In-Depth

Microsoft & Skype: Will Skype Answer the Call in Redmond?

Microsoft's largest acquisition arrives with potential promise as well as possible pitfalls.

• By Paul Korzeniowski
• 10/01/2011

As Microsoft gets closer to closing its $8.5 billion acquisition of telecommunications service provider Skype, the largest deal in the company's history, the impact promises to be far-reaching.

The acquisition of Skype could enhance Microsoft's unified communications (UC) portfolio, a product area that has struggled to gain acceptance. It could fortify the company's messaging products. The purchase could give a boost to the company's struggling Windows Phone platform. Perhaps most importantly, the acquisition provides the company with a huge base of potential buyers for Windows products.

While the deal has a great many possibilities, it also creates many potential roadblocks. The work needed to integrate Skype services with Microsoft UC products is complex, and is expected to be difficult and time-consuming. While Skype has been a popular product in the consumer market, it's unclear if it's ready to roll in the enterprise. Because Skype has a consumer feel, businesses may turn their backs on it.

Given the dichotomy, what can enterprises expect from the Skype acquisition? While it may take time, Microsoft will incorporate Skype functionality into many of its products. As these new items make their way to market, it will become clear whether or not Microsoft's most expensive acquisition will also be its most significant one.

"The Skype purchase has the potential to improve Microsoft's position in a number of different areas if the company can develop and execute the right strategy," notes Jack Gold, principal analyst at J. Gold Associates.

A Tarnished Past
Although Microsoft has made several forays into the UC market, the company has only been a bit player, garnering about 1 percent market share and being listed in the "Other" category of surveys rather than among the market leaders, which include Avaya Inc., Cisco Systems Inc. and Siemens Enterprise Communications GmbH.

"Historically, Microsoft has been missing fundamental features in its UC solutions, such as support for E911 services, and those missing pieces have tempered customer interest," says Rich Costello, a senior research analyst at IDC.

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Figure 1. The Skype home page features contacts and status updates.

Underscoring its troubled past, the product line has gone through three name changes in about half a dozen years: launched in 2003 as Microsoft Live Communications Server, rebranded as Microsoft Office Communications Server (OCS) in 2007 and renamed as Lync Server 2010. (Will the Skype purchase lead to yet another name change?) UC products touch upon a wide variety of communication exchanges (voice, video, e-mail and IM), but the Microsoft solution has garnered only niche success: "Many companies use Lync for instant messaging," says Ted Schadler, an analyst at Forrester Research Inc.

Microsoft has been trying to add functionality, such as E911 services, and broaden use of its solutions to areas such as voice and video transmissions, but it has met with resistance. UC services offer companies the potential to streamline operations and improve productivity, but deploying these solutions has been difficult. The products involve a variety of components that need to be integrated, but often the IT staff only understands small pieces rather than the complete puzzle.

Weaving a Skype Tapestry
Conversely, Skype has been easy to deploy, so its functionality may be woven into numerous Microsoft products, starting with its UC solutions. Microsoft plans to integrate its Lync client software, Communicator, with Skype. Once complete, Lync users will be able to interact with anyone on the Skype network via presence, instant messaging, voice over IP (VoIP) or video chat. Skype is also expected to be incorporated into other Microsoft enterprise products, such as Outlook, Active Directory and Windows Phone devices. Eventually, Skype could emerge in a way similar to SharePoint -- a product included in a wide variety of Microsoft products -- so companies can more easily take advantage of its features.

But whether or not Skype will ever become as popular as SharePoint in the enterprise is an open question. To be successful, Microsoft needs to move quickly. "Recently, Microsoft has gained the reputation of being stodgy and slow moving," Gold says. Rapidly integrating Skype into Microsoft products may pose a challenge because its design points are in many cases antithetical to the way Microsoft built its solutions.

In an enterprise setting, Skype raises a multitude of concerns, with many of them centering on its security. First of all, its protocols are very hard to block -- for a couple of reasons. To ensure that its transmissions are secure, Skype encrypts each communication session. However, many businesses need to open up and examine communications as they enter and leave the enterprise: In order to meet compliance regulations, businesses want to make sure that sensitive data is being protected and confidential information isn't leaked. Because Skype's protocols are proprietary as well as encrypted, it becomes impossible to examine what's coming in and out the door during a Skype exchange.

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Figure 2. The Skype dialing interface aims for simplicity.

Gaining Some Notoriety
Another possible shortcoming is that Skype's protocols were designed more for consumers than for businesses and may not have been properly vetted. In fact, Skype garnered some unwelcome attention in the spring of 2011 as vulnerabilities were found in its Apple Macintosh and Google Android clients. Microsoft will need to convince customers that it has addressed these security issues before corporations will use Skype to support enterprise communications.

One area where Lync has been weak is support for mobile clients, a significant shortcoming given the recent increased use of these devices by business executives. Conversely, Skype read the marketplace correctly and rolled out support for a wide range of handsets. That should help Lync gain more traction.

Skype could provide a potential lifeline to Microsoft's moribund mobile solutions. A preinstalled, well-integrated Skype client could be a potential differentiator for Windows Phone devices, which have been steadily bleeding market share to iPhones and Android devices. But how much of a differentiation Skype could offer is unclear. As a third-party app, Skype has run (and done well) on the systems of Windows Phone's rivals, so it seems unlikely that Skype will completely ditch those handsets. Such a move might help Windows Phone, but also could erode Skype's brand and user base by alienating handset vendors and the tens of millions of individuals using those systems. A more subtle approach would be developing premium features, such as multiperson video conferencing, which work better on devices running the Windows Phone OS than on competitors' systems.

A Gigantic Customer Base
What may have been the most valuable component in the Microsoft acquisition was the huge Skype customer base, which can be measured by various metrics. The company claims that 20 million to 30 million users are on online at any time during the day; that an average of 145 million individuals use the services each month; and that 600 million people have registered for the service. One can quibble about which metric is the most accurate, but "Microsoft could use the Skype purchase to increase sales of its other solutions, like Windows Azure," Gold explains.

Yet here, again, potential roadblocks emerge. Skype's focus has been mainly on the consumer market; Microsoft's customers tend to be businesses. In an attempt to increase its profit margins, Skype recently started touting its business services. The company made some headway in the small to midsize business space, but its services have rarely been endorsed by enterprises.

So is Skype a glass-half-full or half-empty purchase? The answer to that question should quickly become clear.

"I'd expect companies to get a good idea about how Microsoft plans to integrate Skype in the next six to nine months, and in about 12 to 18 months, we'll see how well this acquisition will do," concludes IDC's Costello.