
Microsoft announced that it s going to buy Skype for 8.5 billion US dollars (£5bn) and it is going to be the biggest takeover deal in giant’s history. As soon as the information appeared, it sparked mixed opinions and speculation. The question is whether the Microsoft has made the right move and if Skype is really worth $8.5 bn?
Skype was founded in 2003 by Nikklas Zennströms from Sweden and Janus Friis from Denmark. The Skype software was developed by three Estonians- Ahti Heinla, Priit Kasesalu an Jaan Tallinn, people who were also behind famous peer-to-peer file sharing software Kazaa. On October 2005 Skype was purchased by eBay for $2.6 billion. In 2009 eBay announced the sell 70 per cent of Skype to Silver Lake Partners for approximately $2billion, valuing entire business at $2.75 billion.
Last year, Skype had revenue of $860 million, with an operating profit of $264 million. Overall, Skype made a loss of $7 million and had a long-term debt of $686 million.
There have been reports that Facebook and Google were interested in partnering with or even buying Skype, for the price around $3-4 billion. Microsoft’s $8.5 billion purchase price is a huge premium over other deals. Skype’s purchase would be Microsoft’s biggest to date.
Many believe that Microsoft’s CEO Steve Ballmer highly overpaid for Skype acquisition. The question is why Microsoft decided to buy a business that has changed owners so many times and never made money and on top of it has a substantial debt. The price tag is three times what Skype fetched 18 months ago. Ballmer defended the purchase in an interview, saying that it will make Microsoft “more ambitious, do more things”. Microsoft explains that they want to reach professional users.
Microsoft has already developed a software that is considered to overlap with Skype. Windows Live Messenger has around 330 million active users each month and offers free instant messaging and voice- and video chat. Microsoft also has an equivalent corporate-oriented communicator, Lync 2010, allowing the companies to create private networks.
Skype has around 700 million users and 124 million active users each month, its features are broadly similar to those found ion Windows Live Messenger. Although the Skype user base is significantly smaller than Windows Messenger’s one, it has one big advantage- about 8 million users pay for the service. Skype integrates telephone connectivity and is able to make inbound and outbound calls and those are paid services, its online services are all for free.
The Skype telephony infrastructure would be a valuable addition to Windows Live Messenger/Lync platform. Its functionality could also be deployed in Windows Phones, revolutionising the mobile phones market. However, the purchase price is phenomenal and many believe that Microsoft could build equivalent telephony infrastructure for much less. According to Peter Bright from Ars Technica, even the access to paying customers doesn’t justify the $8.5 billion deal, “The terms of the deal mean that for each Skype customer, Microsoft is paying about $1,000. And on average, those customers are worth a profit of about $30, presuming most of Skype’s income comes from subscriptions and call charges. That’s a huge disparity,” said Bright.
It is also believed that Microsoft bought Skype just to keep it out of reach of Google and Facebook. Skype technology and user base may not be worth $8.5 billion, but time will reveal whether it was a good move from strategic point of view and whether Microsoft will gain a competitive advantage.