This is Microsoft's ICQ moment. Overpaying for a company at the moment when its core competency is becoming a commodity. Does anyone have the slightest bit of loyalty to Skype? Of course not. They're going to use whichever video chat comes built into their SmartPhone, tablet, computer, etc. They're going to use FaceBook's eventual video chat service or something Google offers. No one is going to actively seek out Skype when so many alternatives exist and are deeply integrated into the products/services they already use. Certainly no one is going to buy a Microsoft product simply because it has Skype integration. Who cares if it's FaceTime, FaceBook Video Chat, Google Video Chat? It's all the same to the user.
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?
My mother, father, brothers and friends in 3 countries all have skype running most days. Skype have my credit card so I always have skype-to-phone available (I use it mostly to find my cell). It's been that way for me for about 7 years. That means I have skype running and I use it every day (but I only spend about $20 per year). It's not loyalty, but network effects and momentum count for something too.
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.
From the estimates I have seen, Skype generates $250mm in EBIT per year.
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.
That is, if they keep Skype as it is. There are, however, more than just financial reasons for this acquisition. 2 reasons off the top of my head:
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.
nikcub has a comment on this thread that convincingly puts Skype "gross profit close to $500M+ for YE 2011."
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.
No. Noone is going to buy anything because it is "integrated" with a commodity video product.
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.
If this is really where they are headed, it is just ineffective product strategy and fuzzy thinking on Microsoft's part.
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.
One reason is likely their experience with IE. They took so much flak destroying Netscape that it's just cheaper and less stress to buy the market leader and get on with it.
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 :)
Not 100% sure, but I think the moneymaker and core competency for skype is not video chat.
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.
Just get a Google Voice number, hook it up to your mobile phones sip client, and enjoy the ability to make and receive calls when ever you have a data connection.(Free to receive but international rates apply when calling out, but US and Canada are free)
How about move up then? I work for Sococo, and they have a service for distributed teams like yours. Always-on, no minute charge or limit, plus expanded presence information like you wouldn't believe. Can also call out/in, share docs and views, works on Mac/linux/Windows.
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.
Only problem is Sococo is designed for closed groups, and it has no video -- it's hardly a Skype competitor in functionality. Besides for group chat and conference calls and Campfire does it better for less money and without having to download anything -- it's elegantly Rails and works from anywhere on any device. I'm sure Microsoft will find a way to break Skype like it breaks everything else!
Yeah, Sococo is not a Skype replacement - its for teams, that's for sure.
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.
Agreed completely. Skype certainly has brand recognition and people know it’s “the” way to keep in touch across the ocean, but — and I don’t have studies to back this up — I bet it’s one of those brands people know but don’t feel very fond of. Skype is kind of annoying, for one, and is less reliable and more complicated than traditional telephone solutions (by virtual necessity, but that doesn’t matter). This should theoretically make consumers prone to try alternatives, as parent suggests.
Companies don't have ethics, but a company that sells eyeballs for money is much more likely to take decisions that negatively impact customers compared to a company that sells producs.
Google and Facebook would have been worse for Skype, they both suck at privacy.
This is getting way off topic, but of course companies have ethics. Just like they have core values, goals, and ambitions... A company is made up of people and those people can choose to make ethical decisions and can have a history of acting ethically or not.
The fact that employees have ethics does have an effect on the actions that the company takes, but that doesn't mean that the company itself "has ethics". At most we can say that a company employs ethical individuals - still - that won't necessarily lead to ethical decisions. Things like peer-pressure, the board of directors, profits, strategy, market pressure and so on can make good people do bad things.
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.
You're arguing semantics, which is useless, and also very wrong.
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.
People with strong character and clear ethical guidelines have always been able to get past the herd-mentality. You really can't excuse morally-wrong behavior just because that person is part of a herd, just as you can't excuse the herd itself.
The original message said that "MS and FB are practically the same ethics-wise to me".
In that context I replied that income sources are a much better predictor of company behaviour than so-called company ethics.
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?
There are companies that say "we don't track or store your information" and then there are companies that write five page long privacy policies that link to other privacy policies and so on.
"With $7B they should have just given away about 15 million Windows Mobile phones in the form of an epic PR stunt."
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 ;-)
Really interesting reading that Joel on Software now. Had me thinking of the Jimmy Fallon skit where someone held up a QR code in the background that I scanned with my phone, opened in mobile youtube, and I was watching more content.
There is a very strong network effect with Skype for PC to PC calls. But I doubt MS is going to get full value. They have had little success with freemium business models and I don't see why this would be different.
Don't they still lose money though? Certainly as of 2008 online services (search, hotmail, messenger) was losing over $1bn a year.
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.
I have accounts on Hotmail and Windows Live Messenger since their early days but my use of both of these services has diminished over last couple of years. I have observed the same attitude among my friends and family, all of them still have those accounts but they are active users of other services. I hope skype doesn't end up like Hotmail, windows live messenger.
My estimation is that skype makes enough money to be a fairly profitable company with it's business model (<$1b per year revenue, small or negative profits most years) if that is the goal but, it probably doesn't merit $7b.
MS will need to get more value out of skype than current skype out call revenues. They're probably planning something else.
While you're right about loyalty, quality matters too. Skype is infinitely better than Google Voice when it comes to video calls (very little lag, if at all!) - plus, users can video conference for free, which is not an option with Google Voice (as of now). My point is, Skype is the best product in the market in its domain, no question.
I do agree than Microsoft is massively overpaying for Skype, however.
Good point, thanks. But one of the biggest factors in favor of Skype is still its free audio conferencing capability. Google Voice does not have this, unfortunately, and I wonder why.
"They're going to use whichever video chat comes built into their SmartPhone, tablet, computer, etc. They're going to use FaceBook's eventual video chat service or something Google offers."
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.
They were pretty quick to adopt Skype. Its only seconds to load another VOIP-style client, and no time at all to use the one that came preinstalled. And you always know who you want to talk to on Skype, you're not calling the flower shop or anything, its your brother-in-law or whoever, so you can arrange for them to try another client in seconds.
Very few people are going to go through the hassle of installing a new client just to make a phone call if a good solution, which both parties have, already exists.
Most people I know who use Skype didn't have a video/computer calling solution before Skype. The barrier to installation for a new service that is much lower than switching to a competing service. If they're just getting into that kind of service, the benefits are quite large. Switching to a competing service has much less utility to them, because they already have a solution for the main problem; in this example, calling people. Switching requires losing their old contacts (network effect) as well as learning a new system. To put it in equation:
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
I think you are overestimating the average computer user. As personal computing and broadband access has risen quickly, so have the class of technophobes.
Also, a product will seldom sell itself. The Skype brand has plenty of intangible value, for instance from their collaboration with Oprah.
I think you might overestimate how easy it is for people to switch from Skype. With all your Skype contacts, friends on Skype, the fact that many users would not even fully understand how to download another software program and install it, these are reasonable but not huge barriers to entry.
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.
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.
You are ignoring the facts, Microsofts stock price assumes they are not going to generate incremental profits from their new businesses such as Bing, or the Windows phone. I won't comment on whether I think that is accurate, but it is simply what the current valuation implies.
I don't understand. AOL bought ICQ for 400M, got patent exclusivity to IM for some time, sold a bazillion ad dollars during the dotcom boom through the ICQ client, and then sold the company recently for 200M. I am sure AOL came out ahead on that deal. What is an ICQ moment?
Though in terms of your average joe, no one seems to know about ICQ anymore. Those that do seem to remember it as something of the past (remember those days when we all chatted on ICQ?). Ironically though in Australia it was MSN that took over the market from ICQ. I guess because so many people had a hotmail account and the client came with their computer. Now if only people would switch so quickly to Jabber/XMPP as they did then, though I guess it would help if a popular phone manufacturer would do this by default.
I specifically mentioned Australia. Though I have observed trends for IM market share vary a lot more in different countries. So it's probably true that there is still some country where ICQ dominates. By the way, isn't AOL IM still the main game in the US?
Look at this as an enterprise VOIP play. Skype + Exchange + Dynamics CRM + OCS/LYNC + SharePoint is a pretty strong platform. Plug that all into Windows Phone and you've got a strong corporate platform generally.
Personally, I don't know any alternative to Skype and I don't want to bother to find out. The only other video conferencing software I've used is NetMeeting.
I doubt it. I would hazard a guess that a this is a mindshare acquisition not technology. It might be branded as "Microsoft Skype" but to drop the name Skype would be a seriously stupid move, and Microsoft is anything but stupid. Bureaucratic yes, but not stupid.
A bit hyperbolic, but amusing. Why doesn't Microsoft adopt meaningful brands that aren't 4 words long (Microsoft Windows for Workgroups) or vapid and diluted (ie, live)?
Because it's so hard to come up with distinct unused names that work worldwide. Look at Apple, they aren't really any better (Thunderbolt, Air, Apple TV).
Microsoft owns the desktop - that's their cash cow. For large businesses they (basically) have to buy outlook / exchange. They throw powerpoint, visio, word, excel on top of that, plus the operating system, and they own it. From an operating system standpoint, there's not any real threat. From a productivity suites perspective, there's a bit more threat from cloud, but it's still comparatively small. Same can be said for email - gmail is a much larger threat but for corporate security, calendaring, integration, it's still not really there. This will probably be different in 5 years as the proprietary protocols and integrations move towards open standards. I find it ridiculous that I can't find another desktop email client that will natively work with exchange/MAPI, and Microsoft knows it. Skype is just extending it to the desktop, and it's a strong part of the desktop suite. I think they want to play in the enterprise space, because nobody wants to use Lync for anything other than IM (aforementioned turd comment here).
Far be it from me to hate on a FOSS project, but be aware that the Exchange support for Evolution has a reputation for off-and-on compatibility issues. (Microsoft likes to break things. Who knew?)
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.
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.
I agree, but you forgot one thing they'll undoubtely do: they'll change the underlying protocol, so that existing Mac and Linux clients will not work with the Skype network anymore. http://en.wikipedia.org/wiki/Embrace,_extend_and_extinguish
I don't think MS has the market clout to pull that anymore. Maybe if they want to turn it into corporate IP telephone to compete with Cisco, but if they shut Mac users out they're just asking for immediate irrelevance among the home/hipster/startup crowd which will quickly anoint a successor.
Ironically, because of the European rulings we might see protocol specification for Skype - MS had to publish bunch of it's protocols after some European anti-monopoly deal.
> The linux version has never been on parity with the others
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.
Interestingly, if Microsoft does buy Skype and make it Windows only, they would be opening a huge door for GChat as [EDIT: the obvious] cross-platform client. FaceTime too, I guess, if Apple decides to move in that direction.
If Skype isn't the default, verbed, system, doesn't it lose some value?
GChat is already totally cross platform since it's just XMPP. There are tons of clients out there. You can run your own jabber server and connect to @gmail.com addresses, even.
On that node, didn’t Apple say, via Steve Jobs at the presentation where it was announced, that FaceTime was to become an open standard? What ever happened to that?
He did, but that’s the last we’ve heard of it as of yet [last I heard it discussed]. I doubt they killed it forever though, it’s not like Apple to make a false announcement (vaporware); it is like Apple to de-prioritize the speed of open sourcing that stack over developing/improving/iterating their own implementation and/or iOS ecosystem as a whole.
For what I understood, the protocols are open, but you can't join in the network without a private key signed by Apple :). It seems to use fairly standard protocols though: http://en.wikipedia.org/wiki/FaceTime#Standards
Not so fast. Have you seen the Bing and Microsoft research apps? Bing also is being used on Chinese versions of the Dell Android phones instead of Google.
If this goes through, I wonder what would happen to Skype's Linux and Mac support. I'd hope MS would still support it, but I don't think they have any Linux software currently (I'm not positive about that, so please correct me if I'm wrong) and the Mac version of Office is always delayed compared to the Windows version. I hope Skype doesn't similarly languish.
One of Skype's major strengths is that you can use it to communicate with others regardless of operating system (for the most part... they don't have BeOS client, etc). Personally, I think there would be a large migration to something else if that changed:
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).
Microsoft is actually not too bad at Mac support, their Office is usually one year later than the Windows version (Office 2011 vs 2010 for PC, all the way back to Office 98 for Mac vs 97 for PC). And then they make the Expression suite, Microsoft Messenger (Windows Live client), Silverlight and Windows Media components.
Which is great. It does pretty much everything the Windows client does (chat, voice, video, desktop sharing), without the big, gaudy, annoying interface.
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.)
The linux client is missing a critical feature for me: joining an in-progress audio call. One call I'm in is almost always running, and the host is often not there to add me. I end up running windows skype in a VM when I'm on linux.
Yes, I found this very annoying. I remember the previous OSX version was also missing this and I often got laughed at because I couldn't join a call. Apparently this was Steve Jobs fault or something along those lines.
Skype is demonstrably worse on Linux. Aside from it's tendency to lock up, its support for conference calls is wrong; for example, if you're in a call, and call out to a phone number it offers to add the new call to the conference after you've made the request.
We moved off Skype chat at our company partly due to the fact that the Linux client makes you keep a separate window open for every chat you're in, making it basically unusable beyond 5 or so chats. Throw in the fact that the usernames aren't color coded and you can't bump the font size and switching to IRC was a no-brainer.
1) Four of those friends are not technical, and wouldn't know what to do with irssi. The remainder are using laptops that get disconnected a lot.
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.
I don't use IRC for specific people, if specific people want to speak with me, they can be-bop into mumble, call my phone, IM me, visit me, email me...I'm just explaining why the rationale specific to IRC doesn't make much sense.
Yes. Instead of using the free app Skype, I should instead pay $20/month for a virtual server just so that I can have an always-on screen session with an IRC client running in it. Makes total sense.
There really isn't anything better on Linux, sadly. I wrote a longer comment about this a few days ago, but the gist is that Skype is the only semi-reliable video chat/SIP client for Linux, even factoring in serious neglect from Skype Inc. for the platform.
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.
Can you clue me in? I just tried several a couple of weekends ago and it didn't work out. Twinkle was good but hasn't been updated for years and doesn't work with PulseAudio. Everything else barely ran.
Ekiga doesn't pick up the other end of the call for me when I tried it a few weeks ago (the person is there but no sound output from their side of the call). I actually used Ekiga extensively for a while (I even wrote a partial patch for GCC 4.4 compatibility, this was ~early 2008) and could eventually get it to work most of the time, but it frequently had problems; it would crash, drop sound, leave the device busy from the last call, etc. Lots of problems with it. Went back to Skype.
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.
Maybe I've missed something, but what has changed in the two years since eBay spun off Skype at a valuation of < $3B to make it worth more than $7 billion today?
1. Since eBay sold its controlling stake (they still own an amount of equity in the business) the investors now in control have got the rights to the whole thing where eBay didn't actually buy the rights to some of the code off the founders - this makes quite a difference.
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.
Maybe; eBay paid $2.6b in ~2005 (OP says 3.1b, WP says $2.6b), and then sold off 70% of it for $2b (http://en.wikipedia.org/wiki/Skype#History). OP doesn't seem to specify how much MS is buying, but let's assume 100%, so eBay is selling its 30% too; 30% of 8.5b is $2.55b, so eBay sold its 2 chunks for 2+2.55 or $4.55b.
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)
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 guess the sarcasm didn't come through - forgot my smiley face. Too many talk radio commercials telling me to buy gold were behind that knee-jerk observation.
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.
> a group of technology investors including Silver Lake Partners, venture capital firms Index Ventures and Andreessen Horowitz, and the Canada Pension Plan Investment Board
"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."
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).
1) Skype has stronger growth than when it was owned by eBay
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.
There is always a persistent threat of Apple bringing Facetime to the PC desktop so that people on iPhones could call people with PC.
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.
That's already happened. When Apple introduced Lion, one of the things they mentioned was they'd ported FaceTime to the Mac. You get it preloaded with a new Mac, or it's $0.99 in the Mac app store.
Mac is not a PC.
Apple will hesitate a long while before bringing Facetime to the PC, because Facetime promotes all-important lock-in to the Apple ecosystem and sells Apple hardware.
I will bet a bottle of single malt that Apple will bring FaceTime to the PC.
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.
Are we talking about the same company? The only time Apple ports their software to different environments is when they are in a position of weakness (like they were when they reluctantly put iTunes on Windows). I don't think a single Apple iOS app has made it's way to Android, or any new Mac software has been ported to Windows in recent years. You can accuse Microsoft of a lot of things, but they've always been willing to port their software when there is a buck to be made (they are a software company after all).
I personally see porting something like iWork very differently than porting FaceTime. If they think porting FaceTime will help sell iOS devices, I think Apple will do it for the same reason they ported iTunes. Whereas porting iWork doesn't do anything for selling iOS devices.
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!
For any communication tool to be successful it has to be cross-platform. You aren't going to use an application if you can only talk to people who are running the same app on the same OS as you
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
You are quite right there. Windows environments are a haphazard mess of personal firewalls, routers. There is probably a reason why Jobs didn't want to go there.
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.
As many users as Facebook, many of those users have entered their payment details, a great brand that is just as big as Facebook, and synonymous around the world with communication.
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,
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.
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
I've wondered what impact Zynga has on artificially boosting Facebook's active user count.
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
>especially considering that Microsoft can significantly reduce expenditures by integrating the company into the web group
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.
TFA talks about how this "could play a role in Microsoft's effort to turnaround its fortunes in the mobile phone market".
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)
I haven't tried Lync since it was re-branded from communicator. Communicator is very special in that it is one of the few teams that the 'Live' team could look down on.
I don't disagree with you as to what happened, but I'm genuinely curious as to why you think that Microsoft, Google and Facebook are all awful choices.
Google has no support, Facebook is staging a war against privacy, and Microsoft has some pretty meh software outside of Windows (when they bother to have any version at all).
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.
Wasn't part of the problem for eBay that they did not actually own the core p2p technology that Skype used and instead licensed it from the former owners? Has Microsoft purchased that as well or are they just going to write their own? In which case quality will change...
Yes I'm wondering about that too. Apparently eBay didn't even know that they didn't own the underlying part until they went to sell it :P Bet somebody go their knuckles rapped for that.
Hopefully this forces Google to drop the "play nice" attitude with carriers & Skype and properly integrate video chat into Android across the board (yes, it's in 2.3.4, but it annoys me that Google left it this long and even then made it tied to a release that many phones will not get for ages if ever).
10 years ago, Microsoft was $35. Today it is $25 and change. Not very rewarding.
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.
It's funny that this comment is in response to someone suggesting a dividend, yet completely ignores the dividend in mentioning the stock price over time.
Is it better for shareholders to reinvest dividends from mature firms into growing firms, or for mature firms to continue investing in their own stalled growth?
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).
I'm going to play a little devils advocate here. What if MS payed a big enough dividend that it was clear to everyone inside that burning money playing catch up was not a viable strategy. Is it not possible that fewer extraneous resources would force them to refocus?
I get the sentiment, but do you really think a) that there are 200 worthwhile startups in the mobile space, or b) that there are 200 promising startups that you could acquire for an average of $350 million each that would have anywhere near the chance of establishing a network effect as big as Skype's in any kind of reasonable internet timeframe (say, in the next 5 years)?
a) Probably, though I bet I don't know most of them. If I were MS M&A I would bet disproportionately on mobile, though, because that's an area they need to nail if they want to stay relevant. If they could get 70 out of 200, that'd be a darn good start.
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.)
To the extent that my math was way wrong, I think your point carries more weight (meaning: you're an order of magnitude better than I thought). I'd say if they bought the top 10 mobile plays for $70 million each they'd have a much better expectation (assuming that the acquisitions could be digested--risk which itself carries a significant reduction in expected value).
Ackppttthtt, my fail. Still not a lot of $35 million exits, but significantly more of those than $350 million. The point still holds though--not sure there are 200 of those $35 million exits either. (Isn't that still almost twice the size of a CDBaby exit?)
Yeah but come on, CD Baby is a warehousing and fulfillment company with a niche market that basically gets paid by starry-eyed musicians to let CDs gather dust and paid again to encode their music and send it to iTunes. Some small fraction of the bands actually sold enough to restock inventory. That's not a recipe for high margin success.
I fail to see how this is a wise business decision. Skype has been losing money for a long time, and with cheap/free competition like Google video chat and FaceTime etc, why would MSFT invest in this?
I think you answered your own question: to compete with FaceTime and Google Voice. I think they're afraid to sit this race out the way they did mobile and get left behind again.
If Microsoft somehow owned both of those services, would it affect Microsoft's prospects? Certainly not. FaceTime is a gimmick that few people actually use use. Google Voice is bridge between soon-to-be legacy voicemail and cellphones and the future, which is unlikely to be owned by either Google or Microsoft. Neither business would help Microsoft grow again, and neither will Skype.
My friend who lives far away has an iPhone. I have a mac, we use it all the time. I actually hate using Skype because some clown has my username. We use Skype at work, but I never get entrenched in a service if I don't get my username. Just a singular of data for you.
I haven't met in the flesh anyone who uses it regularly, and I know a lot of iPhone 4 owners. I'm sure there are people who do. It would be interesting to get some real data. My impression is, as with every video chat service for 30 years, it has very limited use because people just don't want to video chat most of the time.
I think that Microsoft buying Skype makes more sense than Google or Facebook buying Skype.
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.
They will use Skype like Apple uses Facetime. Get it natively into every Windows PC, Windows Smartphone and Tablet and let people (video)call each other easily. With the userbase MS has, this doesnt seem like a bad idea.
Imagine Scheduling Meetings in Outlook with automatic Video calls to everyone involved. Could be huge in the b2b market
Interesting to note that the market cap of Vonage is only 1.04B. They might have been able to buy up every single other VOIP company on the planet with the remaining $6 Billion.
I'm sure integrating a truckload of companies all with wildly incompatible systems and personnel would work out more horribly then we could possibly imagine.
Skype's (technical) HQ is in Talinn just across the water from Nokia, Microsoft's other new "acquisition"... useful for their mobile strategy perhaps?
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.
Recently when I started to outsource work I noticed everyone had Skype and wanted to use Skype. Skype is the no1 general platform for reliable business communications today. I got amazed myself how many actually use Skype in this sector.
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.
Strange realization: I am relieved that Microsoft bought this, and not Facebook. Can't remember the last time I was relieved that Microsoft bought a company.
That's really strange. Not being a fan of either, I'd bet Facebook knows a bit more about Internet than Microsoft.
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.
if MS absorbs the Skype technology into their own IM/chat/communications systems - and skype users are left out on a limb - where do they go?.
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?
The only way I can think of for them to really, really make this worth it beyond just owning the service is to integrate it in to Outlook like gmail video/voice chat. Although worker bees would hate it, it would be cool as a supervisor to be able to "call" your employee from a program you already have open all day anyways. Or even co-workers working on a project too lazy to get up or lawyers who need to talk about something but don't really have time to stop what they're doing. They could implement a feature enabling you to "add" friends who use outlook to your chat/buddy list. I don't think it would kill off gmail, but it would make some people much less likely to try it.
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.
I have a feeling that Microsoft was suckered on this one. Google and Facebook probably had no interest in skype, but bid it up so Microsoft would have to pay more. You'd think after all these years, and having this same thing happen time after time that they'd know that trick and see it coming. Guess not.
I think Skype would have been more valuable to Google, than to Microsoft--imagine having a free Google Voice number linked to your Skype ID. I think Microsoft was willing to pay a $1-2 Billion premium to keep it from Google and maybe a bit more to be able to use it as a bargaining chip with Facebook in their (MSFT and Facebook) pseudo-alliance.
"Goldman Sachs Group Inc. and J.P.Morgan Chase & Co. advised Skype on the deal, according to people familiar with the matter. Microsoft is not using any financial advisers for the deal, the people added."
I see. That makes the 8.5 billion (price + debt) make more sense.
Hmmm... I would definitely be happy to pay somebody a few bucks to perform a reasonable independent valuation. I mean, seriously, whats 500K compared to 8.5 billion?
What does Skype's patent portfolio look like? Could this be a way for Microsoft to shutdown other video chat services or at least extract a hefty license fee?
For a long, long time now, MS services (not directly tied to Hotmail itself) have required a Live account only, which can be created with any email address.
I have no real qualms with a Microsoft buy-out, but I was really hoping for Facebook to get on this one. However, this sort of leads me to believe FB is working on something they may consider "better." Let's just hope the MS crew does something intelligent with this move and we don't have another Delicious-style implosion.
Why does Microsoft feel the need to buy other companies? Why do they not just build their own Skype version if they like it so much? How many people are going to lose their jobs now? Why do they employ all the brilliant young programmers if they are just going to buy up companies and not create new products?
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?
As I commented in one of the other postings for this event: "There goes the neighborhood....".
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.
$7B is a lot of money, but might be more relevant is how much Facebook were thinking about paying for the company. Maybe it was not just an acquisition, but a strategic overbid.
Skype is losing tons of money and needed to get out with whatever users it had. Microsoft can then sync this up with their own communication clients for a joint play.
I always thought Skype and LinkedIn would be a really great match. But maybe this is an artifact of being introduced to both at the same time by the same person.
Will be interesting to see what happens to the Skype API. It's used by a lot of 3rd party plugins and is quite comprehensive. Hopefully they will not kill it.
Hilariously unlikely, unless your definition of "a lot" is small enough to cover the more neckbeardy sorts in the Linux community and maybe a few ABMers.
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!)
The most valuable asset of Skype is not the technology, but the social network and user base. That however is not all that valuable since, unlike Facebook, Skype is mostly a 1:1 communications model easily moved to another network. When people want to communicate, they will use whatever is easiest. Skype has minimal and diminishing revenue potential, adds nothing to MS core products, and the social network is not all that sticky. It's a dumb buy by a dumb company. I haven't heard a positive word said about Microsoft product management by an employee in 3 years of time spent in Seattle.
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?