Hi. While this blog is a part of Seed Catalyst’s website, I realised over the initial few weeks that a lot of you are first introduced to the firm via the blog rather than our home page.
So to introduce myself - I’m a business consultant working with early stage technology firms to help streamline their strategy and go-to-market approach and support them for fund raising.
With this blog, I aim to capture key market trends that I see in the industry, the ecosystem and cross-plays in some of the more interesting and upcoming sectors, as well as cover interesting companies that I meet.
I will also be addressing vexing and interesting valuation and deal/term-sheet structures that would be of interest to technology start-ups at various stages of their growth.
And now its Microsoft and Skype. I’ve been thinking about this transaction along various lines:
- Price paid
- Revenue impact
- Organizational impact
Price paid: In 2005, Ebay acquired Skype for $3.1 billion at which point Skype’s revenues were in the $70-75 million range ($71 million according to the recent IPO filings). 2007 the firm was re-valued at $2.7 billion. A peak, a recession, and the price has more than doubled to $8.1 billion.
What could possibly explain that?
- Since '07, the number of subscribers has more than doubled from 217mln to 560mln
- Paying users have also doubled from 4.6 million to 8.1 million since '07
- Revenues in 2007 were $382 mln which have grown to $719 mln in 2009
Press reports state that the firm continues to be loss-making. Net loss in 2007 was $1.4 billion. 2008 was profitable only to return to losses of $369 million in 2009. However, these losses are explained to a certain extent by litigation expenses booked in connection with the JoltId transaction.
So can the revenue and user growth justify the price paid? There is however another angle. We’ve been talking about the huge cash balances at Microsoft. Another aspect is that these balances are distributed across their various international subsidiaries. Moving these funds to the US would have entailed a significant repatriation tax. We’re not talking about a small amount here, rather it’s almost $42B of their $50.2B of cash and STI balances. Skype itself is Luxembourg based and most of the investors also have funds based in various tax-free jurisdictions.
Revenue impact: News coverage is full of Skype’s revenue possibility through advertising. However, I would estimate the real impact would be through the amount of technologial integration Microsoft can implement:
- Integration with the X-Box
- Integration with Windows Mobile
- A more targeted approach for the SME segment
None of these will have an impact overnight. With the X-Box it can take-over home communication. Apple’s Facetime is only just entering the market. Google Voice is US-centric. Skype has the ability to provide landline numbers which can be diverted to Skype thus enabling landline to VoIP calls. It has the ability for VoIP to landline calls; and all of this internationally.
Tighter integration with Bing may also be a possibility. Imagine a search where the phone numbers are reflected along with the Skype icon in case the user wants to make an instantaneous call.
As for the SME segment, Skype has been inching it’s way into the SOHO and SME sector with video-conferencing being one of the key drivers. Till early last year, I had thought of Skype as a potential target for Cisco considering their focus on video, SME and conferencing. However, that became theoretical as they started pulling back as of late last year. There are certainly more overlaps with Microsoft.
And of course, we won't even talk about competitive revenue impact gained just by keeping Skype out of the hands of Google or Facebook.
Organizational impact: As far as I am concerned, this is where it all falls apart. I just don’t have faith in the ability and agility of Microsoft to pull off this integration. Yes, I know, I am going in with a prejudiced viewpoint. Let’s see Microsoft prove me wrong. I hope they do.
