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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14 Responses to “The Microsoft Suicide Watch”

  1. Dave Barnes says:

    “When the Mac era is over and done with”
    Go wash out your mouth with soap, Gene.
    What am I supposed to use to build websites, develop mobile apps, if not a Mac?

  2. Al Staley says:

    Awwww, you’re such a cute little fanboy. Yes, the Mac era is over, and Microsoft is TOAST!! Yes, I know…

    Tell ya what, I’ll keep my Mac and get REAL work done. Enjoy your iToys doing REAL IMPORTANT things like “Steve Says”, “listening to music, enjoying our photographs, surfing the web, and checking our email”.. Man that’s EXCITING!!!

    And I can’t wait to get rid of my 60″ HDTV so I can watch movies on an iPad!!

    You fanboys are too funny!

  3. Blad_Rnr says:

    Wow, why all the hate for Gene? He’s just telling it like it is. The Mac won’t be around forever, or it may evolve into an iPad-like device with the Mac OS. Who knows? BTW: I’ve been a Mac user since 1987. And I work now in an all-Mac shop doing IT work.

    Gene, if you are Microsoft, or better yet, a stockholder, you have to ask yourself, “So how do we recoup $8.5 billion and start making a profit off of this deal?” The answer is, they won’t. There is no way they will ever recoup this money. Ballmer knows this but when you have money pouring in each quarter from Windows and Office, do you think he cares? The spigot is starting to run dry but it might be another decade before it stops. It’s like free money to him: “Buy something cool now because we are out of ideas and have nothing else cool and exciting in the pipeline.”

    Have they learned nothing from Apple?

  4. Chanson de Roland says:

    Microsoft is running one of the older plays in its playbook: Either buy or create a popular technology that it then puts into its proprietary software platform for free in an effort to differentiate that platform with a free service that either costs money or isn’t available on competing platforms.

    Microsoft also purchased Skype’s 170 million customers at a bargain price of around $15.00 per customer. If Microsoft can covert even a small percentage of those customers, perhaps just 10% to 12%, to paying services or platforms, the $8.5 billion will quite easily be a good deal, though not one that is a game-changer for Microsoft in any of its important businesses.

    Microsoft’s problems are that: (1) It doesn’t have a monopoly in the markets for any of its platform, other than PCs, where Skype features are likely to be integrated; (2) Apple and Google both have very good audio/video/texting/chat technology that they can integrate into their mobile and other platforms; (3) Apple will quite likely open-source FaceTime so other who need a good voice/chat technology needn’t reply on Microsoft’s Skype/Messenger product; and (4) Open-sourced FaceTime, if that happens, will quite likely become a standard, which others and, perhaps, even Google will adopt. Given the foregoing, Microsoft’s old strategy of reinforcing a monopoly platform by adding a popular free service is unlikely to work in the post-PC era for Skype and Windows Mobile 7.

  5. Ken says:

    There is a post-Ballmer strategy that Microsoft can use to recover.(I posted this on one other site)

    Make all the divisions subsidiaries. Give each subsidiary a separate brand name, reserving “Microsoft” for the umbrella company. The subsidiaries that write application software or some server software (such as SharePoint) write it for every platform with a significant marketshare.

    Then one of two approaches for Windows:

    1. Phase out Windows, but continue support for enterprise clients.


    2. Go back to vertical integration. Before Microsoft started doing otherwise with MS-DOS 5, the OS always came from the hardware vendor. Vertical integration was the norm, from mainframes right down to the TRS-80.

    Do this by splitting the Windows group into several parallel subsidiaries. Each subsidiary purchases a hardware company and produces vertically integrated workstations or servers. Since each subsidiary is making a version of Windows for its own hardware, they can get rid of much of the one-size-fits-all flakiness. With a standard API, such as we find in UNIX or Linux, they are all compatible with the same application software.

  6. MacCanuck says:

    Who says Google was serious about purchasing Skype this time around?

    The book “In the Plex” mentions how someone at Google suggested a few years back about going after Skype but it was squashed due to technical reasons and it not being suitable for philosophical/planning reasons (IIRC, Skype is “peer-to-peer” vs the Google grand vision of “everything thru the web”).

    Google also played games with an Internet auction, deliberately bidding high to force the hand of the likes of Verizon, AT&T, etc.

    Googlers started to panic when it looked like it may actually win an overpriced bid it didn’t really want.

    Given the fact Google rejected a previous (internally) suggested take over of Skype, could it be purchase rumours were put out to cause a Microsoft panic and an outrageous bid?

    Google played the game before so who is to say it wouldn’t do it again. Perverse enjoyment putting the screws to MS.

    After all, it’s motto of “Doing no evil” is pure marketing PR and BS.

  7. Peter says:

    Okay, a couple of notes.

    One, Skype had revenue of $860 million in 2010–up 20% from 2009. If advertising can add another $100 million, you’re close to a billion dollars a year. That’s nothing at which you should sneeze.

    Second, the Skype brand is synonymous with Internet telephony. Much like you “Google” to search on the Internet, you “Skype” people to talk to them. Hell, people have it on their business cards. So there’s some more value right there.

    So you have a company that is making money in Internet telephony. Doesn’t Microsoft have an operating system that is used with communication devices? Doesn’t Microsoft have an operating system that is used in a popular gaming/movie watching console? Gee, I wonder how that could be integrated into these things?

  8. Bradley says:

    What Microsoft has paid all that cash for is the worlds largest botnet.

    Skype uses it’s client applications to liberate spare internet bandwidth and CPU cycles from the 23 million machines its subscribers have connected to the internet, in order to process and distribute data across the internet – supposedly yours and others video and telephone calls, but ALL their code is encrypted so it could be used for anything and you wouldn’t know.

    Think what Microsoft could do with that cloud and who they could lease it to.

    Governments and corporations pay good money for that kind of processing power, especially when they don’t have to house it, cool it and supply the energy to run it.

  9. Bradley nailed it. The information that can be gathered is phenomenal. Ever tried to track a conversation in Skype? It connects everywhere in order to get from you to the person you want to talk to. And Skype, just like Microsoft, is tied to the Intelligence communities and yes, they do pay very well for that information.

    Big Brother.

  10. Jon T says:

    To say that Macintosh doesn’t live on in iPad/iPhone is nonsense.

    And yes, I agree that Bradley has nailed it.

    Precisely why one day there will be a revolt against such spy-botnets.

    So, Apple’s iCloud may yet be more successful than Skype.

  11. Particle Debris (wk. ending 5/13 Spooky Stuff – JailBake says:

    […] has lost focus, that Steve Ballmer is an idiot. Gene Steinberg thinks Microsoft needs to be put on suicide watch.Perhaps it’s a case where Microsoft’s strategic intentions are oblivious to Microsoft’s […]

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