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Microsoft’s Sense In The Skype Deal - Masterpiece Or Billions Grave?

Microsoft (MSFT) is on a way to reinvent itself. Within the software industry, the giant from Redmond dominated its competitors for more than a decade. Within the Internet, Microsoft never found a way to the peak.

Now, Microsoft will pay billions for the internet telephony service Skype and has the hope to secure a piece of the future internet era. Skype brings Microsoft many new customers as well as a proven technology for video calls on mobile phones. The price of USD 8.5 billion dollar is dramatically higher than the amounts for Skype in recent transactions. In October 2005, Ebay (Ebay) paid USD 2.6 billion for Skype and sold the company in 2009 for USD 2.75 billion. Did Microsoft need this transaction?

The group is just in a curious situation: The funds are filling up each quarter with new billions, money from the cash machines Windows and Office - cash in an amount of USD 50.1 billion at quarter end Q3 2010/2011. Investors want growth and success in the fight against Google (GOOG) and Facebook. But many of Microsoft's problems begin with a lowercase "i", like the iPhone, iPad, and iMac, products designed by Apple (AAPL).

Apple has changed the mobile communication market with the iPhone. With the success of the tablet computer iPad, Apple is on the best way to repeat this for the pc market. This development hits Microsoft Windows in a very bad way because Windows and Office are the only cash cows. Latest figures showed this clearly. The operating profit amounted to USD 5.7 billion at the end of March 2011. Roughly USD 2.7 billion contributed the Windows division, additional USD 3.1 billion came from the business division with its Office licenses. In contrast, the Internet business created a loss of more than USD 700 million in cash - while Google’s search engine Primus reports steady growth and record profits.

For years, Microsoft is trying to find a way to compete with Google. As a result, Microsoft announced a cooperation with the internet pioneer Yahoo (YHOO) - who has similar problems in the internet industry – as well as a cooperation with the leading smartphone manufacturer Nokia (NOK). Is the Skype deal the turnaround?

On the one hand, Microsoft is getting 660 million registered users, on the other hand, they secure a technology which is proven and widely used. A next era could come with the face time video telephony where Skye is an unbeaten market leader. In addition, the deal could push Microsoft’s gaming console Xbox and as Microsoft CEO Steve Balmer has already announced, Skype should be linked to their e-mail communication program Outlook. Skype could also be a good asset for a Facebook cooperation who plans to introduce a video communication service. This could be a gateway to social networking.

Microsoft forgets one thing: Skype has problems too. Many of their customers are worthless because they have an account but they don’t use them. Skype owns a good technology and a strong brand but the quality of the service is mainly depending on the quality of the infrastructure of the telecoms like AT&T (T) and Verizon (VZ). If they don’t invest in their grid, Skype will be meaningless in the future.

Related Stock Ticker:
MSFT, T, VZ, GOOG, AAPL, YHOO, NOK, EBAY

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