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May 16, 2011

Five Buzz Kills for the Microsoft/Skype Deal

By Doug Mohney, Contributing Editor

There's been a lot of smoke and propaganda spun around the Microsoft (News - Alert)/Skype deal.   If we're all honest, there's a big group of Skype fans that are just as hard core as the Apple eaters. I know a lot of people are doing wishful thinking about how this will all somehow end up being great, but there are a lot of moving parts to this deal that don't add up.

Sure, Microsoft and Skype understand the "value" of proprietary protocols and closed systems, but that's about all they have in common. Here are my top 5 reasons why I don't think Microsoft and Skype will end up happily-ever-after.

1) Microsoft paid too much. No matter how you slice it, $8.5 billion is far too much money for Skype.   How you go from a $3 billion to $4 billion valuation from the time Skype filed IPO papers to $8.5 billion is a big mystery.   Microsoft paid over $1000 per paying customer -- that's about what the cable guys value a subscriber that they have a locked-in monopoly on, paying around $100 a month.   Each Skype paying customer pays around $120 per year and can leave at any time.

With a dash of red ink on Skype's books last year, Microsoft paid 10 times revenues. In cash. From all accounts there were no other serious bidders, so Microsoft basically paid list price.

 Ask anyone in the investment community as to which they'd rather have: Stock or cash? The answer is cash, and investors are willing to take a discount to get cash. You mean to tell me Facebook (News - Alert) was offering $9 billion to $10 billion in stock for Skype? Difficult to believe.

I suppose you could spin this as an eyeballs deal with up to 30 million users on line at peak times, or an average of 145 million connected users per month, so some more mystery math means Skype paid about $59 per "viewer."  

2) Skype is not the Rebel Alliance and Microsoft is not the frickin' Empire. A lot of wishful Skype-fan thinking that Skype will inject new ideas and new "rebel" blood into Microsoft processes. I think people need to review the YouTube video "Bambi meets Godzilla," plus two other facts: A) The rebels haven't been that rebellious for a while and Tony Bates (News - Alert) as CEO only underlines Skype management has tightened up considerably over the past year between IPO prep and the enterprise push. B) Anyone who had stock and/or vested options has enough money to go be a rebel on his/her own, rather than sticking around putting up with The Man in Redmond.

Last "rebel" surge Microsoft had was the Xbox and Bungie. Bungie is now an independent company. J. Allard, rebel for Xbox, has left the building.

3) Skype will bring enterprises to Microsoft.   Seriously, who was on crack to even suggest this with a straight face?

There's a lot of talk about integrating Skype into Lync and other UC products, but Skype has struggled for years to get a footprint in the business arena.  History shows a trail from Astricon several years ago to IT EXPO of talk about how Skype will expand into the enterprise via resellers. It will be interesting to see how the Skype "relationship" with Avaya holds up once Microsoft takes control.

4)Software integration, peer-to-peer, and log-ins.

Skype, as ZIpDX's David Frankel (News - Alert) reminded me last week, does some really funky things when it comes to networks and its peer-to-peer architecture, especially with supernodes. Most of Skype's mechanisms have been a big black box, so Microsoft now has to get the code and briefings on how everything works-- which won't happen for around 9 months, since it will take that long to clear due diligence and close the merger -- and then decide if it can simply drop in Skype as a process into a variety of products.  If Skype doesn't need a major rewrite or tweaks, the client should appear as an option in Microsoft Outlook and Lync in short order. 

But does your Skype user ID integrate with the overarching Windows Live sign-in that ties into ever cloud service from Hotmail to SkyDrive and Office?

5) Security and CALEA

Once Microsoft takes the keys to Skype, it will inherit the mystery of Skype security.   Is there a backdoor to Skype, enabling the monitoring of audio and video calls? If there isn't, certainly the U.S. government will be looking to get one in place in short order. Since Microsoft is located in the U.S. rather than hiding out in Luxembourg, serious drama could take place in short order.

Want to learn more about the latest in communications and technology? Then be sure to attend ITEXPO West 2011, taking place Sept. 13-15, 2011, in Austin, Texas. ITEXPO (News - Alert) offers an educational program to help corporate decision makers select the right IP-based voice, video, fax and unified communications solutions to improve their operations. It's also where service providers learn how to profitably roll out the services their subscribers are clamoring for – and where resellers can learn about new growth opportunities. To register, click here.

Doug Mohney is a contributing editor for TMCnet and a 20-year veteran of the ICT space. To read more of his articles, please visit columnist page.

Edited by Jennifer Russell
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