Microsoft gets voice, video – and Skype fans worry

Microsoft CEO Steve Ballmer foresees the time when talking to people around the world is as easy as talking to those in the same room.
Microsoft CEO Steve Ballmer foresees the time when talking to people around the world is as easy as talking to those in the same room. (PAUL SAKUMA / Associated Press)
Posted: May 12, 2011

Microsoft's $8.5 billion deal to buy Skype is the latest reminder of a simple dictum: As rapidly as technology is changing our world, nothing changes as quickly as technology itself.

A decade ago, nobody had heard of the Luxembourg company - it was launched in 2003. Today, Skype boasts 170 million regular users, nearly $1 billion in annual revenue, and annual growth rates of 20 percent to 40 percent.

Skype is profitable, if just barely. What it offers to Microsoft is access to a technology that has captivated a generation of users by offering exceptional services - worldwide computer-to-computer phone calls and video calls - at a price that literally can't be beat: free.

Success is often elusive in any merger or acquisition, especially when entrenched corporate cultures collide. That was a common theme this week as word of the deal leaked and once it was formally unveiled Tuesday.

Among many Skype fans, the instant reaction was that the Evil Empire was buying and threatening to enslave R2-D2 - a cool and innocent technology that we've all come to love, if not to pay for.

It's worth noting that not too many years ago, Microsoft itself was the one helping to turn an established industry on its head: the world of mainframe computers long dominated by companies such as IBM.

Skype CEO Tony Bates generously made that comparison at his joint news conference with Microsoft's Steve Ballmer, where Bates said that Skype "was founded around very disruptive and innovative software, very similar to the founding DNA of Microsoft."

Skype's technology and business model are indeed disruptive and transformative - another of those overused descriptors that cropped up during Tuesday's news conference as Ballmer described the deal's potential and envisioned a future where "talking to friends and colleagues around the world will be as seamless as talking to them across a kitchen table or a conference room."

Maybe there's a reason Skype rhymes with hype, but who knows? There's no denying that Skype has already had an outsized impact. As just an occasional user, I've already benefited from Skype in memorable ways. I've gotten tours of my daughters' college dorm rooms, met their friends face-to-face, shared holiday and birthday festivities via video, and let them each catch glimpses of their beloved (and utterly clueless) dog.

Here are some answers to questions about what the Skype deal could mean:

Will Microsoft start charging for Skype's free services? Sadly, there's nothing that counts as a promise otherwise. "Asked specifically whether Skype would remain free, Microsoft said it is not commenting on how the product or features will change," according to Microsoft's hometown Seattle Times.

Still, there's at least some reason for users to hope that Microsoft will tread gingerly on Skype's initial success. Skype already generates revenue by charging for add-on services, such as calls from computers to landline or mobile phones, cheap international text messages, and multiparty video conferencing, and has recently begun to cash in on ad sales.

"I can't see why they would start charging," says Kevin Werbach, a telecommunications expert and associate professor at the University of Pennsylvania's Wharton School. "I don't think this deal makes sense for Microsoft if it's just trying to monetize today's Skype."

Why does Microsoft want Skype? For all its successes, Microsoft has stumbled as it tries to keep pace with key rivals such as Apple and Google, which have both made major inroads into telecommunications - Apple via its iPhone, and Google with products such as Android phones and Google Voice.

Microsoft sees obvious roles for Skype through integration with its traditional PC software and via its latest horse in the wireless race, Windows Phone. But it also sees roles in less-obvious contexts. With Xbox and Kinect, Skype could improve communications in multiplayer games. With Outlook e-mail or Windows chat programs, it could allow a user to jump seamlessly from a Web interaction into a voice or video connection.

"I don't think there's any product that Microsoft offers where there's not some potential way to integrate voice and video," Werbach says.

What happens next? Werbach says the deal's key is that it enables Microsoft "to buy its way into the next generation of the telephone business," a business less tethered than ever to traditional voice networks or to voice itself.

With its worldwide footprint, a top-notch technical team, and an innovative hybrid architecture that builds on the efficiencies of peer-to-peer networks, Skype has the potential to give Microsoft a foothold in a large and growing business.

Werbach says that Microsoft has long yearned for a new growth market to supplement its Windows and Office cash cows - a goal that earlier attempts, such as its gaming initiatives, have not fulfilled.

"The scale of this acquisition suggests that they see voice and video communications as that new opportunity," Werbach says.

But it's an open question whether this big opportunity for Microsoft will yield a big disappointment for Skype's millions of fans.


Contact columnist Jeff Gelles at 215-854-2776 or jgelles@phillynews.com.

 

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