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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.

If true, P/E is < 20, not bad.

Still, I doubt that is really what MS is after.

Growth that high -- 6.4% -- for the next decade would be huge for Skype and make this not just acceptable but a home run for microsoft.

At that 6.4% rate skype has twice the earnings in 10 years it has today.

Thanks for reminding me to remove my credit card info.

> it could help strengthen the corporate MS position

People are going to continue to buy Word, Windows, and Exchange because they have a commodity video product "integrated"? I don't think so.

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 :)

Maybe you are logged into skype by default and 3rd party apps can access it.

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.

But also its the "facebook effect", where you go there because everybody else is there. So that's in Skype's favor.

When a friend finds something better than skype, I'll go over with them. Network effects are bidirectional.

I have loyalty to Skype. And this is infinitely better than Facebook owning Skype, imo

MS is pretty tight with Facebook, so expect deep integration of Facebook into Skype, just like they did for WP7.

MS and FB are practically the same ethics-wise to me. I'd be interested to hear more of your thoughts on this.

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?

If companies can have cultures then they can also have ethics, as the two are closely related.

How can you put Google and Facebook next to each other talking about privacy? They are on different planets.

No, they are very similar.

* 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.

this doesn't exist on facebook: http://www.google.com/privacy/ads/

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.

Both have a hostile attitude towards privacy, claiming that it's dead, trying to make it look old fashioned and irrelevant. [Citation Required]

What do you mean by this? As opposed to Google and Apple?

FWIW, MS owns part of Facebook too.

Lots of investors own minority parts of facebook. But no outside company owns facebook.

ICQ was mainly purchased/sought-after for their instant messaging patent: http://www.haaretz.com/print-edition/business/u-s-awards-icq...

Which is now owned by DST the same large investors in Facebook and Zynga.

"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 ;-)

[1] http://en.wikipedia.org/wiki/Cuecat [2] http://www.joelonsoftware.com/articles/fog0000000037.html

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.

Off topic, but that was the one with Stephen Colbert singing Friday, correct?

Yes it was

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.

In what way do you measure success? Hotmail and Windows Live Messenger for two services have a huge amount of users.

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.

I wouldn't call either of those an example of a successful freemium business model. A free, ad-supported business model, perhaps.

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.

Skype stopped free video conferences after the end of the beta phase. You now need a subscription to have video calls with multiple people.

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.

So the barrier to switching is pretty low.

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.

Well, they did that for Skype. And if it comes with the platform, that barrier is gone.

But yes, there is market inertia and Skype has it.

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.

> This is Microsoft's ICQ moment

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.

No it's not. MSFT is just a sane stock priced my normal investors who want a balanced portfolio and don't believe in fairy tales.

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 think this is a reference to AOL buying ICQ.

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.

MSN had one killer feature for me over ICQ. Server-side friend lists. When my PC was replaced - my MSN list was there. My ICQ had to be re-added.

This was eventually added to ICQ but probably too late.

Maybe for the average Joe in the US, but it's still widely used around the world.

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.

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