When the Wall Street Journal reported last night that Microsoft was going to buy Skype, the response was puzzlement. Though Skype has some value, the estimated $7 billion-8 billion valuation was unfathomable. Microsoft has now confirmed the purchase and held a press conference to announce the takeover. The morning after the night before, is it making any more sense?

From what little the company has said, not really. Microsoft will buy Skype for $8.5 billion in cash. The companies have entered into a definitive agreement, and the deal has received approval from both boards of directors; pending regulatory approval, it will close by the end of the year. Skype will be run as a new business division within Microsoft, with Skype CEO Tony Bates taking a new role as president of the Microsoft Skype Division, reporting directly to Microsoft CEO Steve Ballmer. Speaking at the press conference, Ballmer said that Microsoft originally planned a partnership before deciding to buy the company outright.

The plan outlined in the official statement is to bring Skype support to Xbox, Kinect, Office, and Windows Phone, and perform some kind of integration or bridge between the existing Skype user base and Microsoft's Lync, Outlook, and Xbox Live communities. Microsoft also confirmed that it would continue to support the Skype clients that run on non-Microsoft platforms.

What are they thinking?

Integrating with Xbox, Kinect, and Windows Phone is the sum total of the plan that Microsoft put in the press release. At the press conference there was also some non-specific talk about advertising. But that's it. That's Microsoft's grand vision for its $8.5 billion purchase. Adding voice and video chat to its games console and phone platform and maybe showing a few ads.

Never mind that the company has its own voice and video chat platform already. Never mind that it shows ads on that platform already. Never mind that its own platform is bigger than Skype's—Windows Live Messenger boasts in excess of 330 million monthly active users with 40 million concurrent, compared to Skype's 170 million and 20 million-30 million concurrent. Never mind that it already plans to integrate Windows Live Messenger into Windows Phone, and surely has the development expertise to integrate Messenger into Xbox and Kinect for a fraction of the $8.5 billion it's spending for Skype. Never mind that Messenger already interoperates with Lync. Never mind that Messenger already integrates with Office. All this was forgotten or ignored.

Even more remarkably, nary a mention was made of the big thing Skype does that Windows Live Messenger and Lync don't do any more (though Messenger used to have a limited outbound capability)—connect to real phone networks, offering both dial-in and dial-out phone access. The one aspect of Skype's service that could be used to truly extend Microsoft's reach—and the main aspect of Skype's service that people actually pay for—was ignored. Instead, the focus was on how cool it would be to use Kinect for video conferencing. This emphasis on (almost all unpaid) video serves only to downplay the value of the paid telephony service. And, of course, it's nothing that can't be done with Windows Live Messenger/Lync; Microsoft has already announced plans to bring Kinect-based telepresence to Lync-based video conferencing.

The question of "Why Skype?" was left fundamentally unanswered. Steve Ballmer made much of Skype's brand strength. Skype has become synonymous with voice or video calling for many, to the extent that "Skype" is now widely used as a verb—so what Ballmer says is true. But how does that translate into real value? Windows Live Messenger's brand may not be as strong or as recognized—not least because many long-time users still call it "MSN Messenger"—but that apparent lack of strength hasn't prevented it from accumulating an enormous number of users. Research suggests that even corporate markets have higher usage levels of Messenger than they do of Skype, so it offers no particular inroads into the corporate messaging market.

Similarly, much was made of the size of Skype's user base and the 600,000 new accounts created each day—but what do these numbers actually mean? How many of those accounts are duplicates, or spammers, or discarded after a single use? With just 8 million paying customers, one thing is clear: most of them are sticking to free services.

Also unclear is just how many people are using those services because they like Skype. I use Skype regularly, and I'm a paying customer, using both SkypeIn, to give myself a phone number in a foreign market, and SkypeOut, to take advantage of cheap VoIP calls. I also use Skype for video calling. But none of this is out of any particular loyalty or strong feeling for Skype. It's because Microsoft made the video chatting in Windows Live Messenger a whole lot worse in the latest iteration, and because there are no good software-based VoIP providers offering an alternative service. If, say, Google expanded Google Voice to offer comparable telephony features at a better price, I'd switch without hesitation. Sure, Skype has network effects—if someone you want to talk to is on Skype then obviously you need to have a Skype account of your own—but these essentially only apply to the free services anyway. And once more, Messenger has network effects of its own, and due to its larger network, these effects are more influential.

One thing is clear: Microsoft's senior management doesn't have much confidence in Messenger and Lync. To buy a competitor with so much overlap and to claim that the purchase is some great enabler for new levels of cross-device messaging and audio/video integration, shows that the managers at Redmond place no value at all on Messenger, and little value on Lync. If these products are so bad—and you certainly don't go out and spend $8.5 billion to replace your in-house effort if you think your in-house effort is any good—one has to ask, why has Microsoft been developing them and why didn't it replace them sooner?

Division of labor

The plan to run Skype as its own division is also peculiar. Microsoft has had difficulty integrating purchases in the past—the Danger debacle being a prime example—so importing Skype wholesale and leaving it as its own standalone division has obvious merits; it avoids all the integration problems that would come from making Skype's employees fit into Microsoft's management structure. There's also no clear place for Skype to go; Online Services (home of Windows Live Messenger), Business Tools (home of Office and Lync) and Entertainment and Devices (home of Kinect and Xbox) would all be candidates. Keeping Skype as a separate division would avoid fragmenting the team.

On the other hand, Skype makes an awfully strange division. Windows Live Messenger doesn't get its own division; nor does Lync, or even Xbox. And the Skype division is going to be pulled in a number of different directions, as each of the other divisions demands access to and integration of its technology. Balancing these demands without descending into squabbles over priorities and access will require careful management. The already substantial overlap between Skype and existing products also means Microsoft will have to work hard to avoid even greater levels of reduplication and waste.

Such reduplication may turn out to be unavoidable. Putting Skype into Windows Phone, Xbox, and Kinect doesn't argue against doing the same for Messenger. There are still plenty of Messenger users out there, and it still makes sense to give them the same level of integration. It's hard to believe that Skype is going to be substantially better, or faster, or easier to integrate than Messenger, and it is beyond credibility that Microsoft felt that this was the most effective way of bringing messaging services to these platforms.

The future of telephony

The joker in the pack could be Windows Phone. If Microsoft integrated Skype into Windows Phone to provide Google Voice-like services to a global market, with free calling to existing Skype and Messenger users and cheap international calling, this could revolutionize the cellphone market. It would relegate the network providers to mere dumb pipes, putting an end to per-minute call charges—or rather, putting an end to per-minute call charges from the networks—and transforming the industry.

The problem with that is that the phone networks are fighting tooth and nail to avoid that very outcome. They don't want to be dumb pipes; they want people to pay for services. Already, many phone networks have terms and conditions that prohibit the use of VoIP systems. Today, Dutch mobile operator KPN turned on a scheme that blocks VoIP applications, including Skype for users on basic data plans. Unlimited data plans that were once relatively common are increasingly being scrapped in favor of capped services.

Even next-generation LTE phone services, which are pure IP and use VoIP infrastructure to provide voice services, are unlikely to bring about any changes to the network operators' business models. Part of that will be out of necessity—terminating voice calls off-network will still cost money, so it still warrants per-minute billing—but much of it will simply be an effort to protect revenue.

At the press conference, Steve Ballmer indicated that network operators were interested in this kind of integration. For the most part, their actions suggest that they're interested in Skype only to the extent that they can block it or bill for it. Unless there's a serious change of heart by cellular carriers, Skype integration stands no chance of revolutionizing the phone industry.

Ultimately, it's not the act of buying Skype that's so astonishing. Buying Skype for a couple of billion dollars, slotting it into Online Services and fusing it with Messenger to produce a single best-of-breed messaging platform, and then expanding Messenger to work on Xbox and Kinect and Windows Phone and so on, would have made a lot of sense. Still not cheap, but it would offer an incremental increase in Messenger's customer base, extend Messenger to support telephone connections (in addition to the SMS support it already includes), and integrate neatly with the messaging and PBX capabilities of Lync and Exchange 2010. A partnership with similar goals would also have made a lot of sense.

But buying the company for $8 billion, buying a product that has so much overlap with Microsoft's preexisting software, and setting out a plan that could easily be achieved with Microsoft's existing software and which leverages none of the few unique strengths of the acquisition? It was incomprehensible when it was rumor; it's even more incomprehensible as fact.