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No! Microsoft Didn’t Overpay for Skype – They Need to Bulk Up To Compete With Google: Where Does This Leave Apple, RIM???

Reggie Middleton's picture




 

Several BoomBustBloggers inquired as to my opinion of what apparently was an overpriced acquisition of Skype by Microsoft. At first blush, it appears as if the management of Microsoft has lost their mind. A second look reveals a more interesting perspective. To make a long story short, Microsoft is trying to replicate Google’s cloud services.

If you reference pages 29 to 36 in our the Google valuation report from 8 months back (63 pg Google Forensic Valuation – tutorial, [Google Final Report 10/08/2010 to download] to plug in your own assumptions see Google Valuation Model (pro and institutional), you will find the answer to why Microsoft is willing to pay $8.5B to buy Skype. Skype, like Google Voice which is tightly integrated into Android, will be folded into the mobile operating system to give full mobile VOIP capabilities that will most likely tie in with Microsoft’s server products ex. Exchange server for storing voicemail along email, voice recognition, transcription services, etc.) , just as Google purchased Grand Central (page 55 on, in the report) to turn it into Google Voice to move vast amount of profitable mobile telephony services out of the reach of telcos and totally to Google’s cloud – leaving only data services to the telcos. This is happening now, reference Sprint’s wholesale adoption of Google Voice by offering users to switch transform their Sprint numbers into GV numbers without breaking their contract. As excerpted from the afore-linked source:

Google was already a competitor

Communications services, especially voice services, are rightly seen as the last bastion of clear telecoms operator advantage over alternative means of offering such services, with the telephone number itself being the key enabler.

In many other areas, such as applications and content, telecoms providers are already losing out in terms of service usage and brand loyalty to aggressive, software-driven players such as Google and Apple. Verizon may previously have partnered with Skype for similar-looking services, but Skype is not Google; as an Internet voice specialist, Skype’s ability to impact the telecoms value system is nowhere near as profound as Google’s.

As such, Sprint’s inviting of Google into the telecoms inner sanctum, through this formal partnership to offer Google Voice, might therefore look something like throwing the baby out with the bath water.

But may prove a better friend than foe

So, what does this really mean? It means exactly what I said it would in my forensic valuation of Google last year. You see, many market participants – and especially the sell side analyst community SIMPLY DO NOT UNDERSTAND WHAT KIND OF COMPANY GOOGLE IS. Google is a PURE PLAY INTERNET COMPANY. It is pure play that caters both to the consumer and the enterprise. Most analysts and investors believe Google to be a search engine and an ad serving company. That perception is wrong and will result in a FAIL! Google is literally, THE CLOUD! The excerpt above is an example of Google selling its cloud services, wholesale, to Sprint – giving Sprint a market advantage over Verizon (who has partnered in a very whimsical fashion that limits synergies) with Skype and particularly over AT&T as it threatens with the T-Mobile merger to become the behemoth that the anti-trust department once broke it up for being. Remember the Ma Bell being disincorporated into the baby bells? Well this baby is trying to grow into a monopoly again….

So, what’s in it for Sprint to sell off its money making (those telcos truly overcharge for that stuff!) voicemail services? Economies of scale, the same advantages everyone else gets when they outsource and offshore! Sprint is simply literally offshoring to the cloud. They get to keep (at least so they think) their interface with the customer through control of the phone number, yet offload the complex software development and data center complexities to a third party while Google gets to monetize its massive investment in cloud infrastructure and services. Google also gets to cross sell is myriad of cloud services to said clients. Think the Google Music Beta (storage and streaming from the cloud), Android, Gmail, Google Talk, Google Docs, etc. Google has already invested heavily in Sprint and the results are already showing. Who has had the best Android phones over the past year? Don’t be surprised to see more coming out of this duo. More importantly, expect to see the entire telco industry either snap up smaller VOIP providers in an attempt to counter the Microsoft/Skype/Windows Phone 7 combo and Sprint/Google Voice – not to mention drive the prices of these smaller guys though the stratosphere, 1999 dot.com bubble style ala LinkedIn yesterday (where are those damn puts???!!!) as they get into bidding wars with Apple, RIM and HP or rush to outsource their own voicemail offerings to Google and/or Microsoft. This is a case where some of the big boys may find it wise to side with the behemoth monopolist, for Google is starting to become dangerous in the power and influence it wields.

Reference our ruminations on Skype last year in our Google Forensic report

As excerpted from the Google forensic report for subscribers (63 pg Google Forensic Valuation, [Google Final Report 10/08/2010 to download] to plug in your own assumptions see Google Valuation Model (pro and institutional).


So, Did Microsoft overpay for Skype?

In retrospect, it is an interesting move by MSFT since Skype has 677 existing members. Many feel Microsoft is overpaying for Skype, but anybody who has access to our proprietary research can see that the price MSFT is paying is about right using Google as a benchmark. This is why company management is always better at strategic acquisitions than financial pundits from the outside looking in. That doesn’t necessarily mean that they are good, simply better than financial investors at strategy.

This also leaves Apple and RIM out in the cold for this level of user access and VOIP telephony/cloud-based data storage pretty much ends with Google Voice and Skype. Apple will have to build organically, ex. bulk up Facetime (which will need a LOT of work which they don’t have the time nor probably the resources either – Google has already incorporated video conferencing in its latest iteration of Android and it works over any network vs Apple’s rendition needing a WiFi network) or attempt to buy a smaller outfit and bulk that up as well. Either path will be both expensive and time consuming without a guaranteed nor necessarily clear path to being able to compete with the new Windows 7/Skype or Android/Google Voice integrations.

This is reminiscent of the many warnings that I have given my readers and subscribers in regards to prematurely dismissing Microsoft as a frontrunner in these mobile computing wars. See the original articles from last summer: Don’t Count Microsoft Out of the Ultra-Mobile Computing Wars Just Yet July 14th, 2010:

I recommend that my readers NOT underestimate Microsoft’s ability to come from behind on this one. Out of the three competitors that I feel have the most potential – Apple, Google/Android, and Microsoft – Microsoft is the only company to have:

    1. A fully established and pedigreed cloud ecosystem for the enterprise (Google’s Docs and Gmail apps are relatively new in comparison, and Apple has only burgeoning consumer offerings that have been recently launched).
    2. The most advanced audio/video client side interface with both streaming and subscription services, to be offered through the Zune interface of Windows Mobile 7. For those who haven’t used it, the new Zune software/hardware combo puts iTunes to shame. Google doesn’t have a comparable offering of note.
    3. The de facto standard Office productivity platform, which also happens to be very, very difficult to replicate and/or reverse engineer. It also happens to be, by far the most feature rich. One should expect enhanced compatibility between Windows Phone 7 devices and Office apps.
    4. A rich version of Office productivity apps that can run from the cloud (Office 2010, currently available for download).
    5. A steady stream of revenue derived from practically every smartphone sold. Just like MSFT makes money on every PC sold, it also gets a license fee for every smartphone that needs to interactive with Exchange server, which is practically every phone that needs to interact with a Fortune 500 mail server. This is a legacy benefit from being the de facto standard in the enterprise. Whose product do you thing works best with Exchange? Secret APIs?
    6. The only major mobile OS vendor who also owns one of the top top gaming platforms – the X-Box system. Expect rich, 3D/HD, cloud-based X-box gaming to come to a Windows Mobile 7 phone/table near you. Imagine X-Box Live (a killer app in its own right) with comparable graphics on a Windows Phone with a 4 or 5 inch super AMOLED screen.

For these reasons and more, Microsoft will be a force to reckon with. I’m not saying they will win the ultra-mobile computing wars, but it will be most unwise to count them out due to their bumbling and stumbling – all to be expected from a big company that has been on top for so long, getting fat and losing touch with its true customers due to an unfettered monopoly revenue and profit stream from its cash cow products. Of course the question still remains, where does this leave Apple and RIM? After all, Google has placed its equity investments in data infrastructure already:

Related reading:

  1. A Realistic Look At The Success Of Google’s Investment History

  2. Google’s Q1 2011 Review: Part 2 Of My Comments On The Gross Misvaluaion of Google

Any who wish to interact with me can do so in any of the following manners:

 

 

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Sat, 05/21/2011 - 09:29 | 1297957 Zero Govt
Zero Govt's picture

the problem with Microshite is they are shite at everything they do... they have a deserved reputation, earned over decades, for producing bug-ridden virus attracting 3rd rate garbage software. They are clueless at new ideas, pitiful at innovation and always have to crib, copy and steal others bright ideas

Skype on the other hand is a great, great service. They would have been so much better as a stand-alone operation rather than continually selling their souls to big diseased dinosaurs

How will this sparkling little gem look sitting on the turd that is Microshite?

...the omens are pretty crystal clear on that: Skype will lose its luster

as for the Google v Apple debate one is the space leader, the other the iSpace copy-cat and catch-up pretender to the iThrone. Google has taken up its rightful position as also-ran slotting in nicely the iSpace vacated by the dying diseased dinosaur, Microshite (RIP) 

Fri, 05/20/2011 - 13:22 | 1295297 SwingForce
SwingForce's picture

That Reggie is a brilliant man! Nice to finally see Sprint ("S", not FON anymore) recognized as WiMax, and see how they got Google Voice to take their 3G traffic? Sounds like MSFT may have done something right for a change.

BTW- Is there a requirement to read your articles before posting a comment? /s

Fri, 05/20/2011 - 10:30 | 1295296 WallStreetClass...
WallStreetClassAction.com's picture

With all my respect to Reggie Middleton, he needs to stick to what he knows best - real estate micro and macro trends and economics. In technology field, he is like fish out of water. To properly evaluate technology opportunities, tech knowledge is essential. Did you know that Skype does not own its own product? That's right, JoltID, the company formed by its founders, holds and licenses its patents to Skype proprietary technology. Skype is provided a "black" box executables, they don't even have the source code for the product. Secondly, Skype cannot work on cell phones. The native client and IP around it is built specifically for PCs (actually a Kazaa stack with new distributed index). It does not work on cell phones, and the current existing Skype cellphone apps must be licensed from other patent holders, in order to be legal. This is why Skype does not have any advantages in cell phone market, except the brand name.

Keep it real, Reggie. Don't get sidetracked on "sexy" topics you seem know little about.

Fri, 05/20/2011 - 11:02 | 1295433 Kina
Kina's picture

Inevitable when somebody makes an arrogant superior criticism of another they find themselves getting Pwned.

Fri, 05/20/2011 - 10:49 | 1295373 Reggie Middleton
Reggie Middleton's picture

 

  1. MSFT has the resources to fill in the Skype holes.
  2. Skype does work on cell phones, I just made a wifi/VOIP on mine. Take your own advice (stick to what he knows best). Technology is just as deep in my camp as the FIRE sector. Be aware.
  3. What is the term of the black box license? It just has to be long enough for MSFT to replicate it.
  4. MSFT has one of the most trafficked collection of sites in the world. They don't need to overpay for eyeballs (although I can't promise that they won't). They see where they can synergistically add value to the Skype acquisition. Exchange server currently replicates PBX, I would assume they are trying to fold in mobile VOIP, which would be a steam roller integration advangtage for WP7. Skype for the enterprise with enterprise class security would be a boon.

 

Fri, 05/20/2011 - 11:24 | 1295525 WallStreetClass...
WallStreetClassAction.com's picture

But see, you still don't understand. Having a functional cellphone app and being the niche leader are two vastly different things. Sure the cellphone app works, I never said it didn't. I said the structural PC based Skype technology advantages cannot be transitioned onto cellphone platform without engaging another partner and paying significant licesing fees. Basically, branding another technology. That's not platform leadership. That's being no different than dozens of similarly positioned VoIP apps, where Skype brand name being the only comparative advantage...

Microsoft does not have enough resources to fill in their own "holes".

The VoIP patent thicket is significant. There is no way Microsoft could "replicate" it without runing into legal issues.

Again, you are comparing the open tech PBX and proprietary black box Skype. Skype will never be adopted by enterprise, because it is a huge security risk. Many corporate admins block Skype ports altogether.

Still a huge fan, just fun to see you wrestling with new topics!

Fri, 05/20/2011 - 11:08 | 1295463 zice
zice's picture

Reggie,

Intergration business side of OCS (Lync) telephony with skype is another angle into the cloud. This is the bridge they have been looking for and more than likely planned. Enterprise business has alot of money in it and while a few execs will wander into iGadgets and Droidian landscapes, most will fall back in line when MS further enhances enterprise management of their devices. The advent of the System Center(Config Manager,Service Manager,OP) line of products that have gone from weak to very strong offerings in this area of device management. These are fully supported for cloud services also.

I don't see anything like this for enterprise business from Apple or Google. There is no reason for all these cloud services provided to not have a top down enterprise framework. This loose cohesion will ultimately spell a loss for Google and Apple.

 

Fri, 05/20/2011 - 11:22 | 1295515 Reggie Middleton
Reggie Middleton's picture

Intergration business side of OCS (Lync) telephony with skype is another angle into the cloud. This is the bridge they have been looking for and more than likely planned. Enterprise business has alot of money in it and while a few execs will wander into iGadgets and Droidian landscapes, most will fall back in line when MS further enhances enterprise management of their devices. 

Agreed, for the most part. The only variable that is less known is Google. Google's rate of development has been absolutely unbelievable (and I can believe a lot). I've been following this space since 1992-3, and the rate at which Google is extending Android has been unmatched. HC 3.1 and GB 2.3.4 already have enterrpise hooks within, and I believe they plan to truly solidify them in icecream sandwhich. Microsoft should be the winner in this, but then again they should have created the iPhone, the iPad, blackberry server/handsets, app market/itunes and Android as well. So should and did are not necessarilly corollary.

In addition, management has been notoriously slow in implementation (re: WP7). Time is not on thier side at the rate Google is growing Android. I don't see Apple in this race, but will have to revisit when they release their cloud offerings.

Fri, 05/20/2011 - 15:59 | 1296610 Ergo
Ergo's picture

We use skype all the time and love it.  Main use:  talking to relatives in a foreign country.  Kids get to see each other.  Grandparents see the kids.  etc...  Beats the heck out of international phone bills, and video is much more personal.  It's the best way we know to keep touch with relatives. 

Fri, 05/20/2011 - 10:00 | 1295196 TheProphet
TheProphet's picture

Microsoft is a legacy business with a dying model, so, naturally, they bought what? A legacy business with dying model.

Where does this leave Apple? The same place they have always been: with 100+ million names, addresses and payment methods (Itunes) and 60+ million devices that are one software update away from deploying VOIP.

This hardly leaves Apple out in the cold.

In fact, you think Microsoft bought technology. I think they bought the Skype user base. If they can monetize the 100+ million names addresses and payment methods they're getting from Skype, then I could be convinced they didn't overpay. Until then... just another mediocre move from the world's most mediocre CEO.

Fri, 05/20/2011 - 10:03 | 1295208 technovelist
technovelist's picture

Ballmer is not a mediocre CEO. Destroying hundreds of billions of dollars in shareholder value takes rare talent!

Fri, 05/20/2011 - 10:25 | 1295287 DaveyJones
DaveyJones's picture

nice

Sat, 05/21/2011 - 09:06 | 1297947 Zero Govt
Zero Govt's picture

you mean Mr Slippy, Bill Gates, dodged that bullet and Bu-l-mmer took it for the boss

Fri, 05/20/2011 - 09:59 | 1295184 falak pema
falak pema's picture

This is a three doggy race : AAPL, Google, Microsoft?  

Can Microsoft catch up with the other two?

AAPL with its product/market coverage of all segments, its hi-class hardware+ software and its own Apple store model. And Google's Android information highway to EOMs + its head on competition to Apple store programmed.

Looks like Microsoft has its work cut out in catch up ball.

What is not clear is :

a)  WHEN the smoke will clear up in the market to show where the MS/Margin trade-off cookies fall and where subsequent strategic positioning leaves each of the three big boys. 

b)  Will an economic downturn affect this growth segment? Or is it so deeply entrenched world wide that this technology roll will keep moving up; whatever the fall-out amongst these key players.

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