In announcing Microsoft’s most expensive deal ever, CEO Steve Ballmer had to clear a high bar to convince people the $8.5 billion he’s paying for Skype makes sense.
While users love Skype because it lets them make free video phone calls over the Internet, the Luxembourg-based company has been a bit of a dud as, well, a company, only occasionally eking out a profit. That’s made it a bit of a high-tech hot potato, bought by eBay (EBAY), then by private investors from eBay and now by Microsoft.
Despite this checkered history, Ballmer and Microsoft believe Skype is worth triple what the group of private investors paid just 18 months ago.
Why? While Ballmer offered a series of rationales, none came close to justifying the deal, let alone the lofty price tag. And in failing to make a clear case, investors have every reason to be worried the Skype deal will end as badly for Microsoft as it did for eBay, adding to the Redmond, Wash., giant’s reputation for bungling acquisitions.
If there was a central vision being offered by Ballmer and Skype CEO Tony Bates on Tuesday, it was this: They want to make Internet video calls as common as email or instant messaging.
The pair are convinced that by joining forces, they can accelerate this trend.
“We want to stitch together the world,” said Ballmer. “We have big customer bases we can connect that can add all sorts of value.”
Added Bates: “Together, we will be able to accelerate Skype’s plans to extend our global community and introduce new ways for everyone to communicate and collaborate.”
Ballmer envisions building Skype into Microsoft products like its Office Suite, the Xbox video game console, and its Windows mobile phones.
Financially, Microsoft believes it can ramp up Skype’s customer growth and use its Microsoft sales teams to sell more ads on the service (something sure to delight users), adding to its earnings in the first year.
Wishful thinking
It’s easy to get caught up in the optimism of the moment. The announcement of a big deal can feel like the first day of spring training, full of optimism and some amount of wishful thinking.
And yet, as I listened to the news conference, I heard echoes of the rationalizations that eBay made in 2005 when the San Jose-based auction company announced it was going to pay $2.6 billion for Skype.
Back then, eBay executives said they would build Skype into their auction services, allowing bidders and sellers to click a button and call each other instantly. Almost no one did.
Perhaps my favorite rationalization was that people in developing countries who didn’t trust e-commerce might use Skype to haggle, just like at their local markets. Um, no.
eBay had to write down the value of the deal by $1.4 billion just two years later. And in September 2009, eBay sold 65 percent of Skype to a group of private investors in a deal that valued the whole company at $2.7 billion. To be sure, eBay stands to make money on this deal, but probably not the way it expected to when it bought the company.
This background explains why I’m not sure this time will be different. Skype is already pretty widely available, so it’s hard to see how it will help Microsoft sell more copies of Office, or Xbox consoles, or Windows mobile phones.
And while the number of video calls will no doubt continue to grow, it’s still uncertain there’s a market for ads to run alongside them. In addition, Microsoft is buying a company that offers cheap phone calls, which is probably not popular with the wireless carriers it’s counting on to help it sell more mobile phones.
Mixed reaction
Reaction across the Web to the deal was, as you might imagine, mixed. Some shared my skepticism. Of course, there were plenty who were more optimistic.
“Given eBay’s experience with Skype and the high price, it is fair to be critical of this acquisition, but I would say that Microsoft has considerably more assets to create synergies with Skype than eBay ever did,” IDC analyst Al Hilwa wrote.
And in a blog post, Ben Horowitz, whose firm Andreessen Horowitz put up $50 million to help buy Skype in 2009, praised Microsoft.
“Today, I tip my hat to an old rival, Microsoft. By acquiring Skype, Microsoft becomes a much stronger player in mobile and the clear market leader in Internet voice and video communications.”
Microsoft has been pressing hard to make up ground in the areas where it has been weak, like the Web and mobile phones. And with the growth of its search engine Bing, it’s made some nice strides. Kinect, which lets people control video games with gestures, has been a big hit among gamers and has given Microsoft a psychic boost for creating a truly innovative product. And the partnership Microsoft announced earlier this year with Nokia for mobile phone software is cause for optimism.
But Skype feels like a panic move, paying too much for too little. I expect it’s one that Ballmer will be regretting for years to come.
Contact Chris O’Brien at 415-298-0207 or cobrien@mercurynews.com. Follow him at Twitter.com/sjcobrien and read his blog posts at www.siliconbeat.com.
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THE DEAL
Microsoft will pay $8.5 billion to buy the popular Internet phone service Skype.
It’s the most money Microsoft has paid to buy a company in its 36-year history.
The $8.5 billion is three times more than Skype’s value the last time it was sold, 18 months ago.
COMPANY PROFILES, A SKYPE HISTORY and THE REST OF THE STORY, Page C1
