The Skype Story: Microsoft Buys Skype. What Now?

I also talked about how eBay never really found a way to integrate Skype into its business, at least not in a way that really worked, and when leadership of eBay changed and John Donaho took over leadership of the company, one of his priorities was to find something to do

with Skype. Now. Initially, the plan was to spin off Skype as its own company in an initial public offering, but that fell apart when Skype's original architects threatened to pull the technology that powered the service if they went

that route without working with those founders. So instead, eBay would actually sell off a majority stake in Skype to an investor group silver Lake and the Skype founders would also get a share of the ownership of Skype, and eBay would hold on to about thirty percent of the steak itself. Now, this is what set up all the parties were a huge windfall when Microsoft expressed interest in

acquiring Skype in around twenty ten twenty eleven. And it's also why I cannot call the eBay acquisition of Skype one of the worst deals of all time, at least not I may have done that once upon a time, I don't think I can really say that. I think it was a bad deal because the companies failed to find a way to integrate with one another. They couldn't find those synergies that they had been planning on. So

in that sense, it was a failure. But unlike some of the other deals that tend to make a worst Deals of all Time list, eBay did not lose a ton of money on this if you're looking just at the purchase price versus the sell price. In fact, they actually made money compared to you know, how much they bought versus how much they got when they sold it. If you compare that to the time when News Corp.

Bought MySpace. They bought MySpace for five hundred and eighty million dollars and then they later sold it for thirty five million dollars. That was a stinker of a deal. That was a huge loss. Now, obviously that doesn't actually take into account how much money eBay spent while owning Skype on the product, like how much money they poured

into development and that sort of stuff. If you take all of those considerations into account, if very well may be that ultimately, yes, eBay lost money on the deal, but they still sold it for more than they bought it, so on the worst deals list, it can't be number one. Anyway. Let's set the stage for Microsoft's offer. While eBay and Skype did not synergize the way Meg Whitman had hoped, it didn't stop Skype from continuing to grow over the years.

In twenty ten, the service boasted five hundred and sixty million registered users collectively. Those users had used Skype for more than two hundred and seven billion minutes of voice and video chats collectively across the entire history of Skype. Now, if you actually convert that into years, that means that there were more than three hundred ninety three, eight hundred and thirty five years worth of digital chats that had gone across Skype over its history. Yaosen no wonder Microsoft

was interested in it. And interested is putting it lightly, because Microsoft was ready to offer the largest deal in the company's history at that point. Anyway, it was for eight point five six billion dollars in cash, a truly princely sum, and this was at a time when other parties were similarly starting to express interest in acquiring Skype. Rumor had it that both Google and Facebook, which of course now is Meta, were interested in potentially either partnering

with Skype or just outright acquiring it. But Microsoft was the party that won the right to acquire Skype. And to be clear, Skype was actually making money at this point. It had debt as well, but it was making money. In two thousand and eight, the division posted revenue of more than eight hundred and sixty million dollars, but of

course revenue is not profit. But the profit was around two hundred six sixty million dollars, so they weren't making money, which put that into contrast with tons of startups that come out of Silicon Valley, where you know, some of them just don't even make revenue. But other ones that do make revenue, most of them failed to turn a profit for years, years and years. There are services that, you know, for almost the entire history of the service

were not profitable. So Skype was kind of a standout in the crowd on that regard. A quarter of a billion dollars in profit is a mountainous amount of money, but it is just a drop in the bucket compared to eight point five billion dollars. And like I said, Microsoft had never made an acquisition offer as large as that before. Now since it has done that, right, Like the Activision Blizzard deal which just completed was nearly seventy billion dollars, almost ten times as much. So so yeah,

they have gone bigger since then. An article from Wired back in twenty eleven put the deal in the context of some other acquisitions Microsoft had made, ones with much smaller price tags. But Wired was saying Microsoft had a history of purchasing companies but having very little to show

for those purchases. That you know, there was clearly a desire to acquire these these companies, but then kind of momentum just died, so that it was sort of a warning, and it raised the question what did Microsoft see in Skype that would prompt the company to offer what was at that point an unprecedented amount of cash. This was a cash deal too. This wasn't one of those deals where it was you know, trades and stock or whatever. It was actually, no, we will pay you eight point

five billion dollars because Microsoft was flush with cash. Now, confusing the matter was that Microsoft already had some products that, at least in part art were overlaps or in competition with Skype. Windows Live Messaging, for example, offered live chat, including video chat, as well as text messaging. So you might say, well, why would you want Skype? You already have a tool that does kind of what Skype is doing. It also had a bunch of corporate products that did

something similar for big companies. Right, a lot of Microsoft's businesses were focused on enterprise clients, not individual customers. But how can we get a customer like an entire company to buy into our systems because that's where the big, big money is. And in fact, Microsoft's owned and operated products already boasted more users and more simultaneous connections than Skype. In some cases, you see a company acquire another one. Not because they want access to that company's technology, so

they want access to that company's user base. Right. That was one of the arguments that was made when Facebook acquired WhatsApp was that Facebook was more interested in getting access to WhatsApp's users than WhatsApp itself. I don't think that was fully true. I think it was like an equal opportunity thing, like, yes, I want the users and I want the technology. Now. Skype did have one thing that Microsoft's products did not have. It had interoperability with

landline and cellular telephone services. Right. That was a paid for option in Skype, in that you could use Skype to make a computer to telephone phone call. Perhaps more importantly, folks had to pay to use that specific service, and around eight million of Skype's registered users were doing that on the rag And that was something that Microsoft did not have access to. And Microsoft was kind of struggling

in the communications space. It had been pushing variations of Windows for mobile phones for years, but the rise of the iPhone and Android platforms kept the Windows mobile platform at a distant third not always at third place, either, Sometimes there were other operating systems that took third place. In fact, let's explore for a few minutes Microsoft's history with mobile communications devices, because I think that's an important

piece to consider. I think it was one of the motivating factors that led Microsoft to acquire Skype in the first place. So Microsoft had been trying to establish a strong presence in the space at least since the early two thousands, with Pocket PC and Windows Mobile operating systems. Now, you could argue that the history goes back even further into the mid nineteen nineties with the introduction of Windows

CE in ninety six. Windows CE was intended for handheld PCs, so think of things like, you know, very mobile computers, almost like tablet style computer systems. Now, before the era of the smartphone, there was the personal Digital assistant or PDA, and you can kind of think of a PDA as a smartphone without the phone part. The term was really established with the introduction of the Apple Newton, although the Newton itself wasn't the first device that fit the definition,

but it was the device that introduced the term. And there was a rush to become the company to define mobile computing, and Microsoft was very much interested in being in that race. So Microsoft had a long history of catering to enterprises, as I mentioned, you know, to go and try and build products specifically for business and business leaders, and a lot of their business came from licensing or

selling Microsoft products to these companies. So it made sense to develop a mobile operating system that could be compatible with the various software packages Microsoft published, right to build an operating system that could run at least some version of things like Outlook or a window, you know, Microsoft Office products, and Microsoft's mobile operating system would also work on smartphones, though at this point we're still in the

era of smartphones being the domain of fancy business people, right, you wouldn't get consumer smartphones, at least not truly widely adopted consumer smartphones until two thousand and seven. And Microsoft also was not in the business of making the hardware, so they were just focusing on the software that would

run on top of the devices. So then when we do get to two thousand and seven, when Apple rolled out its own smartphone, which was a really sexy device that could serve as a computer and a communications device and a digital media player and more, Apple made a power move and something Microsoft was not ready to meet. Like, they did not have an answer for the iPhone when

the iPhone came out in two thousand and seven. Then Google released Android a short time later, and another competing mobile operating system was there on the market, and unlike Apple, Google partnered with handset manufacturers to put the Android operating system on devices. Now Apple was doing everything itself, Google was working with partners, which was more like Microsoft. Right. Microsoft was doing the same sort of thing with their

own mobile operating system. But the important thing is the era of the consumer smartphone was upon us, and the utilitarian smartphones that were meant just for business leaders now were taking second place to these sleek and sexy touch screen interface smartphones that were meant for consumers. In two

thousand and seven, Microsoft introduced Windows Mobile six. While there was a version of Windows Mobile six that would work with touch screens, that version was called the Professional version of Windows Mobile six, so that kind of indicated that Microsoft was still looking at smartphones as kind of an

elite business device, not something for the general consumer. They also offered classic and standard versions of the operating system, so these were versions of the operating system that were meant for other devices, such as smartphones that did not have a touchscreen but had like physical keyboards and stuff

and even PDAs. Now, it wasn't until two thousand and nine that Microsoft had a quote unquote finger friendly version of its operating system, and by then the iPhone and Android phones had been evolving for a couple of years and had really established a firm presence in the market.

In twenty ten, Microsoft would change the name of its mobile operating system, so instead of being called Windows Mobile, it became Windows Phone, and it changed dramatically like Microsoft was finally really ready to meet Android and iOS, and the user interface for Windows Phone was obviously meant to compete direct directly with Android and iOS devices. The company was already well behind Google and Apple and the consumer market. However, and this brings us up to the time of Microsoft's

decision to acquire Skype. We will continue our story, but first let's take a quick break to thank our sponsors. We're back. So perhaps Microsoft was viewing Skype as the killer app that would propel Windows Phone into the spotlight. That might have at least been part of their decision to go after Skype. Maybe the plan was to leverage Skype and make Skype the primary method of connecting with other you know, other people instead of using traditional cellular service,

you would use Skype to connect to everybody. Now, if that had been the plan, conventional wisdom said that Microsoft embracing Skype would likely tick off the various carriers in the phone space. That would be a huge issue now. At the time when smartphones were coming out, there were these big deals with carriers, sometimes meaning that a phone might be exclusive to a specific carrier, at least in the United States. So like when the iPhone first came out,

it was exclusive to AT and T users. If you were on any other carrier, you could not have an iPhone because it wouldn't work on that carrier's service. You had to be an AT and T customer. And part of those deals meant that the carriers would offer big discounts on the smartphones in order to get you hooked into the carrier's service. It's like the whole idea of like, this is the lure, and once you've taken the lure, you're caught, and now you're you're hers for as long

as we want you. And it meant that the initial cost of these phones was much much much lower than you would find today because those kind of agreements are much more rare today. If you were to go and buy a phone, in a lot of cases, you'd just be paying full price to get the phone and then

add it to whatever service you already have. But at this point that's not how things were going, and the fear was that if Microsoft chose Skype as the central way of communicating through this phone, it would alienate all the carriers and there'd be no way to form that kind of relationship and people would have to pay full price to get a Windows phone, which seems like a

barrier to entry now. Before the acquisition deal could even go through, there were a couple of instances where a bug in Skype software caused a significant crash in the service for millions of users. Not service wide, but enough

users for it to be a problem. Fortunately, a patched client and Skype's own instructions or workarounds would limit the problem, but it did demonstrate that there were some issues here, and it prompted Skype to make a change to its back end infrastructure that would continue over the course of the following years. So way back when Skype was first introduced, it was built purely upon peer to peer networks, and in a peer to peer network every computer is equal

to every other computer on the system. But by this point Skype had designated some of its own servers, servers that Skype itself owned, as supernodes. These devices would feature open connectivity and would remain online pretty much all the time. This was meant to be kind of like the backbone of Skype service that while other computers might go up and down, these would be dependable and they would provide

additional stability to the overall network. But it would mean that you're kind of moving away from this more democratic peer to peer approach, and you could say things got a little or Wellian, not nineteen eighty four, but more like animal farm, where you have a peer to peer network in which all computers are equal, but some computers are more equal than others. That's probably being a bit too unfair, because the move was becoming necessary. The way

we were using computers was changing. Before the smartphone era, we were depending on desktops and laptop computers to access the Internet, and a lot of times we would just keep those devices running even if we weren't actively using them. These were the computers that, when connected to a peer to peer network, would continue to share their resources with the overall system. It's what made peer to peer networks work. But with the proliferation of smartphones, more of our computer

activity began to shift to mobile devices. We started to use desktops and laptops less frequently, and we weren't always keeping them online, and that meant that the peer to peer network saw a decline in active nodes across the system. So if Skype had remained strictly a peer to peer service, the actual performance of Skype would have steadily declined because fewer computers remained active in the network. There would be fewer resources for Skype to use, and the service would

go downhill. So you could argue that this was absolutely a necessary move for Skype in order for the service to continue to work. Now, this didn't actually slow down Microsoft's deal. They made the eight and a half billion

dollar offer. The collection of Skype stakeholders agreed to that, and that actually would mean that eBay would get another one point four billion because of its stake in Skype, and by my reckoning, that ultimately means eBay sold Skype for somewhere in the neighborhood of seven hundred million dollars more than what it paid for it, so again, not

exactly the worst deal in tech history. Though also again I'm not factoring in how much money eBay poured into Skype while it owned it, so it's not an apples to apples thing. But anyway, in this era, Steve Balmer was in charge of Microsoft. Now, if you do not know who Steve Balmer is, there's no shade on that. But boy, how do you need to go to YouTube and search Microsoft Steve Balmer and look for the greatest hits of that man's performances on various stages at different conferences,

because the word intense doesn't begin to capture that guy. Anyway, Bamber planned to integrate Skype into lots of Microsoft products. Just like when Meg Whitman was in charge of eBay, she had intended to get Skype integrated deeply into eBay's products and services. Balmer planned to do the same thing over at Microsoft. So the plan was to to great Skype with things like the Xbox game console, with products like Outlook mail, and potentially with Microsoft's Windows for Phones platform.

Most of that would not pan out, and some critics would end up saying that this was classic Steve Balmer, that he was guilty of buying assets and then not really knowing how to leverage them, like how to integrate them or how to otherwise use them in a meaningful way.

Microsoft did continue the trend of porting more of Skype's back end operations onto Microsoft's owned and operated supernotes, So this was again kind of changing the nature of how Skype worked, like removing that whole peer to peer aspect. It was a very slow transition, however, this was not something that was like one day they flipped a switch and everything went from peer to peer to kind of

a cloud based system. It would actually take several years to complete, but it did mean that Skype would change from peer to peer to cloud based ultimately. Now, one semi scandal that kind of broke out around this time was that Microsoft was potentially making this change in order

to garner approval from US authorities. So you got to remember, this is around the time that there were all these whistleblowers coming forward showing that various authorities, primarily the NSA, were using technologies to tap into different communications channels throughout the United States and were actively spying on US citizens. And this is a huge, huge story and it involved dozens of companies in the telecommunications and information services spaces.

So the fringe theory was that Microsoft wanted to migrate away from peer to peer networks because those systems would make it impossible for folks to trace phone calls or to intercept calls, and that Microsoft was instead moving to their own cloud based system because then they could comply with law enforcement if there were in order to share information about users. Now, the truth of the matter is Skype was never immune to tracking, at least not on

a technical level, like it was possible. That doesn't mean it happened, but it was technically possible. So the move toward a more cloud based infrastructure didn't mean that it was suddenly more susceptible to that. It was just a different approach. It also was a move that happened before Microsoft had even acquired Skype, right, because when Skype was still with the investor Group, they were already transitioning toward a semi cloud based kind of infrastructure. So it's not

like Microsoft made that decision. They just continued that decision. But folks love a good conspiracy theory, and trust me, I'm not like a flag waiver for Microsoft, but I don't want to throw the company under the bus for something that it really didn't do. The transition to cloud, like I said, took years, It kind of wrapped up

around twenty sixteen. The change actually meant that Skype users had to update the client that they were using to access the service because the peer to peer based Skype clients would not work with the new cloud based infrastructure. So Microsoft rolled out some new clients for folks to download and use so they could continue to utilize the

Skype service. Under Microsoft's ownership, Skype did get more complicated, and a lot of analysts, at least in hindsight, say that Skype was bloated with features that did not really contribute to the prime purpose for Skype. We see this a lot with different products, especially products that have a very long lifespan, where over the course of a product's life cycle, the developers will start to add in that

don't really make a whole lot of sense. And part of it is just because you might reach a level of maturity with an app or service where there's not really any further you can go with like the primary functions, like a word processor, you can always improve it, but tends to be very incremental improvement, Right, So, how do you create a product that's different enough from the predecessor to convince people to buy it? You know, how do you get people to come out and buy a new

word processing program if they already have one. Well, you've got to add in some features, and often that can mean that features that don't actually really incorporate into the main purpose of the software get thrown in there, and that could just make things more messy. It could mean that your performance will take a hit as well, and

that apparently happened with Skype. At this point. I wasn't even using Skype, so it's hard for me to say from a personal level, but from what I've read, Skype performance was taking a hit, and it was getting so feature heavy. You know, the audio quality, the video quality weren't really measuring up toward to what competitors were able to offer. So the one thing that Skype was really important for, which was for voice and video calls, it

wasn't doing as well as competitors. I Meanwhile, you had all these other superfluous features being thrown in there, and there were still concerns about privacy and security with Skype. Part of the issue was that Skype's operations were proprietary. You know, they were under wraps. Microsoft was not talking too much about what actually was going on under the hood with Skype, and that included what part did encryption

play in Skype communications? Was it fully encrypted? But you had other communications services that boasted end to end encryption, meaning that if someone were to intercept communications between point point B, they probably wouldn't be able to tell what was being said because the encryption would prevent them from doing so. But Microsoft wasn't even saying to what extent,

if any, did encryption play with Skype Communications. And you then had the opportunity for competing services to kind of step and serve a community that was perhaps a bit more concerned about privacy and security. WhatsApp is a great example of that. So WhatsApp was proving to be a massive competitor to Skype, and it's funny because it didn't have the video and audio capabilities of Skype. Facebook actually purchased WhatsApp in twenty fourteen for the princely sum of

around nineteen billion dollars. Again, the estimations of how much this deal went for it they changed from source to source, so somewhere in the neighborhood of nineteen billion dollars. Some of it have it actually significantly more than that when you add in all the different considerations, but let's just say it was a boatload of money, and even more money than what Microsoft paid for Skype right while by the following year, by twenty fifteen, wsapp was cited as

the world's most popular messaging application. And while WhatsApp was only text based, it did allow users to send messages to anyone all over the world without having to deal with text messaging fees or international fees, so it was a very affordable way to have communications. It wasn't even ads supported. The acquisition gave an enormous boost to Facebook's daily active user numbers, and you know those were spread out across all the Facebook platforms, which included Facebook itself, Wasapp,

and Instagram. But Facebook had plans to integrate these like there were. The big plan was, let's make an integrated messaging service where it works on Instagram and Facebook and WhatsApp. It would turn out that would be a lot more complicated than what Zuckerberg initially thought back in twenty fourteen, but that was the plan. Kind of similar to how Microsoft and even eBay had planned to incorporate Skype into

their own operations. Now, one big advantage WhatsApp had was that it sported a simple user interface, It worked, it was easy to understand, and it made everything work fairly smoothly. Meanwhile, Skype was continuing to get cluttered under Microsoft's ownership. While WhatsApp was seeing adoption and use grow year over year, Skype couldn't quite boast the same. Now, overall number of registered users on Skype kept going up, like it was

getting up to like two billion. By the time you're getting to twenty twenty, However, the number of folks who were actively using the service on any given day was in decl line. Okay, we're gonna take another quick break. When we come back, I'll talk about another complicating factor in Microsoft's ownership of Skype. But first let's take another quick break. Okay. In twenty sixteen, Microsoft announced a new product, one that would end up ultimately having overlap with Skype,

and this product was Microsoft Teams. So initially, the Team service wasn't intended to compete against Skype, because that wouldn't make sense. Microsoft already owns Skype, there's no reason to make a product that cannibalizes another of your products. Instead, Teams was intended to be a competitor against another service,

that of Slack. See there was a time where Microsoft was considered making an acquisition move on Slack and offering a similar amount of money to buy Slack as it did Skype, but Bill Gates was not in favor of that.

He was chairman of the board at this point. He was not CEO or anything, but he did not like the idea of Microsoft making yet another acquisition and potentially finding itself in the same situation as it had been in the past, which is that it now owns another company but is incapable of integrating that company's technologies into Microsoft services. Instead, he said, no, what the company should do is develop its alternative to Slack and go into

direct competition. So the plan for Teams was to create a tool that facilitated internal communications within an organization. So it be Microsoft's approach to project management, communication and collaboration. In twenty seventeen, Microsoft pulled the plug on Windows Phone. The company just could not make a dent in the dominant market presence of Android and iOS. They could not

gain market share. They were always in like the single digit percentages when it came to the overall market share for smartphone operating systems on that were active on the market, and because they were having trouble getting adoption, it also meant they were having real trouble convincing third party developers to make apps for the Windows Phone platform. And that

becomes a cyclical issue. Right, you don't have people buying Windows Phone devices, which means you don't have developers making apps for Windows Phone devices, which means you can't attract people to buy Windows Phone devices because their favorite apps aren't available on it. So it just wasn't going anywhere, and Microsoft made the painful decision to kill the platform

and they bowed out of the space. There was tons of news about it in the tech circles when Microsoft finally said, Okay, you know, we did our best, it's not working. We have to walk away. But this also meant that one of the potential applications for Skype kind of faded away as well. One of the reasons why Microsoft bought Skype in the first place just never panned out.

Then you've got Zoom. While Watsapp was becoming the most popular text based communications service Zoom was becoming a much more useful tool for group calls, conference calls, that sort of stuff. Microsoft had been building out Skype to serve as an enterprise tool for remote meetings. They actually had a Skype for Business tool, but Zoom was doing the same thing. And the difference was Zoom was staying relatively

slim compared to the bloat of Skype. Zoom had launched back in twenty eleven, and while it had a late star compared to Skype, the service boasted better audio and better video quality, and that the things that Zoom was investing in were in support of that of audio and video quality and connectivity. Those were like the things that Zoom was focusing on. Meanwhile, again Microsoft was Skype was kind of adding bloatwear to the service. This kind of

starts to bring us up to twenty twenty. Now, going into twenty twenty, Skype had around forty million active users, but by the end of it it was down to thirty six million. Number. Go down is not what companies want to see, so this was bad news for Microsoft. Now, Zoom, on the other hand, was pushed into the spotlight. The service saw an unprecedented surge in adoption as various companies had to jump on the platform in order to make

remote work a possibility. Remember, with the pandemic, companies all around the world were to go remote, not everyone, but a lot of them, and to do that they had to rely on tools that would allow for communication between teams and to let managers have those overbearing conversations with folks that you feel could have been better expressed in

an email. Not that I'm speaking from personal experience, but analysts would say that because Zoom was prioritizing features that supported the very primary purpose of the tool, to facilitate audio and video conferencing, it was winning out because Skype seemed to have a bunch of cruff built around it that not only didn't contribute to the main purpose of the tool, but actually seemed to detract from it. Then you had Microsoft Teams, their division were actually taking lessons

from Zoom and putting them to heart. They built in video and chat features into teams, but they were doing it in a way where they were emphasizing video and audio quality, and that was something that Skype just wasn't really doing at the time. So Microsoft then pulled the plug on Skype for business actually they did that in twenty nineteen, and the decision was, let's focus on Microsoft Teams to fill that role for our enterprise customers, and Skype would be positioned to be more for one on

one personal communication between users. So it almost was like Microsoft Teams is the corporate version of this tool and Skype is for the personal communications version. And the decline in that user base has led lots of people to say Skype is essentially on the road to being obsolete, that it'll just be a matter of time before Microsoft ends support for Skype, but that for the moment, enough people are using it to justify keeping it around for

a while. But who knows. It is possible that Microsoft will find a new way to inject life into Skype. That could happen, or maybe Microsoft could spin off Skype the way that the plan had been back in two thousand and eight, but we'll have to see right now. Or maybe they'll even look to sell it to a different owner. That's another possibility. But that's pretty much where

Skype is today. Just kind of a crazy journey from a peer to peer network to a cloud based communications service, one that could have been the pivotal communications service during the pandemic, but because of various poor decisions, which is easy to say in hindsight. I mean, at the time, I'm sure they didn't feel like they were poor decisions, but in hindsight they are. It just means that Skype was a communication service that some people used and most

people didn't. But I think it's still very important company. I don't know if it's actually on the road to slow obsolescence and death. I hope it's not. I hope that they're able to find ways to make better use of it, because I think that there's a there's a good story there, and it does play a very important part for people who need to be able to communicate with each other across the world and can't afford to do that through more traditional telecommunications routes. So yeah, that's it.

That's the full full story on Skype so far. I hope you enjoyed this pair of episodes, and I've got a lot more stuff coming in the very near future. On next week, we've got an interview with a neuroscientist that's going to go up, and we've got another entry in the Ignobel Prize series, and of course tech News. So I hope you are all well, and I'll talk to you again really soon. Tech Stuff is an iHeartRadio production.

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