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.

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 .

http://www.techcrunch.com/2009/04/02/skype-iphone-app-downloaded-one-million-times-in-first-two-days/

Below is a video from December 2008, in which David Pogue (of the New York Times) discusses cell phones, cell phone services and the convergence between VOIP and the cell networks.  He also discusses GrandCentral which has been relaunched as Google Voice.  You will have one number that you can direct to do many things.  I have heard from some who are in the Beta and they say it is life changing.

Even though it is a few months old, it is worth viewing if you would like to learn a little bit more about what that cell phone in your pocket can do.

Skype has arrived for the iPhone and iPod touch.

• Learn more

I put it through a couple of test calls and it performed well.   My main desire is to utilize the text chat client.  When using Skype on a desktop, that is the function that I utilize most often.

Rumor has it that Ebay is readying Skype for a spin off or sale.  This, along with the support of the SIP protocol announced this week, should be a nice user base generator for the company.  You never know, maybe Ebay is going to recoup some of the $2.6+ billion that they shelled out for the company a few years back.

BTW: Support for the SIP protocol will allow Skype to be used on PBX systems.  This will be a revenue generator for the company.  We procured an additional phone number recently and were disappointed to find that we could not use Skype with the hardware we had in place.  Support for SIP would allow us to do that.