Microsoft Corporation (NASDAQ:MSFT) has entered into an agreement to purchase Skype for 8.5 Billion US Dollars according to a press release posted on the Skype website by Tony Bates, the Chief Executive Officer of Skype. The press release does not give a final closing date, nor does it state why the acquisition has not closed as yet. The Microsoft version of the press release is slightly more detailed. It states that the two companies hope to have cleared regulatory hurdles by the end of this year.
Yes, regulatory hurdles. When both companies involved are major players in their market segment, regulators do have this nasty tendency to become involved. When one of the companies involved is a convicted monopolist on three continents, well, they get looked at very carefully indeed. Hello Microsoft, this is your life!
Why did Microsoft Buy Skype
S|A fired up the Corporate Magic Eight Ball and asked ‘Why did Microsoft buy Skype’ and got the answer ‘Better not tell you now.’ After meditating on the answer for several hours, we decided to send our Magic Eight Ball back to Tyco Toys for overhaul, as the answer didn’t make any sense.
We made a series of increasingly desperate attempts throughout the day, involving bacon, special herbs and bacon, incense, magic wands, unicorns, and bacon, none of which provided anything useful. This meant that we actually had to sit down and think, a truly horrible event that nearly struck the entire staff dumb and blind. After fortifying ourselves with several forty pounders of 160 Proof Jamaican Rum, we tried that, but gave it up after the most coherent sentence any of us could produce was ‘Cryogenic physicists do it on the cold.’ We are still trying to figure out where that one came from.
Because seriously, this one has a lot of people stumped. While S|A thinks we have a line on what is happening, we feel the need to show you the wild divergence in reporting. This is not simple buyout like the tech press covers dozens of times a year. This is an EVENT, and it’s either going to make Steve Ballmer look like an incredible genius, or like a total fool, and S|A is putting our money, the pennies we have left after buying bacon, on the latter.
The Guardian – Microsoft’s $8bn Skype deal shocks analysts – in which the Guardian points out the blindingly obvious, that when a company sells for $8.5 Billion, has $686 Million in debt, and lost $7 million on revenues of $859.8 million in 2010, it isn’t exactly a great business deal.
The Wall Street Journal – Microsoft Dials Up Change : CEO Ballmer Defends Hefty $8.5 Billion Price Tag for Internet-Phone Firm Skype – in which the Journal points out that Skype sold for a third of this amount three years ago, and questions why it went for so much now. However the Journal has one important point that everyone else seems to have missed:
One point in Microsoft’s favor: the company plans to purchase Luxembourg-based Skype with cash held overseas, money that it could not otherwise bring back to the U.S. without paying repatriation taxes of more than 30%. The majority of Microsoft’s roughly $50 billion in cash is held overseas.
Can anyone say ‘Tax Avoidance?’ In other words the U.S. Taxpayer financed this purchase whether they wanted to or not. Joe Sixpack should be proud. All that money that Microsoft avoided paying taxes on bought them one heck of a company! So what if it could have covered health care for poor families. Microsoft now has a new division!
Business Insider – Microsoft Has Bought Skype For $8.5 Billion – Business Insider is not a Microsoft friendly publication. In fact it was the first mainstream publications to call Microsoft’s continued existence into question. One sentence in the article made decent sense:
If Microsoft can successfully integrate Skype with Exchange and Microsoft’s other communications tools (including Windows Phone 7), it would give users more incentive to stick with its products.
Unfortunately that’s a big if, and it would also make Steve Ballmer into a total liar, since he claimed that Microsoft would continue to support other devices. But it is a nice draw, as they do need to provide customers with incentives to stick with their products.
Marketwatch – Microsoft’s track record with big deals – Marketwatch compares the Skype deal with other large deals that Microsoft has pulled off in the past. In theory, anyone should average out at 50% good results, 50% bad results on deals, and when you read the article, that is about where Microsoft scores. The problem is that for many people Microsoft is the be all and end all of big successful companies, and the idea that Microsoft could ever lose money in any way is a shock.
TechCrunch – Ballmer And Bates Sell The Skype Deal: We Think We “Can Reach Everyone On The Planet” – OK, so they have some real ambitions. But can they execute? Something besides themselves that is. They also seem to think countries in Africa don’t exist, or don’t use cell phones or ‘teh intertubes’.
Mashable – How Microsoft Will Change Skype – covered the changes Microsoft will need to make to bring Skype from the home into the business, and also how Skype could help Microsoft make more sales of Windows Phone 7.
Those Are A Lot Of Reasons, Which Ones Are Real?
This is why they pay us the big bucks at S|A. Seriously. The S|A Company Car in Gran Turismo V is a hopped up Pagini Zonda, and we’d really like to take it for a spin again, assuming that Sony ever gets the PlayStation Network back online…
There are two simple reasons for Microsoft to have bought Skype.*
- Money. Microsoft thinks that they can monetize Skype.
- Convergence. Microsoft hopes to use Skype to drive users to converge on Microsoft products.
The two are not mutually exclusive. While Skype lost money in 2010, it didn’t loose a lot of money, and slightly better marketing through Internet Explorer integration could help drive sales. At the same time Internet Explorer integration could help drive Windows sales. If the Windows version of Skype works better than the Mac or Linux version, that gives users another reason to buy Windows, doesn’t it?
At least that’s the sort of thinking that Redmond has shown over the last ten years. What they don’t seem to realize is that people use Windows not because they love it, but because they often don’t have any choice, or know that there are options. Annoy them enough, and they’ll march off to their local Apple store and buy a Mac. Five years ago they wouldn’t have. Now, well, everyone knows someone who owns a Mac, and is happy with it. That is, unless they got a bumpgate version.
Microsoft’s problem is that once someone makes the switch, they aren’t likely to come back. Every once in a while Microsoft will trot out some anecdotal story about someone who so totally hated his Mac, and how relieved he was to make his way back to the Windows Gulag. The studies that Microsoft doesn’t trot out, are the ones that show that most Mac users would far rather switch to Linux than go back to Windows.
S|A is predicting that Microsoft won’t be able to pull this off. It’s not that Microsoft is totally incompetent. They aren’t. It’s rather that they’ve built up a lot of karma over the last thirty-six years, and it’s weighing them down. When you’ve annoyed as many customers as Microsoft has, with the attitude that ‘customer service’ is the customer doing whatever the company tells them to do, it tends to have a negative effect on how customers view your company. The net result is that no one loves Microsoft. Microsoft is totally hurt, doesn’t understand, and needs to make another appointment with its analyst to discuss this Real Soon Now. Of course it won’t change anything, because Microsoft stopped listening to its analyst around the time that sales topped $1 Billion per year for the first time.
For a lot of people the sheer fact that Microsoft now owns Skype (subject to regulatory approval) means that they are planning their Skype Exit Plan. S|A is already considering our options. In fact we’ve drawn up a nice list of options that we’ll be testing out over the next couple of months. To avoid any appearance of bias, we are listing them in alphabetical order. We’ll happily change the order if any of the projects will include nude images on their website like the one below. Either sex will do. Like Captain Jack Harkness, we aren’t picky.
Skype Replacement Options
Note that the blurb is from the website of the project. S|A doesn’t believe any of them, and suggests that you not believe any of them either. At least not until you’ve seen proof. Working proof.
Blink – Blink is the best SIP client for Mac. You can use it with any SIP provider or its own fully-featured SIP service.
Ekiga – Ekiga (formerly known as GnomeMeeting) is an open source SoftPhone, Video Conferencing and Instant Messenger application over the Internet.
Empathy – Empathy is a messaging program which supports text, voice, and video chat and file transfers over many different protocols.
GNU Telephony – GNU Telephony is a project to enable anyone to use free as in freedom software for telephony, and with the freedom to do so on any platform they choose to use.
Jajah – Free Your Voice with JAJAH Communications Solutions
Linphone – Linphone, open-source voip software
ooVoo – Free Video Chat. No matter where you are.
SlykServer – A state of the art, extensible SIP Application Server Zero-configuration multi-party conferencing
There’s no doubt a couple hundred other projects that we haven’t heard of yet. Feel free to let us know here in the comments, or in the forums of the ones that we’ve missed.
You will have noticed the article title, and that it had a cute little * meaning that somewhere buried in the text, there would be an explanation. Here it is:
Microsoft Death Watch was name of a series of articles written by this author after he noticed some interesting discrepancies while reading Microsoft’s Securities and Exchange Commission Year End filing. The discrepancies had nothing to do with mathematical or reporting issues, indeed the author has no reason to suspect any malfeasance on Microsoft’s part. To the best of the author’s knowledge Microsoft has stayed within the letter of the law in meeting it’s regulatory SEC filing requirements.
Rather the discrepancies had to do with consumer purchasing patterns, technological shifts, disruptive technologies, cost benefit ratios, and a general ‘feel’ that something wasn’t right. Microsoft files its year end report, or ’10K’ with the SEC at the end of July (here’s the 2010 report on SEC.GOV to give you an idea of what one looks like – be warned that it’s an excellent cure for insomnia). The author spent August and September staring at numbers, comparing them to earlier reports, until they started dancing in his dreams.
About half way through October the realization hit that Microsoft was in deep trouble. Microsoft had for years shown the typical tech start-up revenue curve, then it topped out, and while still rising, it was no longer rising at the same rapid pace. The numbers I was now seeing indicated that Microsoft was at or near the top of its income curve, and if something wasn’t done soon, the company would start to hemorrhage money.
In fact some signs were already visible. Not long before that Microsoft had held its first every layoffs. Microsoft had been closing divisions, and divesting itself of product lines. Both actions were logical, and would have been done by any company. It was what Microsoft wasn’t doing that was the problem. Microsoft wasn’t bringing exciting new products to market. Microsoft’s mainstays were still the company’s Operating System division (Windows & Windows Live Division) and Microsoft Office (Microsoft Business Division). The new products, like the XBox 360 (Entertainment and Devices Division) and the Bing Search Engine (Online Services Division) either lost money, or were barely breaking even after years of throwing money at them.
When you compared Microsoft to Apple, the difference was striking. Since 2000 Apple had introduced a successful MP3 player line, and online Music store, had moved its computers from one processor architecture to another, had switched operating systems, had bought and incorporated professional level audio and video editing suites, and sold one heck of a lot of product. Apple was hot, Microsoft was not.
I started tossing numbers at the wall, and got a scary figure. So I did it again, and then a third time. The numbers never agreed exactly, and I didn’t expect them too, but I did come up with an answer of sorts. From the numbers I was seeing, if Microsoft did nothing, the company could expect to enter bankruptcy in about 5 years. Yes, I was projecting the bankruptcy Microsoft in the fall of 2014 approximately.
The prediction made several assumptions which are, well, wrong. And I know they are wrong. Those assumptions are:
- That Microsoft is dumb as a post, and doesn’t take any action to avoid going bankrupt. Buying Skype is an action that could be related to to the problem, assuming they’ve noticed it. And believe me, they must have. Microsoft staff isn’t stupid.
- That Microsoft is unable to come up with new products that will be both profitable and popular. So far they haven’t managed to introduce anything which is both.
- That Microsoft is unable to compete with Apple in the high end consumer market. So far Microsoft hasn’t been able to do this, and if you want proof, check Amazon’s popularity list, where an Apple computer is always at the top of both the laptop and desktop categories, and where most of the computers selling for more than $1000.00 in the top 25 are Apple.
- That Microsoft remains unable to compete with Free Software in the web server market. As of this point, Apache still holds over 60% market share, and that isn’t likely to change. And Apache almost always runs on Linux, using MySQL and PHP in the classic LAMP stack. Microsoft can’t match the LAMP stack for price or performance.
- That Microsoft remains unable to compete with Apple’s IWork, Oracle’s StarOffice/OpenOffice, and The Document Foundation’s Libre Office on price.
- That Microsoft remains unable to compete with Apple’s IOS and Google’s Android on price in the Mobile Phone/Tablet OS space.
Note that in several cases for Microsoft to compete on price, it would be necessary for Microsoft to pay the OEM to use their operating system. While this might be feasible in the short term, it wouldn’t be feasible in the long term. As more device categories move to ARM CPU chips, this becomes more of a problem.
Consider Microsoft Word, which BestBuy sells for $139.99. Apple sells its entire IWork suite for $49.99 (which gets you a spreadsheet and presentation software as well). Or if you have an IPad, you can buy Pages alone for $10.00 direct from ITunes. Microsoft can’t afford to sell Word for $10.00.
To Apple the IPad software isn’t a profit center, the IPad is the profit center, and software is priced to sell IPads. To Microsoft, which doesn’t produce hardware, this isn’t an option. If Microsoft matches Apple’s pricing, Microsoft is killing it’s profit margins. Even worse, for every X number of copies of Windows that’s replaced by a copy of Mac OS X, Linux, IOS, Android, Blackberry OS, or whatever else, Microsoft isn’t able to sell Y expensive copies of Office, and Z expensive copies of Windows Server, along with Client Access licenses.
What it all adds up to is immense pressure on Microsoft. As the IPad and other tablets (and remember, the original prediction was made before we knew that the IPad existed) replace low end Windows notebooks, cannibalizing Windows license sales, and Microsoft Office License sales. Microsoft can and will use it’s monopoly to retain as much business as possible in the PC market, however even there it faces problems, as Apple climbs towards 25% market share, and HP, Microsoft’s largest customer gives signs of moving to WebOS.
Was my call right? I truly don’t know. I do know that if I was running an IT department right now, I wouldn’t be taking any chances. I’d be planning a Microsoft exit strategy just in case. Because If I had one, and didn’t need it, it would be a bit of wasted time, true. But if I didn’t have one, and needed it, it could put my firm into bankruptcy, and cost me my job.
If you are an IT manager, can you afford to take that chance?S|A
*Editor’s note: There is also the third reason but the sulfites from the bacon preclude our analysis of this reason. “We have money, we will throw it at anything we can buy hoping it is our next big thing and might earn us market share, somewhere, somehow.”