Microsoft has bought Skype for $8.5 billion.
I declare an interest: I use the products of both companies.
And I declare another interest. I agree with those analysts who say Microsoft has got this one very, very wrong. It's not just the price is too high, although I cannot see how something which is fundamentally free could be worth as much as Microsoft paying for it. The real issue is something fundamentally more important than that.
As the Bank of England noted yesterday, they use an intense myopic tendency within financial markets at present. They have always taken a short-term view, but that trend is becoming increasingly prevalent. I suspect that the Microsoft / Skype deal is indicative of this. Microsoft, like most large businesses, is sitting on a massive pile of cash, hidden somewhere in the world, as far away from a tax authority as possible. There is good reason for this.
First, it seems that businesses run out of any ideas about what really to really invest in. I stress, in this regard Microsoft buying Skype is not an investment. It is simply a change of ownership. investment involves the creation of new products and services, new infrastructure, new training, and so on. Because it is not investing it is sitting on a massive pile of cash.
Second, businesses like Microsoft are sitting on a massive pile of cash because they will not take cash back to the USA where it might be taxed. There business investment criteria are being completely messed up by their paranoia about making a cash return to the governments that underpin their viability, and which give them their licence to operate. I have little doubt that the funding for the Skype deal will come from outside Microsoft USA, which is one reason why Microsoft is willing to pay so much more for the company than it might be worth, and a good reason why the shareholders of Microsoft should question the judgement of the management who would rather overspend on buying assets at excess value than return funds to shareholders.
Third, as this shows, far from business needing more tax cuts to encourage innovation and investment, they are actually so awash in cash, and enjoy such low tax rates, but they are now unable to work out what to do with their money. Despite this our government is giving tax cuts to UK business, even though everyone else in society will be seeing tax increases. All the rhetoric of business supports this, but all that rhetoric is utterly untrue. The reality is that big business is bankrupt of ideas, but awash with cash, and pays little or no tax, a combination that results in the market failures that the Bank of England have so accurately described.
So what's the conclusion?
1) Tax incentives for big business to buy and sell other enterprises should be removed. This is simply wheeler dealering, and adds no value to society.
2) There is no justification for tax cuts for big business, so they should be cancelled.
3) There is no prospect whatsoever of big business creating the investment that will fuel growth in our economy. All the incentives to invest already exist. They have the money (although small business has not). They are facing low interest rates, low wage rates, low property costs, a government willing to waive rules to let them establish new activities, and yet they won't. So let's face reality, there is no prospect of private sector fuelled growth in the UK, or right now, just about anywhere else ( Germany excepted).
4) In that case there is only one prospect of economic recovery in the UK, and that comes from government spending, funded by increased tax charges on business, largely by closing the loopholes they are using to generate large piles of cash hidden in tax havens.
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At least in the US, Microsoft has been working itself into the cellphone market. They might be looking at Skype as a way of integrating phone and computer into a seamless service. So not entirely an odd purchase. It saves them the trouble of building a competing product from scratch and gives them an immediate customer base.
Also, not everything done on Skype is free and some free services can be subject to advertising. Microsoft has an advertising service and this may be another way of increasing revenue for that part of the company..
Er, “It saves them the trouble of building a competing product from scratch and gives them an immediate customer base” it will cost MS $8.5B!
I am afraid that this shows your ignorance of technology. Microsoft has made significant investments in smartphone development but lie behind Apple and Google (Android). Integrating Skype into WIndows Mobile 7 means that WM7 based phones suddenly become potential market leaders. With 600 million Skype accounts that is a game changer.
$8.5 billion may sound a lot, but for the international telephone company with the largest number of accounts, it is really cheap. 20 times BT’s customers for a third of BT”s market cap, little infrastructure to maintain and no wireless spectrum licenses to pay for doesn’t sound like an unwise investment.
I’m not sure it’s ignorance
I read quite a lot on technology
And most would agree MS is miles behind on innovation – based on arrogant assumption of monopoly position
So we differ
That’s not ignorance
I think you have explained why they are prepared to pay $8.5 billion. Microsoft’s position isn’t based on arrogance so much as a need to keep several hundred million users happy across a very broad range of software products. Skype and other start ups have no such constraints when they create their innovative products but often find their growth hampered when they reach a certain size because of the need to integrate with other systems. That is usually where Microsoft buy into such companies and integrate their products with their own.
Buying Skype is a good fit for Microsoft. Smartphones and networks are moving towards video calls, and while companies can develop their own video call systems, they would have to rely on the person being called having compatible technology. It is much easier buy into a company that has the largest existing customer base and a hardware independent product.
Microsoft will expect it to boost sales of Windows Mobile based smartphones. With sales of smartphones running at 400 million a year and a significant portion of sales revenues per phone going to the software manufacturer it won’t take Microsoft long to get their money back.
Raul- don’t spend all your cash on MS stock just yet!
Skype may have 600 million registered users, but that figure is worthless. Many of those accounts will be inactive – mine included.
According to their CEO they have “over 100 million users who use us each and every month, 170 [million] at last count”. Supposedly about 8.8 million are paying customers.
Also, how many Skype users are already MS customers? Possibly, MS has just bought millions of customers, they already had.
So far, Skype has turned over some fairly large sums, but always made a loss. Not surprising considering how their business works – they’re totally dependent on other telcos, for Skype to non-Skype phones. It would seem that the telcos are not selling their services to Skype at a low enough price, for Skype to make a profit, and why would they?
BT is much, much bigger than Skype! Both in terms of number of paying customers, and revenue/profits, by a big margin.
Dan,
You miss the point completely. Microsoft aren’t buying Skype for their revenues or their customer base, but for their technology. Is it particularly wonderful? No but it is out there and has an existing user base.
How do Microsoft make money out of it? By selling their operating system WM7,8,9 etc as part of mobile phone packages. That is how all of their business models work and while there s a limit to the number of times you want to pay to upgrade MS Office or Windows, a lot of people throw their phone away every few years and get a new one with a new shiny operating system.
Could Skype have gone the othe rway and designed an operating system with built-in apps? Probably but it would be quite a risk.
Could Google or Nokia have bought Skype? Probably but Microsoft got there first and hence the price. Skype & videocalls will give Microsoft an edge over the competition.
It isn’t a super soaraway strategy but is probably more considered than some commenters realise and Microsoift will probably see a benefit from it in a few years.