It’s been nearly two years since Microsoft Corporation (NASDAQ:MSFT) paid a whopping $8.5 billion for the VoIP service Skype, its largest acquisition ever. Naturally, a deal of that magnitude elicited its share of questions: How do you monetize Skype to warrant that kind of price tag? How will Skype integrate with Microsoft’s other enterprise-related services? And, most of all, when will investors begin to see a return on Microsoft Corporation (NASDAQ:MSFT)’s investment? Thankfully for shareholders, Microsoft is beginning to answer some of those questions.
A few answers
It’s too early for Microsoft Corporation (NASDAQ:MSFT) to answer all the concerns surrounding its Skype purchase, but a recent report detailing the growth in international phone traffic should help appease some of the naysayers. According to telecom research firm TeleGeography, international calls increased 5% in 2012, to 490 billion minutes. But overseas calls don’t take into account VoIP or messaging apps, like Microsoft’s Skype; and this is where the numbers get interesting.
As large a market as the international telecom sector is, its growth pales in comparison to Microsoft Corporation (NASDAQ:MSFT)’s service. Skype’s international voice and video traffic rose to 167 billion minutes in 2012, a 44% increase compared to 2011. To put that in perspective, the growth in Skype’s usage last year was more than double that of traditional international phone carriers combined. Better still, international calls, including group video and select business features, actually generate revenue for Microsoft Corporation (NASDAQ:MSFT), unlike the free Skype-to-Skype calls many of us are used to.
Microsoft didn’t provide revenue details of its Entertainment and Devices unit last quarter. However, Microsoft’s Xbox unit sales did drop 2 8% compared to a year-ago, equating to a $1.1 billion decrease in revenues for the unit. But, even with the decline in Xbox sales, Microsoft’s entertainment and devices revenues of $4.15 billion were comparatively flat compared to 2011.
Where did Microsoft’s entertainment and devices revenue come from, if not Xbox sales? Even factoring in a number of one-time charges last quarter, there’s more going on here than simple accounting — one look at the staggering growth in Skype usage speaks to that. Microsoft CEO Steve Ballmer is notoriously mum when it comes to providing specific sales results, but it’s not a stretch to infer a 44% jump in Skype usage – especially usage that generates revenues – played a part in making up for its lack of Xbox sales.
Microsoft is hardly alone in the VoIP and video conferencing space, and the primary players are significant. But with the kind of growth Microsoft is seeing in its Skype unit, you can bet the gloves are coming off at Google Inc (NASDAQ:GOOG), and even its current VoIP partner, Facebook Inc (NASDAQ:FB).
With an expected $15.4 billion in revenue generated in the VoIP market this year, Google’s Voice service is going to get some serious attention from CEO Larry Page. Google has already announced its VoIP service will remain free in 2013 for the U.S. and Canada markets, but will charge for overseas calls. Revenues are always nice, but for Google, Voice is (yet) another means of seamlessly running apps, and retaining customers, on its plethora of Android OS devices. And if Google’s good at anything, it’s keeping users around long enough to generate advertising revenues.