Did Microsoft Get a Good Deal For Skype?

There's been  lot of discussion about Microsoft's agreement yesterday (May 10, 2011) to acquire Skype for $8.5 billion. Microsoft will acquire all of Skype's technology and incorporate Skype as a division of the company. $8.5 billion sounds like a lot of money but is it really? Let's take a look at the history of Skype (portions coutesy of Wikipedia) before we look at some numbers.

• Skype was established in 2003 by Scandinavians Niklas Zennstrom and Janus Friis, who had earlier success with the launch of the music file-sharing service Kazaa.

• In October 2005, eBay purchased Skype for $2.6 billion. At that time Skype had 54 million members in 225 countries and territories and was adding approximately 150,000 new users each day. EBay planned to use Skype to allow buyers and sellers to speak with each other.

• The number of registered Skype users reached 100 million in April 2006.

• In October 2006, Skype 2.0 for Mac was released, the first full release of Skype with video for Macintosh.

• In December 2006, Skype announced a new pricing structure, with connection fees for all SkypeOut calls that allow Skype users to call land-line phones.

• Over the next couple of years subscribers continued to grow. In April 2008, Skype launched Skype for SIP, a service aimed at business users. At that time around 35 per cent of Skype's users were business users.

• In 2009 Skype was adding about 380,000 new users each day. Also in April 2009, eBay announced plans to spin off Skype through an initial public offering in 2010.

• In 2010, Telegeography estimated that Skype accounted for 25 per cent of the World's International Calling Minutes.

• In November 2010, eBay completed the sale of 70% of Skype to a consortium comprising Silver Lake Partners, CPPIB, Andreessen Horowitz for approximately $2 billion, with the original founders valuing the entire business at USD $2.75 billion.

• May 10, 2011 - Microsoft agrees to acquire Skype for $8.5 billion.

Now let's crunch a few numbers to try and figure out if Microsoft got a good deal.

• In October 2005 when eBay purchased Skype for $2.6 billion, there were 54 million members. Doing the math:

($2.6 billion) / (54 million members) = $48.15 per member

• In November 2010, Skype had approximately the same number of members it has today - about 663 million and the founders estimated the company was worth $2.75 billion. More math:

($2.75 billion) / (663 million members) = $4.20 per member

• Yesterday, Microsoft agreed to pay $8.5 billion for Skype that currently has approximately 663 million members. And even more math:

($8.5 billion) / (663 million members) = $12.82 per member

Did eBay overpay back in 2005 at $48.15 per member? It sure looks like it. Did investors get a heck of a deal in November last year at $4.20 per member? You bet they did. Is Microsoft overpaying now? Ultimately it will depend on execution - what Microsoft does with Skype - so time will tell. I often look at the telephone on my desk (I refer to it as my "antique") and wonder why we're not seeing phone services more tightly integrated into our computers - like we see today with our mobile devices. I'll write more about this in a later post.

So back to that question - I think Microsoft got themselves a pretty nice deal.