Microsoft wants its 'cool' back

US software giant Microsoft's $8.5 billion buyout of Skype is a bold move to dominate the global technology space.

However, the deal will cause a shake-up in the telecoms arena, as it will step on the toes of established network operators.

Microsoft has made its biggest purchase ever to get back the “cool” image it lost after it launched the largely unsuccessful Vista operating system several years ago. There are three large players vying to be top of mind in the ICT space: Apple, Google and Microsoft.

The acquisition will see Skype integrated into all of Microsoft's platforms, including the mobile space, which will unsettle a telecoms sector still heavily reliant on voice to grow revenue.

Speaking at a press conference yesterday, Microsoft CEO Steve Ballmer said: “Today is a big day for Microsoft, and Skype, as well as consumers and businesses around the world.”

Ballmer said Microsoft is a “super-ambitious company” and the deal is “consistent with our ambitious forward-looking, irrepressible nature”.

Steven Ambrose, MD of WWW Strategy, says the buyout is strategic, as Microsoft is vying with Apple and Google to own the technology space. “There are three ecosystems battling it out to dominate mindshare in the corporate and consumer space to own the technology space.”

Microsoft is doing “cool stuff”, says Ambrose, and “reinventing itself to be loved by hundreds of millions of people”.

Ambrose explains Microsoft caught a big wake-up call a few years ago with the “Vista debacle”. The company realised it had to transform itself and is moving from a technology-engineering company to a more consumer base.

The first step in its evolution was the launch of Windows 7, followed quickly by the handset. Microsoft is no longer a software maker and has moved into mobile and gaming, points out Ambrose.

The IT giant turned over $16.43 billion in the three months to March. It reported net income of $5.23 billion. However, challenger Apple surpassed Microsoft with record second quarter revenue of $24.7 billion and net profit of $5.99 billion in the three months to March.

Google is also a strong contender in the technology space, with revenue in the same period hitting $8.58 billion and net income of $1.80 billion.

Ballmer says communications “is perhaps the most fundamental area in which technology can be transformative”. He notes the sector is rapidly changing and there are “plenty of opportunities ahead”.

“We'll move beyond e-mail and text to rich experiences in the future; talking to friends and colleagues around the world will be as seamless as talking to them across a kitchen table or a conference room.”

Skype has more than 170 million users, registering 600 000 more each day. Last year, it delivered more than 207 billion minutes of voice and video conversations, with video taking up 40% of all the communication. Microsoft bought the company for cash from an investor group led by Silver Lake.

Skype will become a unit within Microsoft and will add to the company's range of products, which includes enterprise-focused solutions and consumer-oriented offerings such as Bing, Xbox, Xbox LIVE, and Kinect.

Ovum principal analyst Richard Edwards says the Skype deal was “now or never” for Microsoft, because Skype-competitor Apple FaceTime is available on the Mac, iPhone 4, iPad 2 and the new iPod touch. “Skype is undoubtedly the product Microsoft needs to stay in the game.”

Ballmer says “at Microsoft, we see enormous opportunity that brings together what people want: data, voice, video, IM, all on a single screen; whether it's a smartphone, a PC, a slate, or the TV. Microsoft and Skype together will define this future and what it really, really looks like.”

There is a huge potential for Microsoft and Skype to create new user experiences and market opportunities, notes Ballmer. “We're committed to optimising Skype for the TV, with Xbox and Kinect, for the Windows Phone, and the Windows PC.”

Skype subscribers will be connected to Outlook, Lync unified communications, Xbox LIVE, and other opportunities like Messenger and Hotmail, explains Ballmer. The acquisition also opens up opportunities to integrate Skype in the mobile arena through Microsoft's partnerships in the cellular space, he adds.

Microsoft recently reached an agreement with Nokia, allowing Nokia to use the Windows Phone 7 (WP7) platform for its devices. Nokia and Microsoft are also set to launch a Nokia-branded app store which will merge with the WP7 marketplace.

While the ink had barely dried on the Microsoft-Nokia WP7 pact, Microsoft also secured a partnership with Research In Motion (RIM), announcing Microsoft's Bing will be the default search provider in the browser for all new BlackBerry smartphones and the PlayBook tablet. Bing maps will also power the tablet's native map application.

Skype CEO Tony Bates points out: “We've started to focus very heavily into the mobile space.” He says mobile is moving to be a rich communications capability beyond just voice. Skype recently introduced two-way video for the iPhone and Android handsets.

Richard Hurst, senior analyst of emerging markets at Ovum, says the deal “makes perfect sense” as Microsoft has been moving into the telecoms space with its recent Nokia and RIM agreements.

Skype will be bundled with Microsoft software for mobile phones, a move networks will resist as they have been fighting IP-based communications for some time, says Hurst. “Mobile network operators must wake up to that fact.”

Hurst says, however, “Cinderella time is over for Skype”. The service will change from its current “spunky and maverick” image to become more mainstream.

The Vista mess left Microsoft with a hangover, and tweets yesterday were not entirely favourable of the Skype deal.

Some joked: “Microsoft buys Skype. Can't hear me? Press control, alt, delete” and “Skype to be renamed to 'Microsoft Windows VOIP Cloud Talky Talky Foundation Services.NET'.”

Skype was founded in 2003 and then sold to eBay in September 2005. It was then bought by an investment group led by Silver Lake in November 2009. The deal is subject to regulatory approvals, but should be wrapped up this year.

(Additional reporting by Kathryn McConnachie.)