Microsoft CEO Steve Ballmer is known for his public exuberance, punctuating keynote addresses with the sort of high-decibel verbal fireworks commonly associated with high-school coaches trying to goad a touchdown.
“Developers! Developers! Developers!” is one of his more famous refrains.
As Microsoft headed into the final stages of its acquisition negotiations with VOIP (voice over IP) and video-conferencing provider Skype, Ballmer’s shout to any Microsoft executives reluctant to embrace the deal might have been: “Synergy! Synergy! Synergy!”
Microsoft is paying a lot for Skype: $8.5 billion. In return for that hefty chunk of change, it will become a business division within Microsoft, headed by Skype’s current CEO Tony Bates. Skype in its new form will support Microsoft products, such as Windows Phone and Xbox Kinect, and integrate across the breadth of Microsoft’s already-extensive portfolio—including the Lync unified-communications platform.
But that’s not necessarily enough to justify the biggest-ever payout in Microsoft’s history. According to some analysts, the secret sauce of the Skype deal—so to speak—is its potential to bolster Microsoft’s recent partnerships with other companies, as well as its relationship to the enterprise.
“Of [Skype’s] 633 million users, fewer than 8 million are paying users. No matter. What is important is that many of these users would love to make free calls on a mobile phone,” Mike Gualtieri, an analyst with Forrester, wrote in a May 11 corporate blog posting. “Microsoft’s plan to acquire Skype fits in perfectly with its recent partnership with Nokia because both offer incredible reach.”
In other words, Skype could allow Microsoft to boost its competitiveness in the mobile realm against both Apple’s iPhone and the growing family of Google Android devices. “There is no stopping Apple when it comes to mobile and cultural dominance,” he wrote. “But Microsoft could displace Google as the alternative based on the great UX provided by Windows Phone 7, the Nokia partnership and the Skype deal.”
Whether or not that takes place—despite some analyst assertions that Windows Phone will increasingly dominate the market, Microsoft’s share of smartphones reportedly remains low—the Skype deal could allow Microsoft to maintain its grip on a segment very near and dear to its heart, or at least its bottom line: the enterprise.
That is, if Microsoft manages to swallow Skype without too much indigestion, according to a May 11 blog post by Yankee Group analyst Emily Green: “Two of the many reasons these things fail after the photo-op: a) they buy something sizzling hot, hoping to reinvigorate their own less dynamic offerings and culture—but end up suffocating the entrepreneurial spirit in the acquired firm that made it sexy in the first place. Or, b) they buy something that’s only available because it’s on the ropes.”
That being said, Green views the Skype-Microsoft deal as capable of sidestepping those pitfalls, if only because supple, lightweight VOIP and video-conferencing assets can serve Microsoft’s designs on the enterprise.
Specifically, as those enterprises shed physical infrastructure, “their leaders have to ask some very tough questions about investing in conventional hard-wired telecommunications infrastructure.” That, in combination with employees’ seemingly unstoppable desire to bring consumer software into the enterprise, could create an opportunity for Microsoft to “tightly weave Skype’s functionality into its corporate offerings” in ways that meet the approval of executives and IT administrators. In turn, that could give Redmond the opening it needs to “maintain relevance with the new breed of enterprises being born in this century.”
However, Green concedes that earning back the enormous costs associated with the acquisition “is another story.”
Skype found itself an acquisition target in 2005, when eBay agreed to pay $2.6 billion in cash and stock for the then two-year-old company. Four years later, a team of private investors—including Silver Lake Partners and Andreessen Horowitz—took it off the auction Website’s hands for $1.9 billion in cash. Skype had reportedly been raising money for an IPO, but that offering was delayed after the company appointed Bates to the CEO role in October.
For that substantial bump-up in cash, Microsoft is purchasing one of the Web’s most recognizable consumer brands—albeit one that’s faced increased competition from Google and others in recent quarters.
But one of Skype’s private investors took to the blogosphere to discount that competition as a threat. In a May 10 posting on his personal blog, Andreessen Horowitz co-founder and partner Ben Horowitz suggested that Google’s attempt to market a similar VOIP offering had failed to stop Skype’s momentum: “What was the result of this effort? … Skype new users and usage growth has accelerated since Google’s launch.”
Apple’s Facetime, he added, also failed to blunt Skype’s momentum: “How did that impact Skype’s use on the iPhone? 50 million users have downloaded Skype’s iPhone product since the release of Apple’s FaceTime.”
If you believe Horowitz’s assertions, then Microsoft managed to sidestep the potential acquisition dangers outlined by Green. But how well the company will integrate its newest property—and create synergy with its partners—remains the question of the hour.
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