It's fair to say I am not a fan of Microsoft, and while I might not be Steve Ballmer's biggest detractor I'll bet I'm in the top tier, so my initial reaction to the Skype deal was shock and awe, to say the least.I've had a few minutes to think about it, and have come to a few (quite early) thoughts. For starters, I don't understand Skype at all. I don't really know how they make money, I've never used it, I don't really see any need for it in my life. My wife has used it, three times, to talk to a friend (who is no longer a friend) and not since. Still, the software sits installed on her Mac, waiting for some other day when she might have need of it again.(I am reminded of the late 1990's when deals were discussed in terms of "users" rather than "paying subscribers." The Mrs. is apparently one of Skype's "users", although they will never make a dime from her. But I digress.)I see three areas for justification of the deal, maybe more. Starting with the first, enterprise, Skype says 35% of its users are "corporate." So this will be an easy "bolt on" to Microsoft legacy products, insuring that the software is optimized and ubiquitous, if it isn't already. Apple has Facetime (but a tiny user base) and there are other solutions, but with Microsoft's prodigious share, this becomes the standard. Will this help sell more? No. But it does blunt one possible reason for buying "other." You can't measure a defensive move in revenue, because by definition it's "what doesn't happen." That's thin gruel to justify $8.5b, but as the TV commercials say, "Wait, there's more."A Skype addition to Xbox adds yet another feature to the thing, which now includes games, video streaming, and other digital media delivery. This could, and I think will make a difference to some box purchasers, who will now have a way for Grandma to see the kiddos in some other city. As Xbox continues to fight for share against the leader Nintendo, this is a clear point of differentiation, and puts them another large step ahead of faltering Sony. I don't know that video phoning will become huge in the household (as opposed to the corporate world) but 1) if 35% of Skype users are corporate, then twice as many are not, so it's already pretty big. And 2) if it is and Xbox doesn't offer it, they're just another box with movies and video mayhem, no?The third area, and most cloudy to me, is the potential addition to Microsoft's almost dead mobile phone business. How the economics of "free phone calling" works out when Microsoft also needs telecom partners to pay for the phones (through subsidies) I don't claim to understand, but there is a needle here which I suppose can be threaded if one understands how these relationships work, which I don't claim to. Again, it puts a valuable feature onto Windows phones (network effect, network effect, network effect) which Android already, but belatedly offers, and which iPhones have had for some time. (This is apparently a cool enough feature that the iPad2 integrated FaceTime where the original did not have it. No camera, you see.) Again, this may be a defensive move (How can you sell a phone without Video Chat anymore?) or offensive (large network of installed users leading to the virtuous cycle) or some of both, I don't know.Will a future version of IE come with Skype preloaded? I should think so. Is that good? I don't see why not. Will the regulators go crazy? Too soon to tell.And if Microsoft is ever going to get in the Tablet game again, they simply must have a ready made, working, viable video feature that works, like FaceTime does. Adding 600m potential users at the other end of the tablet is no small thing.The big objection, of course, is that "You can already do all of that." Well, yes. But trying to build a business like Skype from the ground up is hard, especially when there's already, you know, "Skype", not to mention AIM, Facetime, ICQ, iChat, Jabber and who knows what else? Buying an already existing solution with 600m "users" is easy. Microsoft tried to build MSN from the ground up, they tried to build "Live Search" from nothing, and they've been spectacularly unsuccessful. In fact their list of failures in the consumer space is impressive: WebTV, MSNtv, MSNBC, Tablets, Zune, and so on. (They've had a few other wins, but that's irrelevant, I think, because most of them come from the OEM tax, not consumers. They did OK with Expedia, maybe, and their keyboards and mouse division is tops, right? OK, I'm joking ... )Now Mr. Softie doesn't have to market and build for five years and see if they're successful, during which time Google & Apple are moving forward too. Redmond instantly has a brand name, and they have the ability to optimize the software - and distribute it on all new products - to make sure the consumer experience is the best possible. (I know, Microsoft is not very good at this, but perhaps they can be convinced to make something easy, instead of hard.)Is the price a good price? All they're buying really is a list of names and software installed on 600m computers and some brand equity. And I suppose there's revenue tucked in there somewhere (just kidding, I know there is, but certainly not enough in-and-of-itself to justify this price tag.) But without gettig into the numbers, which I freely admit I don't understand (nor have much interest in pursuing) I do see several strategic reasons for the acquisition, and if only one of them pays off, then it's a decent, albeit expensive play.If two of them come true, or if it becomes a successful stand-alone leg in the Microsoft empire, then it will have been worth it after all. Microsoft has a pretty crappy record with acquisitions, so I make no prediction, only that I see the logic which led them here, and from here on out it's their baby to build or destroy, as only Microsoft is able.
Lots of good points in the linked article but I can't help thinking Microsoft just put a torch to 8.5 billion.Ballmer is still in charge.The Board still rubber stamps better than the cold war Politburo and every other acquisition has ended in massive failures.Turf wars will destroy this as well...Pete http://daringfireball.net/http://bhorowitz.com/2011/05/10/microsoft-buys-skype/Shortly after we started Andreessen Horowitz in mid-2009, we, along with our partners at Silver Lake Partners and Canada Pension Plan Investment Board, bought majority ownership of Skype from eBay for slightly more than $2B. The investment generated a tremendous amount of controversy for us. Marc and I were known as angel investors, so investing $50M of our new $300M fund in one deal surprised people. While consistent with our stage-agnostic strategy, it was a very big deal very early on in the fund. To make matters more exciting, other investors and writers broadly criticized the deal. Joe Nocera of the New York Times wrote: Many people on Wall Street—and a number of telecommunications experts I spoke to this week—were stunned by the price Skype sold for, and not just because we’re in the middle of a recession.That controversy ended this morning when Microsoft announced that it was buying Skype for $8.5B 18 months after we bought it from eBay.
Goofyhoofy - Interesting thoughts. One thing you left out is that MS intends to do a lot of ads on Skype.I hadn't thought about the Xbox angle but you may be on to something (and MS says this is a big priority). Xbox sales in recent months has exceeded Nintendo, thanks to Kinect:http://www.hollywoodreporter.com/news/video-game-console-bat...Once Skype video chat works well on Xbox/Kinect, it stands to reason Xbox will become the runaway market leader. The big reason is that Kinect expands the pool of potential console buyers to a much larger market, though it may also take sales away from the other two competing consoles.Consider the case of our family. We bought a house recently and literally made decisions about how to lay ethernet in our home based on an Xbox/Kinect system we hadn't even purchased yet. The reasoning was:We have a 6 year old - eventually he will be doing video games.We don't like the impact on kids of playing first person shooters with traditional controllers and want to channel our kid away form that as much as we can.We don't mind controller-less games so much that emphasize jumping around - Wii is okay but Kinect is way better: zero button pressing.We don't want a computer in our living room but want the benefits of Windows Media Center and a computer for viewing baseball games and netflix movies (Xbox lets you do this in conjunction with a system that has Windows XP, Vista, or 7)We already had enough reasons. I guess Skype is anathoer. In our case video chat is pretty minor (we've done it on Skype a couple types with grandparents on an iPod touch - too much choppiness and lag). Maybe it would matter more if quality were excellent and our 6 year old grandparents really got into it.What I'm getting at (with too much detail, perhaps) is that Xbox already has a lot of momentum thanks to Kinect, but this addition might be the last straw that causes Xbox to permanently take 1st place in the console wars.In the case of our family, our choice is between an Xbox/Kinect or nothing at all.P.S. I have historically not been a MSFT fan. I've been predicting the decline of the Windows franchise for years and (incorrectly) the decline of MS Office as well. Xbox Kinect is pretty much the only thing coming out of MSFT in the past decade that I think is really amazing and has the potential to add lots of revenue and income.
Goofy, nice post as well. As elan says, I don't understand why so many putatively smart people don't understand that you can make scads of money off a 670m installed user base. It's like people have never heard of Google or FB making money even though their main product is 'free' to users.Let's take my neighbor - his daughter is doing a year studying abroad in Florence and they Skype:Do you think there are certain products/services that they are going to be more interested in purchasing over this year?Do you think airlines/hoteliers or luggage firms might be interested in reaching them? Cappuccino machine makers? The Accademia? [Or even non-targeted large biz like KO, LVMH, et al]I mean, if MS can get this to really work for just one of their offerings: xBox, mobile, ads, PC - I think it can be a home run [or at least a double.] If.
For starters, I don't understand Skype at all. I don't really know how they make money, I've never used it, I don't really see any need for it in my life. My wife has used it, three times, to talk to a friend (who is no longer a friend) and not since. Still, the software sits installed on her Mac, waiting for some other day when she might have need of it again.I use Skype exclusively at home. I don't have a long distance carrier for my land line. For less than one month of basic, local, land line service I have unlimited calling to any land/mobile number in the US for a whole year (free is only PC to PC)I'm *this* close to canceling my land line.Jim
For my family Skype is positively brilliant! We're all distributed around the world (Belgium, Australia, New Zealand) and have friends in a lot of other places. In all of these cases Skype is the norm to video conference. Furthermore the company I'm working for has just implemented Skype internally for 1-to-1 (or more) communication across the globe.In terms of revenue, Skype can bank on the following in a number of places:1) Calling from the PC to mobile or land-based phones in another country can be a lot cheaper than using the local telecom companies. In Belgium its less than 1/2 the price. So we buy a lot of Skype minutes.2) Corporate networks can come with a fee.3) Adverts as mentioned previously.In terms of reach Skype is by far the largest and appears to be getting larger faster. For Goofy - who's a big user of Apple products - it's superfluous due to Facetime, but most of the rest of the world is less Apple adopting and so Skype represents the best chance you'll find the person you wish to chat to cheaply and easily available. That network effect should keep Skype well ahead, especially as it will now be expected to work on a wider variety of devices as mentioned above.
Thank you for the food for thought, Goofy.On the client side, I note that my son at college has become an avid Skype user, communicates for pleasure with friends and for school use with classmates. You get a dirt cheap copy of the entire MS Office suite, once you get your .edu email, so MS is racking up tons of new users each year. SkyDrive, being a MS app, is the preferred docs collaboration/presentation method (They use this to share class notes and then review over the phone.) I imagine Skype will be integrated with Word, OneNote, Powerpoint which makes me see additional potential in distance learning (Will he go to class even less given that a classmate could Skype with integrated materials?). IMO, the corporate piece offers a real and large benefit. MS has a large customer base in it's MS Dynamics CRM/ERP (accounting, manufacturing software system) and an extensive and talented network of VARs (value-added resellers) who are now selling the MS product as a cloud-based system, on a subscription basis, based on the number of licensed users, with a lifetime revenue stream. Skype then just added a fleet of salespeople and the ability to be sold as an add-on (easier sell). The fact that MS picked up the ex-Cisco small business VP in the Skype deal is an added benefit. From live sales demos to using the Skype Click To Call facility, I think integration with their CRM/ERP system will add significant revenue (how long it would take to make that $8.6b back I don't know, but they say the Dynamics subscription model's breakout point is 18 months for the VAR).Another interesting application is the new 911 system. Time magazine just had an article on how the new system will enable callers to stream video of the accident/crime scene, so that the dispatcher can see first-hand what to deploy. MS has a case study detailing their success with the new Miami 911 system, wherein MS Azure is now utilized, which gives the cost benefit of dumping the mainframe and going to a SQL server, that allows for better application integration (example given what that the fire dept. can see maps of fire plugs, etc. - Bing integration, I would think). cautiousone
"Thin gruel" was the exact phrase that ran through my mind after reading the conference call transcript. My impression was that the implicit answer to "Why do this now, at this price?" is "We were bored."Would it kill these big companies to ever buy something not at the worst possible time? It's like there is a rule where if you are a tech company with over $20b in cash, you have to take 2 stupid pills before acting.Instead of MSFT buying Skype for $8b as its private equity owners desperately try to offload it, why not, say, buy a big chunk of Ebay (Paypal & Skype included) in 2009?
Instead of MSFT buying Skype for $8b as its private equity owners desperately try to offload it, why not, say, buy a big chunk of Ebay (Paypal & Skype included) in 2009? eBay's board would never sell the company in '09. Only distressed companies sell at the trough, like SIRI to Liberty. In an interview in '10, John Malone lamented there were few truly distressed opportunities. come to think of it, this "great recession" really didn't produce that many bankruptcies outside financial sector.i can't imagine the PE owners are desperate to offload it. they only tripled their money (even higher return on equity).
I realize that EBAY's board wouldn't sell the entire company, which is why I wrote "a big chunk".What would have prevented MSFT from tendering for 30% of EBAY's shares at $18-20/share in that 6 month period in late 2008/early 2009? If they then were able to purchase a decent number of shares, they could have used that as leverage in a deal to buy Skype. Aren't these MSFT guys supposed to be smart? Kniving? Playing for the long-term?Skype was being shopped. The owners were selling a stake in an IPO and shopping it aggressively to strategic buyers beforehand, and MSFT happened to bite. MSFT functionally won an auction where you had a financial sponsor as a seller, when a non-financial and motivated seller (EBAY) sold these assets 18 months earlier at 1/3rd the price.Think there were a few high-fives in the Silverlake office yesterday?
FWIW, for many people the video capabilities of Skype are beside the point. The real benefit is that Skype replaces their landline for very little cost. I don't even have a camera for my computer so the video stuff matters not to me.However, a few years ago I got rid of my landline and got Vonage instead. We liked it but then last year I was using Skype to talk to my husband (we have even used Skype when we are on separate computers in the same house...it is an easy way to chat) and I found out you could pay Skype something under $30 and for a full year could call real phones. That was less than 1 month of Vonage. So we dropped Vonage and got Skype. Now, no one can call us on Skype except another Skype user but for a couple of dollars a month we could get a "Skype number" and then it would function completely as a phone substitute for much less cost than even a metered land line with the bonus that you can use it on your cell phone as well.
Goofy,I don’t pretend to have any expertise in this area either technical or business wise. What I do know is that we have 5 kids and 5 grandkids (more to come I’m sure). The closest lives 30 miles distant, the furthest 250 miles. Mrs. street used Skype about 4 times to talk to the grandkids before abandoning it. And one of those parents (a daughter with 2 kids) works for Microsoft!I just have a feeling this is not going to be a great move for MS but what do I know?
I am a paying Skype customer.I live on Boracay in the Philippines, but I have a German (Skype) phone number. I run Skype on my Motorola Defy. The 3G connection is usually good enough to allow me to make phone calls to Germany from wherever I am on the island, at 2 Eurocents a word.My life is kind of like a smartphone commercial these days.Also, Skype is what most translators I know use on a daily basis as a chat client. I am online on Skype the whole day and there is a list of a dozen of my colleagues who are as well.A friend of mine (daytrader) uses Skype as a mesns to exchange thoughts and ideas with other traders during the day.It seems to me that Skype is the chat client of choice for people who need use chat clients professionally. No idea why it is Skype instead of Yahoo messenger or whatever, but this is how it has panned out.
Instead of MSFT buying Skype for $8b as its private equity owners desperately try to offload itI can't think of a more incorrect accusation of Silver Lake. Desperate, they are not.
Substitute "incredibly eager" for "desperately". I am referring to the idea of Silver Lake was incredibly eager to sell at that rich price.Say I own WMT stock at $56/share, and I think it's worth $65/share. Someone comes along and says to me, "My good man, I am feeling rather saucy. I'd like to pay $75/share for your WMT stock." I am not desperately trying to sell my WMT stock at $56/share, but I would be desperately trying to close that deal at $75/share before the guy changed his mind. That is what I meant.
I wonder if Skype is a generational thing--many posts seemed to mention wives who dropped it, but the kids stay on. I grew up with the plain black telephone. It was cool when you could get a wall phone--what a thrill! And then there were colors!I have Skype on my smartphone, but I am mad as hell Verizon won't let me delete it. But my kid, who's 45 years younger than me, uses it all the time to talk to her boyfriend. And a charity board I'm on uses it to get us into the meetings if we're away. The person who sets it up is 25. So there could be growth just from more young people, who never had the baggage of that old black phone, adopting Skype. Let's not forget the tablet computers that are coming now. Wouldn't they make interesting Skype vehicles? There's plenty of room on my daughter's iMac screen for ads, to be sure. Still, is YouTube making any money for Google yet? There's another service used by young people making a tough transition to the ad world.I hadn't thought of the landline replacement strategy with Skype, but there will be more of that. It would be nice for MSFT to have a chance to compete with the dumb old phone companies instead of Google. And since the Skype app is hardwired into my Droidx, I guess the phone companies don't seem to care. And wasn't NOK up after the MSFT/Skype announcement. Maybe there is something there...At the corporate level, I used to try various conferencing systems which didn't work too well. Wouldn't the network guys at big companies like to present users with a MSFT-supported service, possibly including document-viewing during a call? This actually does look like a big possibility, for a few bucks extra per year per user.So was Balmer just sounding dumb because he didn't want to tell the marketplace what he really wants to do, instead of just being clueless?In order to keep the PC alive in the cloud environment, MSFT has to keep coming up with functionality for the PC that's tough to replicate on the cloud. To that end, I still don't see why they wouldn't have spent $8.5 billion to buy Nuance Communications and bring powerful speech-to-text capability to the operating system. Better capital discipline could arise if MSFT committed to a substantial dividend growth policy. The payout ratio is 25%. They need to commit to bringing it up to 40% over the next 5 years or so. This would reduce the "value trap" as well because investors would know they share in profits and that management won't fritter it all away.
People in Brazil often print their Skype username on their business cards. Telecom is prohibitively expensive down here and even large, well-capitalized companies use Skype to keep costs down.For the most part folks use the free skype-to-skype service, but more and more, like myself, are buying minutes to be able to call any number.I've used the skype video chat plenty. I actually think the Google video is a better product but it hasn't caught on as quickly in my crowd. I would not mind banner ads during those calls. (I haven't clicked on a banner ad in years, unless it was an accident. Do they actually work?)G
I can't comment on the price paid (it's large, but there may be justification as has been pointed out). I can say that we've used Skype repeatedly in a number of contexts (and one future one is being played with):1) My wife is almost completely computer illiterate. She has close friends in about a dozen countries and had been using "phone cards" to call them at a reasonable expense over our phone line. I succeeded in teacher her to click on the Skype icon and then clicking on a friend's name on the phone list and voila she's got a call placed.2) The other place that I use Skype is when I travel. I've used it from cruise ships, hotel rooms and even, during a trip in Europe, bought a subscription to McDonald's hotspots to use as my "office away from home".These are both paid services, but at a few cents a minute, well worth the expense.The thing I'm looking forward to trying is to get a local phone number from Skype and having phone calls to that number forwarded to whatever SIM chip I happen to be using in my GSM phone as I switch countries. It gives a cheap way for others to reach me and in most countries incoming calls to cell phones are free, so that's also cheap.I think I have made exactly one (free) phone call Skype-to-Skype in all the time I've used the service. This may change. I have an inexpensive box made by US Robotics (unfortunately discontinued) which interfaces a POTS phone system to a PC and allows Skype calls to ring house phones, be answered, etc. on existing phones without seperate gadgets. It sits on my office desk, but at some point will transition to my home.The cell phone carriers have to make some hard decisions as to whether they are phone companies and will block competing services or whether they are internet service providers and will allow Skype to canibalize their existing services.Jeff
The thing I'm looking forward to trying is to get a local phone number from Skype and having phone calls to that number forwarded to whatever SIM chip I happen to be using in my GSM phone as I switch countries. It gives a cheap way for others to reach me and in most countries incoming calls to cell phones are free, so that's also cheap.Have you tried Google Voice? You can make it your permanent phone number and then just change (at any time) whatever phone (or phones) it rings at.http://www.google.com/googlevoice/about.htmlSo far, it seems that Google Voice is mostly used by geeky types.
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