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Microsoft's $8.5 Billion Mistake?

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Most analysts felt that eBay (Nasdaq: EBAY  ) was overpaying when it shelled out billions for Skype. The auctioneer finally agreed, when it took a whopping $1.4 billion charge to write down its investment in Skype four years ago.

If agreeing to pay as much as $4.2 billion -- before ultimately forking over closer to $3.1 billion -- seemed ludicrous in 2005, how does $8.5 billion sound now?

Microsoft (Nasdaq: MSFT  ) will be shelling out more than twice as much as eBay did for Skype several years ago, giving it a giant Web-based chat platform to dissolve into its system.

Mr. Softy already has plans for Skype. It will support Xbox gaming, allowing Xbox LIVE gamers to chat more effectively along with Kinect motion-based controls. Much to the dismay of wireless carriers, it will inevitably work its way into Windows Phone handsets. Skype will also dovetail nicely with Lync, Outlook, Messenger, Hotmail, and any other communications-based initiative at Microsoft.

Microsoft claims that it will continue to support Skype on non-Microsoft platforms, and that's a good thing. You don't fork over $8.5 billion for software that reached 170 million users and delivered 207 billion minutes of voice and video chats last year only to implode it by making it Microsoft-centric.

It makes sense on paper, but didn't it also make sense when eBay made Skype the third verb in its portfolio six years ago? Skype was supposed to bring a voice to auction transactions. It was supposed to humanize PayPal transactions. The synergies never materialized.

Seller's remorse, revisited
eBay also looks pretty dumb for selling nearly two-thirds of Skype for $1.9 billion less than two years ago. Sure, the stock popped 3% higher this morning on the news because it still owns 35% of Skype. The payday could've been so much sweeter if it had held on.

It will be hard for Microsoft to justify this kind of capital outlay for a platform that has had its monetization challenges. The stock opened lower this morning, so Wall Street isn't impressed. The software behemoth had to do something, though.

Microsoft's flagship operating system franchise suffered a 4% dip in revenue in its latest quarter, and that's never coming back. Yes, I said never.

Consumers are spending less time on Windows-fueled PC and laptop experiences, settling for "good enough" computing on more portable smartphone and tablet gadgetry running Apple (Nasdaq: AAPL  ) iOS and Google (Nasdaq: GOOG  ) Android.

Microsoft is holding up better on the business and server software fronts, but it clearly has to do something to shake things up. It's overpaying for Skype, because nothing that it can underpay for would be worth buying.

Shopping with Mr. Softy
Let's hope that Microsoft doesn't stop here. While it can always go for cheaper chat plays such as Vonage (NYSE: VG  ) for telephony and LivePerson (Nasdaq: LPSN  ) for consumer-facing support to beef up its new Skype division, the real opportunity here is to keep the buying spree going to build up its other divisions.

Microsoft continues to lose money in its online division. Now would be a good time to crack open the vault a little wider to make some needle-moving buys to take the red out of Redmond. The gaming division is rocking these days -- and an embarrassingly hacked rival network will keep the good times rolling -- but now would be a good time to make a bigger splash in social gaming so it can actually cash in on the Android and iOS revolutions.

There's also a chance to breathe new life into mobile. Paying billions to a fading handset maker for support may pay off, but there hasn't been a better time to take advantage of a desperate Research in Motion (Nasdaq: RIMM  ) during BlackBerry-picking season.

I applaud Microsoft for doing something this morning, but I reserve a standing ovation for the other deals that make even more sense.

Do you like the Skype acquisition? What should Microsoft buy next? Share your thoughts in the comment box below.

Google and Microsoft are Motley Fool Inside Value choices. Google and LivePerson are Motley Fool Rule Breakers recommendations. Apple and eBay are Motley Fool Stock Advisor selections. Motley Fool Options has recommended a bull call spread position on Apple. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Apple, Google, and Microsoft. Alpha Newsletter Account LLC owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz wonders how long it will take for Skype to get the blue screen of death. He does not own shares in any of the companies in this story. He is also a member of the Rule Breakers analytical team, seeking out the next great growth stock early in its defiance. The Fool has a disclosure policy.

Read/Post Comments (6) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 10, 2011, at 7:12 PM, techgoose wrote:

    In which Micro$oft buys a post-prime voip / videoconferencing system for twice its' value, only to watch the value slide by another 50% in the coming 2 years. Nice play, Balmer!!

  • Report this Comment On May 10, 2011, at 8:33 PM, baldheadeddork wrote:

    The eBay/Skype deal never made sense to me, but this one does.

    Everyone is focusing primarily on how Skype will be integrated into WP7, but I think that's missing the biggest opportunities Microsoft has because of this deal.

    Make no mistake, a robust text/voice/video client in Outlook could be a game changer. Being able to open video chat with anyone in your address book (as long as they have Outlook) is huge. Office suite upgrades are always a tough sell because the feature set of the software has been set for a long time, but if Microsoft even gets it mostly right this is going to sell a lot of copies of Office.

    It also gives Microsoft a big opening into the VoIP services business. With Skype ingrained into Office and Windows, it's a short step to adding VoIP management into Windows Server and/or selling VoIP subscriptions.

    How far can this go? How far do you want to take it? Add a bluetooth headset and it's nothing to remove the physical phone from the equation. There's a couple hundred dollars savings per person. If Microsoft sells a VoIP management server program a la Exchange, businesses could save $30-$50 a month per head.

    Microsoft should also be able to better than Vonage on making money from its traditional market, too. Bing is more than capable enough to deliver targeted ads, and MS has the infrastructure to sell the ads. This isn't going to make Microsoft the next Google, but they should make a hell of a lot more money from it than Google ever made on Docs.

  • Report this Comment On May 10, 2011, at 8:39 PM, Klippenstein wrote:

    You stated: "Microsoft's flagship operating system franchise suffered a 4% dip in revenue in its latest quarter, and that's never coming back. Yes, I said never."

    Why do you think so? I bet you are wrong, too bad we can't make a market.

  • Report this Comment On May 10, 2011, at 8:44 PM, Klippenstein wrote:

    I love Skype and use it all the time for calls from my netbook when I am mobile (especially when I am out of country) since I feel cell phones are overrated and too expensive for people who don't need to be "on call" for sales, etc. 24x7. Microsoft now owning this just warms my heart! As I shareholder, I now have to hope it makes money!

  • Report this Comment On May 10, 2011, at 8:50 PM, baldheadeddork wrote:


    I missed that.

    Rick is hanging his hat on a 4% dip in a quarter where consumer confidence hit a low since the really bad days of 2009? I want to go to Vegas with him. (And bet opposite of whatever he puts his money on.)

  • Report this Comment On June 17, 2011, at 7:31 PM, brentrjones wrote:

    Microsoft should innovate. I would buy a bluetooth wristwatch phone or even a pendant. The base unit is the size of a fair sized watch. The ear piece slides into it and is removable. Hell give me an eye patch video and an earring phone. Capt. Jack "Connected" Sparrow.

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