Microskype

I have posted at some length over the past few years about the need for Microsoft to go out and do something to remain relevant as a market-leader in the technology space rather than clinging to their established, diminishing positions dominating the desktop.

Buying Skype was not what I had in mind.

The market seems to agree this morning, with MSFT down almost two percent at the open. That is a common pattern in acquisitions, the purchaser often being punished while the purchasee (a confusing concept in this case, but as far as the market is concerned, 30% stakeholder EBAY) is rewarded. Still, Microsoft has been in the doldrums for most of the past decade, investors waiting for some bold breakout move where the company uses all those smart people and the big piles of cash it has laying around over there in Redmond to catapult back to the forefront of the tech industry. Clearly, this wasn't the move they were looking for.

I like to try to keep an open mind about these things, but I can't really see how Skype is anything other than another floundering move by an executive suite that doesn't quite know what to do next and has no grand strategy for recovering market pre-eminence. The cynical market view is that it's basically a way of buying cash-flow, and that may be true, but it seems to me more like another Bing: an effort to get into an apparently hot segment (VOiP in this case, search with Bing) without demonstrating any real understanding of that market or how it might leverage or impact their existing strengths.

Maybe I'm wrong and there is a secret plan on Steve Ballmer's desk that uses Skype to revolutionize the rest of the company's offerings. I just don't see it right now. At this point, I would kind of like this assessment to be incorrect; I am getting tired of picking on Microsoft, and when all is said and done they remain an important contributor to the local economy here in Seattle and a source of some stability. It's fun to needle the schoolyard bully, but not the asthmatic kid with thick glasses who pathetically chases the cool kids around the playground wanting to play. Microsoft is starting to wheeze a little.

UPDATE: Todd Bishop points out that in fact, this acquisition is an excellent fit with the Kinect, a surprising hit out of the Entertainment and Devices division. For that matter, there are potential applications with Windows Phone. So there are some synergies available.

I don't see that as a significant move, however, and in fact if that is where Skype is destined to fit into the Microsoft family, I would say they badly overpayed for the capability. CNBC just pointed out that Skype is not a revenue generator either, contrary to what I said above about buying cashflow. So eight billion to buy into a money losing operation when all you wanted to do was hook up Xbox's and handsets doesn't seem like a good deal. A connectivity partnership probably could have been done with Skype as a distinct entity for next to nothing, to the same ultimate effect.

Even if the effort is wildly successful, the best thing it can accomplish is to bring Entertainment and Devices out of the doghouse to start earning its keep. The division is barely profitable as it is. It is extremely difficult to envision a future in which it becomes the savior of the company, no matter how successful the Kinect has been. And I doubt that either the board or the company's stockholders would be content with a Microsoft that decided to focus on gaming and devices to the detriment of servers and desktops.