Microsoft Skype Deal Boosts Xbox's Game

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.

Each already has video chat services as well -- Sony through its free PlayStation Online service and Microsoft through its $60-a-year Xbox Live Gold online package -- but that's about where the comparison ends after Microsoft's buyout of Skype. Michael Pachter, video game industry expert and managing director of equity research at Wedbush Securities, says the Skype partnership is a big improvement for Xbox Live that the Kinect can only enhance, giving Microsoft a nice advantage over Sony, but adds that online gaming probably wouldn't be the most effective use of the Xbox's newest feature

"Skype functionality will be pretty beneficial to the Xbox Live experience, and the technology will probably enhance in-game chat and video," Pachter says. "I'm not sure that most of us want to see our online opponent, who may be called Conan the Barbarian and in reality is an 11 year-old girl."

Just as the addition of ESPN content to Xbox Live Gold last year made Microsoft's offerings increasingly vital, Skype only broadens the Xbox's appeal as an entertainment hub. It recognizes that the modern living room increasingly involves multitasking on laptops, tablets and smartphones and that Apple's already addressing those multiscreen consumers by putting gaming, movie and other entertainment applications only a finger swipe away in the App Store.

"Whether it be gaming, movies, television, messaging or even face-to-face communication, Microsoft's goal is to ensure that their console is the primary outlet for these entertainment and communication vehicles," Divnich says. "The idea being that if consumers use their Xbox 360 for video communication, they are only one click away from ordering movies, music and video games."

By running Skype's common thread through all of its devices, Microsoft not only provides the kind of cross-platform functionality Sony's wanted for its PlayStation, Bravia television and Vaio laptop, but gives Microsoft 170 million Skype users and more than 200 billion minutes of voice and video conversation that Sony and partners such as Google ( GOOG) will likely have to build from scratch.

"I think the more valuable part of the acquisition is the customer list, not the technology, as both Sony and Microsoft have videoconferencing and interactive chat functionality already," Pachter says. "However, by integrating Skype, Xbox owners can suddenly videoconference from their living room to any Skype user in the world, so it makes the Xbox 360 more of an open system than before."

That "open" part is going to be yet another issue for Sony, whose PlayStation Network's been a bit too open of late. The company still hasn't restored PlayStation Network service after hackers infiltrated it in April and had access to the personal and financial information of 77 million network users. That's not counting the 24.6 million accounts compromised in a related hack of the company's Sony Online Entertainment division, which produces and hosts online games. About 2,500 of those users, who were sweepstakes participants, had their information posted on a website affiliated with Sony Electronics without Sony's knowledge, according to a report by The Wall Street Journal.

With sales of its PlayStation Move motion controllers already lagging behind Microsoft's Kinect by roughly 2 million, Sony and the PlayStation were already playing from behind. While Sony teams up with Google on Android-based tablets and watches its video chat options for those products and its increasingly limited PlayStation dwindle to the less-popular Google Voice and untested Intel ( INTC) and Facebook offerings -- as well as also-rans such as Fring or Qik -- Microsoft's game division scores huge points by adding Skype features that may affect game play, but whose primary purpose thinks far outside the Xbox.

"I don't know how well Skype will be received by game developers and ultimately the gaming consumers," Divnich says. "I think there are some functions best left out for gaming purposes, face-to-face communication being one of them."

-- Written by Jason Notte in Boston.

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Jason Notte is a reporter for TheStreet. His writing has appeared in The New York Times, The Huffington Post, Esquire.com, Time Out New York, the Boston Herald, the Boston Phoenix, the Metro newspaper and the Colorado Springs Independent. He previously served as the political and global affairs editor for Metro U.S., layout editor for Boston Now, assistant news editor for the Herald News of West Paterson, N.J., editor of Go Out! Magazine in Hoboken, N.J., and copy editor and lifestyle editor at the Jersey Journal in Jersey City, N.J.

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