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.
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.
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.
"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 ;-)
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.
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.
"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.
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.
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.
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).
When we see the mac version stagnate, we won't be able to say MS has sabotaged it - skype did that before on their own.
The linux version has never been on parity with the others - will it be officially killed? Might MS actually put resources in to it to make it work as well as the others?
Overall, good on MS for doing this. I'm assuming this may bring on some more interesting dynamics to the google voice / skype party.
If 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.
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.
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?
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.
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.
>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)
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).
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 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
[+] [-] jsz0|15 years ago|reply
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?
[+] [-] netcan|15 years ago|reply
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.
[+] [-] richardw|15 years ago|reply
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 :)
[+] [-] utnick|15 years ago|reply
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.
[+] [-] alanh|15 years ago|reply
[+] [-] sukuriant|15 years ago|reply
[+] [-] drawkbox|15 years ago|reply
Which is now owned by DST the same large investors in Facebook and Zynga.
[+] [-] Luyt|15 years ago|reply
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
[+] [-] mmaunder|15 years ago|reply
[+] [-] bvi|15 years ago|reply
I do agree than Microsoft is massively overpaying for Skype, however.
[+] [-] riams|15 years ago|reply
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.
[+] [-] timedoctor|15 years ago|reply
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.
[+] [-] jcampbell1|15 years ago|reply
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.
[+] [-] dingle_thunk|15 years ago|reply
[+] [-] tybris|15 years ago|reply
[+] [-] ChrisNorstrom|15 years ago|reply
[+] [-] trout|15 years ago|reply
[+] [-] mgkimsal|15 years ago|reply
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.
[+] [-] joshzayin|15 years ago|reply
[+] [-] pyre|15 years ago|reply
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).
[+] [-] mahrain|15 years ago|reply
[+] [-] william42|15 years ago|reply
[+] [-] cookiecaper|15 years ago|reply
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.
[+] [-] phlyingpenguin|15 years ago|reply
[+] [-] cfinke|15 years ago|reply
[+] [-] teyc|15 years ago|reply
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.
[+] [-] daimyoyo|15 years ago|reply
[+] [-] nikcub|15 years ago|reply
I just happen to be talking to a non-tech computer user on the weekend who told me that he and his entire family and friends overseas do not use Facebook because Skype does everything they need in terms of staying in touch and it has worked for them for years.
They should start over with the software and spin it into a web and mobile service. It is a great platform to take on Facebook with - a much simpler service for basic video or text chat, and add in some photo sharing, email, etc.
Google really missed out on an opportunity here - I bet that whatever they end up producing internally will not be merely as good or as popular as a new Skype run by Microsoft.
In terms of the price, it would almost be a worthwhile purchase with just the users and brand - the near-billion in revenue is just a bonus. Skype has near $1B in revenue, and most of the expenditure is related to writing down and amortizing assets as part of the acquisition (something that most PE groups do when they takeover a company - part of what makes some of these deals profitable and worthwhile). Number of Skype users and revenue is growing remarkably. If you look at the published financials[1], $97M was written off as cost of acquisition, another $250M was amortization of assets that were written down at acquisition. Their 'real' costs are $131M in marketing, $72M in development and $104M in administration - which brings gross profit closer to $500M+ for YE 2011. PE of 17-20 is a bargain, especially considering that Microsoft can significantly reduce expenditures by integrating the company into the web group.
I think this is a great deal, very different to ICQ (the immediate parallel that everybody is drawing) and much closer potential to the eBay PayPal deal. If done right, this could work out as well for Microsoft financially as PayPal did for eBay (remember PayPal wasn't doing so well financially at the time [2] - everybody called that deal crazy at the time as well) - add to that the potential of Microsoft taking on Facebook in the 'online communication for ordinary folk' sector - and it is a great,
[1] http://www.sec.gov/Archives/edgar/data/1498209/0001193125110...
[2] http://www.ygoodman.com/ppipo.html
[+] [-] brudgers|15 years ago|reply
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.
[+] [-] mcarlin|15 years ago|reply
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.
[+] [-] shrikant|15 years ago|reply
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)
[+] [-] jaffoneh|15 years ago|reply
http://kara.allthingsd.com/20110509/microsoft-will-announce-...
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[+] [-] horatiumocian|15 years ago|reply
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.
[+] [-] kayoone|15 years ago|reply
Imagine Scheduling Meetings in Outlook with automatic Video calls to everyone involved. Could be huge in the b2b market