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Skype and Microsoft: Mirage or Dynamo Duo?
By EconMatters 
As global economy slowly recovers from the Great Recession, market confidence starts to return, Microsoft finally decided to join the M&A party and made the biggest acquisition in its 36-year history—paying $8.5 billion cash for the Internet telephone service Skype Technologies SA from eBay and a group of private equity investors including Silver Lake Partners.
eBay, Inc. who acquired Skype in a 2005 deal valued at around $3.1 billion, sold about 70% of Skype to the private group at a loss in 2009 after failure to integrate Skype into its eCommerce model. That left eBay with a roughly 30% ownership in Skype.
Although Microsoft is well known for its deep pocket with around $50 billion cash on hand, from a valuation standpoint, the deal is pricey as Skype makes no money, despite 663 million registered users. In 2010, Skype had revenues of $860 million and posted a net loss of roughly $7 million. Analysts have estimated Microsoft is paying roughly $1,000 per Skype user, while each user represents only about $30 in profit.
Furthermore, Microsoft’s reportedly paid more than twice of the next highest bid at around $4 billion by Google. (Facebook is said to be one of the suitors, and Cisco also was rumored to be in talks with Skype last year.)
The potential strategic synergy is definitely intriguing. Microsoft stated in its press release that the plan is to integrate Skype with Microsoft's existing Lync, Outlook, Xbox Live, Kinnect and Windows Phone. With Microsoft jumping on the mobile wallet bandwagon, this deal could potentially increase Microsoft’s competitiveness against both Apple and Google in the mobile arena.
So far, from a technology integration point of view, some of the technology sites such as Wired and ZDnet have called the Microsoft-Skype marriage basically a big blunder on Ballmer’s part, while a few financial analysts believe Microsoft will get its money’s worth..…eventually.
In our opinion, strategic vision is just a mirage without the critical path of successful execution, which Microsoft has had a pretty bad track record based on its past big acquisitions. We think Microsoft most likely is in it mainly to lock out rival Google’s access to Skype, with strategic integration a secondary consideration.
Moreover, Microsoft seems a little too late in the tech game, even if (a big IF without an overhaul of its organizational structure and the executive team) Microsoft could “learn the lesson” from past mistakes to succeed where eBay has failed. So the skype deal has not changed our view that Microsoft is a 'cash cow,' instead of a typcial tech growth stock, and remains one of the five dead money plays in the tech sector, from an investment perspective.
For now, the biggest beneficiaries of the Microsoft-Skype union are the equity investors (eBay, Silver Lake Partners, et al), and the two founders of Skype--Niklas Zennstrom and Janus Friis (double dipping from two separate sales to eBay and Microsoft.) Facebook could also end up getting the benefit of Skype technology without paying a penny as Microsoft is one of its investors.
It'll be interesting to see how Microsoft integrates and markets Skype services. Meanwhile, check out the infographic at our blog detailing Skype’s Cinderella rags to riches of eBay and Microsoft.
EconMatters, June 1, 2011 | Facebook Page | Twitter | Post Alert | Kindle
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Never used Skype, so pardon any obvious ignorance, please, but what exactly does this do for MS....give them an alternative to offer "free" Internet calls via their mobile phone?
Would this allow them to bypass using an AT&T or Verizon platform for mobile?
Adding 6 million new users to the MS web network sounds pretty cool, but $1,000/per does seem extravagant. I use EGHT now for my business, and frankly love the service. For MS to buy EGHT and put themselves in a business model that holds explosive potential growth would make a lot of sense to me. There are far fewer subs at the moment, but the company is already profitable, and owns a ton of patents for VOIP. An acquisition like that could make Mr Softee a serious competitor for all the major phone companies. I slashed my phone bill, have far superior features than my 20 yr old PBX system, and own the phones for a fraction of the lease cost over a 3 year period. With the deep business connections MS has, it would seem to be an easy thing to leverage them and build one giant business communications service integrating all of the MS products.
But, what do I know?
....As global economy slowly recovers from the Great Recession, market confidence starts to return, Microsoft finally decided to join the M&A party and made the biggest acquisition in its 36-year history—....
I have a problem with this statement...As a result I have a problem with what follows on...
What happens if the great recession becomes the great depression in 2013? Where goes MS then if the market deflates? Not that I doubt that a high tech company with market dominance is going to come out on top whatever the economic scenario... I do doubt if MS will be able to "out Google" Google or "out Apple" Apple thanks to Skype. Especially as IBM is now coming back strong into the hi-tech game. If there is market shrinkage there will be losers...big ones...
I don't follow the stock price. So I merely comment on the tech and strategy:
You're spot on that MS is a cash cow rather than a growth tech. We all buy new versions of Windows and Office every few years, despite that they're not improvements at all.
So MS may as well buy some things that they can "integrate," and have something else to offer. IMO, the price for Skype is justified by MS maintaining monopoly power. That's what MS does. They buy innovation rather than develop it.
And MS learned that companies like Google can come out of nowhere and be a threat. Better to buy new innovators, before they become a threat. And then bundle the new products with the old ones to keep MS's monopoly running.
If they actually get into a new market, it's a huge bonus. But even if they can't, they'll keep us all buying Windows and Office for a long time to come.
It's a winner.
No company has treated its customers so badly. They will lose the operating system revenue, kill any acquisitions, and pull a Enron as it sinks.
I was in Europe and had to have a smart phone, this was a couple of weeks ago. Anyway, Verizon had no service where I was going but they have a company that I could get a phone from, they said. Service was provided by Vodaphone.
Well, the phone operated on an Opera/MS platform on an HTC phone. I have an HTC Droid Google OS.
My goodness. What a nightmare user experience. The Opera platform overthinks every fricken thing. I use Bing on an Apple and it's easy. Bing on the Opera system was a nightmare. And, no voice turn by turn navigator. The key pad over anticipated every word and badly and auto wrote stupid things, even after I had established a base of certain words.
It was horrible. I have heard people say the Microsoft smart phone isn't bad. I went from an I phone to the Droid and it was a very short learning curve. This thing was awful. And I hope the same kind of thinking that went into it is not going into their new phone.
Overgeek.