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?
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.
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.
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.
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.
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 :)
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.
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.
Which is now owned by DST the same large investors in Facebook and Zynga.
This instantly reminds me of the CueCat , 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 ;-)
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.
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.
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.