$8.5B seems rather expensive to me, but I can understand why Microsoft would want Skype.  And I don’t think it is primarily for the reasons most people are saying.

First of all, recognize that Microsoft already has two competing products.  The first, Lync (formerly Office Communicator/Office Communications Server), is aimed at the enterprise unified communications business.  This is not something either Skype nor Google competes in, however it is an area of significant competition between Microsoft and Cisco.  I don’t see how Skype helps Microsoft in this particularly competition.  On the other hand Microsoft has failed in, and withdrawn, its offering for Small Businesses: Microsoft Response Point.  And while Office 365 Lync may be suitable for larger small businesses it isn’t clear it will address the very small (<=5 user) market.  Skype could be a gap filler here,  particularly since I see so many small business people using it.

Microsoft also has Windows Live Messenger (WLM), which besides being an instant messenger client allows for both voice and video calling to other WLM users.  Indeed when analysts say something like Microsoft bought Skype to have something that can compete with Apple’s Facetime I really scratch my head and wonder if they have a clue about Microsoft’s assets.  Microsoft already has everything it needs to offer a Facetime competitor, and I’m sure one was well along as part of the “Mango” update independent of the Skype purchase.

So what is Microsoft missing?  Well for one thing it has no way to connect Windows Live Messenger with the telephone (either VOIP or POTS) network.  So Windows Live Messenger only allows calling between WLM clients.  Skype provides the interconnect with the phone network that Microsoft has been missing.  This is one of the two reasons that I believe Microsoft purchased Skype, but I’m not sure it is the primary reason!

The primary reason I believe Microsoft purchased Skype was to increase its share of Users & Identities on the Internet.  Up until recently Microsoft held the lead on Internet Identities via the Live IDs used for its Hotmail, Messenger, XBox Live and other properties.  But Facebook, not to mention Google and ongoing competition from Yahoo, have erased Microsoft’s lead.  While most now consider Facebook the leader in Internet Identities, the numbers seem to indicate that Skype is the real leader with about 660 Million users.   Add that to Microsoft’s existing Live IDs and we are talking about Microsoft properties having somewhere in the neighborhood of 1 Billion users.  That’s twice Facebook and leaves both Google and Yahoo in the dust.  Of course there are duplicates on all these properties, so the number of unique users/IDs is somewhat of a guess.  But if we assume similar duplication rates across the various user bases then its all a wash.  And given that Windows Live Messenger and Skype are direct competitors, it is likely that Microsoft gains between 250 and 500 million new unique users/IDs.  That is huge.

Microsoft considers owning a user’s Internet identity crucial for all kinds of reasons.  There is the obvious, that an identity represents a user (or at least a user in a specific context), and someone using one of your services is someone not using (or using less of) a competitive service.  It is an opportunity to get them to use more of your services.  And, in this age of rejecting third-part tracking, it is another way to aggregate first-party information and use it for personalization.  That should improve the aggregate user experience, and from a business perspective it makes it more attractive for an advertiser (e.g., Macy’s, Ford, Sony, etc.) to place ads with Microsoft because Microsoft can deliver them to a larger number of users in a more targeted way.

How Microsoft wraps this all up with its existing product lines is yet to be seen, but the opportunities for doing so are huge.  Skype is obviously the best known consumer VOIP/Video calling brand and one that will have great appeal for Windows Phone 7 as well as on future Windows tablets.  The Skype distribution that goes to 660 million users, mostly on PCs, becomes another tool for distributing Bing toolbars and search defaults.   And how will Microsoft integrate and/or rationalize its Skype, Windows Live Messenger, and Lync offerings?  I would expect Skype and WLM to be merged, while Lync is perhaps rebranded but otherwise remains a separate (and hopefully integrated) offering.  As they say, the devil is in the details and we’ll have to wait and see if Microsoft can maximize the opportunity while minimizing the defection of Skype (and Messenger) users to other services.

There is of course one additional way to view this acquisition.  Microsoft is determined to be the leader in Natural User Interface, an area it pioneered in Microsoft Research but was slow to adopt in its products. After letting Apple get an early lead with capacitive multi-touch (since Microsoft Surface addresses such a narrow segment) and Nintendo with motion-sensing controllers, Microsoft took the lead on motion-based control with Kinnect and has been working to achieve competitive parity on the multi-touch UI front.  Microsoft has always seen itself as a leader in all aspects of Voice, although that has yet to really pay off for them.  The addition of Skype may be a further signal that they really intend to own Voice (based control and communications) user interfaces.

Is Skype worth the $8.5B Microsoft is paying?  Potentially.  Unfortunately Microsoft hasn’t yet shown the ability to monetize its Internet properties the way that Google has.  The Skype acquisition can turn out to be extremely successful from a strategic standpoint, but unless Microsoft figures out the “monetization thing” shareholders are going to be dissapointed.  And that applies to Bing, MSN, and Windows Live every bit as much as it applies to Skype.