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Microsoft / Skype vs AT&T / TMobile

A lot of the press today is claiming that Microsoft overpaid for Skype.  I am not so sure.
Here are some numbers for comparison.

Skype has 560 million registered users, of which about 2% (say 11 million) are paying customers with an average ARPU of $8.  Thus, Skype should be generating about $8*12*11M ~ $1B/year in revenue right now, with an EBITDA of about $250M.  So, Microsoft is paying about 8X revenue, and 32X EBITDA.

T-Mobile US has about 33M subs, with an ARPU of about $50.  So, T-Mobile's revenue should be around  $21B/year.  AT&T is paying about 2X revenue, and 7X EBITDA.

Thus, Microsoft is paying a 4-5X premium for Skype compared to what AT&T is paying for T-Mobile.

The obvious question is : Can Microsoft leverage Skype 4X more effectively than a traditional mobile carrier?  To that, I think the answer is yes:

1) Skype is not a major enterprise player, yet.  Microsoft should be able to make this happen.  That alone should be 4X in ARPU, and should lead to better margins.

2) ARPU for T-Mobile has strong downward pressure as mobile operators (especially AT&T) become dumb pipes.  Skype ARPU should have lots of growth room. The $8 to $50 ARPU gap should meet somewhere in the middle; say $25.  This is huge growth for Skype and a huge challenge for T-Mobile.  If this happens, Microsoft got a steal.

3) Skype should be able to improve gross margins with stewardship from Microsoft.

4) Microsoft should open up new revenue streams from Skype. For example with Skype bundled into other product offerings (Office, X-box Live, etc.), ad revenue and/or premium bundles are quite possible.

There is also the obvious strategic wins for Microsoft.  They increase their brand equity with leading edge users; they bundle Skype with every mobile, gaming, and OS product, giving an easy to use, cohesive, and consistent experience.

Of course, it comes down to execution, but if Microsoft executes at all, I think the premium they are paying is reasonable.


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