Saturday, May 21, 2011

Skype's the limit as Microsoft waves its chequebook again

After the acquisition of Skype, some wonder whether yet another disruptive mouse is about to be sat on by the software elephant?

'A billion here, a billion there, and pretty soon you're talking real money" is an aphorism frequently attributed to the late Everett Dirksen, the celebrated Republican senator from Illinois, who died in 1969.

While intensive research has failed to unearth documentary evidence for the source of the entire quotation, the phrase "a billion here, a billion there" was one of Dirksen's mantras which he often deployed in castigating congressional profligacy with taxpayers' money.

One wonders, therefore, what Dirksen would have made of the news that Microsoft was spending $8.5bn (around �5bn) of its shareholders' money to buy Skype, the internet telephony venture, in an acquisition that has gobsmacked both the technology industry and Wall Street. It is, said the ArsTechnica analyst, "a deal that's hard to understand" (translation: nuts).

The scepticism that greeted the announcement stemmed from various sources. Some observers were astonished by the price Microsoft paid for a loss-making outfit. Others struggled to identify a coherent technological strategy behind the deal. And many people speculated that Microsoft's unhappy record with new acquisitions might mean that yet another disruptive mouse was about to be sat upon by the software elephant. "Skype RIP?" was how one of my email chums expressed this suspicion in a message after the news first broke. Microsoft's CEO, Steve Ballmer, was mightily exercised about this.

"We will continue to invest in Skype on non-Microsoft client platforms," he said in a conference call on Tuesday, "I said it, I mean it: we will continue to support other platforms."

The Wall Street Journal reported the conversation under the headline "Microsoft: We Promise Not To Screw Up Skype."

Now it is well known that valuations of internet ventures, as the Bible says of the Peace of God, "passeth all understanding". (Just think of the current "valuation" of Facebook at $52b.) But even by those hallucinatory standards, Skype's chequered history to date is a thing of wonder.

The company was launched in 2003 by chaps who had earlier run the, er, controversial peer-to-peer file-sharing system Kazaa. The basic idea was to use peer-to-peer technology to carry digitised voice signals over the internet, thereby enabling users to make free voice calls to anyone who had an internet-connected PC running Skype software.

From the outset, Skype spread like wildfire ? putting on nearly 400,000 new users a day; by 2010, it was reckoned to be responsible for a quarter of all international telephone calls.

Yet it was able to achieve this without spending very much on technology. How come? Simple: it's a peer-to-peer system. When you sign up, you click on an agreement that states that "Skype Software may utilise the processor and bandwidth of the computer (or other applicable device) you are utilising, for the limited purpose of facilitating the communication between Skype Software users." Translation: your computer and internet connection become part of Skype's global technical infrastructure. So the more users there are, the more capacious that infrastructure becomes.

Neat, eh? It was so neat that eBay acquired Skype in 2005 for $3.1bn, in a deal that provoked almost as much astonishment as the one announced last week. Two years later, eBay took a $1.4bn "impairment" in an explicit admission that it had overpaid. Relations between the Skype founders and their eBay owners became rocky and in 2009 eBay sold 70% of Skype to a consortium of private investors which included someone called Marc Andreessen.

The plan at that stage was to float the company on the stock market, but legal wrangles over intellectual property were already beginning to cast some shadows over that agreeable prospect.

Then along comes Steve Ballmer armed with the Microsoft chequebook: eBay gets $2.55bn for its 30% stake, and so hasn't lost money on its Skype punt. Niklas Zennstr�m and Janus Friis, the co-founders of Skype, get $1.19bn for their 14% stake (in addition to what they got first time round by selling it to eBay).

The sweetest thing of all, though, is that the venture capital firm Andreessen Horowitz, which owned 3% of Skype, comes out of it with a $205m profit on an investment of $50m.

Readers with long memories will remember that a certain Marc Andreessen was the co-founder of Netscape, the company that was wiped out by Microsoft all those years ago.

Revenge is indeed a dish best eaten cold.


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