Microsoft overpays for Skype

  
Microsoft acquires Skype for $8.5bn, becoming MS's largest acquisition. Quick history (with big numbers) associated with Skype:

• Skype was founded in 2003 by Swedish entrepreneur Niklas Zennström and Dane Janus Friis
• In October 2005, EBay outbid Google and Yahoo! Inc. for the loss-making company and paid $2.6 billion for the privilege. (I thought that was madness then!)
• Zennström and Friis fell out with Ebay about patent licensing of some of the key technology in Skype (Truly incompetent due diligence from Skype - surely the IP should have been bundled into the acquisition?!?)
• In 2007, EBay wrote down the value of Skype by $900 million.
• EBay's CEO, John Donahoe, sold 70 percent of Skype to a consortium of investors (Silver Lake Partners, CPPIB, Andreessen Horowitz)  in November 2008 in a deal that valued Skype at $2.75 billion. 

Today

• Skype has 663 million global users (145m active users in an average month)
• Windows Live Messenger has 299 million accounts worldwide in June 2010. (Source: Microsoft by the numbers) 
• Skype is the largest international voice carrier and owns 13% international call market share (Source: Skype Commands 13 Percent of International Phone Calls)

The Deal

• Microsoft pays Skype for $8.5bn
• This marked a 300% increase in value for the company in the three years since the eBay write-down in October 2007.
• The price Microsoft agreed to pay for the company is 32 times Skype's operating profits
• EBay said it will reap more than a 50% return from the company’s $2.6 billion investment in Skype Technologies SA six years ago. (Source: Bloomberg)
• $14.70 is what Microsoft paid per user for Skype. When eBay bought Skype back in 2005, they paid $45.60 per user. (Source: 14 And 116: These Two Numbers Explain Why Microsoft Dropped $8.5 Billion On Skype)
• 116 is the number of days until Microsoft makes the money back in operating cash flow. Microsoft had $26 billion in operating cash flow last year. So $8.5 billion works out to around 116 days of cash flow for Microsoft (Source: 14 And 116: These Two Numbers Explain Why Microsoft Dropped $8.5 Billion On Skype)

Was the deal over valued?
Lots of respected analysts think that this was a fair investment by MS - given all the possible synergies between so many of Microsoft's products (Windows Phone 7, Kinect, Lync, etc.), but in my opinion they overpaid.

MS are no novices in any of this technology. Skype does have some advantages - intelligent routing for one (see Skype's explanation of its technology)
 
I think there are two logical reasons for this acquisition:

• User Base 166m users making international calls. By plugging Skype into WinMobile 7, it gives MS a way to get a bunch of well connected users making premium international calls from their mobiles. (IMHO, people avoid making international calls from their mobile phones because of its outrage expense.) This gives a neat way for operators whose users on WinMob phones to take voice calls off 3G data network and onto 2G voice network (See my post on 3 launches X-Series for how this could work.)
• Keeps Cisco from getting its hands on Skype Apparently Google came knocking, but was told the starting price was $7bn, but I think this would have muddied Andriod's strategy. An acquisition by Cisco could have seriously dented MS's interest in the enterprise unified communications market now and in the future. (Note that Skype's CEO Tony Bates is a former Cisco execs appointed in October last year.)

Some great blog posts on reasoning:

• ZDNet: Microsoft's purchase of Skype: One expensive game of keep away
• Microsoft Insider: Here's Why We Bought Skype

Skype's recent outage

Skype suffered a massive outage just before Christmas, crippling the service for 24 hours. Fortunately for me, I don't use Skype as my primary telephone and when I do use Skype, it is 'bursty'.

The detailed explanation given by Skype made me wonder about Skype's competitive advantage:

• VoIP (shipping voice packets over the internet) is as old as the (internet) hills. 
• Skype's incredible growth / user base is down to two aspects:
• Product launch happened to be around the moment in internet history when people were (a) purchasing machines for their own use at home (b) broadband penetration was just taking off
• Service does a slightly better job of routing VoIP packets over the internet using Skype supernodes.

Allow me to explain the last point (technicians might want to refer to Skype's explanation of its technology):

• Skype uses P2P concept, meaning that the VoIP packets aren't sucked into a central server (from the 'sender' of the voice packet) and then squirted out to the client (ie the recipient / listener of the call). 
• Instead, the speaker's machine sends the voice traffic directly to the listener's machine.
• Previous VoIP service just lumped the VoIP out onto the internet and allowed the internet to determine the best method of getting the packets from speaker to listener. (Note that the internet is magnificently self-tuning to route packets in the most efficient manner from sender to receiver).
• Skype differentiating factor is that, within its network, it defined some of its users' machines as 'supernodes'. (Skype's CEO indicates that there are tens of thousands of these supernodes.)
• These supernodes take on additional responsibilities - see the detailed explanation. (I must admit that I thought that these machines took on a disproportional amount of traffic, but no mention of this is made in the explanation.)

The outage occurred when a bug in a particular version of Skype caused some of these supernodes to crash. (Technically, there was a precipitating factor before the crash, but I'll gloss over that.) This then overburdened the remaining supernodes causing a cascading effect, bringing down the whole Skype network.

Conclusions:

• In a networked-based or distributed-communication system, defining super nodes will create a vulnerability. (In a true P2P, each node is genuinely a peer of every other, so this isn't a concern.)
• If you have a vulnerability, then for God's sake make sure you have control of the weak points. (If you read the detailed explanation of the failure, then you notice that Skype is reviewing its auto update policy of its software, so that Skype can autonomously self update these supernodes without users restarting their machine / Skype. You'll notice that Skype had already deployed a fix for the original bug, but not every machine had updated to the latest version. I assume that the update occurs when Skype restarts or when the machine restarts.)
• It would appear that Skype didn't have an automatic way to promote node to becoming supernodes when a systemic failure started to occur to compensate for the diminishing network. (The detailed explanation of the failure indicates that Skype engineers had to put manually inject several thousands of "mega-supernodes" to compensate until the network of supernodes could recover.)

So, quite a mess, indicating that the disaster recovery plan needs some additional scenarios added!

Full credit to Skype for the level of information that they provided their users - see the Skype blog for December. Also, they offered paying users some credit to compensate for the lack of service - my voucher arrived today.

Showing their true colors - Skype & Google

Two announcements, one shortly after the other, indicate the intended strategic direction of some big players.


Skype has announced SkypePro in Europe for €2 per month:

• Pay nothing per minute to numbers in your country
• Free Voicemail
• Ability to purchase SkypeIn at a discount
• Bunch of other discount vouchers, freebies

Interestingly, Skype will still charge a 'connection fee' of about 3.9 Euro cents per call. This sounds a trivial charge for Skype to eat in comparison to the zero cost per minute.

Frankly, I'm surprised Skype haven't put this bundle together years earlier.


Google finally announces an Office-like suite of productivity tools for business called Google Apps Premier Edition for $50 per user, per year: online e-mail, calendaring, messaging, and talk applications, as well as a word processor and a spreadsheet.

It differs from the the consumer version (launched last August) with an API to permit businesses to interface to their existing applications.

Missing from the line-up are a presentation tool (I wonder if the Google M&A team will be busy??) and full-on contact management capabilities.

And in the Microsoft corner: Office 2007 for $499 or MS Live (and Ray Ozzie: Chief Software Architect, creator of IBM Corp.’s Lotus Notes). I wonder what Yahoo's reaction will be?

3 launches X-Series - Mobile Broadband bundle - when will they learn??

3 announced the upcoming availability of the ‘X-Series’ bundle – a mobile broadband offering that includes:

• Skype – unlimited calls from their mobile phone (using data tariff, rather than voice minutes). On further reading, Skype service is NOT wVoIP - it's a circuit-switched call from the phone into a Skype VoIP gateway in 3's network according to this post.
  
• MSN Messenger

Guideline cost per month is £15-20. Each country can set their own price tariff. To be launched in the UK on 1st December with other countries to follow in the New Year.

For an additional premium, 3 customers can use:

• Sling – watch their home television on their mobile (and set their home recorder - nice)
  
• Orb – access music, video and other content their home PC remotely
  

Plus there’s an announcement of a relationship with Google and Yahoo – search, of course, being the key enabler of the mobile internet.

Love this sound bite from Frank Sixt, Group Finance Director of Hutchison Whampoa:

"We are tearing down the wall around the garden and going naked into the world outside."

I can’t see this being a massive success for 3. Sure, it sounds cool and all and early adopters will point at this announcement excitedly, pontificating that the mobile internet has arrived and that one operator has seen the light etc.

But, it’s too early for this type of bundling – much better to drip feed these features onto the market. For the mass market, is there any precedent indicating the requirement for these features? For some, yes; for all, no; for all together: NO.

Users don’t want all these features – they want to trial a couple of them (with low barriers to entry, of course) and then to sign-up to the ones that are relevant to their needs. Presenting them as a bundle means that consumers think that they’ll be paying for features they don’t want - and won't try any ('Too much, too complicated, don't have time'), leaving a sour taste in everyone's mouth.

Much better to launch ‘Any two for £5 per month, free for the first 2 months’ or even catchier, ‘3 for 3 months for free’.

Will the other operators be impressed by 3’s announcement?

Nope, bundling too early means that everyone has to produce bigger and better bundles at ever lower costs OR other operators have to hope that this will be a damp squib (think of 3’s previous too-early-to-launch of video calling) and they can reset the market 9 months or a year later.

Overall result is that this may well stymie the market before it even exists.

Conclusion: Amateur marketing - 3 has p*ssed in its own pot and soiled it for everyone, including themselves.

Skype 3.0 beta is out

Here are my headlines

• Significantly bigger installation file (from 10Mb to 19Mb)
• The most immediate change is a new UI - much nicer I think. Here's some of the details.
  
• Public chats - basically Skyecasts but for instant messages (don't worry, there are moderation controls to allow you to kick people out of chats and to let them join in etc).
  
• The promised browser extensions that allow you to simply click on a any telephone number on a webpage and for that to trigger a Skype out call (IE or Firefox only)
  
• Access to Skype add-ins got easier too.