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Microsoft aims to put Skype at your fingertips

$8.5b deal will bring online calling to many more devices

By Hiawatha Bray
Globe Staff / May 11, 2011

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Microsoft Corp. wants to be your phone company.

The software giant’s $8.5 billion purchase of the Internet voice chat company Skype Inc. will give consumers a host of new online telephone services, built directly into Microsoft’s industry-dominating software products.

“Talking to friends and colleagues around the world will be as seamless as talking to them across a kitchen table or a conference room,’’ Microsoft’s chief executive, Steve Ballmer, said yesterday at a news conference.

Microsoft’s Windows Live Messenger software already lets people talk to each other over the Internet. But by adding Skype to its stable, Microsoft picks up an additional 660 million voice chat subscribers worldwide. Microsoft also stands to make Skype even more popular by integrating it into its best-selling products, including the Windows computer operating system, the Office productivity suite, and the Xbox 360 home gaming system.

“I think it is good for consumers,’’ said Zeus Kerravala, senior vice president of research at Yankee Group in Boston. “You will start seeing more Skype showing up in more places.’’

For example, Microsoft’s popular Kinect motion-based video game controller for the Xbox 360 gaming console already features Internet-based video chat. The system allows users to talk to any other user of a Kinect device, or to users of Microsoft’s Windows Live Messenger software for personal computers.

If Microsoft adds Skype to the Kinect, users could hold video or audio chats with any of hundreds of millions more users. And those with paid subscriptions to Skype could make voice calls to any phone, anywhere.

Consumers and small businesses could also benefit with the blending of Skype and Microsoft Outlook, the popular address book and calendar program found in Microsoft Office. A user could look up a friend in the Outlook address book, then launch a voice or video call directly from the computer by clicking a Skype icon. Microsoft already sells this kind of “unified communications’’ software to big companies. With Skype, it could deliver the same service to nearly everybody.

But Microsoft will find it tough to recoup Skype’s purchase price.

“It just seems like an awful lot of money,’’ said Mike Cherry, lead analyst at Directions on Microsoft, an independent research firm in Kirkland, Wash., that tracks the company. “I’ve never understood the business model of Skype.’’

While 170 million Skype subscribers use the service every month, the overwhelming majority use it to make free voice calls to other Skype subscribers, through their desktop computers or smartphones. Skype collects some revenue from its paid service, which lets callers dial traditional landline phones or cellphones anywhere in the world, but that has attracted fewer than nine million customers, and the company reported a $7 million net loss for 2010.

Kerravala said forcing current Skype users to pay is a nonstarter, especially since companies like Google Inc. and Yahoo Inc. offer free calling services. “If Microsoft disrupts this and tries to charge for it,’’ he said, “people won’t pay for it anymore.’’

Skype’s chief executive, Tony Bates, who will head the new Skype division at Microsoft, said the company will generate cash through on-screen advertisements.

Irene Berlinsky, senior analyst at IDC Corp. in Framingham, said Microsoft will need to tackle one of the biggest problems in Internet voice and video: the lack of a single technical standard to allow different chat products to work together. “They need to do more interoperability for this to take off,’’ Berlinsky said. “Every platform needs to talk to each other.’’

In the long run, she said, enabling Skype users to communicate easily with those using rival products will make the service more useful and more popular with consumers.

Hiawatha Bray can be reached at bray@globe.com.

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Skype

Founded: 2003

Headquarters: Luxembourg

Revenue: $860 million (2010)

Users: 663 million registered (as of December); 145 million monthly users, on average; 8.8 million paying users

Services: Free video and voice calls to other Skype users; instant messaging via Internet; calls to landline and mobile phones (for a fee). Customers can purchase a phone number that will forward calls to other phones. No 911 calls.

Google chat

Headquarters: Mountain View, Calif.

Launched: 2005, as a text-chat service; voice, video added in 2008

Users: Number unknown

Services: Free computer-to-computer voice and video calls to other Google Chat users. Calls to any US or Canadian phone are free in 2011. International fees vary. Free upgrade to Google Voice includes a free number to forward incoming calls to user’s other phones. Google Voice users must have US telephone service. No 911 calls.