Microsoft to buy Skype for $7 billion
online.wsj.com
online.wsj.com
With $7B they should have just given away about 15 million Windows Mobile phones in the form of an epic PR stunt. It's not a bad product -- they just need to make people realize it exists. If they want to flush money down the toilet they might as well engage users in the process right?
Is that a reference to ICQ's "Uh-oh"? If so, I fully agree.
If Apple stock is priced to perfection, MSFT is priced to stupidity. This kind of wasted earnings is exactly why Microsoft stock sells at a mere 10x earnings. Investors are fully aware that a large portion of all future earnings will be wasted.
Google and Facebook would have been worse for Skype, they both suck at privacy.
Historically we can see that companies (especially corporations) are as ethical as the laws force them to be, especially when it comes to decisions affecting the bottom line.
People themselves have ethics because that's the only way of living in a society -- discerning between good and evil, making decisions that aren't hurtful to others -- these are standards we live by because they work best in improving our own quality of life.
Historically, we can see that people (especially leaders) are as ethical as the laws of their society force them to be, especially when it comes to decisions affecting their well-being (which quite often is their bottom line).
In society when people misbehave, they get marginalized, discriminated against, even abused. E.g. for rapists punishment doesn't stop immediately after jail-time was served, for some unlucky ones the real punishment only begins after getting out of jail.
Things like peer-pressure, the board of directors,
profits, strategy, market pressure and so on can
make good people do bad things.
You can look at a company and try to analyze its decisions from an ethical point of view, but that is just using a convenient and familiar simplification to understand a complex entity. One can say that a company is "good" or "bad" or "immoral", one could even say that it has goals and ambitions as someone mentioned earlier, but how useful is this really in trying to understand that company and in predictiing its actions?
* Most of the services they provide are free (with a hidden privacy tax).
* They make most of their money based on analyzing their user's data.
* Both have a hostile attitude towards privacy, claiming that it's dead, trying to make it look old fashioned and irrelevant.
In terms of 'why', this is just the easiest way to integrate telephony with their own operating system in a way that leverages the network effect. Soon, any app which runs on Windows could just use the Skype Service. Mac/iPhone/Linux will only have bolt-on app integration with the market leader, or have to develop their own from scratch. And Microsoft will slap some very serious marketing behind this. Maybe Windows phones automatically use Skype when you call other Skype users and they're online, saving costs. Or MS could integrate it into business services, taking over internal phone networks. Maybe they have thought of a use I haven't in my 5 minutes of thinking :)
This instantly reminds me of the CueCat [1], which Wired sent out to half a million subscribers. I admit, a phone (even a WP7 one) could be a million times more useful than a CueCat ;-)
[1] http://en.wikipedia.org/wiki/Cuecat [2] http://www.joelonsoftware.com/articles/fog0000000037.html
I have a skype account, I pay for a personalized USA number that people can call with their phones and reach me around the world, I also pay for the ability to dial any number around the world. All of my work contacts also have skype accounts which we use to communicate. It would take quite a bit to get me to move off of Skype.
Above it was mentioned Skype has no loyalty, will be replaced when something better comes along. We're hoping thats Teamspace, Sococo's 1st product.
But don't mistake it for another "group chat and conference call" tool. Its designed to remove the friction from those activities by making collaboration instant, always-on and visual.
I don't believe that they've ever broken that down publicly but it would seem unlikely that any one of those services is making significant money if the who division is losing cash.
10 years on (I think the Hotmail acquisition was that far back) it should be making money unless Microsoft has become a charity.
MS will need to get more value out of skype than current skype out call revenues. They're probably planning something else.
I do agree than Microsoft is massively overpaying for Skype, however.
Not sure that adds up to $7b (I dunno how to evaluate anything that big), but it is something. I'm sure this has a big chance of being useless, but it also has a chance of being helpful.
If in 2 years (assuming skype can keep it's usebase) every windows pc tablet & phone is connected to skype by default, it could be strenthened. If skype integrates in some significantly useful way with outlook/exchange (scheduling calls, confirming meetings, emailing chat sessions, synching contacts) it could help strengthen the corporate MS position (the real cash cow).
Like many decisions, it's not the decision itself that is most important, it's the subsequent actions, the execution. That said, a 1m phone giveaway would be epic. MS have money to burn and big fish to catch. Burn. Catch.
That would mean that Microsoft is paying 28x earnings. If we want to approximate EBIT as free cash flows (not the same, but this is back of the envelope) and assume a 10% discount rate, to break even Skype would need to be growing EBIT at 6.4% annually for the next 10 years or so.
I don't know how achievable that really is, but maybe they could test raising prices to get some of that growth.
I was going off an article that had skype revenue/profit as 859.8/20.6 for 2010 and negative the year before. I assume that the accounting tricks of having been bought by a PE firm that he mentions are responsible for the discrepancy.
If true, P/E is < 20, not bad.
Still, I doubt that is really what MS is after.
1. Microsoft will gain from Skype's synergy with their existing portfolio. Think Skype + Live Messenger or Skype + Windows Phone 7.
2. Block competitors from purchasing. Microsoft, Google and Apple (to some extent even Facebook) have businesses that are increasingly overlapping. Skype in the hands of a competitor becomes an alternative cost for Microsoft.
At that 6.4% rate skype has twice the earnings in 10 years it has today.
People are going to continue to buy Word, Windows, and Exchange because they have a commodity video product "integrated"? I don't think so.
They might if it is integrated (no quotes) with the call, chat, filesharing and screenshare client that they, their clients and suppliers use (and understand) if it is integrate in some useful way or maybe if it comes with some other corporate value add (data about who employees call, chat..).
Even though it really isn't marketed that way, skype is a business tool, something people use at the office. It is used by lots of people that use Office, Media Player and IE only.
I assume by the tone of your comment that you either don't think that something everyone knows and have already been using for 5 years is particularly valuable or that you are skeptical about people continuing to buy MS for any reason. Microsoft would disagree with both of these.
They get two things:
Technology: These are technologies Microsoft already has or could develop cheaply (say, for 1% of the cost of Skype?).
Users: Yes, no one will buy Microsoft because it is integrated in "some useful way" - whatever that means. 99% of the utility of Skype is already present without an integration - and other products can also integrate with Skype or other similar technologies if there is really a value add there. There is no sustainable market advantage and no value compelling enough to affect a purchase decision. Users have all they need from Skype - making calls one click away or some light simple integration like that is not a reason to spend 8.5B on a company.
Words like "synergy," "cross-sell," "eyeballs," etc. were no doubt tossed around the MS board room with this vision in mind. Abstract synergies don't work, and integrating unrelated products doesn't work.
Ebay bought Skype because they thought lack of telephony was the reason they were getting their but kicked by Taobao in China. Nobody cared and users weren't interested. Ebay was losing because their pricing and service model were wrong for the market, but it's easier to buy companies than fix your own, so that's what they did.
Which is now owned by DST the same large investors in Facebook and Zynga.
Really? I'm thinking the barriers to switch from Skype are pretty high due to the vast amount of users Skype has. Why switch to a slightly more polished product when you have no one to communicate with there?
We have to remember that the Hacker News crowd probably represents early adopters. Most people will not be as quick to try/switch to new services.
So the barrier to switching is pretty low.
But yes, there is market inertia and Skype has it.
Installing something like skype for the first time:
Total utility of program - hassle of installing and learning a new program = large benefit
Installing a competitor:
Marginal utility of somewhat better program - previously available contacts on old system - hassle of installing and learning a new program = much less benefit
Also, a product will seldom sell itself. The Skype brand has plenty of intangible value, for instance from their collaboration with Oprah.
However did they overpay? In my definition anything that is more than 10 time net earnings is overpaying. So unless their net earnings dramatically improve to $700 million in a few years (unlikely), or unless there are some significant synergies that I am not aware of, I would say it's overpaying.
From what I've heard, it's not always plug-and-play to set up, either. (Calendaring support in particular.)
When we see the mac version stagnate, we won't be able to say MS has sabotaged it - skype did that before on their own.
The linux version has never been on parity with the others - will it be officially killed? Might MS actually put resources in to it to make it work as well as the others?
Overall, good on MS for doing this. I'm assuming this may bring on some more interesting dynamics to the google voice / skype party.
If Skype isn't the default, verbed, system, doesn't it lose some value?
The cloud is more important to MS than WP7 is.
After acquisition, MS will put out a lot of PR saying that cross-platform is "very important" in this new acquisition, they will even release an updated version on cross-platform. ...of course that update will be screwed up as it has been "fixed" to make all versions more "windows friendly" at the expense of features that may be better on other platforms (i.e. scrap the Mac interface, kill open protocols, replace working code with .net tech, etc.).
Then after a few months of user complaints there will be MS's product performance review, since after alienating the Linux and Mac folk, they will declare there is no viable market for those platforms any more and close those divisions and thus drag it into the Windows only division.
Yep, I've been around for several of those (FoxBase/FoxPro, Bungie Games, Flight Simulator, etc. to just name a few) - if they were selling a shirt about it I'd have already worn it out.
So the protocol is already OK, the client however they'll convert it to using as many Windows specific technologies as possible.
That may be true, but in my experience, I could barely get skype running on an old windows box: it would routinely grind the system to a halt. In 2010 I switched to that box to SuSE 11, where Skype, though a bear to set up, ran smoothly, with a non-noticable frame rate and better-than-TV graphics on old hardware (circa 2003 2GHz Dell with 1 GB RAM. It did that while providing NFS filesharing to another computer playing movies and a laptop playing audio.
The audio setup hassle had all the features of any other sound setup headache in Linux. I lay that problem squarely in the lap of the Linux sound community.
I fear that it'll just go away, or actively get shut down by compatibility changes.
(My friends and I practically live on Skype. The one killer feature for us is persistent chatrooms; it's like IRC, except when I log in I get all the missing chat history I didn't get while I was logged out.)
What?
screen + irssi + /lastlog your_nick
2) I reboot to Windows to play games. There goes the screen session.
3) Skype on iPhones. Seriously. I ain't screwing around with a phone keyboard and terminal app to SSH in, screen -dR and scroll around just to get back into a chat.
1. Linux/Mac users would move because they had to.
2. Linux/Mac users that use Skype to communicate with long-distance friends and family would convince them to jump ship to another platform (if only to be able to do video conferencing).
3. People pissed off at MS would migrate on principle (though maybe only if there was a viable alternative to the way they currently use Skype).
This acquisition probably is the final nail in the coffin for Skype's hypothetical open-source Linux client.
I don't have high hopes at all that alternate versions of Skype will be kept up very long. Everything Microsoft does eventually leads back to Windows or Office.
I tried Wengo (now QuteCom) and couldn't get it to pick up the sound device or something like that. Maybe another PA bug, but PA has been a default feature of Linux desktops for 3-4 years or more by now. I don't remember the exact issue I had with it.
Pidgin isn't made for SIP/VoIP applications but I still haven't ever been able to get the gstreamer connector to respond correctly. The only IM client with which I've had success using video chat is Empathy, but it had a few issues too with closing devices/picking up subsequent calls.
Maybe it's just because I use Arch, but Skype is the only mostly-reliable video conferencing/SIP-like app on Linux that has actually been usable for me.
Not by that much, but it's certainly changed.
That, and ebay never figured out how to monetize it. MS likely has some plans in place to aggressively make money from it. I'm a skype subscriber, and probably will continue to be one, assuming they keep at least the same level of support for Macs.
Since the owners are almost all US-based (I think), fluctuation in the dollar against foreign markets shouldn't have much impact on Skype's pricing. Even so, the dollar's value against the Euro hasn't hardly changed at all: eBay announced their sale of Skype on September 1, when 1 USD = 0.7 EUR. Today. 1 USD = 0.6975 EUR.
I think the higher price is partially because MS may have a strong monetization plan in place and they don't want anyone else to get it.
Sept 1: 1 USD = 1.05 CAD
Now: 1 USD = 0.96 CAD
Is not fluctuations against foreign market, inflation is rampant, that means that is something has the same value,(a company) you need to pay more dollars for it.
Dollar has gone down against commodities(sugar, rice, oil, gold, copper...) because FED is printing dollars like there is no tomorrow. Europe is doing the same for Euro(because if they do not Spain, Greece, Portugal and Ireland burn).
http://skypenumerology.blogspot.com/2011/04/summer-recession...
2) When it was spun off by eBay, Skype acquired the IP of their P2P technology from the founders. This makes it more attractive to suitors
3) Skype has filed for an IPO, which would give its valuation a premium
These are the reasons that make Skype more valuable now than when it was spun off by eBay. If you add a bidding war between Facebook, Google and Microsoft, it explains the $7 billion valuation.
However, I agree that $7B is too much for Skype, unless there are great synergies for the acquirer.
2. The western world is slowly pulling itself out of a recession right now, rather than two years ago when we were on the other side and already sliding down. This will help any good plan to monetise the service further if that is MS's goal (it is probably their secondary goal).
3. Social networking, while already the "big thing" two years ago has grown considerably and is a fertile battleground for the big names. Competing in this market is presumably MS's primary driver for the purchase.
4. Facebook were strongly rumoured to want Skype or something similar to integrate with its current offerings and Google already has Google Talk (though it only has a fraction of the market awareness of Skype). So for MS to compete in that area they would have two choices: put up a big enough offer for Skype to scupper anyone else (particularly facebook, because if they got it MS would be competing against two entrenched brands in the same beast) buying it, or make their own (or buy something else) and have to compete against the entrenched ubiquitous brand in the area (some people talk of making an Internet call as "skyping" someone).
The valuation seems quite a bit high to my untrained eye, but MS buying Skype makes sense and perhaps that is simply the price they had to pay to get it. It isn't like MS is short of a bob or two.
That represents a profit of 1.45 or 1.95b over 6 years or $320m a year. (If MS didn't buy eBay's share, then they are currently at a 0.6-1.1b loss on their Skype investment excluding whatever that 30% is worth.) Presumably eBay had better opportunities for 2-3b of capital.
I wouldn't presume Ebay had better uses for the capital though. Skype has clearly had a faster rate of growth than Ebay. (although, paying an effing dividend would in my personal opinion be better than maintaining a thirty percent share of a telephone company)
By purchasing Skype, MS could bring Skype to WP7 and offer it preloaded.
There used to be a time when MS could get traction simply by bundling their product everywhere. A competitor like Skype would be abandoned simply because they couldn't outspend MS. Imagine, $7b is a lot of money. You can give away $1b of free calls to get Live Messenger kick started, or run Lync for free. MS has lost that swagger that used to create their own reality.
I agree that FaceTime sells Apple hardware, but I think the hardware they want to sell is the iOS product line. Weigh how many Mac sales the will lose if people can get FaceTime on a PC against how many iPhone and iPad sales they will make to people who can now chat with Grandma on her PC?
Ubiquity on the desktop and exclusivity on the mobile device are wins for FaceTime just as they are wins for iTunes.
Having said that, Skype showed that they could make it work.
Apple's valuation today is based on its growth trajectory. This means growing their customer base and engaging in hand-to-hand combat for existing PC users to move to the Apple platform. In some way, Apple's hands are forced.
That being said, this is a guess and that's why I said I would bet on it. If I knew for sure, it would be unethical to bet on the outcome!
That is why I agree that both Apple will eventually release FaceTime on Windows, and why Microsoft will do everything they can to keep Skype multiplatform
I just happen to be talking to a non-tech computer user on the weekend who told me that he and his entire family and friends overseas do not use Facebook because Skype does everything they need in terms of staying in touch and it has worked for them for years.
They should start over with the software and spin it into a web and mobile service. It is a great platform to take on Facebook with - a much simpler service for basic video or text chat, and add in some photo sharing, email, etc.
Google really missed out on an opportunity here - I bet that whatever they end up producing internally will not be merely as good or as popular as a new Skype run by Microsoft.
In terms of the price, it would almost be a worthwhile purchase with just the users and brand - the near-billion in revenue is just a bonus. Skype has near $1B in revenue, and most of the expenditure is related to writing down and amortizing assets as part of the acquisition (something that most PE groups do when they takeover a company - part of what makes some of these deals profitable and worthwhile). Number of Skype users and revenue is growing remarkably. If you look at the published financials[1], $97M was written off as cost of acquisition, another $250M was amortization of assets that were written down at acquisition. Their 'real' costs are $131M in marketing, $72M in development and $104M in administration - which brings gross profit closer to $500M+ for YE 2011. PE of 17-20 is a bargain, especially considering that Microsoft can significantly reduce expenditures by integrating the company into the web group.
I think this is a great deal, very different to ICQ (the immediate parallel that everybody is drawing) and much closer potential to the eBay PayPal deal. If done right, this could work out as well for Microsoft financially as PayPal did for eBay (remember PayPal wasn't doing so well financially at the time [2] - everybody called that deal crazy at the time as well) - add to that the potential of Microsoft taking on Facebook in the 'online communication for ordinary folk' sector - and it is a great,
[1] http://www.sec.gov/Archives/edgar/data/1498209/0001193125110...
I suspect that there is a closer correlation to one account = one person with Skype than Facebook since there is little social incentive to create multiple Skype accounts. In addition, the strength of relationships between Skype customers is more easily determined. Finally, Skype has the potential to scale well into MicroSoft's core B2B business model.
http://news.ycombinator.com/item?id=2532230
Facebook has 3x active over Skype - but as you mention, while Facebook are straight-up about their numbers, it is still hard to compare because of differing methodologies and different app types
Zynga's games provide an incentive to operate multiple accounts, and counts about 200m active users, so if only 5% of those users were each running multiple accounts (say 5 extra), that's around 50m dupe accounts. (I figure thats an over-estimation though)
Not to mention the other reasons people create dupe Facebook accounts
This is a business truth generally, but Microsoft has proved a very strong exception. Historically their attempts to integrate their web and communications acquisitions into the web group (or at least the Microsoft frameworks) have resulted in stagnation and/or collapse. Whatever they gained in operating costs, they lost many times over in value.
Hotmail, Mesh, TellMe, Groove, Colloquis, and Danger all experienced terrible stagnation as they integrated into Microsoft. Yes, even Hotmail, which has never recovered as a brand from the three or four year period where they moved from unix to windows servers, producing no new features and allowing Gmail to gain rapid traction.
Personally I feel this could be more about Microsoft strengthening its enterprise communications portfolio. Communicator/Lync is a giant turd, and this could be their play at Cisco's market, rather than Apple/Google's.
(Incidentally, the Skype chief exec Tony Bates is ex-Cisco)
http://kara.allthingsd.com/20110509/microsoft-will-announce-...
I guess ultimately MS buying it was not the worst decision - a second-class client on non-Windows is better than Google not supporting it till the users give up and they can discontinue it, or Facebook defaulting to telling the whole frigging world every time you phone someone or sharing your Skype address with every scabby app developer out there.
But it was really a lame lineup to choose from. I don't know who I'd actually have liked to buy Skype, but not these three.
Microsoft is like the electric utility of the technology business -- they should embrace that or wake up and break up the company into manageable parts.
Buying Skype? That's not creating shareholder value.
There aren't many very large brand name "statement" acquisitions there. Most are small companies you've probably never heard of. I think this Skype acquisition is a clear message that Microsoft is playing hardball now.
1: http://www.microsoft.com/investor/InvestorServices/FAQ/defau...
That's a big if for them right now. When you're trading at a P/E in the single digits ex cash, the market is telling you they have no faith in your ability to re-invest your earnings(especially when interest rates are so low).
b) Individually, not terribly likely. Collectively? Sure. (And it's $35M each, but the exact number isn't the point - let's say you could offer every ycombinator and techstars startup an average of $35M each, you'd likely end up getting two or three Dropbox-esque gamechangers, a few dozen decent products, and 150 otherwise good ideas folded into MS and dead-ended.)
http://about.skype.com/2009/11/joltid_settlement.html
"eBay Inc. and Silver Lake Investor Group Settle Skype Litigation with Joltid Limited"
FaceTime is a gimmick that few people actually use use.
First, the way for Skype to make decent revenues is to go for the enterprise market, which brings them paying customers. It would be really hard to convert end users to paying customers, because of all the competition out there (Google Voice). So, they need to cater to enterprise customers. And Microsoft is huge on the enterprise, they would be able to integrate it into their suites, and make it a multi-billion dollar product in a few years.
I don't see any reason for Facebook buying Skype (different technology, different culture, price too high). Also I don't see any reason for Google to buy it other than to kill it and fold it into Google Voice (possible anti-trust issues?). So, even if the Microsoft-Skype deal isn't a match made in heaven, it still makes much more sense than Facebook-Skype, or Google-Skype.
Imagine Scheduling Meetings in Outlook with automatic Video calls to everyone involved. Could be huge in the b2b market
But Skype's infrastructure is all Linux + Postgres (they are a huge Postgres user), so maybe they will be forced to rewrite it all on SQL server for the next few years.
http://www.microsoft.com/Presspass/press/2011/may11/05-10Cor...
Skype is the new msn for voice chat and has been for quite a while. One of the reasons Skype is so attractive for businesses is the encryption methods it uses. I know the governments are annoyed by Skypes encryption due to they cannot listen and spy on those talking there.
Which governments? I've heard that the US and China have the keys.
Though in the end both are just money making machines with unethical practices. In either case you can expect Skype to become less geek-friendly and more like a surprise box with an evil clown inside.
(sorry, punctuation nazi + Airplane reference temptation overwhelming)
I'll miss the Linux client when Microsoft kills it. :(
They stay with the MS product line happily perhaps, or they go to __________?
gChat/open/xmpp? Jump all the way to Apple FaceTime (seems a far jump). Or with forthcoming p2p flash video ease-of-dev/ease-of-use, does this all just become super common/easy to access?
On a more personal note, I really hope they don't take away all those cool chat thingys (refuse to call them emoticons). That dancing guy and disappearing pizza get me every time.
http://lync.microsoft.com/en-us/Product/Workloads/Pages/conf...
I see. That makes the 8.5 billion (price + debt) make more sense.
I see. Yes. An independent valuation would be nice, if you could trust someone to have the competence and integrity to do it.
More importantly, this is a textbook network effect market. Skype users are what makes Skype work. If MS announced they building their own, what odds would you offer me to bet I use it to talk to my Mother on it within 2 years?
Skype is/was one of the most significant products of the last decade or two. one I use and depend upon every day. I doubt that Microsoft will be able to avoid killing the goose that laid the golden egg.
-$2.6b purchase + 70% of $2.75b on sale + 30% of $7b on Microsoft sale = $1.4b
Not sure if they got any cash from profits, and they probably spent a bunch of money on the purchases/sales and subsequent culture integration stuff.
Was it someone from Skype (or their VCs) trying to start a bidding war?
Or someone from Microsoft trying to kill the deal (or get Google to overpay)?
chat works too but the interface is not that great.
Most people just don't care so long as the software works well. (Whether Skype does work well is debatable, but given its popularity, it seems to work better than the rest of the options available. EKIGA SOFTPHONE, EVERYONE!)