Microsoft's (NASDAQ:MSFT) pending $8.5 billion purchase of Skype raises a number of difficult questions for those in the wireless industry: What does the deal mean for wireless carriers like Verizon Wireless (NYSE:VZ)? What does it mean for Windows Phone 7 licensees like Nokia (NYSE:NOK)? And how does Microsoft plan to leverage Skype into its mobile offerings?
Obviously Microsoft can and probably will pull Skype into a number of its businesses, including Xbox, Hotmail and Lync, but I think mobile is where the Microsoft-Skype tie-up holds the greatest opportunities--and the greatest challenges.
Specifically, Skype gives Microsoft an answer to Apple's (NASDAQ:AAPL) FaceTime calling technology, which allows iPhone, iPad and Mac users to make free video calls to each other. So far Apple's FaceTime only works on Wi-Fi, but Apple said last year it hoped to add cellular into the mix at some point. (Although I suspect most wireless carriers have serious reservations about supporting FaceTime.) Skype also represents an alternative to Google Voice, a call management service Google NASDAQ:GOOG) is working to embed into its Android smartphone operating system. Both FaceTime and Google Voice are over-the-top offerings that undermine wireless carriers' relationships to their subscribers. After all, why would a subscriber pay for Verizon's call-forwarding service if they could just get it from Google Voice for free?
That said, some wireless carriers have opened to Google Voice and Skype. Verizon Wireless early last year inked a major deal with Skype to provide inexpensive calling services to Skype users that work over Verizon's circuit-switched network. Separately, Sprint Nextel earlier this year announced a deal with Google to support Google Voice service for free on all Sprint (NYSE:S) phones.
But exactly how far will Microsoft push Skype into mobile? Skype earlier this year acquired mobile video calling service Qik for a rumored $100 million; Qik powers the default video calling service on many Android phones from both Sprint and T-Mobile USA. Will Microsoft push Skype and Qik as the default video calling service for the wireless industry? (Interestingly, Microsoft did today confirm that it will continue to support Skype's efforts to target non-Microsoft platforms--meaning, Microsoft's Skype business will continue to support Google's Android and Apple's iOS operating systems.)
"We'll certainly work with our [wireless] operator partners," said Microsoft CEO Steve Ballmer during a press conference detailing the Skype transaction.
And what of Nokia and Windows Phone? Will Microsoft make Skype a required element of Windows Phone devices? Such a move would mean that Windows Phone licensees like Nokia and HTC would have to support a calling service that wireless carriers might not.
The questions sticking to the Microsoft-Skype deal are weighty, but the opportunity the companies are eying is too. Already, video calling is 40 percent of Skype's traffic, and the advent of LTE and WiMAX networks creates a foundation to foster ubiquitous mobile video calling. Microsoft's purchase of Skype--one of the software giant's few major acquisitions of the past 10 years--indicates the company wants to play a role in the future of IP communications, both wired and wireless. After all, imagine a future where a user could start a video call on their Xbox in their living room, move it to their LTE phone as they travel outside, and pay either nothing or very little thanks to Microsoft's insertion of video ads. (Skype's CEO said the company expects 45 percent growth in video-based ads over the next few years.)
But to reach that opportunity, Microsoft will have a bit of a tricky line to toe. The company will have to play nice with wireless carriers, handset makers and--most importantly--users, if it is to cash in on the future. --Mike