By MARTIN PEERS
Microsoft's job may be to make "life better for billions of people" around the world, as CEO Steve Ballmer said Tuesday. But in paying $8.5 billion for Skype, it is improving life mainly for Skype's owners.
Most of the investors that now own the Web telephony company bought into it only 18 months ago, in a deal that valued Skype at $2.75 billion. In contrast, the chance of Microsoft's long-suffering shareholders ever seeing a healthy return from Skype is doubtful.
Yes, Skype has a huge user base, 663 million as of Dec. 31, and a well-known brand name. But even in the Internet age, that isn't enough to generate returns from such a high-priced deal. There still needs to be a decent business model.
Skype doesn't have that. While Skype charges for calls to land lines and cellphones, Skype-to-Skype calls are free. That means the more people register to use Skype, the more can make free calls.
Indeed, while the number of registered users rose 104% from 2008 to 2010, average monthly paying users rose only 52%, to a measly 8.8 million, according to Skype's regulatory filings. And most of the usage is in the free Skype-to-Skype calls, which jumped from 65.5 billion minutes to 194.3 billion over that time. Communication services billing minutes, in contrast, rose from 6.9 billion to 12.8 billion.
Skype hopes to sell advertising against its user base, particularly in the increasingly important video area. But given the competition among websites trying to sell advertising, the potential of that has to be discounted.
Still, there is revenue potential in the business arena. Skype could help Microsoft establish a foothold in the nascent unified-communications market, for technology that aims to seamlessly tie together phone calls, email, instant messaging and various kinds of conference calls. Gartner analyst Steve Cramoysan estimates the global market for unified-communications hardware and software could reach $18.9 billion by 2015.
Microsoft would only have a shot at part of that revenue. And there are some serious caveats. One is that unified communications has been slow to take off, hobbled by companies' unwillingness to rip out different pieces of their communications infrastructure before absolutely necessary. It is also a competitive field.
Moreover Skype has yet to prove itself to be a viable business product. And its ability to make inroads with businesses could be hurt by perceptions that the quality of its consumer service is patchy.
Given those uncertainties, it is hard to justify anything like the price, which is 32 times Skype's 2010 earnings before interest, taxes, depreciation and amortization, adjusted for numerous items. Microsoft has to do something to change investor sentiment, but this deal isn't it.
Microsoft's job may be to make "life better for billions of people" around the world, as CEO Steve Ballmer said Tuesday. But in paying $8.5 billion for Skype, it is improving life mainly for Skype's owners.
Most of the investors that now own the Web telephony company bought into it only 18 months ago, in a deal that valued Skype at $2.75 billion. In contrast, the chance of Microsoft's long-suffering shareholders ever seeing a healthy return from Skype is doubtful.
Yes, Skype has a huge user base, 663 million as of Dec. 31, and a well-known brand name. But even in the Internet age, that isn't enough to generate returns from such a high-priced deal. There still needs to be a decent business model.
Skype doesn't have that. While Skype charges for calls to land lines and cellphones, Skype-to-Skype calls are free. That means the more people register to use Skype, the more can make free calls.
Indeed, while the number of registered users rose 104% from 2008 to 2010, average monthly paying users rose only 52%, to a measly 8.8 million, according to Skype's regulatory filings. And most of the usage is in the free Skype-to-Skype calls, which jumped from 65.5 billion minutes to 194.3 billion over that time. Communication services billing minutes, in contrast, rose from 6.9 billion to 12.8 billion.
Skype hopes to sell advertising against its user base, particularly in the increasingly important video area. But given the competition among websites trying to sell advertising, the potential of that has to be discounted.
Still, there is revenue potential in the business arena. Skype could help Microsoft establish a foothold in the nascent unified-communications market, for technology that aims to seamlessly tie together phone calls, email, instant messaging and various kinds of conference calls. Gartner analyst Steve Cramoysan estimates the global market for unified-communications hardware and software could reach $18.9 billion by 2015.
Microsoft would only have a shot at part of that revenue. And there are some serious caveats. One is that unified communications has been slow to take off, hobbled by companies' unwillingness to rip out different pieces of their communications infrastructure before absolutely necessary. It is also a competitive field.
Moreover Skype has yet to prove itself to be a viable business product. And its ability to make inroads with businesses could be hurt by perceptions that the quality of its consumer service is patchy.
Given those uncertainties, it is hard to justify anything like the price, which is 32 times Skype's 2010 earnings before interest, taxes, depreciation and amortization, adjusted for numerous items. Microsoft has to do something to change investor sentiment, but this deal isn't it.