The antennae of those predicting a new dotcom bubble were sent quivering this week with the news that Microsoft has acquired Skype for $8.5 billion.
The latest and largest of a series of recent tech buy-outs demonstrates that there is plenty of money in the market for innovative online ideas, as well as Microsoft’s determination to be seen as a cutting edge digital player.
But what can start-ups hoping to following in Skype’s footsteps learn from the deal? Here are the top 10 lessons from the Microsoft/Skype marriage.
$8.5 billion is a lot of money in anyone’s book, but it shows the importance of negotiating hard for the right deal.
Skype was rumoured to be gearing up for an IPO worth around $3 billion, which was the price that eBay paid for the VoIP provider in 2005.
Instead, these plans were shelved as Google and Facebook, and ultimately Microsoft, entered the race to buy the service. Skype realised that there was cash in the market, took advantage of the high valuations placed upon other tech companies and managed to wring every last cent out of Microsoft, making it the software giant’s largest-ever purchase.
As mentioned above, Microsoft wasn’t the only contender for the ownership of Skype. Google and Facebook were both believed to be in advanced talks with Skype, independent of one another.
The figures being bandied around for a partnership or buy-out were in the $3-4 billion ballpark, making the $8.5 billion sum paid by Microsoft look such a hefty outlay.
However, Skype’s strategy was one that should be noted by start-ups. It created competitive tension in the market by holding talks with several suitors, obliging Microsoft to pay a premium for the business.
Skype has 170 million regular users, yet only 8.8 million of them pay. The vast majority take advantage of the free video and Skype-to-Skype calls offered by the company.
Much like its tech contemporary Twitter, Skype has fully embraced the ‘freemium’ business model. By offering its service for free, Skype has amassed a huge, global user-base that is only partially monetised.
Microsoft clearly feels that Skype can start paying its way, while integrated into its existing products, but it’s clear that today’s tech businesses don’t necessarily need to follow traditional price modelling rules.
If you have a product or service that is in great demand, then it’s possible to pass on the burden of monetising it to someone else. For a price, of course.
Skype’s large price-tag was magnified by the fact that it is carrying $686 million in debt. Last year, the company’s revenues were $860 million, with operating profits of $264 million. However, the company lost $6.9 million overall.
This clearly wasn’t a concern to Microsoft, which realised the long-term potential in the service Skype offers, rather than concern itself with its levels of debt.
While it would be reckless for start-ups to plunge themselves into debt early on, it can pay off to invest in your products and service and carry a relatively small amount of debt. Investors will be prepared to look beyond it.
A group of investors, including Silver Lake, Index Ventures, Andreessen Horowitz and the Canada Pension Plan (CPP) Investment Board, bought the majority of Skype from eBay for $3 billion in 2009.
Clearly, nearly tripling this figure through a sale two years later is an excellent return for Skype’s investors. But this is a lesson that all entrepreneurs can learn – when the market conditions are right and there are buyers in the market with money to burn, don’t delay. Plan your exit strategy early on and once the right conditions are in place, take the money and run.
