What did Microsoft really buy in this deal?
Code? Nah…
The Skype technology code base is similar to a version 1.0 of a microsoft product and is notoriously known for having been riddled with technical inefficiencies. The Microsoft Lync product has relatively similar features to Skype. So if Microsoft really wanted better code, I would guess that they could have out-coded Skype for say a budget of about $1 billion and still have saved 7.5 billion dollars. So lets take technology and source code off the table. That’s not it.
Affiliate Relationships? Nope…
How about the affiliate relationships that Skype developed over the years with the carriers and cell phone manufacturers? Considering that Verizon and AT&T are struggling to offer 4G services and in making capital investments to take on the 1,200% growth of data over their networks over the past few years (AT&T is seeking to purchase T-Mobile so it can keep up with demand), I can imagine how cautious the carriers are about seeing a reduction in paying subscribers for cell phone minutes and an increase in data subscription packages so users can use Skype to call anywhere for free. For example, Skype users can call Brazil for .02 cents a minute through the Skype technology. Oh – and its free to call other mobile phones in Brazil! And the manufacturers make a great deal of their money from subsidies from the carriers, who in turn will be less likely to get excited about improved efficiencies about how to reduce their earnings if the phones are better apt to take advantage of Voice over IP services like Skype. So let’s take strategic partnership opportunities with Nokia, Motorola, Verizon, T-Mobil and AT&T off the table.
Microsoft bought users for $1,000 each
Microsoft bought market share. That’s right, they were willing to pay about $1,000 per paying Skype subscriber as a risk prevention measure to keep current Microsoft users using Microsoft Outlook, to try Windows 7 mobile, and to more widely connect their user base on Xbox live and Kinect. Steve Ballmer, CEO of Microsoft, is showing a propensity to take on big bets over the course of his last few takeover attempts (Yahoo, aQuantive to name a few). He stated in his official release about the Skype takeover that “Together we will create the future of real-time communications so people can easily stay connected to family, friends, clients and colleagues anywhere in the world.” Here’s what I think it means:
- Skype Integration with Outlook using a “click to call” feature via skype could help Microsoft stay King of the Hill in Enterprise email. That would be cool – really – a little “call” button on every email to call anyone who is also a skype user…
- Microsoft desperately wants to get back to the internet. They can do it via their beta program to allow users to use Microsoft Office applications such as Word and Excel through the browser (like Google docs). They can do it by bringing users to Bing and reduce Google’s 65% market share of search queries. The Skype tool can help on both accounts by offering value added connectivity and collaborative features as part of Skype’s offering. But keep in mind that if the giant Microsoft wanted to do this already, they could have – it’s about users, not software.
- Integration with Kinect and Xbox live for those video gaming enthusiasts to play and talk as part of the game could help create more virtual connections and leverage existing connections when combining your online friends from Xbox with your online friends with Skype. Keep in mind that Skype automatically has a feature to bring in your Outlook contacts list.
- A return to Skype’s original idea to embed ads within the Skype platform based on non-personally identifiable ads (like gender, location, activity, platform you’re using, content you’re consuming, etc…)
- Bing may plan to use the information within your outlook chats to inform their SERP (search engine result pages)
- Skype has been talking with Facebook for some time about integrating Skype into the chat feature. I still expect the innovation to come forward . It’s coming, this deal won’t stop that.
The average cost to acquire each paying and non-paying Skype subscriber is another way to view the acquisition. The former founders of Kazaa (an early competitor to Napster) have been more lucky than good. As a business, Skype was purchased for 10 times its earnings last year and over 1,200 times its profits. Last year the company posted revenue of $860 million and $264 million in operating profits, but still had a loss of $7 million. (source from the WSJ article) The Luxembourg-based company had an average of 145 million monthly connected users at the end of 2010, but only 8.8 million monthly paying users, according to Skype’s recently filed amended S-1.
Boxing out Facebook, Google and Apple
Microsoft came to the negotiating table later after Facebook and Google and simply put more cash on the table than either of the other companies were willing to pay. Why? Because, like in basketball, they wanted to box out Google and Facebook from using the integrated features from Skype into their offerings. Facebook is working on their own line of mobile phones. Google has Android and is heavily investing in Google Voice. Besides, both companies were reported at only willing to dispense with $3 to $4 billion to acquire Skype.
Cisco and Avaya were also potential suitors but aren’t as ambitious in their hopes of leveraging the solution with their other product lines. It just wasn’t as good of a fit for them. And of course, we have to address Apple who is leading the marketplace with their iPhone, iPad, the iMac – all products that have a Skype equivalent, FaceTime. I think we’ll see the iTouch and iPod see these innovations embedded in future releases. With the iPhone 5, the iPad 2 and the latest releases of the operating system for the iMac, Apple embedded FaceTime, a video conference tool that allows video conversations. It works very well although at present can only function if both parties are on wireless networks.
Keep in mind that Microsoft also has Kinect as part of its Xbox platform. For those that don’t follow the online video gaming marketplace, keep in mind that it’s bigger than the entire movie making industry. The amount of time video gamers spend online is staggering and an embedded strategy would be very interesting for online gamers, and in-game advertisers.
But Windows 7, the mobile operating system that goes by the same name as the PC Operating System, is not gaining market share in spite of heavy investment and relatively positive reviews.
Microsoft is a big Facebook investor and I believe that the biggest winner here could be Facebook. With Skype away from Google now, Facebook can breather a little easier because they still can use Skype’s technology to serve their 650 million users leveraging the Skype platform. This investment for Facebook wouldn’t be something they could probably have done on their own.
So Who Made Money?
Wow – everyone involved. Here’s the breakdown.
