Tuesday, May 10, 2011

Sloppy Seconds

Hype logo

Wasn't I just saying how it'd be interesting if Apple bought Viber and how established companies frequently grow through acquisition rather than innovation?

And today there's this: Microsoft buys Skype for $8.5 billion.

My advice? Put down the keyboard and slowly, quietly step back and move away from Microsoft stock.

Microsoft Market Cap: $215 billion. On the surface they only paid about 25 times their market cap for Skype. And I really like Skype. Use it all the time. I'm one of of 663 million Skype users. Out of 663 million users? 145-170 million use it monthly. How many are paying customers? 8.8 million.

So Microsoft paid nearly $1000 per paying Skype customer.

But Skype had $860 million in revenue last year. Minus expenses? Profit of $264 million. Minus Skype's $866 million in debt? Skype is still $422 million in the hole.

So suppose that Skype had continued on and in another two years, doubled their customer base and paid off their debt and generated and annual profit of $500 million dollars by the start of year three (not an unreasonable scenario). And suppose in three years time Microsoft paid $8.5 billion for Skype, a company (hypothetically) generating a clear annual profit of $500 million?

Then Microsoft paid 17x times Skype's annual earnings for Skype. And even if Microsoft is able to double Skype's annual revenue every year for the next 7 years, they'll have just begun to pay off this acquisition.

And 7 years in internet-years is a really, really long time. 7 years ago, Microsoft's market cap was over $300 billion. Now it's about 2/3 that amount.

So why do I think this doesn't bode well for MSFT? Because Microsoft would pay $8.5 billion of their hard earned cash (well, yours - if you're a stockholder) to acquire Skype rather than innovate on their own. In other words, they're now paying a premium to push the pedal down and try to catch up.

Apple introduced the iPhone in 2007 - after having designed the iOS, hardware, and App Store ecosystem.


  • Didn't have a "Plan A"
  • Doesn't have the culture to innovate in the VOIP / mobile phone space
  • Conclusion: Unlikely to have the force of will to implement this acquisition

Pull up a chair. When existing companies consciously decide that there's is going to be a culture of acquisition of expensive, established and unprofitable technologies in order to stay "competitive", the future gets foggy really fast. Because it's not about acquisition, or innovation. It's about something even more important. Companies can acquire technology. They can even hire away great talent at a premium.

But you can't buy relevance.


Henry said...

This has the feeling of the Cisco-FlipHD deal. Microsoft is an B2B company - not a consumer tech company. Microsoft's history in the consumer space is generally littered with failed and half-hearted attempts - Zune, Bing, MS Live.
The one big exception is the xbox. In creating the xbox, Microsoft hired the team that developed the Sega Dreamcast, through them in a room and left them alone.
If MS takes that path, skype might be okay. But I would not hold my breath.

J said...

Perhaps you are forgetting the need for write-offs??? Absurdly large but a possible reason...

One doesn't get to become MSFT by being totally dumb... I bet in 30 years they will still be the #1 ginormous presence in Tech... Get in on robotics now kids!!!

11x17MarketingDepartment said...

LOL, I agree, could be a write off...I use Skype too, and would love to see it make some serious improvements, but doubt that MS will do that either...lol

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