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It's fair to say I am not a fan of Microsoft, and while I might not be Steve Ballmer's biggest detractor I'll bet I'm in the top tier, so my initial reaction to the Skype deal was shock and awe, to say the least.

I've had a few minutes to think about it, and have come to a few (quite early) thoughts. For starters, I don't understand Skype at all. I don't really know how they make money, I've never used it, I don't really see any need for it in my life. My wife has used it, three times, to talk to a friend (who is no longer a friend) and not since. Still, the software sits installed on her Mac, waiting for some other day when she might have need of it again.

(I am reminded of the late 1990's when deals were discussed in terms of "users" rather than "paying subscribers." The Mrs. is apparently one of Skype's "users", although they will never make a dime from her. But I digress.)

I see three areas for justification of the deal, maybe more. Starting with the first, enterprise, Skype says 35% of its users are "corporate." So this will be an easy "bolt on" to Microsoft legacy products, insuring that the software is optimized and ubiquitous, if it isn't already. Apple has Facetime (but a tiny user base) and there are other solutions, but with Microsoft's prodigious share, this becomes the standard. Will this help sell more? No. But it does blunt one possible reason for buying "other." You can't measure a defensive move in revenue, because by definition it's "what doesn't happen." That's thin gruel to justify $8.5b, but as the TV commercials say, "Wait, there's more."

A Skype addition to Xbox adds yet another feature to the thing, which now includes games, video streaming, and other digital media delivery. This could, and I think will make a difference to some box purchasers, who will now have a way for Grandma to see the kiddos in some other city. As Xbox continues to fight for share against the leader Nintendo, this is a clear point of differentiation, and puts them another large step ahead of faltering Sony. I don't know that video phoning will become huge in the household (as opposed to the corporate world) but 1) if 35% of Skype users are corporate, then twice as many are not, so it's already pretty big. And 2) if it is and Xbox doesn't offer it, they're just another box with movies and video mayhem, no?

The third area, and most cloudy to me, is the potential addition to Microsoft's almost dead mobile phone business. How the economics of "free phone calling" works out when Microsoft also needs telecom partners to pay for the phones (through subsidies) I don't claim to understand, but there is a needle here which I suppose can be threaded if one understands how these relationships work, which I don't claim to. Again, it puts a valuable feature onto Windows phones (network effect, network effect, network effect) which Android already, but belatedly offers, and which iPhones have had for some time. (This is apparently a cool enough feature that the iPad2 integrated FaceTime where the original did not have it. No camera, you see.) Again, this may be a defensive move (How can you sell a phone without Video Chat anymore?) or offensive (large network of installed users leading to the virtuous cycle) or some of both, I don't know.

Will a future version of IE come with Skype preloaded? I should think so. Is that good? I don't see why not. Will the regulators go crazy? Too soon to tell.

And if Microsoft is ever going to get in the Tablet game again, they simply must have a ready made, working, viable video feature that works, like FaceTime does. Adding 600m potential users at the other end of the tablet is no small thing.

The big objection, of course, is that "You can already do all of that." Well, yes. But trying to build a business like Skype from the ground up is hard, especially when there's already, you know, "Skype", not to mention AIM, Facetime, ICQ, iChat, Jabber and who knows what else? Buying an already existing solution with 600m "users" is easy. Microsoft tried to build MSN from the ground up, they tried to build "Live Search" from nothing, and they've been spectacularly unsuccessful. In fact their list of failures in the consumer space is impressive: WebTV, MSNtv, MSNBC, Tablets, Zune, and so on. (They've had a few other wins, but that's irrelevant, I think, because most of them come from the OEM tax, not consumers. They did OK with Expedia, maybe, and their keyboards and mouse division is tops, right? OK, I'm joking ... )

Now Mr. Softie doesn't have to market and build for five years and see if they're successful, during which time Google & Apple are moving forward too. Redmond instantly has a brand name, and they have the ability to optimize the software - and distribute it on all new products - to make sure the consumer experience is the best possible. (I know, Microsoft is not very good at this, but perhaps they can be convinced to make something easy, instead of hard.)

Is the price a good price? All they're buying really is a list of names and software installed on 600m computers and some brand equity. And I suppose there's revenue tucked in there somewhere (just kidding, I know there is, but certainly not enough in-and-of-itself to justify this price tag.) But without gettig into the numbers, which I freely admit I don't understand (nor have much interest in pursuing) I do see several strategic reasons for the acquisition, and if only one of them pays off, then it's a decent, albeit expensive play.

If two of them come true, or if it becomes a successful stand-alone leg in the Microsoft empire, then it will have been worth it after all. Microsoft has a pretty crappy record with acquisitions, so I make no prediction, only that I see the logic which led them here, and from here on out it's their baby to build or destroy, as only Microsoft is able.
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