Microsoft & Skype Can Lose the Web But Win the Internet

by Glenn Kelman | 13 Comments

What I’ve never understood about critics of Microsoft’s Internet strategy is what you expect Microsoft to do instead: just give up, and pretend the Internet doesn’t exist?

A more realistic strategy may be to give ground on the Web, but not the Internet. This after all, is what Apple has done, with iPhone and iTunes, with proprietary applications instead of HTML5. It has worked out just fine for Apple.

And this is what I like about Microsoft’s acquisition of Skype. Microsoft has demonstrated that it is fundamentally better at building software applications than websites. And Skype is an application, not a website.

Why not re-invent Office, Windows and X-Box to use the Internet for multi-media communications, with Skype as the backbone? The true threat to Microsoft’s business isn’t Google’s search engine, it’s Google Docs, which includes chat and video-calling functions that Skype can counter. Microsoft needs to give the world a reason not to buy the new Chrome notebooks that will start showing up in Best Buy next month.

Of course, the deal may well blow up. Any time you pay $8.5 billion for a company losing $7 million per year, it’s hard to call that financially savvy. And in general, it’s easy these days to be skeptical about any Microsoft acquisition, or any Microsoft Internet strategy, especially when acquiring a European a company that has been consumed and disgorged once already.

But I respect Microsoft for putting its chips in play. For years, the company’s corporate development strategy has been so quiescent that it seemed to be ceding the Internet to its competitors. No longer. It’s easy to criticize Steve Ballmer for doing nothing, or for doing anything; harder to say what you would do in his place. I’d try to win.

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Discussion

  • Bill

    Looks like Microsoft has completed that last piece of the Lync
    puzzle, connecting Skype directly to the PBX(Lync).
    Verizon, AT&T et al. can't be too happy. Microsoft has also announced that smartphone
    devices would be coming out that directly connect to Lync.

    “Skype will support Microsoft devices like Xbox
    and Kinect, Windows Phone and a wide array of Windows devices, and Microsoft will connect Skype users with
    Lync, Outlook, Xbox Live and other communities. Microsoft will
    continue to invest in and support Skype clients on non-Microsoft platforms,”
    said the release.

    • http://blog.redfin.com GlennKelman

      That's a smart move.

  • http://www.digitalquarters.net Ben Elowitz

    You changed my perspective on this. My first reaction on the news was “Oh dear.”.

    But yes, you're right: they should do *something*. The things that have kept Microsoft from winning on the internet are neither simple nor isolated. And though I'm sure they try hard to overcome those obstacles, progress has been slow. Cheers that Bing has gained ground, while Microsoft's other online initiatives – MSN, advertising, Mesh, Office Live, and others – have largely fizzled.

    So yes, an acquisition – a big acquisition that comes with an installed base of hundreds of millions of active users – gives them discontinuous traction. It takes them from zero to 60 at least in one area without having to slowly fight through one to 59. Good for Steve for doing something.

    But even as you changed my perspective, I'm still left feeling sad. Microsoft has so much potential. There are so many bright minds, so much talent, so much market power, so many brand assets. And yet the company can't seem to produce reliably to delight customers, much less win market share. The fierce determination that I saw from Microsoft when I worked there in the early 1990's is gone. Everyone I know there spends more time navigating internal politics than crushing competitors. While they have heavied up on Bing, they've let the rest of online languish. Features and whole products are repeatedly kept from achieving their potential to create and dominate new markets, subverted to serve the goal of selling only more Windows and Office licenses, while those two product lines are increasingly a smaller percentage of the software universe, getting outpaced by new categories of search, social networking, mobile, and video applications.

    Yes, Microsoft should make some inorganic moves to keep moving forward, and even at a shockingly high price for Skype, they can afford it. But I can't help but think that if only they put a tenth of that $8 billion in the form of attention on the problem of fixing the internal culture, management, and strategy issues they could create a company that would lead us into the next digital generation, instead of becoming the next legacy platform of the past.

    • http://blog.redfin.com GlennKelman

      Brilliant commentary Ben. Do you think money can change Microsoft's culture? What can?

      • http://www.digitalquarters.net Ben Elowitz

        I don't think the pressure will start from within; the layers are too dense and intertwined. The frog has been boiling for too long, and any impulse to jump is long since gone. But there are three sources I can think of to kickstart a change from outside.

        1) Shareholders. At what point will shareholders say that the current path of harvesting the core isn't good enough for a company with this much potential? An $8.5B Skype acquisition implies a shareholder base that is seeking growth, and accommodating of risk to get it. If things continue to languish in other areas, that creates room for an activist shareholder.

        2) Bill Gates. I wonder if he feels like his legacy is locked in with the success he achieved at Microsoft during his career there. It's not. They say the four points people remember of any experience are the first, the last, the high, and the low. Bill has the chance to create a new 'high' for his 'last', and be remembered for reachieving the greatness he had during his prime.

        3) Competitors. The last path is a bit slower, but is the one that would take hold eventually: each time a competitor gobbles up territory that Microsoft 'should' be able to own (search, online media, advertising, smartphones, consoles, streaming platforms (e.g. netflix/boxee), digital a/v media sales and rentals, web apps, and more), Microsoft recedes. At some point does the pressure build up where those in the innermost circles finally are willing to take drastic action? I hope so – though I think it will take a lot. Particularly, it will take threats to Microsoft's core Windows and Office profit centers. And those are not far out: Android is already eating in to Microsoft's profits. If Chrome gets a foothold on the desktop, and Google beefs up its apps, Microsoft's management and board may find their hands forced to take drastic actions.

        –Ben

  • Autod

    Might want to look at what happened to the Aquantive acquisition. This will end up the same.

    • http://blog.redfin.com GlennKelman

      Therefore Microsoft shouldn't acquire any companies at all?

      • http://www.limohiredirectory.co.uk/ Limo Hire

        no it is not possible.

  • Andrew S

    Microsoft needs to hand over their online operations to a company that knows how to make money on the internet. It's embarassing that the company with the most OS users and the most browser users loses money on online operations! Microsoft's problem is that every action they do is limited by the rest of their company–Office/Windows gets top priority; anything seen as hurting those businesses will get canned. For example, every top internet company uses Linux for servers, but at Microsoft they're forced to use Windows which ends up making computer capital costs 2-3x higher.

    I bet Redfin could turn Microsoft's online presence into a profit center…

    • http://blog.redfin.com GlennKelman

      That's very sweet of you to say but Microsoft so far is much, much better at making money than Redfin…

  • http://cafeland.vn cafelandvn

    i think that a good move

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  • Limo Hire Brisbane

    I think he has a good intention of doing so.
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