May 112011

I said it on KUOW’s Weekday program today, and I’ll say it here: I’m from Missouri concerning Microsoft’s announced $8.5 billion acquisition of Skype, the service that allows users to make voice or video calls using the World Wide Web free or at very low cost.

I understand what the optimists say. Gleacher & Co. analyst Yun Kim told the Wall Street Journal that the key is not the price, but that Microsoft makes “the right strategic move to migrate their solution from the PC era to the post-PC era.” Good point. Skype will give Microsoft a brand name and critical mass in an important niche not yet dominated by Apple or Google, perhaps making up some ground lost to them in search, tablets and smart phones.

The Seattle Times technology blogger Brier Dudley likens Skype to Seattle’s $60 million trolley linking the booming South Lake Union neighborhood with Westlake Center, the city’s retail core.  In isolation it looks like expensive frippery. But in context it contributes to a vibrant, active urban neighborhood, complementing the millions Paul Allen has invested. Dudley thinks Skype may become a cornerstone of the next iteration of Windows. Microsoft, meanwhile, can thread Skype services into existing software and hardware, including the Xbox system and new smart phones from Nokia.

Perhaps. But I also sympathize with Wall Street Journal Mean Street blogger Evan Newmark, who dismissed the deal as the fate of a company “with too much money, too few good ideas, and a share price that can’t break $30.” Newmark is brutal. The item is headlined “8.5 Billion Reasons to Fire Steve Ballmer.”  He concludes: “Microsoft’s board would be doing its long-suffering shareholders a favor by making this dumb deal Ballmer’s last.”

The breakingviews column in today’s New York Times points out that Microsoft is paying over 10 times revenue for Skype at a time when Google trades at only a little over five times. Based on its current revenue stream from the small number of users who actually pay Skype for some services, Richard Beales of breakingviews concludes that Microsoft would have to grow the company 40-fold to achieve a 10% return on investment.

Over 10 years since 2001, roughly coincident with Steve Ballmer’s tenure as CEO, Microsoft revenue has increased by 151%, according to the Wall Street Journal. Net income has risen by 147%. And yet the stock has been essentially dead money.

The law of large numbers means Ballmer has to make large bets to bend any curve affecting either the top or bottom line. Like the Sage of Omaha (Berkshire Hathaway’s Warren Buffett) before he snagged Lubrizol, Ballmer had an elephant gun and an itchy trigger finger. Only time will tell whether he bagged a trophy.

One more thing. I think the Wall Street Journal’s Holman W. Jenkins Jr. is spot on with his column today. He observes that “the Microsoft-Skype deal is one more business plan that treats broadband as basically an unmetered resource.” He posits that usage-based pricing and metering are right around the corner, “evidence of a maturing broadband industry, in which growth has slowed and players increasingly must try to nab customers from each other.”

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