Skype and Microsoft: anyone understand it?

Even a decade or more back I read that Microsoft would not enter a market it couldn’t create a $billion business from. A company as big as Microsoft has to make big bets. Some will work, some will not. Even so, what’s the deal with Skype?

I’ll suppose for a moment that Microsoft see spending $.5bn as good value. In an article yesterday someone calculated that it worked out at $15 per user which is not bad assuming Microsoft has something to sell – maybe the new Nokia phones running Windows Phone 7? So the number is the number, I assume Microsoft’s management is not completely nuts and it’ll work out (or not) like any other acquisition.

But if Microsoft were serious about the need for Skype now, why did they not pick it up when Ebay sold it last year? Ebay sold to a consortium lead by Silver Lake Partners for just under or over $2bn and Microsoft has paid them over 3x that amount. Doesn’t that seem strange?

Microsoft is a dividend paying company. Those dividends are used by pension fund investors to pay pensions. Ballmer & Co have decided that it wasn’t good business to buy Skype last year @ $2bn but is good business to pay the consortium $8bn of investors money today. How does that work out? How can it be good for Microsoft or it’s investors to make a decision like that? I’d love to know.

Again, I’ll assume Microsoft will make money our of the acquisition. But if they’d made the same decision last year their investors would now be $6bn ahead. Is that good management?

Perhaps their recent acquisition of the patents from Novell mean they can contemplate Skype now whereas before there would have been legal problems. But if that’s true, it would be true for any other company without the patents which, it seems to me, would limit the sale options for the Skype consortium and so limit the price. So probably the patents are not the reason for the change of mind or the motivation for spending an extra ~$6bn.

Keeping it out of the hands of Google is another source of motivation I’ve read about. However the gain to Silver Lake Partners is Google’s entire profits for a year. That’s a steep price to pay to keep a techology out of another company’s hands. And, if so, I think it must be a concern that the best thing Microsoft can do with $8bn is not create great products but a keep loss making one out of a potential competitor’s reach.

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