Microsoft Buyout Of Skype: A Quest For Search Market Share

A number of media outlets say that Microsoft (NASDAQ: MSFT) bought global VoIP service Skype for $8.5 billion. Skype’s subscriber base has been put at 655 million. Skype’s S-1, a step toward an IPO, showed 2010 revenue of $860 million and a net loss of $7 million.

A valuation of ten times 2010 revenue is rich to say the least. Microsoft must see some strategic value to the transaction, or what business school professors and management consultants call synergy. Microsoft may expect that Skype’s primary value will be to drive its search engine share much higher and allow it to more successfully attack  Google.

The initial speculation is that Microsoft will use Skype to help its foray into the mobile phone market. Its Windows Mobile 7 product has lagged behind Google (NASDAQ: GOOG) Android-powered phones and operating systems from Apple (NASDAQ: AAPL) and Research In Motion (NASDAQ: RIMM). Microsoft’s most daring gamble to increase its mobile market share is a joint venture with troubled handset company Nokia (NYSE: NOK). Those benefits may be years away and may never come. Demaned for Nokia smartphones continues to be weak.

The Wall Street Journal’s comments on the deal analyze why the buyout may have limited appeal as a way to advance Redmond’s mobile OS business. “Microsoft will likely need to tread carefully, though, in integrating Skype into its mobile software because of the potential for pushback from wireless carriers, whose support Microsoft badly needs. Skype could give consumers a way to make cheap phone calls over the Internet from mobile phones, without paying higher rates to the carriers.” Carriers may decide to block many of Microsoft’s VoIP  plans altogether.

Microsoft’s real motive for a Skype buyout is likely to be to increase its mobile search engine share, something it has been unable to do so far. Recent research from brokerage Macquarie Group shows that paid search may get 10% of its revenue from mobile use by the end of the year. The same research shows Google has 98% of that market in the US. Google’s total market share in Europe means that it is probably just as dominant in the mobile market there.

The Skype software does not carry search engine features now, but at any given time 25 million Skype subscribers are online. That would give Microsoft a huge platform for Bing. It has no other way to flank Google in the wireless sector.

The race for search dominance has quickly moved from the PC to the portable device, and Microsoft has made nearly no progress in this transition. Skype may be a cheap ticket to the next huge search market.

Douglas A. McIntyre