Microsoft’s $8.5B Skype Purchase Raises Telco Regulatory Issues, Experts Say

With the integration of Skype onto Microsoft services, regulators would be faced with less easily avoided issues of how far to extend telco duties to VoIP as, depending on in what way and how well Microsoft executes, it could accelerate the decline of the public switched telephone network, and the division between edge and network further blurs, Stifel Nicolaus analysts said. Policymakers may welcome the deal as a counterweight to the Bells and cable in the network vs. edge battles, particularly on “open Internet,” they said. Facebook was reportedly a potential buyer. But the social networking service that already has found success in a regulation-free environment wouldn’t want to have to deal with “the overhead of worldwide telco regulations,” said VoIP pioneer Jeff Pulver.

The deal would also raise issues of how Microsoft plays in the Universal Service/Intercarrier Compensation debates, as treatment of VoIP is a key variable in the revamp analysis, Stifel analysts said, saying the deal reinforces the need of the FCC to clarify the treatment of VoIP. National Telecommunications Cooperative Association CEO Shirley Bloomfield told us that the proposed acquisition proves “that we are way past the days of claiming that Voice over Internet Protocol is still a nascent technology and also that it’s essential that each and every service that utilizes advanced communications and broadband networks will fairly contribute to their sustainability.” Rural carriers have pushed back at the FCC’s proposed Universal Service Fund and intercarrier compensation regime overhauls (CD April 19 p3).

But OPASTCO President John Rose said he didn’t think Microsoft’s weight would be felt unless the FCC decides to make VoIP contribute to intercarrier compensation. “If this forces the FCC to have something less than the full rate of access, then that'll have huge implications for us,” Rose said. In the meantime, the proposed acquisition “has major implications for Microsoft, for Google and Facebook,” he said.

Microsoft and Skype are each a member of the Voice on the Net Coalition and each have argued that the FCC doesn’t have jurisdiction over non-interconnected VoIP traffic. But Microsoft’s proposed takeover “makes it harder for Skype to portray itself as the scrappy start-up” in its battles with rural carriers, one industry lobbyist said.

Media Access Project Senior Vice President Andrew Schwartzman said the proposed acquisition shouldn’t just affect the VoIP discussion. Microsoft has been “equivocal” about net neutrality while Skype has been “a leader” on pushing for neutrality rules. As Microsoft “takes over Skype, it ought to see the wisdom of net neutrality,” Schwartzman told us: “Skype’s business model depends on it."

The transaction, already approved by boards of both companies, is expected to get regulatory clearance before the end of the year, Microsoft Chief Financial Officer Peter Klein said during a conference call Tuesday. Plans to integrate Skype with Microsoft’s platform would be announced closer to when the companies receive regulatory approvals, executives said. “Even if Skype has licenses that need to be transferred, approval from the FCC and DOJ shouldn’t be a problem.” said Paul Gallant with MF Global. “It’s hard to see how this deal is anything but pro-competitive,” he said. In the U.S., either the Justice Department or the Federal Trade Commission would review the deal and across the Atlantic, the European Commission, said Jeff Silva with Medley Global Advisors. He expects the deal to be cleared on both sides of the ocean. The transaction continues trends of vertical integration in the tech sector, he said.

The risk to carriers is small, said Jonathan Chaplin with Credit Suisse. Investors might be worried that “a well sourced” Microsoft could make Skype a more credible threat to carrier voice revenue, but Skype has had a negligible impact on carrier revenue so far, he said. Additionally, some carriers have already imbedded Skype in their devices (Verizon did so more than a year ago), he said. Some carriers claimed Skype has been positive to revenue, especially data revenue, rather than cannibalistic, he said. Microsoft needs good relationships with carriers to drive the adoption of Windows Mobile operating system, Chaplin said. This would discourage Microsoft from pushing a disruptive business model with Skype, he said. Telcos wouldn’t be happy to see another over-the-top front opening but they have seen it coming, said ABI analysts.

Executives emphasized advertising opportunities as they explained plans to monetize Skype. Skype is now “just scratching the surface” with ads in the Windows platform, said Skype CEO Tony Bates. He expects to expand the availability of immersive rich media experiences in Skype products going forward. “We estimate 45 percent growth just in video-based ads over the compound annual growth rate in the next few years,” he said. Even before Microsoft made its bid for Skype, the two companies were working on advertising together, Microsoft CEO Steve Ballmer said. Skype would continue to be multiplatform: The executives stressed the importance of having the service work on different platforms, whether it be a computer, a phone, or on the TV. Microsoft will continue to build upon Skype’s customer base, Ballmer said. Under the agreement, Skype will become a new Microsoft division, led by current CEO Tony Bates. He will report directly to Ballmer.

Meanwhile, $8.5 billion is a lot of money for “a firm whose business has yet to become profitable,” especially if compared to the $2.6 billion (in cash and stock) that Silver Lake paid eBay for 65 percent of it in 2009, and the $5-$6 billion the owners had sought from other potential suitors including Google, some analysts said. It’s quite possible Microsoft is willing to pay the price so their closet rivals can’t have Skype, Pulver said. And in order to protect their future customer base, a move to take Skype out of the hands of their competitors is well worth 7 or 8 billion dollars to Microsoft, he said.