MICROSOFT is splashing the cash again in its war with Google, a war of attrition it is losing badly. No-one denies that the software giant needs to use the $50bn it has sitting in cash and short-term investments to buy new companies. Whether Skype is the right buy at $8.5bn all comes down to whether you think the company is a social network or not. If it is, then it needs to be considered alongside Facebook et al, which have attracted stratospheric price tags.
But we think Skype is a telecoms company – not a social network. Its customers use it to make phone calls, not to organise and catalogue their social lives. Compared to other telecoms companies, an $8.5bn valuation is simply absurd.
Consider this: Microsoft is spending $1,000 on each of Skype’s 6m paying customers, who each contributed a measly $33 to last year’s operating profit of $264m.
Now look at Vodafone: Each of its 341m customers contributed $55.29 to operating profit of $18.8m in 2010. Based on its market cap of $146.8bn, shareholders value each of Vodafone’s customers at $430 – less than half the amount Microsoft is paying for Skype’s users.
Bulls will argue that Skype has better growth prospects, but around a third of Vodafone’s customers are in India, where the average spend-per-customer is very low and likely to rise in the future.
There is some method in Microsoft’s madness. It wants to use Skype to create a so-called “unified communications system”, a one-stop shop for email, instant messaging, voice and video. It is already very succesful in the first two, and hopes that Skype can help it to break into the others. But this is the wrong deal at the wrong price.