Microsoft and Skype
It was announced this morning that Microsoft is buying Skype from a group of investors for $8.5b. I don’t know if this price tag says more about M&A team at Microsoft who put this deal together or the M&A team at eBay who sold Skype to a syndicate of investors for $2.75b just over a year ago. I know eBay got a lot of pressure from public market investors to “unlock value” from their asset portfolio by spinning out Skype, but the ultimate sale price seems to underestimate the ultimate value of the asset; it lacks vision. At the time of the sale, Skype had over 600m unique accounts and over 50mm daily users. This was before the massive ramp in iOS and Android sales. I’m not sure how management could have underestimated the value of a mobile phone/calling asset, but from the growth trajectory in Skype user minutes it obviously happened. I know that not every Skype customer is monetizable (I’ve never made a Skype-out call), but there is still some strategic value to that subscriber. The spin-out sale price valued each account at $4.50. The sale to Microsoft today valued each account at over $10. Obviously, a strategic buyer is going to value the asset differently, but this is a large discrepancy.
There are a number of factors at play. The sale took place before facebook was large enough to be a potential bidder; not an issue with its current $70b+ valuation. It also happened before the launch of Facetime on millions of iOS devices, thus Google’s bidding motivation. As mentioned, there was a lot of shareholder pressure on eBay management to dispose of/IPO Skype and there was no way to foresee Steve Ballmer going Jim Dolan/Carmelo on the asset. The market and shareholders aren’t always right, especially if the management team has long term vision.
Price tag aside, I like the deal for Microsoft. It opens them up globally in what is seemingly an important emerging communication platform (desktop and mobile video communication). Skype can be integrated into both Windows 8 and Windows Mobile 8, unifying the communications platform for consumer and enterprise Microsoft customers. We are already seeing consumer choice invade the SMB and Enterprise space when it comes to handset and tablet purchases. This keeps Microsoft from having to develop a VoIP platform to compete with facebook messaging and Google Voice (which, itself, is now integrated with Sprint Nextel). On the technology side, I think Microsoft has a huge opportunity in the living room thanks to its connect platform. Integration gives Xbox/Kinect a huge video chat user installed base, including multi-party calls. I’m not sure I always want to video chat with someone, but having Skype functionality (and video quality) built into a camera already in the living room makes the use-case a little more obvious and convenient. That is just a 1.0 implementation.
This is all, of course, assuming the deal gets approved. Microsoft’s history of [dominant] product bundling has not gone over so well in Europe.
