Since Microsoft’s 2011 acquisition of Skype, the evolution of the messaging and network communications unit has come to illustrate the shift in how the software giant develops its products, industry analysts and company partners say.
As Microsoft works to seal its purchase of LinkedIn, the company is quietly overhauling Skype, the chat service that for years stood as the company’s largest-ever acquisition.
The $26.2 billion deal to buy LinkedIn put Microsoft’s checkered record of big acquisitions back under the spotlight. Deals to buy aQuantive (for $6.3 billion) and Nokia’s handset business (for $7.9 billion) both resulted in write-downs that erased virtually the entire value of the assets Microsoft acquired.
But the jury is still out on the $8.5 billion 2011 purchase of Skype, the trailblazing internet chat service.
The company doesn’t break out the financial performance or user totals for Skype, or its “Skype for Business” branded cousin, a descendant of unrelated Microsoft chat products. It is clear, though, from the rise of Facebook-owned Messenger and WhatsApp, that incumbents like Skype face a stiff challenge to stay relevant in the fast-moving technology industry.
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Messaging, along with voice and video chat, are becoming ubiquitous communications tools, and are among the software people use most. Such services are typically offered for free or at low cost, but can be conduits to display advertising, gather data to sell to advertisers, or get people to opt into other services.
The evolution of Skype in the past five years highlights the shift in how the Redmond company develops its products, industry analysts and company partners say, and may offer clues for its plans with LinkedIn.
Largely left alone for its early tenure under the Microsoft umbrella, Skype is increasingly intertwined with Microsoft’s Office suite, and is one of the company’s test cases in a bid to build more intelligent, next-generation software.
“It’s what Microsoft is doing more of,” said Ed Maguire, a software analyst with CLSA. “Buying a massive user base, not messing with it too much, and finding ways to tie it into the core franchise.”
Last week, the company announced a major re-engineering of the technology behind Skype, a bid to modernize and improve the software’s quality.
Skype, founded in 2003 and headquartered in Luxembourg, was among the pioneers in Voice over Internet Protocol (VoIP) technology, using computers to make calls through the plumbing of the internet, rather than telephone lines or cellular airwaves. The name was a mashup of “Sky” and “peer-to-peer,” for technology that connects one caller’s computer directly to another, instead of via a digital switchbox.
The company helped open the door for people to connect over the fast-growing internet, particularly across borders, without paying onerous telephone bills.
Skype was bought by eBay in 2005, and later sold to a consortium of technology investors. The company was exploring an initial public offering when Microsoft came calling in 2011.
After the $8.5 billion sale, Skype Chief Executive Tony Bates reported directly to Steve Ballmer, then Microsoft’s CEO.
Under the software giant, Skype retained its footprint of globally distributed teams. And despite Microsoft’s preference at the time for emphasizing tools for Windows, Skype kept its applications on other operating systems alive.
Current Microsoft Chief Executive Satya Nadella has made a similar pledge with LinkedIn, saying he will leave the day-to-day operations to LinkedIn CEO Jeff Weiner, who will report to Nadella.
Despite Skype’s relative independence and Microsoft’s backing, the service has been surpassed by other consumer chat services, particularly on smartphones — an institutional weak spot for Microsoft.
This spring, Nadella said Skype had 300 million “monthly connected users,” a term a company spokeswoman declined to define. When Microsoft bought Skype, about 170 million people were using the service each month.
Nearly doubling the customer base in five years is growth many companies would envy, but it pales in comparison to the trajectory of some Web-native chat newcomers.
Facebook’s stand-alone Messenger app, launched the year Microsoft bought Skype, this month topped one billion monthly active users. So has WhatsApp, a chat service popular outside the U.S. that Facebook acquired in 2014.
WeChat, launched by Chinese internet giant Tencent in 2011, now claims more than 700 million monthly active users.
Other messaging and collaboration services, including products from Google and Apple and upstarts Viber and Slack, make the field a highly competitive one.
“It’s a crowded conversation,” said Bill Haskins, a partner and senior analyst with Wainhouse Research. “There are a number of platforms out there that have better network effects. Microsoft has work to do to put Skype up there.”
Microsoft is two years into a painstaking effort to re-engineer Skype without breaking it.
Gurdeep Pall, the corporate vice president overseeing Skype, says the service’s peer-to-peer backbone, which worked well when messaging was primarily conducted between pairs of computers, grows outdated in a world in which people deal with Skype across a handful of different devices.
In the next few months, Pall said, Microsoft is aiming to finish migrating Skype’s services to Microsoft’s cloud, its centralized network of data centers. “We could have pulled the Band-Aid off two years ago, but we wanted to see what we could do to make this transition as seamless as possible,” Pall said in an interview.
Along the way, users have noticed hiccups like lost messages or notifications, dismissed on one device, that reappear later on another.
Pall says the migration to the cloud, and shutting down some older, soon-to-be unsupported Skype versions, should fix most of the issues, and stay within the 150 millisecond budget to between caller’s mouth and listener’s ear.
“We feel pretty good about Skype,” he said. “The brand is incredible, it extends to a very large user base which has survived many, many changes in the market.”
Skype wasn’t Microsoft’s first foray into messaging.
In addition to a consumer-focused Windows Live Messenger, Microsoft sold a series of workplace-focused messaging tools that ultimately landed on the Lync brand.
After the Skype deal, the Lync and Skype teams were eventually moved to the same unit, Lync was rebranded as Skype for Business in 2014.
They’re not the same product, however, and Pall said that though some joint teams are plugging away on services shared between the two, other groups of software engineers remain separate.
Skype for Business is focused on challenges like companywide conference calls, and a push to get businesses to replace their telephone systems with Microsoft’s cloud-based services.
Last year, the company added Skype to the bells and whistles of a new, more expensive business tier of its Office productivity software bundle, a classic Microsoft formula to use familiarity among information-technology buyers to get them to consider tacking on another product.
As in many markets Microsoft has plied since helping to put a computer on every desk, Skype appears to have found greater success with business than consumers.
Skype for Business is among the leaders in business messaging, running neck and neck with Cisco, analysts say.
Among some individual employees, Skype’s name recognition means they tend to use the service more than other products bought by their company, said Haskins, the Wainhouse analyst.
“Microsoft [could be] in control of a very dominant market position,” Haskins said. That could be a lucrative market: sales of chat services and other so-called unified communications systems to businesses totaled $20.7 billion worldwide last year, he said.
Skype is one of the guinea pigs in the new regime of software development at Microsoft, one that emphasizes speed, cross-company collaboration, and an aim to make software work more intelligently.
Skype was a highlight of one of Nadella’s first public appearances as chief executive when, in May 2014, he introduced the then-upcoming Skype Translator feature and said it would be available for people to try out before the end of the year.
That was the first time the team of Skype Translator developers, pulled from both Skype’s product groups and Microsoft’s research unit, heard of the aggressive deadline.
This spring, Nadella placed Skype, along with Outlook and other office tools, at the core of a Microsoft push to join the technology giants working on designing intelligent bots.
The early steps — enabling people to reserve a hotel room or order a pizza through a chat window — are relatively easy.
The longer-term goal is to help people interact with computers through conversational terms without having to learn the language of the internet or download an app. Microsoft can bring to bear a mound of chat and email data, and feed that into the computers learning how people talk and behave.
“The long-term potential is enormous, and Microsoft has what it takes to play a leadership role,” Qi Lu, the executive vice president of Microsoft’s Applications and Services Group, which includes Skype, said at a developer conference earlier this year.
If Microsoft uses Skype to carve out a foothold in that future, it could help justify the expensive deal, analysts say.
“It’s definitely a longer game than you think,” said Maguire, the CLSA analyst.
For Microsoft, which fell short on booming internet-age markets like mobile phone software and social networking, the bar for a win can be relatively low, he said.
“People don’t pay a whole lot of attention to Skype,” Maguire said. But, he added, Microsoft hasn’t fouled it up.