Fit or misfit – decoding the Skype acquisition

On May 11, 2011 Microsoft coughed up a staggering $8.5 billion to acquire Skype via an unsolicited bid. The general reaction all around was critical; why did Microsoft make its largest ever acquisition for a company which only 18 months ago was acquired from eBay at 1/3 the price? And that too a company which by itself had never turned a profit in all the years of its existence, but with over 170 million active users most of whom never paid a dime for the service.

Why would this be important for emerging markets you ask? Well, for one Skype is the way millions of users across the world communicate with each other – many of them from just these developing countries. I have been an avid user of Skype for many years from Africa to Asia and Latin America and can daresay that there are few services which can squeeze voice and video within a limited bandwidth as compared to Skype. And what’s more – it is all for free. What makes it an excellent and attractive proposition for a user makes it a challenging proposition for a company….. well unless you are Microsoft.

Microsoft has quietly developed several online properties over the years, some by itself – others by acquisition but few if any have actually gain traction among a large user base. Anyone can tell you, that in order to be successful in this space you either have to be niche and specialized or well, be the gorilla. Microsoft is just too big in size to be able efficiently address many small niches, hence only the gorilla option is available. In addition, it had been hoarding a lot of cash over the years and now investors were getting restless. You could consider an analogy to that of a property developer building a large mall with all the bells and whistles only to find that he didn’t have anyone coming to his mall because it was too far, too inconvenient or perhaps there were better alternatives. If he couldn’t somehow get the people to come and visit, then he would never have any hope of monetizing his other assets.

This is the dilemma Microsoft faced. It needed a heavy lifter, one who had the capacity to draw people to itself. Organically this would have been impossible, it would have taken too much time and effort – and well, past efforts hadn’t been successful as well. The only logical choice was an acquisition. If you looked around carefully at that point in time, the only asset which was available was Skype. If Microsoft had low-balled it may have resulted in a protracted negotiation, other parties may have entered the mix and the end result could possibly have been much higher. Hence it offered a price which couldn’t be refused – and at around $35 per active user, it can also been seen as a pretty low price to get continuous users.

Now that it has this asset, it is to be seen how best it will go about integrating it with its other offerings. If it manages to keep Skype’s flexibility and ease of use intact, it could potentially draw customers to products such as Office Live, its cloud assets etc – making its once barren landscape humming with activity once again. This could be an route to get people in the developing world latched onto Microsoft as they continue to use Skype as an integral part of being connected to the outside world.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours