Microsoft Purchased Skype for $8.5 Billion (Primack, Essay

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Microsoft purchased Skype for $8.5 billion (Primack, 2010). This marked the third time in five years that Skype had been sold, first to eBay and then to a private investment group. The company filed for an IPO, but that never came to pass as Microsoft entered the bidding and took over. There have been significant questions from industry observers about the value of Skype to Microsoft, and whether Microsoft overpaid for Skype. Analysts have attempted to determine what Microsoft's plans for Skype are, and whether those plans justify the seemingly high valuation (Bright, 2011). Since the purchase, there have been a number of changes at Skype that have seen Microsoft seek to capture value from the company. One recent change, for example, is the pending launch of conversation ads (McCue, 2012). To better understand this acquisition, the business of Skype and the needs of Microsoft must both be taken into consideration. This paper will focus on the Skype side of the transaction in order to determine what value it brings to the transaction.

Mission, Vision and Values

As a subsidiary of Microsoft, Skype no longer publishes an independent mission, value or values statement. Some of this information can be interpreted from the company's website nevertheless. For example, the company bills its business as being the following:

"Skype is for doing things together, whenever you're apart. Skype's text, voice and video make it simple to share experiences with the people that matter to you, wherever they are." - Skype.com (2012)

This statements sounds like a mission statement. It describes in loose terms the company's business, which is actually Voice over Internet Protocol (VoIP), but broadly communication. Skype is used for both personal communication and business communication. The software is downloaded onto your computer or mobile device, and functions across a number of different platforms. Calls between Skype users are free, but other calls are not free, and customers must deposit funds into a Skype account in order to cover the cost of such calls.

Skype has a number of strengths that serve to attract Microsoft. Skype has 170 million users in total and upwards of 40 million online at any time, something that adds significant volume to Microsoft's own Live Messenger service (Bright, 2011). There has also been speculation that Microsoft made the purchase defensively, to counter the threat that Google or Facebook would acquire Skype (Bright, 2011). That would imply that the value in Skype is in the lost revenue or lost market share that would have occurred had a competitor been able to purchase the company. The intrinsic value of Skype to Microsoft is therefore only a component of the purchase price.

Competitive Analysis

Among VoIPs, Skype is a differentiated company, with the main points of differentiation being ease of use, the large user base and the low price. As a communications medium, however, Skype is positioned differently. Given that the mission statement seems to indicate Skype sees itself first and foremost as a communications software provider, its positioning must be viewed in this context. Using Porter's generic strategies, Skype would be positioned as a cost leader. Its service is offered at a lower price than the services of landline or mobile telecom companies, and with this strategy Skype pursues the mass market. The company's low pricing succeeds when volume is high enough. Microsoft is pursing the same strategy with Live Messenger, a function that has attracted a user base even larger than that of Skype.

The major strengths of Skype revolve around its ability to reach a broad audience. The company has an excellent brand name that attracts users. Although there are other VoIP services, including ones from very large companies, Skype is often the first one that is thought of by consumers and the first one that it recommended. This shows that Skype has exceptional brand power, and is the brand of choice for many consumers wanting to use this type of service. Another strength of Skype is that the company does have such a large user base. There are significant benefits with both parties in a conversation are on Skype (it is free at that point), so having a critical mass of users only serves to attract other users as well.

The critical weakness of Skype lies in its business model. The company struggles with profitability because it cannot generate a large enough user base to cover its costs. It offers telecommunications at a very low price and this have proven insufficient to turn a profit.

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There is no evidence that this has changed since Microsoft has taken over, although there are new revenue streams being developed at this point. However, the business model is such that the more people sign up to Skype, the lower the percentage of communications will be subject to charges. This inherently contradictory logic, and the fact that competition within the VoIP industry means that the policy is unlikely to change, is one of the reasons many observers question if Skype can ever be profitable.

In addition, there are product weaknesses. Skype cannot charge more for phone calls because the call quality is lower than that of competitors in landline or mobile telecommunications. There are more issues with respect to clarity, dropped calls and other elements of quality with Skype than there are with conventional telecommunications services. There is a perception that security with Skype is lower than with other modes of communication, something that prevents businesses from adopting Skype in large numbers and from paying for the service.

There are opportunities in the marketplace. Globalization in particular is an opportunity because it brings people from around the world together. It is not uncommon for people to have friends in other countries, and that creates greater need for cheaper ways to communicate internationally with people. Additionally, globalization results in a greater degree of global dispersion. Technology, however, allows people to retain touch with their roots. The result is greater demand for this type of communication to keep people together.

The biggest threat to Skype, aside from its own business model, is that there are a number of competitors also seeking this space. Prior to the takeover, Microsoft's Live Messenger had a bigger market share than Skype. There are numerous instant messaging services, from companies like Google, Yahoo!, Apple and Facebook. The VoIP industry is slightly less saturated, but the core technology is easy to replicate, meaning that any major tech competitor can enter the space with relative ease. There appears to be little besides Skype's brand power and installed base that make it a more formidable competitor than any number of these other competitors and potential competitors.

In general, the environment is only moderately positive for Skype. The most important consideration is the value of the underlying technology. There is nothing particularly innovative about what Skype does, and the core technology has been commoditized. When there is nothing special about a product, it becomes more difficult for one firm to differentiate from others. That differentiation, unfortunately, is the basis for being able to charge enough money to earn a profit (Ricknas, 2008). There is a question as to whether profitability is a concern at all for Microsoft, if Skype's main value to Microsoft is defensive.

The social, legal and political environments are generally in favor of Skype. There are few limits to operating a VoIP business. The amount of competitors in this space and the positioning of VoIP as a telecommunications service ensures that Skype is not going to face any antitrust issues any time soon. Socially, the trend towards globalization and the desire for cheap long-distance communication makes Skype desirable for many consumers, as long as it is offered at the right price.

The economic environment also is favorable for Skype. In general in tight economies, people look for ways to save money. A cost leader like Skype is positioned well against more traditional forms of telephony to attract customers, especially among communities where people are seeking to communicate over long distances. If the economic environment worsens, this could actually drive more people to Skype. However, consumers may reduce the amount of Skype calls that they make for which they must pay. Skype members may put more pressure on their friends and family to sign up for Skype so that the calls are free. The result under this scenario would actually be a reduction in the revenues for the company and an increase in the costs.

While most of the forces in the external environment are favorable for Skype, they are only moderately so. When the forces are very favorable, such as the trend towards globalization, the company's business model is only designed to capture users, not revenues. The major negative factors -- competition and technological change -- are significant negative factors that constrain the ability of Skype to increase its revenues. If the company focuses on existing technology in order to cut costs, however, it might become so archaic in its technology that it.....

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