Skype and Microsoft Could Work Very Well…. or not

I’ve read a fair bit of head-scratching over Microsoft’s US$8.5 billion acquisition of Skype, particularly after the challenges Skype had after it was acquired by, and then released from, eBay.

Skype never made sense as part of eBay. eBay is about commerce. Skype is about communication. (Paypal, which is about money, fit with eBay perfectly, and now is possibly a more valuable asset than eBay.)

For Microsoft, the lion’s share of revenues are still generated by Windows and Office. But you cannot go to sleep on Xbox or Windows Phone 7. The Xbox 360, with Xbox Live and Kinect, is perhaps the leading entrant in the living-room-colonization race. In my household, we dropped DirecTV (“cut the cord”) and purchased an Xbox 360 with Kinect, and signed up for Xbox Live. Thanks to streaming Netflix and ESPN (as well as an 8-week-old and a two-and-a-half year old, which means we’re home a lot and can’t really do much besides watch TV), our TV experience is about 95% Xbox-mediated.

And have you played with the voice controls for Netflix via Kinect? Sweeeeet.

And while Windows Phone 7 hasn’t made an appreciable dent in the smartphone race, it has a lot going for it — Microsoft’s giant piles of cash, Nokia’s commitment to using it, and the fact that it’s a cleverly designed smartphone OS, which didn’t try to just mimic Apple (ahem, Android), but do something distinct and potentially meaningful.

Now, what does Skype have? According to the reports, 170 million active users. And around 30 million concurrent users online, and as you can see from this Skype fanatic’s recent blog post, that number has been rising faster and faster.

Skype is also positioned very well for the technological advances we know are coming, particularly 4G. 4G will make mobile video calls a reality, and Skype is far ahead of all competitors in terms of quality and scale of their service. Additionally, as more and more televisions become connected to the internet (either directly or through some type of set-top box (cable/satellite, game console, or Roku-like device)), and those televisions become equipped with input devices (microphones, as we see with Kinect, cameras as we’re starting to see with some TVs), Skype is ideally suited to be the tool to tie all this together.

It’s also worth noting that for voice and video calls online, Skype is the pre-eminent brand. This Wired article mentions how Windows Live Messenger offers the same functionality and has a much larger user base… But how many people are using Messenger’s voice and video capabilities? I would guess that the overwhelming majority stick with instant messaging (as they do with iChat, AIM, and Yahoo! Messenger).

So, Skype has the leading mindshare and technological base for an activity that, while currently popular, will simply explode in the next 5 or so years as 4G, broadband, and cameras and microphones become basic internet plumbing. Skype will make Microsoft’s current product lines more desirable, and its potential is too great to really understand (it feels a bit like when Google bought YouTube.)

Now, by no means is this a slam dunk. The biggest challenge Microsoft will face in making the most of Skype is organizational. If you read about the acquisition of Danger and the misery that was the Kin, you know that Microsoft can be something of a shit show, particularly when there’s internal competition. One hopes that they’ve learned from that horrid experience, but I also know that organizational change is really freakin’ hard. Microsoft would probably be best served by simply leaving Skype alone (as much as possible). Skype needs to be free to build for all platforms, but there are definitely opportunities where Skype can integrate with other Microsoft components to create something special and new.

We’ll see.