Microsoft's $8.5 Billion Skype Acquisition: Value Analysis
This paper examines Microsoft's $8.5 billion acquisition of Skype by analyzing the value Skype brings to the transaction. Beginning with Skype's mission and business model, the paper evaluates the company's competitive position using Porter's generic strategies and a SWOT-style environmental analysis. It identifies Skype's key strengths — its brand recognition and massive user base — alongside significant weaknesses, particularly its struggle with profitability and product quality. The paper also assesses external opportunities and threats, including globalization trends and intense VoIP competition. The paper concludes with strategic recommendations for Microsoft regarding integration, technological leadership, and the establishment of clear objectives to unlock Skype's long-term value.
- Introduction: Context and scope of Microsoft-Skype acquisition
- Mission, Vision, and Values: Skype's business identity and user base strengths
- Competitive Analysis: Porter's framework, brand strengths, and profitability weaknesses
- External Environment Analysis: Globalization opportunities, competitive threats, economic factors
- Recommendations for Microsoft: Integration, technology leadership, and profit objectives
- Conclusion: Unlocking Skype's value through Microsoft integration
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What makes this paper effective
- Applies a recognized strategic framework (Porter's generic strategies) to assess Skype's market positioning, grounding the analysis in established business theory rather than opinion alone.
- Balances internal analysis (strengths, weaknesses, mission, business model) with external analysis (social, economic, legal, competitive forces), giving the paper a well-rounded analytical structure.
- Moves logically from diagnosis to prescription — the recommendations section flows directly from the weaknesses and threats identified earlier, demonstrating coherent argument construction.
Key academic technique demonstrated
The paper demonstrates applied strategic analysis: it takes a real-world corporate event (a major acquisition) and systematically evaluates it using multiple business frameworks. By combining a mission/values review, a SWOT-style competitive analysis, and Porter's cost-leadership framework, the author shows how academic tools can generate practical, evidence-based recommendations rather than mere description.
Structure breakdown
The paper opens with context on the acquisition and narrows its scope to Skype's side of the deal. It then examines Skype's mission and user base, conducts a competitive and environmental analysis covering industry threats and macro forces, and closes with targeted recommendations for Microsoft around integration, technological leadership, and profitability objectives. Each section builds directly on the previous one, maintaining a clear analytical throughline.
Introduction
Microsoft purchased Skype for $8.5 billion (Primack, 2010). This marked the third time in five years that Skype had been sold — first to eBay and then to a private investment group. The company had filed for an IPO, but that never came to pass as Microsoft entered the bidding and took over. There have been significant questions from industry observers about the value of Skype to Microsoft and whether Microsoft overpaid. Analysts have attempted to determine what Microsoft's plans for Skype are, and whether those plans justify the seemingly high valuation (Bright, 2011).
Since the purchase, there have been a number of changes at Skype as Microsoft seeks to capture value from the company. One recent example is the pending launch of conversation ads (McCue, 2012). To better understand this acquisition, the business of Skype and the needs of Microsoft must both be taken into consideration. This paper focuses on the Skype side of the transaction in order to determine what value it brings to the deal.
Mission, Vision, and Values
As a subsidiary of Microsoft, Skype no longer publishes an independent mission, vision, or values statement. Some of this information can nonetheless be interpreted from the company's website. For example, the company describes its business as follows:
"Skype is for doing things together, whenever you're apart. Skype's text, voice and video make it simple to share experiences with the people that matter to you, wherever they are." — Skype.com (2012)
This statement functions as a mission statement. It describes, in broad terms, the company's business — which is technically Voice over Internet Protocol (VoIP) — but more generally encompasses communication. Skype is used for both personal and business communication. The software is downloaded onto a computer or mobile device and functions across a number of different platforms. Calls between Skype users are free, but calls to non-Skype numbers are not, and customers must deposit funds into a Skype account to cover the cost of such calls.
Skype has a number of strengths that make it attractive to Microsoft. It has 170 million users in total and upwards of 40 million online at any given time — figures that add significant volume to Microsoft's own Live Messenger service (Bright, 2011). There has also been speculation that Microsoft made the purchase defensively, to counter the threat that Google or Facebook would acquire Skype (Bright, 2011). This would imply that part of the value in Skype lies in the lost revenue or lost market share that would have resulted had a competitor been able to purchase it. The intrinsic value of Skype to Microsoft is therefore only one component of the purchase price.
Competitive Analysis
Among VoIP providers, Skype is a differentiated company, with its main points of differentiation being ease of use, a large user base, and low price. As a communications medium more broadly, however, Skype occupies a distinct competitive position. Given that its mission statement indicates it views itself first and foremost as a communications software provider, its positioning must be evaluated in that context. Using Porter's generic strategies, Skype would be classified as a cost leader. Its service is offered at a lower price than landline or mobile telecom services, and with this strategy Skype pursues the mass market. The company's low pricing succeeds only when volume is sufficiently high. Microsoft is pursuing a comparable strategy with Live Messenger, a service that has attracted a user base even larger than Skype's.
The major strengths of Skype revolve around its ability to reach a broad audience. The company has an excellent brand name that attracts users. Although other VoIP services exist — including those from very large companies — Skype is often the first one consumers think of and the first one they recommend. This demonstrates exceptional brand power and confirms that Skype is the brand of choice for many consumers seeking this type of service. Another significant strength is Skype's large user base. There are considerable benefits when both parties in a conversation are on Skype (calls are free in that case), so having a critical mass of users only serves to attract additional users.
The critical weakness of Skype lies in its business model. The company has struggled with profitability because it cannot generate a large enough paying user base to cover its costs. It offers telecommunications at a very low price, and this has proven insufficient to turn a profit. There is no evidence that this has changed since Microsoft took over, although new revenue streams are being developed. The business model is inherently contradictory: the more people who sign up for Skype, the lower the percentage of communications that will be subject to charges. Given that competition within the VoIP industry makes it unlikely this dynamic will change, it is one of the primary reasons many observers question whether Skype can ever be consistently profitable.
There are also product-level weaknesses. Skype cannot charge more for phone calls because call quality is lower than that of competitors in landline or mobile telecommunications. Issues with clarity, dropped calls, and other quality-related problems are more prevalent with Skype than with conventional telecom services. There is also a widespread perception that security with Skype is lower than with other modes of communication, which discourages businesses from adopting the service at scale or paying for it.
Conclusion
Overall, Skype is in a difficult position, but because of its strong brand and massive user base it does have a lot to offer Microsoft. The key to unlocking that value lies in establishing a clear vision for the integration of Skype with Microsoft — one in which the value Skype brings adds to the overall value of Microsoft, and in which Skype becomes a technological leader capable of generating sufficient revenues to make the company profitable.
Works Cited
Bright, P. (2011). Microsoft buys Skype for $8.5 billion. Why, exactly? Wired Magazine. Retrieved June 15, 2012 from
Bright, P. (2011). Why Skype? Microsoft confirms $8.5 billion purchase, clarifies nothing. Ars Technica. Retrieved June 15, 2012 from http://arstechnica.com/information-technology/2011/05/microsoft-confirms-85-bn-skype-purchase-clarifies-nothing/
McCue, T. (2012). Skype for Windows and Microsoft launch conversation ads. Forbes. Retrieved June 15, 2012 from http://www.forbes.com/sites/tjmccue/2012/06/13/skype-for-windows-and-microsoft-launch-conversation-ads/
Primack, D. (2010). Yes, Microsoft is buying Skype. CNN Money. Retrieved June 15, 2012 from http://finance.fortune.cnn.com/2011/05/10/yes-microsoft-is-buying-skype/
Ricknas, M. (2008). Skype's new packages show VoIP becoming commodity. PC World. Retrieved June 15, 2012 from
Skype.com. (2012). About Skype. Skype.com. Retrieved June 15, 2012 from
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