10 May 2011

On The Microsoft–Skype Deal

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No doubt that the biggest news of the day was Microsoft stating its signed intention to acquire Skype for 8.5 billion dollars.  While there was already a rumor on it first unearthed by Om Malik. Many of the Microsoft Watchers didn’t believe it, more surprisingly not even  Mary .J Foley from ZDnet believed there was much truth to that rumor. Yet truth it was and maybe the reason for such disbelief was that the rumored asking price was for 7 billion. A figure that ended up falling short to the actual 8.5 billion asking price. Thing that surely added to the shock and disbelief.  And in tone to that shock and disbelief many blog posts have already being posted about the deal.  But from the posts already made on the Microsoft-Skype deal, there are many things that are either not being discussed or pointed out I would like to bring up and some I would just like to reiterate on:

Did Microsoft Overpaid for Skype?

Yes, no doubt about it.

Did Microsoft Insanely Overpaid for Skype?

That is something no one can state for sure, read on below so I can explain further on that.

Why Skype went for such a high price?

There are three takes on that:

1.-Skype owners collective perceived value of skype as a whole based on both the company and its patents pre-IPO

2.-Skype perceived value by those bidding to acquire it that could have gone from a weak bid by Facebook, and semi-serious bids by Google, Cisco or who knows.  Rumors go that such bids were around the mark of 3-4 billions, but that was more or less the supposed perceived value of skype pre-IPO. So there is nothing certain on if Google or whoever else was bidding for Skype made bids for over that amount or not.

3.-Skype possible potential value for the first opening month post-IPO.  That could have gone for up to 5 billion.

Why Microsoft didn’t simply waited to see what Skype worth was for the market as a public offering?

For one because it was a gamble, even if Skype had went for 5 billion post-IPO. A acquisition would have required a premium offer of 30-50% above whatever the stock value had went.  Meaning a cost that could have gone anywhere from 6 to 7 depending on what Skype value went and how the news of a Microsoft possible acquisition of Skype would have made the stock spike up at the same time.

And also a second reason was that there was really nothing clear on the chances of Google, Cisco or someone else acquiring it. Microsoft could just not risk it on that part.

But didn’t Skype was property of Ebay?

Yes, they originally bought it for 3.1 billion in 2005. The premise of the acquisition was that they wanted to integrate it with Ebay listings, but never did because apparently they didn’t liked the idea that if they added Skype as a option to Ebay Listings, they would have been forced to allow VOIP competitors to also integrate with Ebay Listings.  Later on Ebay wrote off the Skype acquisition for 1.9 billion and also lost a bit in stock value in the process. But what was more interesting about the price Ebay originally paid is the year that happened been 6 years ago from now and that it didn’t included the patents for the skype core technologies in the deal.  Finally Ebay solved the issues with Skype founders Niklas Zennström and Janus Friis and  sold a 70-percent stake in the company ceding control to Silver Lake, Andreessen Horowitz and the Canada Pension Plan Investment Board, which included a deal where the skype founders would get a 14-percent stake of Skype all based around a 2.7b valuation.

Complicated stuff.

Does it makes sense for Microsoft to acquire Skype for such a high price?

Well, no. They are overpaying, but they really ended up being forced unto that price because they acted late on deciding to buy skype. If they had acted earlier,  price could had been 6-7 billion instead. But it is good to note that according to the Microsoft-Skype Press Live Stream earlier today, the price was set in mid-April.  And acquisition talks started a month ago spurn out of other  talks on exclusive Skype-Microsoft deals that were previously in discussion.

It is worth it for Microsoft on the long run to own Skype?

In my opinion of course it is if the acquisition does came with all of the skype core technologies patents and because of the competitive advantage it gives Microsoft over Google and Cisco.

What is Microsoft going to do with Skype?

So far Steve Ballmer has officially said it will be integrated with Lync, Live Messenger, Outlook, Hotmail and Xbox.  The how and the when of such integrations is what remains at large. But they should vary on a product by product strategy, as that is usually Microsoft M.O.

How is Skype going to make money for Microsoft?

Microsoft is setting Skype as its own Division, this means that they will continue to operate almost as if they continued being a independent company. With the difference of being able to integrate and cooperate with other Microsoft divisions directly.  Skype projected revenue for 2011 is around 1 billion dollars with a $300 million of operating profit. But that is without counting the boost in growth acceleration it could bring to Lync, Kinect and Windows Phone adoption as another selling point to those products.  But perhaps the most interesting scenarios around Skype are on the advertising monetization side now being powered by Microsoft AdCenter, the possibility of Microsoft going as far as integrating Skype with Bing later on and Microsoft now being the handler of Skype previous deals with Verizon Wireless, Facebook, among others.  So there is room for Microsoft to make a lot of money with and because of  Skype.

What will happen with the Skype clients in Android, iOS, Mac, Linux, etc?

Nothing, things should not only stay the way they are now but they could actually improve.

Microsoft stated today that it would continue to support (maintain) and invest (continue to update) in Skype on Non-Microsoft platforms. Citing that Skype on all platforms was a critical component for its growth.  There is even a Steve Ballmer quote on the matter when the question was more or less re-asked:  “I said it and I meant it” as on Microsoft supporting Non-Microsoft platforms with Skype.

Nonetheless it would be a given that Microsoft platforms should get the best integrations and special features. It would be weird if they didn’t.

Could the acquisition of Skype by Microsoft tamper with the current grow of Skype?

While some are speculating on Microsoft bringing damage to the Skype brand via ill will, it would be a total anomaly if that tampered with Skype current trajectory. The reason is that there is only an all-in-one alternative to skype right now. The closest to that is Jajah and Jajah has now been slowed down considerably as it is now part of Telefonica. Other competitors in the consumer side are too small to serve as true replacements like is the case with Viber and Fring. On the business/enterprise side of the equation you only have the usual suspects of WebEx and Cisco.

Many would instead just mention Apple Facetime and Google Voice. But they are not even in the same realm of a service as Skype to begin with. At least not of as this point.

Could the complex assimilation of Skype because of its overlapping with Microsoft products tamper Skype growth and potential?

No,  at least in theory it should not happen as Skype will continue to operate as it is right now regardless of slowly being absorbed and integrated with Microsoft products and overall strategies.

Would not Microsoft becoming the absolute #1 on IM and Video-Chat could be met with a block by regulatory authorities?

Yes, it is possible that could happen. That is why Microsoft has been careful on the language it is using in its intention to buy Skype. Yet you never know if Google and Cisco will not retaliate publicly against the deal as soon as tomorrow.

Why the point that skype is a voip to telephone company too has been downplayed so far by Microsoft?

Right now, that no doubt is because Microsoft multiple partnerships with carriers. So there must be some serious carrier-Microsoft tension at the moment. After all, Microsoft owning Skype makes them  the biggest Global VOIP based Telecom too. You can bet that is the one thing on the minds of carriers and telecoms all around the world.

Conclusions

Is that there cannot be any until the deal is actually approved. But I think that the info I  enumerate as questions and answers do add some perspective to the Microsoft-Skype deal that I have not entirely seen in the coverage of this news.

As a bonus I added  Long Zheng take on how Skype logo would look if Microsoft revamped it.

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Linkage

Microsoft Press Release on the Skype acquisition.

Microsoft On-Demand Press Conference Stream

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2 comments :

call recording said...

As long as Microsoft gives Skype the freedom it deserves, I don't think anything bad can come out of this merger. Skype knows what it's doing. All Microsoft has to do is provide the funding and muscle necessary for Skype to achieve its goals.

Avatar X said...

@call recording:

Yeah, that should be the main idea.

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