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Microsoft to buy Skype

Confounding expectations that it would be Facebook that eventually went for Skype, it has emerged yesterday that Microsoft has agreed to buy Skype for US$8.5bn.

Aside from being a flashy attention grabbing move, this acquisition has the potential to bring added value to many of Microsoft's products and services, not least Windows Phone. Skype can be used in some form or another on most smartphone (unless Microsoft has a mind to change this situation, which it would be unwise to do). But the service could be optimised and tied in closely with Windows Phone 7, perhaps with some exclusive features, potentially providing a unique selling point for Nokia's upcoming range of Windows phones available through dealers.

There is potential stumbling block. Mobile operators, with a few notable exceptions, have traditionally been very wary of Skype and mobile VoIP in general. And mobile operators remain essential partners in the sale and distribution of mobile handsets, especially in markets like Western Europe where device subsidies remain high. Pushing Skype to the fore of a new device's features as an attractive selling point may actively put off mobile operators.

However, the outright hostility shown by many mobile operators towards Skype and its ilk is not a tenable long term position. Actively blocking or even failing to aid the use of VoIP on mobile devices risks damaging consumer perceptions of mobile operators in the long run. The immediate threat to call revenues is also not very high. VoIP usage is heavily concentrated in outbound international calls, and the majority of VoIP calls terminate on PCs, not on mobile phones – which is a different use case from conventional mobile calls.

Added to this is the fact that in order to freely use VoIP over the mobile network, users need to have a reliably generous data plan, meaning they are most likely to be contract customers who do not pay incrementally for voice calls anyway. Of course what mobile operator are scared of is a potential future scenario in which the majority of mobile users have VoIP on their phones and habitually bypass voice services making free calls to each other as they now do over their computers.

This is not outside the realms of possibility but many things are likely to change within the mobile industry before such a scenario becomes likely, and in any case continued hostility to Skype in the short term is unlikely to prevent it.

The other reason that mobile operators are worried by VoIP is the effect it can have on their networks. Skype is trying to combat this concern. In February this year it launched a new mobile partner program that provides, among other things, Skype mobile voice calling with optimised bandwidth efficiency. If VoIP over mobile is coming anyway, it surely make sense for operators to actively partner with providers, Skype being the most attractive, to have more chance of controlling its impact, and take advantage of the potential marketing and brand image benefits.

So far, most mobile operators are not doing this. Rightly or wrongly, the majority of mobile operator would prefer to continue hiding from Skype. So, while deep Skype integration and exclusive Skype features could be a great selling point for the forthcoming range of Nokia WP7 phones, the potential hostility of mobile operators could prevent Nokia and Microsoft taking full advantage, thus diminishing the value of this gutsy acquisition by Microsoft.

Rosalind Craven – Senior Research Analyst, IDC
11 May 2011