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Microsoft and Skype: A Marriage Made in That Other Place?

After talk arose this week about potential suitors for Skype, the popular (but debt-ridden) voice and video communications service, the news arrived that Microsoft would be acquiring the company for a whopping $8.5 billion, all cash. This happens to be the largest transaction ever for the fading software giant.

That Microsoft’s stock price dipped after this deal was announced clearly indicates the financial community regards the transaction as overpriced, and perhaps not making a whole lot of sense. But CEO Steve Ballmer is, typically, bullish on the prospects. Then again, how many people listen to Ballmer these days?

Typical of the skepticism is this comment from the people at Ars Technica: “Integrating with Xbox, Kinect, and Windows Phone is the sum total of the plan that Microsoft put in the press release. At the press conference there was also some non-specific talk about advertising. But that’s it. That’s Microsoft’s grand vision for its $8.5 billion purchase. Adding voice and video chat to its games console and phone platform and maybe showing a few ads.”

In short: “Why Skype?”

Now Skype, founded in 2003, has had an adventurous existence. It was founded by Niklas Zennstrom and Janus Friis, whose previous venture was a peer-to-peer download service of questionable legality, Kazaa. Just two years later, eBay got ahold of Skype, somehow imagining that people who participated in online auctions would use the service to talk to each other prior to making a transaction. Fat chance!

The synergies were questionable, so just four years later, eBay finally found their exit strategy from this misguided venture, as a majority stake in Skype was sold to a private investment company that included the original founders. So you can bet that the deal with Microsoft means one huge payday for Skype’s owners.

Forgetting the arcane issues of money, contracts, and all the rest, I’m sure most of you realize that Skype has been something less than a money maker. In 2010, the company recorded revenue of $820, which isn’t too shabby, but not an awful lot for when you consider that the service has hundreds of millions of users, but only a little over eight million actually pay for anything. The reason is that most of you run Skype to make free voice and video calls to other Skype users.

This isn’t to say everyone gets free service. Skype does offer cheap calls to traditional phones, and you can even set up a Skype telephone number to receive them. It’s actually quite a good deal, and the situation is even better when you install Skype on an iPhone or other smartphone. Suddenly you can talk to people in other countries without paying the huge ransom exacted by the traditional wireless providers.

Indeed, Skype doesn’t even have to host all that traffic. Using technology that builds upon their history as a file sharing service, Skype actually uses the computer of the person who hosts the connection to handle the bandwidth requirements. Yes, Skype has a pretty large worldwide server infrastructure too, with hundreds of employees managing the system. It even works pretty well most of the time, though truth to tell, connection quality can be flaky regardless of the speed and reliability of your broadband connection. It can become particularly troublesome when you host a group audio or video chat.

Regular listeners to our shows know that Skype can be problematic. But you can’t argue with the price.

Certainly, if Microsoft does well by the Skype acquisition, this will be a good thing for everyone. While I realize some of you would prefer to avoid Microsoft at all costs, if they build good products and services, there’s no harm in using them.

These days, in fact, it does appear that Google’s dominance of search and other businesses has targeted them as the potential most hated tech company on the planet, if they’re not there already.

Now I realize there are many pitfalls in this transaction. Microsoft has had problems with the companies that they hane acquired. Key executives depart, and quality goes down the tubes. The one positive note is that Skype CEO Tony Bates will become President of the Microsoft Skype division, and that he’ll report directly to Ballmer. He won’t have to deal with revolving vice presidents in order to manage strategy. But all this assumes that Ballmer will listen, and that he and Bates are on the same page as to how the two companies will be integrated.

As far as non-Microsoft operating systems are concerned, Ballmer is assuring us that they will continue to be supported. It’s also true that the latest Skype, version 5.x, actually comes much closer in look and feel to the Windows version, which is actually not a good thing. And, by the way, a recent software update fixed a serious security problem that only impacted the Mac. But if MicroSkype continues to build comparable apps for all supported platforms, there will be little reason to complain, assuming they make an honest effort to improve connection, voice and video quality, not to mention security.

The other huge question is pricing. Will greedy Microsoft decide to jack up the rates in order to build profit potential? Perhaps, but that would come at the risk of losing customers. Skype isn’t the only cheap Internet phone service out there, and I wouldn’t be surprised to see Apple considering support for traditional telephone connections in iChat and/or FaceTime in a future release. If Apple chooses to go that route, though, they’d probably have to build versions for Windows too, perhaps even Linux, in order to lure more potential Mac customers their way.

If Skype suffers from this acquisition, however, I’ll be extremely disappointed. But it’ll take time to determine the fallout. Meantime, I will be looking for other options — just in case.