14 And 50: These Two Numbers Explain Why Microsoft Dropped $8.5 Billion On Skype

Business Insider ^ | 05/11/2011 | Pascal Emmanuel-Gobry

[SeekAndFind]

The big news yesterday was Microsoft's acquisition of Skype for a striking sticker price of $8.5 billion.

Most people stopped at the price, expressing surprise that Microsoft could spend so much money for a company that had recently been spun out at a $2.5 billion valuation.

But here are two numbers that explain the logic behind the deal: $14.7 and 50.

What do they mean?

$14.70 is what Microsoft paid per user for Skype. By contrast, Atomic Inc points out, when eBay bought Skype back in 2005, they paid $45.60 per user. So Skype's price went up, but its price per user went down. Another way to look at it is that when Microsoft invested in Facebook at a $15 billion valuation, a move then viewed as an act of desperation and now recognized as a masterstroke, the social network had less than 100 million users, which works out to more than $150 per user. Comparatively, Skype is a bargain.

50 is the number of days until Microsoft makes the money back in free cash flow. (Source) To a company as big and as profitable as Microsoft, Skype doesn't cost $8.5 billion, it costs 50 days of free cash flow. That money would have been rotting on the balance sheet anyway. Given the possible synergies between so many of Microsoft's products--Windows Phone 7, Kinect, Lync, etc.--50 days of free cash flow is cheap. Of course, it's all up to good execution whether those synergies can be accomplished, but even the option on them is worth 50 days of free cash flow.

[Mr. K]

Because Microsoft CANNOT WRITE good software, it never could.

Just play with MSN or Windows Live Messanger- especially the crappy new version. It has less features and links that are broken all over the place.

In short, it is a piece of crap. If it was an initial offereing for a new spftware product- it would fail. No one would use it. But since it is an ‘upgrade’ to existing software with a user bas of millions, people are forced into it.

Look at their pathetic ‘facebook’ wanna-be app that is supposed to be somehow connected or related to “windows live spaces” or something- I dont know because half of it does not work.

VOIP and Video conferencing is the next big wave. We will all have the voice and video phones like you alawys saw in the future. And microsoft just did what it always did best- find a better product and buy it.

[youngidiot]

This is convoluted reasoning. I still think it was an idiotic buy. If I was a share holder, I’d be pissed.

[SeekAndFind]

RE: Because Microsoft CANNOT WRITE good software, it never could.

Well, if you can’t beat them, buy them.

[Scutter]

You’re painting with too broad of a brush. Microsoft is a huge company, with many groups. Some groups produce good software, some don’t. Some groups produce a crappy release, and then turn it around later.

I use Microsoft Lync every day at work. It’s a spectacular piece of software that allows me to do instant messaging, video and voice calls, and has great integration with email and active directory.

Microsoft is also responsible for driving a lot of the hardware devices that make VoIP a more natural experience. For example, I have a little Polycom device that plugs in a USB port on my computer. It is just like having a Polycom speakerphone, except the device is relatively small and can be used anywhere my computer has a connection to the Internet. I doubt that device would exist if Microsoft wasn’t driving VoIP adoption in many of its enterprise customers.

[newzjunkey]

if you can’t beat them, buy them.

MS SOP for decades.

Microsoft claim they'll continue Skype on other platforms but history has shown their claims don't mean much.

[paulycy]

Have Your Say Every Day.

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[KarlInOhio]

There's nothing new under the sun. Microsoft bought QDOS from Seattle Computer Products which was then used as the basis for MS-DOS and PC-DOS.

[SeekAndFind]

RE: Microsoft bought QDOS from Seattle Computer Products which was then used as the basis for MS-DOS and PC-DOS.

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Next, you’re going to tell me that Microsoft bought Windows from some company as well instead of developing it on their own ....

[angry elephant]

Yes, they bought their DOS operating program back in the late 70s from Tim Patterson for $125,000.