Commentary: Microsoft buys Skype – Why this deal makes sense

It’s Done. Microsoft has bought Skype for $8.5 billion, in an all cash deal – now that’s a ton of money. The announcement is likely to come out later today. The Wall Street Journal confirmed the news after we had talked about it during our last podcast and now LTG will analyze why this make sense.

Skype has been up for sale for some time, thanks to some very antsy investors. Sources indicate that eBay and Silver Lake Partners have been getting nervous about the IPO and have been pushing for a sale of Skype. Facebook and Google were said to be earlier dance partners for Skype, and Microsoft was late to the party but is now walking away with the prize.

It doesn’t surprise me that Microsoft gets a lot of major heat for Skype. This is, after all, Microsoft.  In last night’s podcast recording some of the guys discussed how the software company could always botch this purchase, as it often does when any company buys another company. The Skype team is also full of hired guns who are likely to move on to the next opportunity rather than dealing with the famed Microsoft bureaucracy.

But, of course, there’s always other reasons that can’t easily be seen at first glance – at least not at this scale. For one, Facebook and Google were never serious buyers. Google, with its Google Voice offering, doesn’t really need Skype. In some ways, I feel that Microsoft was bidding against itself. Even then, I personally think this is a bet worth taking, especially for a company that has been left out in the cold for so long.

Why?

• Skype gives Microsoft a boost in the enterprise collaboration market, thanks to Skype’s voice, video and sharing capabilities. This is especially true when competing with Cisco and Google.
• It gives Microsoft a working relationship with carriers, many of them looking to partner with Skype as they start to transition to LTE-based networks.
• It would give them a must-have application/service that can help with the adoption of the future versions of Windows Mobile operating system.
• However, the biggest reason for Microsoft to buy Skype is Windows Phone 7 (Mobile OS) and Nokia. The software giant needs a competitive offering to Android / Google Voice and Apple’s emerging communication platform, Facetime.

Guess Who’s The Big Winner

The biggest winner of this deal could actually be Facebook. The Palo Alto-based social networking giant had little or no chance of buying Skype. Had it been public, it would have been a different story. With Microsoft, it gets the best of both worlds it gets access to Skype assets (Microsoft is an investor in Facebook) and it gets to keep Skype away from Google.

Facebook needs Skype badly. Among other things, it needs to use Skype’s peer-to-peer network to offer video and voice services to the users of Facebook Chat. If the company had to use conventional methods and offer voice and video service to its 600 million plus customers, the cost and overhead of operating the infrastructure would be prohibitive.

Facebook can also help Skype get more customers for its SkypeOut service, and it can have folks use Facebook Credits to pay for Skype minutes. Skype and Facebook are working on a joint announcement and you can expect it shortly.

Why Did Skype Want To Sell?

Skype had filed for an IPO and was going to do about a billion dollars in revenues and was on its way to becoming profitable. So why sell? Silver Lake and eBay were both getting impatient and wanted to lock in their profits. Some sources also believe that Skype’s revenues had stalled.

The company had bet heavily on is video sharing service. The premium version of video calling and sharing was a way for Skype to increase its average revenue per user and move into the enterprise market. However, given Skype’s DNA is that of a consumer Internet company, the challenges are not a surprise.

So Who Made What?

• Using the $8.5 billion price as the likely sale price, eBay gets $2.55 billion for its 30 percent stake in Skype. So in the end, eBay did make money on the Skype deal.
• Niklas Zennström and Janus Friis, the co-founders with their 14-percent stake, take home about $1.19 billion. Damn, these guys know how to double dip!
• Silver Lake, Andreessen Horowitz and the Canada Pension Plan Investment Board (CPPIB) own 56 percent of the company and that stake is worth $4.76 billion.
• Andreessen Horowitz had 3 percent of the deal and made $205 million profit on their $50 million initial investment.

Game Over.