Microsoft Gets Skype for $8.5 Bill!

After many rumors and presumably long negotiations, Microsoft has purchased Skype for the unimaginable price of $8.5 billion—it’s biggest deal ever. My question: was this a smart move? I’m trying to figure out what it is about Skype that makes them worth this much. I must be missing something here.

Maybe Microsoft knows something that I don’t know; clearly they do. What I know about Skype is that they are a cool VoIP service that is not yet profitable. Nothing about that seems $8.5 billion worthy. I’m going to have to imagine that there is some master plan behind this that is larger than any of us common-folk know.

What we know is limited to the news that Skype will be integrated into most Microsoft devices including Xbox and Kinect, Xbox Live, Lync, Outlook, and the Windows Phone, Microsoft will also support and develop Skype on non-Microsoft platforms. I’m no business mogul but I don’t see how any of this will compensate for the amount paid for the service.

Perhaps $8.5 billion is nothing to Microsoft. I imagine that Microsoft CEO Steve Ballmer and his colleague, Charles Songhurst spearheaded this deal with a plan in mind that would make this venture worthwhile. Surely these people didn’t get to the positions they are in today as a result of poor planning.

From a spectating standpoint, I’m puzzled, to say the least. Yes, Skype had operating profits of $264 million and revenues totaling $850 million last year. The company also lost $6.9 million overall and carries a debt of $686 million. To pay $8.5 million for this is starting to seem even more ridiculous.

Microsoft is justifying the purchase saying that part of Skype’s appeal is in the user base of 663 million. 145 million of these users are monthly, 170 million are regular users and 8.8 million of these regular users are paying customers. Majority of Skype users, however, use Skype’s calling service for free. This is essentially what is making it difficult for the company to make money.

There seems to be one set of winners here and it doesn’t appear to be Microsoft. Skype investors, a group that includes Silver Lake, Andreessen Horowitz, Index Ventures and the Canada Pension Plan (CPP) Investment Board have definitely come out on top. Purchase a company for $2.75 billion in September 2009–sell in May 2011 for $8.5 million while experiencing a debt of $686 million; yep, I’d definitely say they won with this one.

Microsoft, I don’t want to speak too soon and say that you jumped in too deep but I think the proof is in the numbers. Unless you have a few major tricks up your sleeve, you may have just lost and lost big. Only time will tell…keep your fingers crossed.

May 10, 2011