Skype and Microsoft: Your Cheat Sheet to the Good, Bad and Ugly

Today’s huge mergers and acquisitions news is Microsoft’s (NASDAQ:MSFT) move to snap up Skype. Andreessen Horowitz VC Ben Horowitz already explained why he things the deal is a winner, but he owns Skype. So, we put together a more comprehensive Cheat Sheet for you to consider as well:

The Good for Skype and Microsoft

1) Skype is an awesome brand (worldwide!) that has survived because it works great.

2) Skype has figured out how to monetize something that Microsoft (NASDAQ:MSFT) has not — more than 8 million of the nearly 130+ million active users pay for Skype service, whereas none of Microsoft’s 330 million active users pay.

3) Skype has local network access all over the world, giving Microsoft a more solid global presence.

4) Skype’s telephony infrastructure will add nicely to many Microsoft products, including Windows Live Messenger, and could be really inventive once you start thinking about Xbox and Windows Phone 7 (although the carriers might try to kill this attempt or Windows Phone or both). Microsoft could even swap out its new Lync Communications Service with Skype, who knows? For sure it will be more competitive against Google Voice (NASDAQ:GOOG) and Apple FaceTime (NASDAQ:AAPL) in both the PC and mobile arenas.

The Bad for Skype and Microsoft

1) Buying Skype for $8.56 billion is probably more about making sure Google (NASDAQ:GOOG) and Facebook don’t get it than Microsoft (NASDAQ:MSFT) really knowing what it intends to do with it.

2) Microsoft already has most of what Skype has already, and with more users. While it’s great to talk about neat things Microsoft could do with Skype, the history there has been that it will take a long time to see strong integration that is meaningful to the bottom line. It would have been easier and cheaper to buy other VoIP carriers and integrate a far less expensive but generally as-capable technology (think Google and Grand Union for $50 million).

The Ugly for Skype and Microsoft

1) Microsoft (NASDAQ:MSFT) has a miserable history with big ticket acquisitions. It bought aQuantive for $6 billion, and that’s become a poster child for how Microsoft can’t do advertising well; it sold off the Razorfish division when it could not really find out what to do with it. It paid somewhere on the order of $500 million for Danger, the mobile technology company responsible for, among other things, T-Mobile’s (NYSE:T) fabulous Sidekick phones, and then bungled it with bad products (KIN phone). There are more examples: Massive was bought for $280m and they shut it down; $265m spent for LinkExchange, also shut down; Web TV was purchased for $425m and (guess what?) shut down.

2) The price is amazing. Skype has never been known for spinning off profits — this was a big reason why eBay (NASDAQ:EBAY) sold most of their Skype stake at a loss. There’s no rocket science about what Skype has to offer — their software is a closed system that keeps them out of many cross-platform chat and IM products. Microsoft could build the whole thing for a lot less, and give away a lot of free phone service to convert users, and still have money left over. There’s just little to justify this price, except that Google and Facebook don’t have it now – especially considering that Skype has yet to make a sizeable profit.

The Silver Lining for Skype and Microsoft

1) Microsoft (NASDAQ:MSFT) could still license Skype to its strategic partner Facebook and recoup some of its investment while tapping the huge Facebook user base.

2) Microsoft says it’s keeping Skype as its own operational division, perhaps learning from past acquisitions that tried (and failed) to bolster failing divisions by adding in successful startups.

3) Google can’t integrate Skype with Google Apps, Gmail, Google Voice and Google Talk (NASDAQ:GOOG) — and make it a core part of its Android OS.

4) People laughed at Microsoft (NASDAQ:MSFT) when it invested in Facebook at a $15 billion valuation.

Authors Danny Briere and Pat Hurley are telecommunications experts at TeleChoice, Inc. Mr. Briere has written more than 1,000 articles and has authored or edited a dozen books on the subject. He is often quoted in leading publications and can be seen on major TV networks providing analysis on the latest communications news and breakthroughs. Mr. Hurley specializes in emerging telecommunications technologies. Danny and Pat are co-authors of Smart Homes For DummiesHome Theater For Dummies and HDTV For Dummies. Danny and Pat also co-wroteWireless Home Networking For Dummies, 3rd Edition.