Microsoft & Skype – Why?

Last week we saw Microsoft paying an unheard of price of $8.5B to acquire Skype, the free voip company from Europe. When eBay bought Skype few years ago for something like $2.3B, we thought that was crazy. The theory seemed sensible to some folks – auctioning parties can talk using Skype if they want. A friend of mine said, actually not talking is the best part of the eBay model. Sellers and buyers are united by eBay anonymously. Goods are sold, payment is made, all very smoothly. No one needs to use voice. For that you go to a supermarket or a flea market.

After admitting its flawed strategy on Skype, eBay sold 70% of the company to investors such as Silverlake Partners and Andressen-Horowitz barely 2 years ago. All these investors are laughing to the bank since last week. eBay got back its first investment by getting 30% of $8.5B, about $2.5B. Silverlake made $3B on its $850m investment. Andressen-Horowitz got almost $200m from its investment of $65m. Great ROI. But why did Microsoft pay such a hefty price? That is an enigma.

Skype became popular for one thing – it was free. Two key technologies, voip and video-conferencing are available between Skype users at no cost. These technologies are commoditized now. Even Microsoft had these technologies in its  goto-meeting product. Harry McCracken, well-known author and editor twitted jokingly that Microsoft would name Skype “Microsoft Internet Phone Professional Premium 2012”. This may be a huge blunder on the part of Steve Ballmer.

Once you take away the free part of Skype, its users will drop drastically. Using it as a front-end to sell more back-end servers like Sharepoint seems far-fetched. Even the technology behind Skype is clumsy at best (uses Kazaa, and old network protocol, if I recall). Blending that with .Net would be fun. Also the appeal of multi-platform (Linux, Macs,..) advantage is suspect under Microsoft’s ownership. Its motto is Windows-only way or the highway.

The only reason Microsoft paid this huge price seems to be Google-fear. There was a rumor that Google and Facebook were looking at Skype as potential acquisition. Microsoft did not want this to go to Google and decided to pay such a big price.

Let us wait and see where this goes in Microsoft.

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