Strategic CIO // IT Strategy
Commentary
5/11/2011
02:44 PM
Paul McDougall
Paul McDougall
Commentary
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Skype Buy First Of Many For DOJ-Free Microsoft

Now that its consent decree with the Justice Department is expiring, Redmond is turning its $50 billion in cash into a competitive weapon.

Microsoft’s announcement on Tuesday that it will pay $8.5 billion to acquire Skype stunned the technology world. But it shouldn’t have been too surprising. Starting this week, for the first time in a decade, the software giant is free to operate without hands-on scrutiny from the U.S. Department of Justice. Microsoft can now spend its $50 billion cash pile mostly as it sees fit.

Quick bit of history: The U.S. government sued Microsoft for antitrust violations in 1998, alleging that the company was using its dominant position in the software market to stifle competition. Among the DOJ’s concerns was that Microsoft geared Windows to favor Microsoft apps over competing offerings on host PCs. Under a 2001 settlement, Microsoft agreed to share documentation with rivals and to take other steps to promote the interoperability of Windows with third-party applications.

That settlement didn’t prohibit Microsoft from bundling software like Internet Explorer or Media Player with Windows, nor did it explicitly place limits on Microsoft’s ability to acquire other companies. But there’s little doubt that the deal had a chilling effect on Microsoft’s M&A appetite -- the company just didn’t want to push its luck after getting off with what many critics of the consent decree called a slap on the wrist.

And that’s why Microsoft has been among the least acquisitive big tech vendors over the past decade, and one of the industry’s biggest cash hoarders. Before the Skype deal, Microsoft had made just three acquisitions in excess of $1 billion in the last 10 years. Oracle has made six, while IBM has made nine.

Those days are over, starting now. At a press event Tuesday at the Interop Las Vegas technology conference, Internet pioneer Vint Cerf, now a Google VP, made a sly reference to the Skype deal when informed that the Microsoft consent decree expires on Thursday. “That explains a lot,” Cerf said.

Indeed, now in the unfamiliar position of having to play catchup to long-time rival Apple and upstart Google, Microsoft CEO Steve Ballmer appears ready to put more of the company’s cash to work in the post-settlement era. In addition to the $8.5 billion for Skype, Microsoft will pay billions more to Nokia as part of a deal that makes Windows Phone the default OS on Nokia smartphones.

Those moves should serve notice to the rest of the industry that Microsoft is now willing to buy market share in sectors where it’s had a tough time competing through innovation and smart marketing.

Microsoft’s biggest buyout while laboring under the consent decree was its 2007 acquisition of digital ad services provider aQuantive for $6 billion. That deal put Microsoft in a brand new business that was already highly fragmented, so there never was much chance of it drawing the wrath of the company’s DOJ minders.

The Skype deal is completely different. Microsoft unapologetically plans to use Skype to bolster Windows and other core products by bundling in VoIP services, a step it wouldn’t have taken while still under the DOJ’s thumb. ”Skype will support Microsoft devices like Xbox and Kinect, Windows Phone, and a wide array of Windows devices, and Microsoft will connect Skype users with Lync, Outlook, Xbox Live, and other communities,” Microsoft said in a statement.

The company did pledge “to continue to invest in and support Skype clients on non-Microsoft platforms.” Right. Remember the pathetic drone from the movie Office Space? The sap who kept getting shunted around the building until he was finally banished to a desk in the basement? That’s the guy who’ll be working on the iPhone and Android versions of Skype at Microsoft.

On Thursday, the technology industry passes into a new era. It will be fun to watch an unfettered Microsoft battle its biggest rivals. That creaking sound you hear? It’s Microsoft opening the war chest. Next week, I’ll take a look at the sectors where the company will spend that money.

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