Microsoft Skype Deal May Strain Relations With AT&T, Verizon

Microsoft Corp. (MSFT) may have a tougher time convincing wireless operators to support mobile phones with Windows software after its $8.5 billion purchase of Skype Technologies SA, analysts said.

Skype’s Internet-calling service will be on Windows phones, as well as Microsoft’s Xbox and Kinect game consoles, the Redmond, Washington-based company said today. Skype lets members make free voice and video calls to each other, and calls to most outsiders for 2.3 cents a minute.

Microsoft’s backing of Skype may be seen as a threat by wireless carriers such as AT&T Inc. (T) and Verizon Wireless because it could cut into voice revenue, said Craig Moffett, an analyst at Sanford C. Bernstein & Co. in New York.

“It is kind of a head scratcher to me how Microsoft is going to navigate the complicated relationships that it has to have with carriers at the same time as it is repositioning itself as a potentially major threat to their wireless voice business,” Moffett said.

Microsoft is trying to expand in mobile devices as it faces slower growth in personal computers, the traditional market for its Windows and Office software. The company, which has lost ground in the smartphone market to Apple Inc. (AAPL)’s iPhone and Google Inc. (GOOG)’s Android devices, introduced the Windows Phone 7 operating system last year and struck a partnership this year to have Nokia Oyj (NOK1V) use Windows as its primary handset software.

Nokia, the world’s largest mobile-phone maker by unit sales, said last month it plans to introduce devices running Windows Phone in volume next year.

Microsoft fell 16 cents to $25.67 in Nasdaq Stock Market trading at 4 p.m. New York time. It has lost 8 percent this year. Luxembourg-based Skype is privately held.

‘Bandwidth Arbitrage’

Software such as Skype’s may cut into revenue for wireless operators because it allows users to make calls with data services, just like they do when surfing the Internet, rather than using traditional voice minutes. Carriers typically charge customers for voice plans and data plans separately.

Using a data plan for voice or video calls can make them much cheaper for customers, Moffett said. Google and Apple offer similar products.

“It’s certainly a threat,” said Moffett, who has an “outperform” rating on AT&T and an “underperform” on Verizon Communications Inc. (VZ), majority owner of Verizon Wireless. “We’ve broadly characterized it under the title of bandwidth arbitrage. Wireless operators make the vast majority of their profits from low-bandwidth services like voice and text, but those services are easily arbitraged by doing them over the data network, where the price per megabyte is a tiny fraction.”

‘Good Relationships’

Investors may see the Microsoft-Skype combination as a threat to carriers’ revenue, said Jonathan Chaplin, an analyst with Credit Suisse Group AG. Still, Microsoft is unlikely to push Skype services so aggressively that it threatens carrier relationships, he said.

The company “needs good relationships with carriers to drive the adoption of Windows Mobile,” New York-based Chaplin said in a note to investors. “This will discourage Microsoft from pushing a disruptive business model with Skype.”

Melissa Havel, a spokeswoman for Microsoft, declined to comment. Brenda Raney, a Verizon Wireless spokeswoman, and Fletcher Cook, an AT&T spokesman, also declined to comment.

Microsoft is likely to integrate Skype into software for tablet computers as well as mobile phones, said Colin Gillis, an analyst with BGC Partners LP in New York. Skype, with 170 million active users, will help boost the popularity of Windows- powered devices, he said.

Big Knock

“What’s the big knock on Microsoft right now? PCs are going to be displaced, tablets are going to take over the world,” Gillis said in an interview. “Throw Skype into this, that’s going to give them a unique edge.”

If Internet-calling technologies gain in popularity on mobile devices, wireless operators may respond by changing prices. Carriers may raise the price of using their networks by boosting the cost of data plans, Moffett said.

“The simplest thing will be new pricing plans where they will shift more of the price burden onto data plans to insulate them,” Moffett said. “There’s a clear vision in the technology community that voice and text aren’t businesses, they’re applications.”

To contact the reporters on this story: Amy Thomson in New York at athomson6@bloomberg.net

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net

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