Original URL: http://www.theregister.co.uk/2011/05/10/skype_microsoft_analysis/

Would Microsoft's Skype buy strengthen Lync or push it off a cliff?

Talk is cheap, and $8bn is a lot

By Kelly Fiveash

Posted in Broadband, 10th May 2011 11:14 GMT

Analysis Is Microsoft preparing to school Skype in technology that it recently described as the "next generation of unified comms", or has the company spotted a hole in its VoIP strategy that can only be filled by an expensive acquisition?

Worse than that, might Redmond simply be circling Skype with a potential multi-billion dollar deal in an effort to bag the company before its webby rivals Google and Facebook dive in?

Rumours about talks between Skype and several high profile internet firms have been ricocheting around for some time now. Most recently, it looked as though Facebook and Google might slug it out in a sweaty dancefloor grab for Skype.

Partnerships rather than a quick buyout looked more likely, up until now. Skype seemingly made its intentions pretty clear last year: to take the company public, eventually. In the meantime, its valuation has rocketed in line with other social media properties such as LinkedIn and, of course, Facebook.

As I've previously noted, all the noise and chatter among the networking2.0 classes may simply have been an effort, orchestrated by Skype's CEO Tony Bates, to woo a big name buyer to its door.

If a report in today's Wall Street Journal proves to be correct, Skype's daddy could soon be Microsoft, which is reportedly ready to part with between $7bn to $8bn to acquire the Luxembourg-based company.

Should such a merger take place, immediate questions arise about what this means for Microsoft's own unified comms platform – in the shape of Lync, which has undergone a recent rebranding, having been folded into the software giant's Office 365 beta effort last year.

Indeed, just last November, Microsoft wheeled out Bill Gates to anoint its software, which was previously dubbed Office Communications Server.

The Lync product, according to Microsoft's official blurb, brings together instant messaging, presence, audio, video, web conferencing and voice under one roof.

So would Skype's technology complement that existing service, or might it altogether replace Lync?

Gates made the following hyperbolic statement about Lync last year: "Unified communications is far stronger today than when we started on this path.

"This is probably the most important thing to happen for the office worker since the PC came along."

Six months on, and Microsoft could be on the verge of buying Skype. If it's true, is MS acknowledging to the world that the path it has been on with Lync – which is supposed to be slotted into the finalised version of Office 365 later this year – was ultimately a dead end in development terms? And is Skype the only way out of that technology dirge?

Alternatively, Redmond simply believes that VoIP is the final piece of the jigsaw for its unified comms strategy – albeit a massively expensive piece.

There's more, so much more

And Skype could find its way into a mass of other Microsoft product lines. It could form the basis for a Apple Facetime competitor for Windows Phone 7 and flesh out the Windows messenger offering. It could also extend the Xbox Live service.

On the other side of the walled garden famously erected by Skype, readers might want to consider the VoIP company's inglorious record of serving its parent obediently.

In September 2005, online auction house eBay baffled many when it bought Skype for $2.6bn. When earnouts were included, the company actually paid over $3bn for the VoIP outfit. A little over two years later, eBay wrote off $1.43bn of the value of the acquisition.

By September 2009, eBay finally offloaded a majority stake in Skype to a gaggle of investors in a deal that valued the VoIP outfit at $2.75bn. The online tat bazaar kept a 35 per cent stake in Skype and got $1.9bn in cash for its trouble.

At the time eBay predicted that Skype would be making $1bn in revenues by 2011.

But cut to Skype's IPO statement filing in August 2010 and it was clear that the popular VoIP outfit remained wide of that mark.

In the first six months of 2010, it pulled in net sales of $406.2m and net income of $13.2m. Skype scored 2009 revenues of $719m, but also lost $99m in the same year.

And that just about brings us up-to-date, other than to point out that Skype said in March this year it would begin testing advertising on its service, which has recently drawn criticism from some of its users for not being as stable as it once was.

Since then, early stage talks with Google and Facebook have been cited. But Microsoft swooping in to buyout the firm, really?

Returning to Skype's IPO statement from last year offers a reminder that the two companies have more in common than they might seem to do on the surface.

Skype's current general manager David Gurlé worked at Microsoft for four years. He founded and ran Redmond's real time communications business in the early Noughties. Perhaps there is some synergy in a potential merger, after all. ®