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  • The Microsoft Suicide Watch

    May 12th, 2011

    My recent comments have probably echoed that of many other commentators, that if Microsoft is on a death spiral, it would be a slow decline, one that would require years to totally reverse their standing as one huge money-making machine. But now it appears as if Microsoft is doing their level best to speed up the process.

    Take the curious decision to waste over $8.5 billion in spare cash to buy up Skype, a company that has yet to demonstrate the ability to actually deliver even decent revenues despite having a huge user base.

    Now I wouldn’t resume to suggest that Skype is a worthless property. With hundreds of millions of members — and over 20 million online at any one time — it’s clear that Skype has attracted one large user base. On the other hand, the vast majority of those users restrict themselves to the free portions of the service. Although you can use Skype to place and receive calls to regular telephones and mobile handsets, only a little over eight million see fit to take advantage of that service. At the same time, though, Skype is reported to be the world’s largest provider of international phone calls.

    The real issue is just how all this fits in with Microsoft’s product strategy, and that press conference featuring CEO Steve Ballmer, along with Skype CEO Tony Bates, was rather less than illuminating.

    Now I understand why a tech company might want to buy out a competitor, or a firm that can offer new and desperately needed technology. But Microsoft already has chat software in place that provides text, audio, and video, and that’s Windows Live Messenger, which is known as Microsoft Messenger on the Mac platform. The quality of this product appears to be decent enough, so where’s the benefit of adding Skype?

    Sure, Skype offers paid services, and can act, for the most part anyway, as a regular Internet telephone provider. But I fail to see why Microsoft, with its vast staff of talented developers, couldn’t provide an in-house solution. Sure, the name “Skype” is an icon, and there’s an intangible value as a result. But, as I said, Skype is no money-making machine, and what is Microsoft going to do in order to justify that huge investment?

    Certainly, stockholders deserve an answer, but nothing in that press conference appeared very illuminating on that issue. If Microsoft increases the external calling rates for Skype, customers might simply look to other solutions. Yes, there will likely be targeted ads present when you use Skype’s free services, in the fashion of Google, but is that going to magically generate billions of dollars of revenue? I hardly think so, although I don’t pretend to be an expert on the advertising business.

    But I wouldn’t dismiss the real reason Microsoft might have been so eager to grab up Skype at such an exorbitant premium, and that’s Google. There have been published reports that both Face-book and Google were in the market for Skype. Microsoft might have been desperate, hoping against hope that they could swing a deal to keep Skype from falling into the hands companies that it regards as fierce competitors in the online universe, particularly Google.

    Thus, Microsoft offered a deal Skype’s executives couldn’t refuse. Even if this questionable marriage falls apart after money changes hands, Skype’s owners will be laughing all the way to the bank. The real issue is how Steve Ballmer is supposed to explain all this to Microsoft’s stockholders in a way that makes sense. He couldn’t do that in a room filled with journalists either, although it’s also true that he seldom gets anything more than softball questions at such events.

    Now according to published reports, the regulatory hurdles will be overcome by the end of the year, so you probably shouldn’t expect any changes in Skype — for better or worse — until 2012. While all this is going on, it’s quite likely Skype’s developers will be treading water, avoiding any significant changes in the network or software until the fallout from the merger is known.

    The other issue is how Microsoft is going to solve their real problems, with a declining PC market and, except for game consoles, no proven track record to establish products and services that will ultimately become larger profit centers than Windows software and services.

    That’s the magic bullet that Apple discovered years ago, when the arrival of the iPod presaged a new direction for our favorite fruit company. These days, Apple makes most of their revenue from the sale of mobile gadgets, not Macs, although Mac sales continue to grow ahead of most of the rest of the PC industry. When the Mac era is over and done with, it’s likely Apple will continue to prosper without missing a beat.

    This is not to say that Microsoft is finished. IBM managed a rebirth as a services-oriented company. I suppose Microsoft, if the situation proves desperate enough, will find ways to survive. But that will likely require dumping Steve Ballmer and the rest of the company’s failed leaders, and going on a hiring spree to attract executive talent to guide the company into the future. The question is whether that’ll happen before it’s too late.



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