Skype

Microsoft’s purchase of Skype for $8.5 billion is a high premium to pay for a product/service that is falling behind its rivals.  The purchase is a big move and many would argue that Microsoft is now in a position where it needs to make a big bold move.  Let’s all recall how well it worked out for Ebay.

Actually, it worked out well for Ebay… when they sold it.  Ebay retained about 1/3 of the company.  The $8.5 billion dollar price puts the value of Ebay’s stake at approximately $2.95 billion.  Ebay paid $3.1 billion for Skype in 2005.  After a poor integration attempt, Ebay sold Skype for $1.9 billion to an investor group that included Andreesen Horowitz, Silver Lake, Index Ventures, and the Canadian Pension Plan Investment Board (seriously).  If you combine the amount received for the stake with the recent sale (assuming the deal closes), Ebay walks away with $4.85 billion.  Let’s not forget the tax benefit received from the $1.4 billion dollar charge Ebay incurred in early 2007.

Rumor had it that Skype had some tire kickers buzzing around.  The usual suspects (Google and Facebook) were said to be in the mix.  Apparently the competition was in the $4-$5 billion dollar range.   Once the Google deal fell apart (due, in part, to the ill fitting technology) Skype appeared to be headed toward an IPO.  The final suitor (Microsoft) had to step and and was forced to a pay a premium for Skype’s massive user base. The user base is too large to ignore.  Skype is the largest international calling service in the world and has approximately 600 million registered users.  Skype’s 2010 revenue came in at about $860 million.

This deal really makes Google’s $50 million dollar acquisition of Grand Central look fantastic (June 2007).

How can you make money on this deal?  Is it time to short MSFT?  Hard to say, but a big acquisition can be a huge distraction.  With the cloud taking over, perhaps it is time to play the MSFT short.  I would expect that further changes are in the wings.  The government considered breaking MSFT into parts back at the height of the antitrust furor.  Now, Microsoft might just do the break up on its own. OS / Applications / Services.

Microsoft

Further Reading:

Skype was reading itself for an IPO.
Google didn’t want to do a deal due to the ill fitting technology.

According to reports (Michael Arrington at Techcrunch).  Google has acquired Gizmo5.  If you aren’t familiar, Gizmo5 is a VOIP client/soft phone.  The acquisition is rumored to be in the $30 million dollar range and became possible when Skype made nice with the founders and brought them back in house (as equity holders in the new entity).  This gave them the rights to a key piece of software to keep their existing technology.  Crazy as it may sound, Skype (owned by Ebay right now) failed to renew their licensing to this technology.  That is like buying a computer and licensing the monitor.  When you fail to renew your monitor license you don’t have much.

Tangent: Failure to renew key pieces in a large company is not new.  When no one knows whose responsibility it is, this can be overlooked.  Maybe it was Meg’s job and she failed to do so before leaving… who knows.   There are some great domain stories from the past.  Adobe failed to renew Photoshop.com… TWICE!  It cost them dearly on the one occasion since there was no WIPO at the time to determine the dispute and they couldn’t afford to wait for the courts to decide who should own it.

Gizmo5 VOIP

Google could be changing the game once again.  The Gizmo 5 purchase could pave the way for them to offer a product that fully competes with Skype.  How do you think their cell carrier partners feel about this move?  Doesn’t Google essentially have their own data network that wouldn’t have to rely on the carriers?  They do own a lot of fiber.  Smart move Google.

My hunch is the Index Ventures (who was cut out of the deal when the Skype co-founders were brought in) might be please that they were cut out after the Google / Gizmo deal.

Google Has Acquired Gizmo5 .

If you are wondering why Google has become so dominant… read this article from Bill Gurley (Gurley is a VC at Benchmark Capital).

Bill discusses the case where Google is not only offering the mobile OS (Android) for free, but they will be paying carriers.   This is an incredibly difficult proposition for companies who are a forced to show revenue directly for their product.

To Google, everything is a numbers game.   It is all about the math.  They are able to monetize in a rather indirect way.  It is in a way that the consumer doesn’t mind.  They aren’t splashing my screen with ads on every product or forcing me to watch a commercial prior to viewing a mobile video, they are simply building on what I am already used to… seeing an ad when I search for something.  On top of that, they do their best job to be sure that it is a relevant ad.  I actually appreciate the result and look for the ads to provide guidance.

The GPS companies have a big deal on their hands here.  Google is not dependent.  When I was able to get GPS on a phone, I wondered why there would still be a need for the GPS providers. Ahhh… the data.  Google just got around that.

There is another player here.  Microsoft could do something interesting with their “birds eye” data.  I really appreciate the service at Bing Maps.  I can get a real good sense of where I am with this imagery.  I wonder if MSFT will be able to bring it to a handset near you.  We shall see.

This is an interesting game.

PS: If you like reading about VC’s or the startup culture and want to follow a few great startup stories (including Ebay) check out the book eBoys

Excerpt…

I then asked my friend, “so why would they ever use the Google (non open source) license version.”  (EDIT: One of the commenters below pointed out that all Android is open source, and the Google apps pack, including the GPS, is licensed on top.  Doesn’t change the argument, but wanted the correct data included here.)  Here was the big punch line – because Google will give you ad splits on search if you use that version!  That’s right; Google will pay you to use their mobile OS. I like to call this the “less than free” business model. This is a remarkable card to play. Because of its dominance in search, Google has ad rates that blow away the competition. To compete at an equally “less than free” price point, Symbian or windows mobile would need to subsidize. Double ouch!!

via Google Redefines Disruption: The “Less Than Free” Business Model « abovethecrowd.com.

As I mentioned back on April 1st (no I wasn’t kidding), there is a Google PC effort in the works.  It appears that the effort to move the Android Operating System (OS) to the PC is in full swing.  This time Google is directly involved.

Microsoft announced Bing last week and Google has made some efforts to bash it.  You can read Matt Cutts Twitter feed to see what I mean.  This might just be Google’s effort to steal the spotlight and put MSFT on their heels.  Read more below about the Google OS / Android OS that is setting out to challenge the dominance of Microsoft.

To top it off, Google has also challenged Kindle at the e-Book game.  You had to wonder why they were scanning all of those books.  Is Google feeling threatened in it’s old age?

Google version 1.0

Google gets aggressive. In a direct challenge to Microsoft (MSFT), Google (GOOG) is offering its free Android operating system for use on computers. Acer, the world’s second-largest laptop maker, will release an Android-run netbook by next quarter. Asustek Computer has also developed a model based on Android. Earlier this week, Google said it plans to launch a program to let publishers sell digital versions of their books directly to consumers, a move that would put Google in competition with Amazon (AMZN) and its e-reader Kindle.

via Wall Street Breakfast: Must-Know News — Seeking Alpha.