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Why Microsoft Paid $8.5bn For Skype

May 12, 2011 by  
Filed under Features & Editorials

It may seem a ludicrous amount of money, but there is method in Microsoft’s madness. Here’s a sample of my breakdown for TrustedReviews

 

Why Microsoft Paid $8.5bn For Skype

  • By Gordon Kelly
  • 12 May 2011

It takes something special for technology to become front page news, but that is what has happened following Microsoft’s blockbuster agreement to buy Skype for $8.5bn (£5.2m). The deal represents Microsoft’s biggest ever purchase and the size of the fee has left many scratching their heads. Why would Microsoft pay so much for a company which cost just $2bn in 2009? We’ll tell you why…

The first hints come from looking at the deal itself. As incredible as the price is, equally remarkable is Microsoft is paying investor group and Skype owner Silver Lake “in cash”. No stock options, no complex trades, cash. Which immediately tells you one thing: Microsoft was in no mood to lose out. Rumour has it both Facebook and Google were in the running and Microsoft has lost enough of the limelight to them in recent years.

ballmer

“Together we will create the future of real-time communications so people can easily stay connected to family, friends, clients and colleagues anywhere in the world,” proclaimed Microsoft CEO Steve Ballmer in an official statement. Answering speculation as to how Microsoft will use Skype, Ballmer was clear: it would be in everything. “Skype will support Microsoft devices like Xbox and Kinect, Windows Phone and a wide array of Windows devices, and Microsoft will connect Skype users with Lync, Outlook, Xbox Live and other communities.”

Is this smart or is it simply throwing mud against the wall and seeing what sticks? After all eBay bought Skype in 2005 for $2.6bn before admitting it had “limited synergies with eBay and PayPal” and selling it off to Silver Lake for $1.9bn in 2009}. Right now Silver Lake is laughing all the way to the bank… READ ON

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Comments

6 Responses to “Why Microsoft Paid $8.5bn For Skype”
  1. Liam says:

    TR won’t let me log in so I’ll leave this here.

    Why did the chicken cross the road?

    MS is cash rich, so while the price tag seems bonkers,they can afford to deny Google etc access to it. I really think thats the only reason. They may indeed add it to some platforms, but office is a stretch. They already have an enterprise voip solution built in to Office/Exchange.

    XBox already has a voip solution right?

    And if they think that integrating Skype in to WP7 will work, they need to think again.

    “only when people don’t realise they’re using it will VoIP truly replace standard cellular calls”

    You’ve got that ack-baswards. People are ALREADY using voip. There is no significant technical difference between how cellular calls are routed and how voip is managed, except that the carriers control the first/last mile, and thus can charge whatever they like for the privilege of using their networks. I remember chatting to senior R&D people at a well known handset manufacturer who repeatedly expressed the view that the biggest block on innovation for their products was the carriers. Voice is a cash cow for the carriers, as is data. They’re not likely to want to change this.

    I agree that the integration of all their services using one platform is a compelling thesis, except of course that they didn’t need Skype to do that. Bottom line? In my view its not a very interesting story: they are doing it because they can.

  2. Gordon says:

    Yep, seems a common problem on the site at the moment. I like having your comment anyway.

    I think you’re pretty much spot on: it did cos it could. But what I do think makes it an interesting story is it needed to. Microsoft for all its attempts to cultivate its own VoIP service in Messenger, Xbox Live and so forth hasn’t come up with a concept to draw outsiders in. It’s a worrying trend mimicked by its attempts to compete with Google Maps, YouTube, Google Docs and, so far, Android and iOS. Buying Palm would have been an arguably smarter move…

    And yes carriers will fight tooth and nail to keep control of voice, but it is a painfully inferior technology and inevitably it will lose it. The big question is not if, but when… and that could still be a while. No carrier wants to turn into a mobile ISP, but it is where they are headed.

  3. Liam says:

    Hi Gordon,

    I don’t disagree with any of that. As you are aware though, the technological possibilities are hugely tempered by market realities.

    I think the demise of “value add” services as offered by carriers has been predicted for a long time… :) it remains to be seen how this will happen in practice. Certainly the consumer is not winning that fight so far. LTE..?

    I agree though, its interesting to imagine the possibilities that new services can offer (but my money would be on Google, not MS, being the catalyst for this! A major clue comes from looking at the hiring trends from both companies, arguably they best way to infer their longer-term strategies).

  4. Gordon says:

    Agreed. I think it is no coincidence that carriers in the UK have been happy to wait for LTE. Its widespread availability would call carriers’ entire business model into question.

    Microsoft is buying users. It is easy to launch a VoIP service, harder to get 170m users. As I conclude in the feature Microsoft is buying market share with its Nokia and Skype deals, the fact it has had to says everything about its recent shortcomings.

  5. Liam says:

    Totally agree, and there is a plausible context for all of this: There is something like €700B of profits from American multinationals sitting gathering dust in the Irish Financial Services Centre. This money is ‘clean’, in that Irish corporation taxes have been paid but if any of this cash is repatriated to the US for distribution to shareholders it incurs a whacking great levy from the IRS. No doubt there are similar examples to be found in the Netherlands, Cayman islands etc. So it makes sense for Microsoft to, as you put it, “buy users”. There is plenty of cash around for this kind of manoeuvre.

    In my view it seems that despite various national austerity plans in many western countries, there is in fact no shortage of capital looking for a good home somewhere in the world. I see a real risk of a new bubble forming out of cash rich companies seeking tax efficient ways to functionalise their excess capital. Why innovate when you can buy your way in to a market? Like the tech bubble of the late 1990’s the costs are relatively low and the potential margins in the longer term are high. Watch this space I reckon!

  6. Gordon says:

    I think you speak an extraordinary amount of sense.

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