Why Microsoft Had an $8.5B Over-Reaction with Skype

Many people have covered ad nauseum the Microsoft purchase of Skype yesterday and what it means to Microsoft and Skype.  I wanted an evening to think about it and what it means to the real time communication space.  I kept returning to the same question, why did Microsoft need Skype, forgetting the billions it cost them.

Microsoft Was Worried About Facebook
Microsoft’s Live Messenger team has been looking for ways to combat the damage that Facebook started inflicting to their network’s health in Western Europe.  They started acknowledging the issue a year ago when Microsoft added a bunch of Facebook integration into Live Services.  The issue is that, as I knew would happen with AIM, was that is like putting a band-aid on a giant leak.

Microsoft Needs a Distribution Platform for Communication Tools
I have an issue with this theory as well. Microsoft has a great consumer platform for real time communication in XBox360, they have the enterprise space, and a potential mobile solution with the Nokia relationship.

Microsoft Needs Help with Improving Video Technology
This is plausible until you consider that Microsoft is part of the patent pool for H.264 and the Skype acquisition does not give them technology like browser based video (though Skype has been working on it). Skype might be able to help them on mobile platforms but Skype’s architecture may end up hurting Microsoft more than help them with enterprise customers.

Microsoft Needs a Strong Consumer Brand
This is the best reason I can think Microsoft executives talked themselves into buying Skype. Is Microsoft now saying the consumer internet space is once again important to the company? If you go simply by the balance sheet that can’t be right. Skype is a verb, and that alone is always worth considering when buying a brand.

For Skype, I wonder if this will be any different than when EBay acquired them? It’s hard to integrate a real time communication platform into a company with an existing strategy. I do know that the acquisition worked beautifully for the investors. As for Microsoft, time will tell if they over paid, but after 24 hours to me it still feels like an over-reaction.