At first glance, Microsoft’s purchase of Skype for around $8.5bn looks pretty punchy: an adjusted-ebitda multiple of 32 times for a lossmaking company that Ebay failed to make work at less than half the price six years ago.
But six years is a long time on the internet and with Google and Facebook also reportedly sniffing around, the strategic value to Microsoft could – if it pulls off the integration challenge – make the deal look almost reasonable. For Microsoft more than either of its counter-bidders, Skype could form the glue between its PC, mobile and gaming businesses that it has hitherto lacked.
Skype has become one of the truly great digital brands, embedded in the way millions of people communicate – at peak times, 23m people are online at once.
In its IPO filing last August, Skype said that it had 560m registered accounts as of last June, with 124m active on a monthly basis. Skype’s commercial problem has been that only 8.1m pay for any extra services, on average. That’s just 6.5 per cent of its active user base, a relatively low number for a “freemium” business (Spotify, for example, claims over 15 per cent of its active users pay for its music service).
Microsoft’s Office product set – which is even more embedded in the world’s PCs – could change the commercial aspect of that. But Skype could also transform the utility of Microsoft’s Xbox Kinect, the motion-capture gaming system it released last year, selling more than 10m units. With its camera, microphone and internet connection, Kinect is already set up for living-room videoconferencing, plugging into Windows Live Messenger’s 300m-strong userbase.
But a huge proportion of Skype’s calls involve video: 40 per cent at the last count. Plugging Kinect into a more established video-conferencing system than Messenger’s predominantly text-based chat would be a great way to make the Xbox into the digital-home centrepiece which Microsoft has always hoped it would be.
The Xbox has a great opportunity to take the initiative back from Sony’s PlayStation3, whose PSN system of online gaming, music and video has been offline for weeks after a hacking attack. Unlike PSN, all but the basic features of Xbox Live require a subscription to its “Gold” premium package. Microsoft does not reveal how many of its 25m Xbox Live users pay for those services, but Skype would be a compelling extra feature.
Skype would also help reinvigorate Microsoft’s mobile phone strategy. Microsoft already signed a partnership with Nokia earlier this year, and Nokia smartphones using the Microsoft Windows 7 operating system are due to be in the shops by the end of the year.
Nokia and Microsoft are joining forces to better compete against Apple’s iPhone and Google’s Android mobile phone operating system, which are wildly popular. Analysts have wondered, however, whether combining two companies that have lost the “wow” factor in phones will produce a genuine challenger in this market.
But stick a fantastically well-integrated version of Skype – maybe with a few exclusive features – on a handset and you could have something that would really stand out from the competition.
Skype has been available on a variety of phones – particularly iPhone and Android – although ironically not currently Microsoft’s Phone 7 handsets. However, its usability has occasionally been patchy and a lot more could be done to integrate the system seamlessly with cellphones.
A Microsoft-Nokia-Skype phone would pose some big challenges for telecoms operators. A free internet-based telephony system like Skype does cannibalise voice revenues, but many operators are beginning to accept this. Verizon in the US, for example, has embraced Skype usage over its mobile network. Microsoft could have much to play for in the new world of 4G smartphones.
By Maija Palmer and Tim Bradshaw