May 10, 2011

Microsoft buys Skype

TECHNOLOGY - Microsoft is in the final stages of a deal to buy Skype, the popular VOIP phone service. It is Microsoft's biggest acquisition in its 36-year history with Skype being valued at $8.5 billion USD. The sale became official earlier today.

Which is a bizarre price when you consider Skype has comparatively low profits and a chunk of debt.

The previous biggest acquisition was the $6 billion purchase of ad service aQuantive in 2007.

The purchase of Skype gives Microsoft a valuable communications tool as it tries to gain ground online vs. Google, which itself is gaining ground with both Google phone and its growing majority of the smartphone market. Google's Android OS is now used in over 55% of all smartphones.

Skype has 663 million users worldwide who make voice and video calls over the Internet, amounting to 207 billion minutes of phone calls in 2010 according to records.

HOWEVER we should point out the only reason people use Skype (or Google Phone) is because they're both (for the most part) FREE. Trying to make a profit off a free service is like going to India and hoping to find and Outback Steakhouse. Futile.

As a result Skype is really more of a "money losing enterprise" than the type of company that actually makes money. In 2010 Skype's losses was $7 million, despite efforts to boost revenue.

It makes sense that the previous owners (Ebay Inc.) might want to sell it and ditch their sinking ship. Instead they thought they might sell shares of their company by making an initial public offering of stock. The IPO is now forgotten since Microsoft is apparently dumb enough to think they can make money off it. (Its likely Microsoft will add Skype as a standard feature on all Windows systems in the future, thus becoming the default VOIP service for internet users. Whether they can make money off it is another matter.)

Microsoft says it will also be adding Skype as a feature available on future Xbox game consoles, Outlook Email and Windows Mobile smartphones.

Three years ago Microsoft made a desperate bid to buy Yahoo! for $47.5 billion bid... although it should be noted that Yahoo! stocks are undervalued (they're deliberately deflated by constantly splitting the stock) when you consider Yahoo! still maintains impressive global profits, and thus Microsoft's bid was ridiculously low.

We would estimate the real value of Yahoo! of being in the range of $110 billion (approx. $84 per share for 1.31 billion shares). Furthermore Yahoo! profits continue to grow steadily, up 84% in 2010.

Thus Yahoo! executives laughed off Microsoft's attempt to bid on their company.

In related news Facebook is thinking of getting into the VOIP business too, a risky move considering Facebook (like Skype) has its own problems with healthy profit margins.

NOTE: Ebay Inc. bought a 70% stake in Skype for $2.6 billion in 2005, but failed to unite the phone service with its online shopping business and has since given up trying. The other 30% was owned by private investors and equity firms.

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