Sunday, May 15, 2011

Microsoft's Skype acquisition: Warning Signs ahead

Microsoft and Skype announced that they have entered into a definitive agreement under which Microsoft will acquire Skype, the leading Internet communications company, for $8.5 billion in cash from the investor group led by Silver Lake. The agreement has been approved by the boards of directors of both Microsoft and Skype.

There are mixed opinions concerning the expected acquisition. 
I see the warning signs ahead

I do think that analyzing important factors such as the number of months Microsoft's profit's sum to 8.5 billion USDs or tax reduction due to acquisition of a Luxemburg based company are irrelevant or at best secondary.

Even if a company profits are high, the company could find better investment alternatives, e.g. spending more on R&D, buying other companies or investing in companies without acquiring them. The last option was chosen by Microsoft in order to invest in Facebook.

The significant factors are:
  • What Strategy is used for increasing profits related to the acquired company assets?
  • Could the Strategy realize the promise? 
  • Is the company capable of Executing this strategy and provide large enough measured profits in reasonable time frame?

Warning Signs

Warning sign no. 1: Unsuccessful acquisition by eBay
Skype was acquired by eBay in September 2005. However, the acquisition provides no measurable Value, therefore sold by eBay to investment group led by Silver Lake in November 2009. 

Warning sign no. 2: despite of millions of users Skype does not generate high profits
The volume of Skype's activity is impressive: 170 million connected users and over 207 billion minutes of voice and video conversations in 2010. The revenues are a lot less impressive. Is it because of Skype's business model or is it because it is difficult to gain money from free VOIP telephone service?

Warning sign no. 3: Microsoft's image is an image of an old conservative company, which is a laggard in new technologies and paradigms 
Microsoft is not an agile company who can easily change its Strategy, Technologies and focus. 
It is a matter of: size (it is easier to small companies to adapt) and fear of losing revenues in current products (for years most of Microsoft's revenues derived from traditional Office products and Windows Operating Systems). 

Microsoft was late in entering to emerging technologies such as the Web (Microsoft adapted to the Web only in 1995) Web 2.0 , SOA and Cloud Computing.

Warning sign no. 4: The payment is 8.5 billion USDs in cash
If the strategy is a strategy of development and enhancement of an acquired product, then preserving leading employees is a key for success. A payment in cash does not guarantee that the key people will continue working for the company. Without the leading people a product value could be a lot less than its value when they are available for future development.        

Warning sign no. 5: No history of successful acquisitions
I maybe wrong but I am able to recall only one successful Microsoft acquisition: CRM product which evolved to Microsoft Dynamic CRM.
Acquisitions are not simple (see for example: Acquisition is not simple: SAP-Sybase acquisition agreement). Assimilating an acquired company is a long multi-dimensional process requiring alignment of Organizational Cultures, Technologies, Procedures, Applications, Organizational Chart, Rewards Scheme, Development Methods etc.  

Microsoft was more successful in investing in companies instead of acquiring them. Facebook and Apple (many years ago before it turned into a success story) are good examples. On the other hand, investing in Yahoo! was not a success.      
Warning sign no. 6: Microsoft opposing software usage without charge   
Microsoft was the leader of the anti Open Source camp. It also fought against illegal reproducing software. Both activities share a common rational: Enterprises and Home Users should pay for software and for software maintenance. 

Most of Skype software usage is free of charge. It is a different revenues model.
Will Microsoft charge for basic Skype services? If yes, I wonder if users who did not pay for years, will not abandon Skype for its competitors.

My Take
The warning signs cited above suggest that Skype acquisition for 8.5 billion USDs in cash is at least questionable.
Is Microsoft going to acquire Skype for its large installed base or for its products and technology? I am not able to answer this question after reading Microsoft's and Skype's announcement.

According to the announcement, Microsoft has a long-standing focus and investment in real-time communications across its various platforms, including Lync  , Outlook, Messenger, Hotmail and Xbox LIVE.

I can hardly spot significant benefits to Outlook and Xbox Live from Skype acquisition.
Skype may augment Instant Messaging of Microsoft's Messenger by its Voice and Video capabilities. 
Lync is Microsoft's new Unified Communication Server replacing Messenger. I do not know if it will be improved significantly based on Skype's technology or features, but I doubt if such improvements will justify a price tag of 8.5 billion USDs. 

Will Skype technology be the foundation for Windows Phone? Cannibalized to augment Windows Phone capabilities or most probably will be developed concurrently to Windows Phone? I do not know if Microsoft managers made their minds yet, but combined with potential improvements in Lync, I still doubt if the future results will justify a 8.5 billion USDs transaction.   


ron said...

Great article, very interesting, my hypothesis is very much inspired by the facebook angle, google is taking big chunks of microsoft end users and SMB to medium clientele regarding the future services that will be supplied via cloud, this is Microsoft major concern, they know very well they were pretty much caught off guard, they cannot R & D quick enough to change the balance, so they picked the strategy to weaken theyre opponent instead of strengthening them selves.

Avi Rosenthal said...

Ron, It is not a matter of R&D only. Other aspects include adaptation to a diferent development and maintanance approach, a different revenues model etc. You can read more in older posts such as:
vendors Survival: Will Microsoft Survive until 2018?
and Vendors Survival: Will Google Survive until 2018?

Avi Rosenthal said...

I received the following comment in
LinkedIn lobal Technology CXO (CIO, CEO, CTO, VP, GM) Group

Discussion: Microsoft's Skype acquisition: Warning Signs ahead
I really don't know why Microsoft would pay huge money to buy this dying business. Very surprising move. I can only pray for the best for MS.
Posted by Sharon Reeder, PMP,CSCP

Yaniv said...

Microsoft is doing many mistakes. I think this is one of them.

They want the user base, and they think / hope by acquisition people will start to like them. It may work for a while but they want get ROI on Skype. It's just to upgrade their image. For MS, spending here and there $8B, is okay if one of the acquisition will generate what they want

Avi Rosenthal said...

I received the following comment in Linkedin Global Technology Managers Group.
MS specializes in dying products...but in this case I think they're after the 170 million users. I wonder what they're going to offer these users? Integrated MS Dynamics CRM or evolving Microsoft's Messenger to a new social platform based on Skype?
Posted by Emanuel (Emi) Maskil Leitan

My respones to the comment is:
Emanuel, Are there reallly new 170 million users? I doubt, many if them are already using Microsoft's products such as Windows and Office. The real questions are:
1. What willl be the Microsoft serivces they will use?
2. What revenues Microsoft can get directly or indirectly from these services?

Some people suggest that those users will use Bing search engine instead of Google Search.
I do not think that siginificant number of users will do so.

Others suggest that it will be a new service in Windows Operating System. I do not think that Microsoft can bind Skype and Windows without being sued due to misuse of its Operating System monopoly.

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