Microsoft just threw an enormous amount of money at the Skype messaging service. More than $8 billion dollars.
To put that figure in context, Senator Kerry has recently proposed an infrastructure bank designed to offer loans to get infrastructure construction projects funded and off the ground. An entire bank designed to jumpstart the national economy…and the Senator is asking for a seed fund of about the size of the Skype purchase.
Skype retailed for $3 million in 2005, and less than $2 million in 2009. Microsoft’s purchase quadruples the price of the service less than 2 years later. (Kudos to the investment group that made the investment in 2009). Microsoft is smart, right? The brainchild of Bill Gates would not throw money around heedlessly. So what are they doing buying Skype? It is not the current base of customers. Some customers pay to use Skype for phone services. Microsoft paid about 33 times more for these customers than what they are worth. It is not the current business model. Skype has never made decent profit, although last year they posted a decent operating profit of $284 million, a figure that slipped to a $7 million loss once all the numbers were counted.
It is not the underlying design of the product. I am no software engineer but my experience with the product is often frustrating. From what is readily available online, others who know more are also concerned about the design of the service, citing difficult architecture and incomprehensible coding.
What justifies the big purchase? A number of theories have been floated, including those offered by Microsoft. These justifications include:
- A chance to integrate Microsoft’s base of Windows Live Messenger customers, all 300 million plus of them, into the Skype paying service.
- A chance to integrate Skype into other Microsoft products, including perhaps Windows Phone, Hotmail, and Xbox.
- A chance to capitalize on a service that may have suffered budget woes in the past, but is poised for profitability in the future.
- A chance to dangle Skype as a lure for important business partners, including Nokia or Facebook.
Those all sound nice, if not $8 billion worth of nice. My take? Overpaying for Skype reminds me of a team like the San Francisco Giants, in the heat of a pennant race, adding a big name like Carlos Beltran in order to stay in the race against dangerous competition.
Google and Facebook have the cache, the market presence, and the talent to continue to erode Microsoft’s commanding position in the marketplace. The digital world is moving from desktops into cyberspace. Windows remains the predominant operating system on PCs, but will Microsoft hold that place in a brave new world of smart phones and tablets?
The purchase of Skype may be one way in which Microsoft attempts to maintain their competitiveness in a dynamic and evolving marketplace. And overpaying? For a company like Microsoft, who has the sort of deep pockets the Yankees would appreciate, maybe it is better to overpay than to let Skype drop to a young and hungry competitor.
Skype can be a great way to communicate with family and friends. However, before getting to know anyone for the first time online, you may want to try the best background check service. Know before you go.