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Microsoft Skype Deal Boosts Xbox's Game

Stocks in this article: MSFT SNE AAPL

REDMOND, Wash. ( TheStreet) -- Microsoft (MSFT) buying Skype for $8.5 billion isn't just a savvy move against Apple (AAPL), but a steel-toed kick to Sony (SNE) while its PlayStation products are down and hurting.

Microsoft's recently announced purchase of Skype certainly presents a challenge to Apple's FaceTime video conferencing, but there are bigger gains to be made in the gaming world, where Microsoft and its Xbox 360 are already a market-share monster. According to ComScore (SCOR), Microsoft has a 7.5% share of the U.S. smartphone market that's fallen almost a full percentage point since December, while the share for Apple's iPhone is 25.5% and climbing. Though Nokia's (NOK) alliance with Microsoft has Gartner (IT) betting that its cut of the global smartphone market will be 19.5% to Apple's 17.2% by 2015, right now the iPhone's iOS is on top with 15.7% of the world's smartphones compared with just 4.2% for the folks in Redmond.

Microsoft's $8.5 billion deal for Skype just gave the Xbox a weapon upgrade in its fight against Sony's PlayStation 3.

The battle Microsoft can win, however, is for dominance in a gaming industry where its Xbox 360's U.S. share is more than 35%, Sony's PlayStation 3 has little more than half that share and the industry's leader -- Nintendo -- just dropped the price of its flagship Wii bundles to $150 and dropped the price of such popular games as Legend of Zelda: Twilight Princess and Animal Crossing: City Folk.

"It has always been Microsoft's goal to make the Xbox 360 the total entertainment packaged," says Jesse Divnich, vice president of capital research for video game market research firm EEDAR. "With Netflix, gaming, music and HD movie playback now available through the Xbox 360, Microsoft's Skype acquisition is likely an attempt to position the Xbox 360 and other Microsoft platforms as a standard communication vehicle, in addition to its entertainment offerings."

The Xbox has gained some ground on Nintendo after introducing a slimmer, less red-ring-of-death-prone Xbox 360 last summer, trimming its base price to $199 and giving its users the camera-based Kinect motion-capture controller to play with, but the biggest boss standing between the Xbox and the next level has been Sony's PlayStation 3. The two consoles are the only two high-definition platforms in the industry and share many of the titles beloved by hard-core gamers -- including Activision's (ATVI) Call of Duty series and TakeTwo's (TTWO) Red Dead Redemption and Grand Theft Auto franchises. They also both released motion control devices last fall in an attempt to break Nintendo's hold on casual gamers.

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