Brin had to practically pull a tantrum in a key meeting, and storm out.

Whether Skype would have been a good fit with Google is unclear. It certainly wasn’t a good fit with eBay, which floundered in working out what to do with the telephony service. But is it any better a fit with Microsoft?

It could certainly improve Microsoft’s own products. Skype has considerable market penetration in Microsoft’s core office enterprise markets, as well as among consumers. Simply embedding and expanding the service within Microsoft’s Office and operating system products would help establish any remote co-operation and communication systems that the company is planning.

That includes Microsoft Lync (previously Microsoft Office Communications server), which has been Microsoft’s competitor in the corporate instant messaging and telephony world.

But could it provide a small part of Microsoft’s $8 billion worth of improvement? As Google argued internally, they could probably come up with a more “Google-ish” Skype competitor internally – and indeed did, with Google Voice. Microsoft already has plenty of internal resources to continue work on a Skype-alike.

The other arguments for purchasing a company are to buy up key talent, and for the audience. It’s unusual, but not unheard of, for Microsoft to buy for the audience, given it already has the largest desktop computer user base in the world. It did purchase Hotmail in 1997 for its 8.5 million users.

Horowitz says Skype has an active user base of 170 million, with 500,000 sign-ups every day. But Horowitz argues for the talent purchase: Microsoft bought Skype because it has technical talent who are still innovating.

Big companies often struggle to keep such talent after a buyout, but Skype managed to keep its team through eBay’s far muddier purchase. They also struggle to preserve both the talent and the product. Both Google and Microsoft have reputations for engulfing companies and then scattering their most brilliant engineers and executives to the far corners of their empire, there to languish like discredited courtiers while their original product withers from neglect.

My gut feeling is that Skype will live: its team must have developed some pretty powerful big company immunities during the eBay years, and Microsoft recognises the value of a brand as global as Skype.

Its product and technology will probably spread into other parts of Microsoft’s technology set, but slowly and with little impact.

And whatever happens, it will not bring $8.5 billion more profit or even revenue to Microsoft. But these purchases rarely do. Microsoft has $50 billion cash on hand, and limited ways to use it. That means that, if Microsoft wants Skype within its reach, and the price for Skype is in the billions, the company will seriously consider paying at that valuation.

What sets the price for Skype is as much about how others value it. And there might lie the real reason for the valuation and the purchase. There have been strong denials that Skype was being courted by other companies, but both Google and Facebook have nonetheless both clearly considered taking Skype on board.

Skype was known to have abandoned an IPO earlier this year, which made it particularly vulnerable to a buyout.

If Microsoft might struggle to know what to do with Skype in its own house, it clearly benefits from not having Skype in anyone else’s. If you’re interested in Skype, you’re probably a competitor on some level with Microsoft, whether you are in the telecommunications, entertainment or internet services sectors. And right now, Microsoft’s real fight is not to innovate, but to maintain its market share against increasingly threatening rivals.

Reaching out and snatching Skype has less to do with what that entity can do inside Microsoft, and more to do with what damage it might do outside the software giant. Keep your friends close, and your enemies closer: but keep the weapons either might use against you closest of all.