Microsoft feeds its cash machine with Skype buy

News and Insights

Microsoft feeds its cash machine with Skype buy
This article first appeared on Best in UC. Would you spend a buck if it meant that you could keep a nice crisp $20 bill in your pocket? That’s essentially what Microsoft did this week when it agreed to pay more $8.5 billion to buy the Skype online communications service. But don’t try telling the technology world that just yet. The folks in Redmond have come in for loads of criticism from industry watchers since announcing the deal, with many scratching their heads over Microsoft’s rationale for making such a huge payout. Indeed, in an online poll conducted on Mashable.com, more than 60 percent of survey participants are saying that Microsoft paid too much for the Skype acquisition. Simply put, the masses are wrong. Microsoft could double the price it paid and still come out smelling like a rose. The Skype acquisition is the single smartest thing Microsoft has done since company executives went on a corporate retreat in the mid-1990s and hatched the company’s “embrace and extend” approach to deal with the then-looming threat of the Internet browser and Netscape. The company’s priority then – as it was with last week’s Skype deal – was to protect Microsoft’s existing cash machine and the company’s overall market value. At the risk of oversimplifying the issue, only three product categories really matter in shaping Microsoft’s larger financial picture. Success in Redmond hinges on selling more Windows operating system licenses, more copies of the Office productivity suite and more server software for use in the enterprise. Everything else – even the Xbox – is pretty much window-dressing. The $8.5 billion spent on Skype is the equivalent of an insurance policy to make sure that Microsoft’s existing business pillars – the operating system, Office and server software – continue churning cash for the next decade. If it succeeds, Microsoft pretty much guarantees that its current market value, which still exceeds $200 billion, does not evaporate in the face of threats from the likes of Google and Facebook. In short, they’re spending $8.5 billion to protect (and grow) their $200 billion market value. To better understand the significance of the Skype acquisition, a little history lesson on the Microsoft cash machine is in order. Perhaps the biggest challenge to Microsoft’s cash flow prospects emerged in 1995, a time when Microsoft was widely perceived as an Internet laggard focusing on the isolated islands of desktop computing in a Netscape-driven world destined to usher in a new world of “network computing.” As Sun Microsoystems CEO Scott McNealy famously declared at the time, “The network is the computer.” Such a worldview was a direct shot at the Microsoft cash machine. In a network-centric world, Netscape’s browsers could evolve into platforms capable of replacing the Windows operating system on a new generation of lightweight “net computers.” Such an evolution, in theory, would chip away at the need for both Microsoft Office software and related Microsoft servers tuned to work in concert with Windows operating systems and applications. It would have been tempting for Microsoft at that point to simply dig in its heels, stick to its desktop focus, and tirelessly promote the advantages associated with maintaining the computing industry status quo. Instead, Microsoft turned the threat into opportunity. It baked the browser into the operating system and launched efforts to build Web-enabled capabilities throughout its application software. The changes enabled computing advances that fueled a software upgrade cycle, keeping the Microsoft cash machine humming for more than a decade. Now, fast-forward to 2011. One can argue that Microsoft once again is beginning to look a bit frumpy, digitally speaking. Apple has the mass-market sizzle with its mobile devices. Both Google and Facebook certainly look more innovative in emerging online communications categories, such as social media and video sharing. In the face of this rising competition, the Skype deal is a watershed moment for Microsoft equivalent in importance to the early days of “embrace and extend.” Just as it addressed the challenge of network computing in the 1990s to grow its flagship franchises, Microsoft now is embracing the emerging world of unified communications in a way that promises to drive a new software upgrade cycle and fuel its cash machine for the foreseeable future. The Skype platform makes it possible for users to connect via audio and/or video while sharing applications online. Additionally, a massive installed base of users proves that the platform can support itself on a global scale. That’s the fuel Microsoft needs to keep the cash flowing. Buying Skype, for instance, sets the stage for Microsoft to aggressively develop a new generation of Office software that directly integrates multimedia collaboration into everyday business communications in a meaningful way. Workers can schedule and initiate Skype-enabled meetings from Outlook. Screen sharing on Skype makes it possible for users in those meetings to work in concert on active documents, spreadsheets and presentations. As businesses of all size use more video and collaboration, they’ll likely buy computer upgrades that generate more operating system revenue for Microsoft, while giving companies of all stripes more reasons to upgrade their server software. Certainly, all of this can – and is – being done today. But if a Google or a Facebook would have acquired Skype, the Microsoft vision for making multimedia collaboration a reality would have become far messier than is now the case. With Skype, Microsoft can weave unified communications capabilities more thoroughly than ever before and, in the process, have a cleaner deployment story to sell. As a result of this strategy, the Microsoft cash machine will keep plugging away, and the company’s market value will be preserved. For the industry overall, we’ll be able to look back a decade from now and say that this was the deal that brought video-enhanced unified communications to the mainstream corporate market in a big way.

Comments are closed

Email Us or Call 1-800-345-4211