Updated: The Challenges And Opportunities For Microsoft And Skype

Steve Ballmer, the CEO of Microsoft (NSDQ: MSFT), today said his company first decided to buy Skype when the two were in discussions on an advertising deal (advertising is one way Skype has hoped to make more money off those millions of people who steadfastly refuse to take up its premium, paid services and opt for the free ones). In talking to Skype, he says, “it became clear to us that we had the opportunity to do more as a single company that would be innovative and beneficial” than as two entities. Now that Microsoft is paying $8.5 billion in cash to close that deal, it will, indeed, have a lot more opportunities to use Skype as a conduit for its other business, and to also use Skype’s voice and video chat services to enhance its own products. But will it all be smooth sailing for Skyposoft?

Integration: Microsoft has laid out massive ambitions for Skype to enhance its existing business. In its statement announcing the deal, it names no less than six products and services where it hopes to integrate it: Xbox, Kinect, Windows Phone, the corporate IM service Lync, Outlook and Xbox Live.

That’s an exciting prospect — think about how a video chat service might work brilliantly in a game, for example, or the opportunities for Microsoft to add more voice and videoconferencing services in to its enterprise offerings. (It has them now, but clearly it’s not been as much of a success as Microsoft would have liked.)

And it’s a prospect that might be realistic too: Skype has been pushing hard on developing and rolling out APIs (via its Skype Kit SDK) for third parties to use, and these could make it easier for Microsoft to integrate these services than one might think.

But operationally, will Microsoft’s culture mesh just as easily with Skype’s? Tellingly, perhaps, Microsoft is bolting Skype on as a separate division, and keeping its CEO, Tony Bates, at the helm of the operation.

Scale: Microsoft already has huge reach with its most successful products. Skype, with 700 million downloads, has demonstrated that it could give Microsoft even more — and crucially in ways that it has been trying to move, across multiple platforms like Internet and mobile. No word on what kind of crossover Microsoft and Skype users there is at present.

Mobile: A huge opportunity here for Microsoft. The company is in the middle of revamping its Windows Phone platform — the latest iteration will be launched in two weeks’ time — and it’s looking for services that will both help it compete with and exceed what Google (NSDQ: GOOG) and Apple (NSDQ: AAPL) are respectively doing with Android and iOS. Skype has already made a lot of headway into the smartphone world with its apps for the iPhone and Android; a tie-up with Microsoft could give a more native, integrated version of those services to Windows Phone users.

Skype — once a cannibal threat to voice revenues — has slowly, slowly been finding a seat the table with mobile operators, too. Now that they are moving to faster networks and getting more jazzed up about data services, there could be an opportunity for Microsoft to leverage Skype’s services with those others that it already offers to operators to run their networks.

Facebook: Before the Microsoft deal was announced, there was a lot of talk about Facebook doing something with Skype. This deal doesn’t wipe out that possibility at all — and in fact it might make it more possible, given that Microsoft is a shareholder in Facebook. Could Microsoft also piggy back that deal to embed more of its products in Facebook?

Google: Google was also being floated as a Skype partner/buyer. Some have reported that Microsoft’s buy, in fact, was defensive, made to keep Skype out of Google’s hands. Marc Andreessen, one of Skype’s investors who has now cashed out, appears to dispute this in an interview with AllThingsD. Regardless, it seems very unlikely that Google will be integrating with Skype in any way now.

The acquisition specter: Microsoft has a very patchy track record with acquisitions, and even more so with its priciest ones: think here of Microsoft’s Danger mobile acquisition (for a mere $500 million) or its $6 billion purchase of aQuantive.

The eBay (NSDQ: EBAY) specter: Skype is a killer Internet calling service — one that, when it does go down, you hear about in amplified form — but its achilles heel has been monetization. Skype today said it had 10 million paying users, and 170 million users that connect monthly on average. Microsoft is making a costly gamble on being able to do what eBay never could (although it has gained in Skype as a pure investment, thanks to Microsoft) and monetize a service that at its heart was envisioned as a cheap and disruptive one?