In 2011, Microsoft paid $8.56b for Skype. And then Microsoft blew it.

The popularity of Zoom is proof enough – if COVID-19 happened 10 years ago, we’d all have been Skyping, not Zooming.

At the time of the deal, questions were already being asked about the strategic fit and the premium price tag (Wired, 2011). Skype had reported a turnover of $860m, but a net loss of $7m. The economics of the deal didn’t justify the price. Nor were there any strong enough integration prospects with Microsoft’s existing apps. In fact, Skype was likely to kill Windows Phone.

Then things got worse.

So, what happened and what are the lessons for the business owner?

1. Poor user experience: Skype’s business model involved peer-to-peer contact, which is a good model in reducing operating costs – no heavy investment in servers to host each call. But it’s a terrible architecture when relying on user’s devices for quality, which were often under-resourced and, hence, often failed. (Slidebean: Startups 101, 5 June 2020)

2. Poor user expectation: to address the quality issues, Microsoft tried implementing a series of fixes. Unfortunately, fixes that were promised within months took years. And, like smacking water drops on a counter top, while one problem was eliminated, more problems splashed out of other places.

3. Too many projects: Microsoft prioritised developing Skype for Business, which distracted from definitively and rapidly resolving the user experience issues with regular Skype. Capital and talent were stretched and results suffered.

4. Multiple overlapping products: funding and R&D for MS Teams took a much higher priority than Skype in the boardroom, leaving Skype as the poor cousin languishing and exacerbating the other problems. It didn’t make sense to have multiple products competing not only for management attention, but diluting each product’s position in the market.

For an app that so successfully disrupted the telecoms industry (to the point where Skype was banned in some countries to protect national phone networks), it’s a sad demise.

An upside from this tragedy, though, is that MS Teams took many good elements from Skype and Skype for Business. This contributed to Teams being a robust product (even though it’s nowhere near as user-friendly as Zoom).

There's little else worth celebrating, meaning that the only real value Microsoft earned from acquiring Skype was extending Skype technology into Teams. There could be an argument for the economic value of removing a competitor from the market, but then why invest anything at all in not only maintaining Skype, but building Skype for Business?

The bottom line, literally, is that Microsoft’s return on investment is dwarfed by the cost of its investment in Skype.

Something we advise our clients wanting to hit the acquisition trail is to be clear on how any acquired company will strengthen their growth strategy, their market position, and their product suite, and that there’s a viable plan for integrating the acquisition that preserves its value.

In this case, Microsoft got all four of those criteria very wrong.