Microsoft's Skype acquisition would give the company access to a broad consumer audience and a brand name heavily associated with communications. But did Microsoft overpay?
The day after Microsoft announced it would acquire Skype for
$8.5 billion, bloggers and pundits continued to dissect the deal's
ramifications for both the companies involved and the tech industry as a whole.
Once the deal is closed, Skype will become a Microsoft
division headed by Skype CEO Tony Bates, its services will be meshed with a
variety of products in Microsoft's portfolio, including its Lync
unified-communications platform, Outlook, and Xbox Live. In a May 10 press
conference, Microsoft CEO Steve Ballmer suggested that the deal, the biggest in
Microsoft's history, is the sort of bold move needed as his company faces
competition on multiple fronts: "This Skype acquisition is entirely in keeping
with our ambitious, forward-looking, irrepressible nature."
Skype previously found itself an acquisition target in 2005,
when eBay paid $2.6 billion in cash and
stock for the then two-year-old company. Four years later, the auction site sold a majority of its Skype holdings to a team of
private investors-including Silver Lake Partners and Andreessen Horowitz-for
$1.9 billion in cash. Microsoft's $8.5 billion, of course, represents a
substantial markup, leading analysts to parse out what exactly the company is
getting for that hefty amount of cash.
"Google and Apple and Skype have dominant consumerization
brands," Forrester analyst Ted Schadler wrote in a
May
10 blog posting. "Microsoft does not. Until now. As a bonus, Google doesn't
get to buy Skype. And more importantly, neither does
Cisco."
Of perhaps greater importance to Microsoft, though, is the
ability to sell Skype's services. "While it's true that Skype has been slow to
make money off its service, the potential is there," Schadler added. "Local
phone numbers, three-way video conferencing, business administration, and
making calls to real phone numbers are all things that people will pay for."
This could bolster Microsoft's bottom line at a time when its traditional
source of revenue, desktop-based hardware, has become increasingly overshadowed
by the cloud; Microsoft's own cloud-based offerings, including Windows Azure,
have yet to generate significant profits.
Skype could also boost the capabilities of Microsoft's Lync
unified-communications platform, expanding the company's reach beyond
business-to-business conferencing and into the consumer realm.
"Skype's vision of cross device communication has been
proven in recent years, with video and voice calling made possible across both
PCs and mobile phones," Matthew Casey and Allan Krans, analysts with Technology
Business Research, wrote in a May 11 research note. "TBR expects Microsoft will
utilize Skype's established communication platform to generate traffic across
all three arenas [PCs, mobile phones, and the living room], by attracting
consumers with an unprecedented communication opportunity." By continuing to
support Skype's non-Microsoft client platforms, Microsoft will also have the
ability to cross-sell its products to a broad audience.
Meanwhile, Ben Horowitz, co-founder and partner of
Andreessen Horowitz, took to his blog to trumpet Skype's ability to repulse
"full frontal assaults" from Google and Apple.
Specifically, he cites Google's attempt to market a similar
VOIP
(voice-over-IP) offering to Skype's via its Gmail service. "What was the
result of this effort?" he wrote in
a May 10 posting.
"Skype new users and usage growth has accelerated since Google's launch."
Apple's Facetime, he added, also failed to blunt Skype's
momentum: "How did that impact Skype's usage on the iPhone? 50 million users
have downloaded Skype's iPhone product since the release of Apple's FaceTime."
Horowitz also praised
Microsoft's decision-perhaps unsurprising, considering how much money he stands
to make off the deal. "By acquiring Skype, Microsoft becomes a much stronger
player in mobile and the clear market leader in Internet voice and video
communications," he concluded. "More importantly, Microsoft gets a team, ably lead
by the exceptional Tony Bates, that can compete with anyone."
But some analysts aren't quite convinced by the deal's
potential upsides, especially considering the amount of cash Microsoft paid to
make it happen.
"Wall Street hated the deal when eBay bought it, and they
only paid 1/4 of what Microsoft is now paying," Roger Kay, founder and
president of Endpoint Technologies Associates, wrote in a May 10 email to
eWEEK. "In eight years, Skype hasn't made any money, and even at the operating
level, it would take three decades to pay out in cash terms alone."
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