And the spotlight-stealing award of 2011 goes to… Microsoft (Nasdaq: MSFT).
Unfortunately, the company could also have just made its biggest mistake of 2011. And I can give you 8.5 billion reasons why.
In an announcement that whipped the financial media and tech blogosphere into a frenzy on Tuesday morning, Microsoft confirmed that it’s buying internet phone and video calling service, Skype, for $8.5 billion.
Based on the top stories section of my Zite news app, you’d think it was the only big tech event of the day. It wasn’t. The Google (Nasdaq: GOOG) I/O developer conference also started on Tuesday.
But Microsoft managed to steal all the limelight from its big rival. And why not? It’s Microsoft’s biggest acquisition yet and many suggest that the pairing could enhance existing Microsoft products. However, The Guardian points out, “Analysts have broadly favored the idea of the deal, but questioned whether it could ever be worth the price.”
My question: Who cares how much Microsoft paid for Skype? It was a flat-out waste of money that promises to do little for Microsoft’s business.
Why Dish Out $8.5 Billion for a Service You Already Provide?
According to TechCrunch, Skype fits “nicely into many of [Microsoft’s] current product offerings.”
And Reuters points out that, “Skype could be combined with Microsoft software such as Outlook to appeal to corporate users, while the voice and video communications could link to Microsoft’s Xbox Live gaming. Skype offers Microsoft another route to develop its mobile presence.”
Problem is, Microsoft already has these services covered:
~ Microsoft Sync: Brings video calling and collaboration to corporate users in Outlook.
~ Xbox Live: Allows players to chat during gameplay. And Xbox Kinect has shown that it’s capable of highly interactive video calling.
~ Windows Mobile: Smartphone owners can already download the Skype application. So can Android and iPhone users.
True, Skype is a household name, with 145 million subscribers. So the deal could lead to more Kinect purchases from Skype users who want to bring their video chat to another level.
But it’s unclear how those subscribers could benefit Microsoft exclusively, since the company also plans to “continue to invest in and support Skype clients on non-Microsoft platforms.” In other words, Skype users can continue to access the service through Android and Apple (Nasdaq: AAPL) mobile devices.
The deal seems even more ill-advised for other reasons, too…
Skype Dials Up a Big Loss
In 2010, Skype chalked up $7 million in losses on $860 million in revenue. As Forrester Research says, “It doesn’t make sense at all as a financial investment. There’s no way Microsoft is going to generate enough revenue and profit from Skype to compensate.”
So what’s Microsoft’s motive if it’s not to bolster its services or turn a profit?
Rather than actually needing Skype’s services, Microsoft’s decision was probably a strategic move to keep Skype away from rivals like Facebook, Google, or Cisco Systems (Nasdaq: CSCO). (Recent rumors pegged all three as potential Skype suitors, too.)
But splashing out $8.5 billion to do so? Shareholders have a right to question the deal, since it only serves to siphon resources away from what should be Microsoft’s primary objective right now – gaming.
Is Microsoft Ignoring a $12 Billion Opportunity?
As I noted here last week, the recent security nightmare at Sony (NYSE: SNE) has led 66% of PlayStation 3 owners to ponder a switch to Microsoft’s Xbox 360 instead.
That equates to 51 million potential new Xbox customers and over $12 billion in prospective sales for Microsoft. And I’m convinced that if Microsoft were to funnel its resources into developing games for its Kinect device, it would be the best way to convince Sony PS3 users to jump ship over to Microsoft.
What would that entail? Specifically, Microsoft should combine the Kinect’s video calling feature with its motion-capture gaming functionality. That way, you’d have everything people love about Skype, combined with Kinect’s advanced gaming platform.
Imagine serving a volleyball to your mother in New York… or throwing a dodgeball at your sister in Texas… or playing some Pictionary with your cousin in Massachusetts. All using the Kinect’s current capabilities.
In other words, no Skype needed.
It’s not like Microsoft is ignoring Kinect’s potential. Last month, the company opened the door for software developers to create new applications for the device. As I mentioned then, this could completely transform how we interact with electronics.
But I think Microsoft has its tactics wrong here. After all, why let third-party developers run with this when the company could have used the $8.5 billion it just spent to buy Skype to further unlock the Kinect’s potential itself? Not to mention that it would have more control over grabbing as many potential Sony defectors as possible.
Now, that’s what I call a solid investment.