10-May-2011 15:31

$8.5bn for Skype? Yikes!!

Microsoft is buying Skype - but the price tag may be raising a few eyebrows and giving investors & bankers indigestion...

There’s been plenty of speculation lately about whether there’s a new tech bubble developing, and today's announcement by Microsoft that it's buying internet telephony business Skype for a whopping $8.5bn (£5.2bn), the biggest deal in the tech giant's history, will do nothing to dispel that speculation.

Skype might have 663m users, and it might have had the likes of Google, Facebook and Cisco sniffing around it as a potential target recently.

But $8.5bn, for a loss-making company that provides an essentially free service?

Wow! That looks nuts!!

Skype’s chequered history is partly what's making analysts nervous.

The service, which uses a ‘freemium’ subscription model where it’s free to make PC-to-PC calls but makes users pay (albeit reduced rates) to phone real phones, was bought by eBay for $2.6bn in 2005 - the idea being that users could incorporate it into auctions.
But eBay found this more difficult than expected, and it ended up writing down its value by $1.4bn before selling 70% of its stake at the end of 2007. With this price tag, its 30% stake will be worth about $2.5bn, meaning it will virtually make its money back.

As to what Microsoft will actually do with Skype, it's all a bit speculative.

Some think it could integrate the service with its Xbox 360 (which, lest we forget, includes Kinect, its new motion detector - plenty of fun and games to be had there), or even its Office products, so it can raise its game on sharing and collaboration.

The other option might be to bundle it in with Windows Phone 7, its mobile operating system - although in the past, carriers haven’t been keen on the idea of having Skype on their phones, since it does have a tendency to encroach on their revenues.

Analysts’ scepticism is understandable: despite Skype's huge user base, a relatively small proportion is taking advantage of its premium service.
That's why Skype has accumulated debts of $686m (which Microsoft will apparently take on) and why in 2010 it recorded a $7m loss on revenues of $859.8m.

What's more, there isn't much sign of things improving.
So it does seem to be a bit of an odd decision for Microsoft to shell out a sum of this magnitude.

Perhaps it's just desperate to find somewhere to park the billions in cash currently burning a hole in its bank account...

Unfortunately, Microsoft's previous forays into the online area haven't been terribly successful: although most big tech companies (even Google) have had the odd flop, Microsoft’s online service division, which includes search engine Bing, is doing particularly badly, having lost $8bn since the end of 2005.

A $48bn takeover bid for Yahoo also fell through (although that was arguably no bad thing, given that the latter's value has since halved).

Investors will hope that this time around, it knows what it’s getting into.

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Contributed by Rob Killen on 11-May-2011 08:49
There's probably a whole raft of reasons as to why failure occurs. Some of them are well described above.

From personal experience - I've consulted and or rescued/been involved in the turn round of sixty five businesses, ranging in size from £300k to £350M. In every one of them, there's been a set of consistent threads common to all problems.

Some are simply never going to make it;

Daft management processes - inadequate focus on revenue generation.

Failing to understand the difference between marketing and promotional planning.

Greed - taking large chunks of the equity without re-investment.
Senior managers or manager/owner buys an Aston Martin on tick, thus creating a gap in the revenue forecast.

Poor or low sales skills.

Failure to understand market dynamics and life cycles.

Failure to innovate.

Bounded rationality - estate agents who hire other estate agents to diversify the business and who end up acting like estate agents when what was needed was a cold, objective view of the marketplace.

Poor accounting.

Poor staff management.

Failure to stay on top of employment legislation.

Weak marketplace positioning.

A failure to understand the revenue gap algorithm leading to subsequent poor cash flow actual.


What was a great idea three years ago, is now not a great idea but hey, let's keep plugging away.

Mediocre to poor proposition - never going to succeed.

Too much emotion in the business - too much passion and not enough concept of reality.

Susceptibility to fear of failure - constantly setting themselves up to fail. Not enough focus on the joy of success.

Diabolical planning.

No access to cash - cash allows promotion and investment.

Too much reliance on self help book bullshit.

Paranoia about making important business calls.

Lack of access to expertise.

A failure to facilitate and deliver true value exchange.
Contributed by Norman Feiner on 10-May-2011 19:09
Unless I've got my biz-head on backwards..

Isn't 'price' the overiding factor in most investments and buy-outs?

Or, do these enormous companies work to a different set of rules to us mere mortals?

..don't answer that :(
Contributed by Massimo Luciani on 10-May-2011 19:08
Clearly Microsoft isn't spending such an awful lot of money for Skype's profit, rather to become more aggressive in the communications market after the deal with Nokia.

Considering Apple's success and Google ambitions it makes sense that Microsoft makes such a move, the doubts concern Skype's price...
Contributed by Norman Feiner on 10-May-2011 19:07
'Chat' is good especially - if they're using phone > phone & International calling on my SimplyFone lines ::)

Thanks for commenting Simon
Contributed by Norman Feiner on 10-May-2011 19:06
My thoughts exactly Anthony but I was too intimidated to express it that blandly :)
Contributed by Massimo Luciani on 10-May-2011 16:12
Clearly Microsoft isn't spending such an awful lot of money for Skype's profit, rather to become more aggressive in the communications market after the deal with Nokia.

Considering Apple's success and Google ambitions it makes sense that Microsoft makes such a move, the doubts concern Skype's price...
Contributed by Simon • Cartoon-O! • Ellinas on 10-May-2011 16:10
I hate 'chat' functions generally.

Email, text and forum posts are fine for me!

So Microsoft are welcome to it.
Contributed by Anthony Haley on 10-May-2011 16:08
I have had to stop using Skype for business calls because it is too unrealiable and at one point was getting embarrassing.

No doubt it is strategic in some way but they certainly need to improve the diabolical customer service and the reliability if they are going to make it work.
Contributed by Ty "Mac-Head" Tyson on 10-May-2011 16:00
This from a company losing $3B a year from Bing....

Way to go Ballmer!

May he stay CEO for as long as possible!
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