L018: How Microsoft Spent $7B on Skype and $1.5B on a Facebook-Killer Freeroll

by Jason McCabe Calacanis with LAUNCH Analyst Kirin Kalia

Certainly Microsoft bought Skype for its tremendous 600M+ member strong VOIP and video conferencing business. However, the company is also freerolling (poker speak for a free chance at winning more) on a potential social network built off a beloved Internet brand.

We were actually Skyping with Steve Ballmer yesterday and he sent a mockup of my new Skype page, which features the folks I Skype with most up top.*

Skype’s purchase made Microsoft a leading horse in the hotly contested race to a billion members of any internet service. Facebook is currently at 600M. While Google doesn’t have forced memberships like Skype and Microsoft, it does have at least hundreds of millions of global users.

Credit for the race to a billion should be given to Ted Leonsis, co-founder (essentially) of AOL. During an offsite meeting of Aol xVPs (VPs, sVPs, eVP -- dang there were lots of VPs) he gave us all t-shirts that said we were on the "march to a million." Always a good study of talent, I stole that concept for Mahalo last year and told my team that we were on the "march to a million" videos in our educational library (Side note/plug: Mahalo is at 30K of 1M videos -- 3% of the way and growing by 1% every 10 weeks).


The Communication and Social Graph Danceathon
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If you think Skype as a social network is a reach, let’s look at some evidence triangulating around the communication and social graph danceathon that has been going for five years now:

1. Last fall, Facebook CEO Mark Zuckerberg correctly described Facebook as a communication platform when the company debuted its unified messaging system. "This is not an e-mail killer. This is a messaging system that includes e-mail as one part of it," he said. "We don't expect anyone to wake up tomorrow and say 'I'm going to shut down my Yahoo account or my Gmail account and switch exclusively to Facebook.' But we do expect a shift to more real-time communication."

2. Facebook added Aol's instant messaging in the form of a bottom-bar Meebo knock-off. To this day, no one steals as fast or as skillfully as Facebook -- except for the Samwer brothers in Germany. The Samwer brothers are such dirty clones they couldn’t even name their fund without stealing from Peter Thiel’s Founder’s Fund with the wildly creative “European Founders” description. In related news, I’m starting a venture fund called Sequoia Trees Capital.  

3. Watching MySpace’s success in profile pages, Aol unsuccessfully ripped them off with AIMPages. This social, Tumblr-like blog network built from your AIM address book was very, very innovtive but died when it was presented to the technologically challenged Aol user base (good luck getting them to set up About.me, Tim!).

4. Google built a social network off your address book called Buzz. For some unexplained reason, Google froze that project despite its amazing 1.0. Had Google bought Buzz.com and made it a destination social network, it would have grown to tens of millions of users. The buzz on the street is that someone upstairs -- and at the time, there were three possibilities -- didn't like it.

Of those three, one was a CEO named Eric who wanted to host a talk show. The other two were founders. Of those two founders, one is fabulously competitive, cerebral and intelligent. The other is just fabulously cerebral and intelligent. So, our money is on the competitive Larry canning the project while cerebral Sergey was busy building self-driving cars, $20-a-month laptops and human hamster trails.

Why didn’t AIMPages and Buzz successfully build a social network on top of their communication platform while Zuck easily added a communication to his social network?

Two reason: focus and execution. Zuck had it, Aol and Google didn’t (and perhaps still don’t). This points to Microsoft failing when it tries to expand Skype into a social network.


The GAMING Wildcard
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There is another factor to consider:  Microsoft has over 30M members in its social gaming network: Xbox Live. Facebook’s games employ the technological sophistication of the Super Nintendo 64.

Xbox’s technology is at Mossad/CIA-level, complete with GPUs capable of 500 MHz (essentially double the computing power of Nintendo's Wii at 243 MHz). Oh yeah, they just added the Kinect, which has sold over 10M units since launching in November 2010 -- and your avatar will soon be able to reflect your every gesture, smile and frown.

Oh yeah, all these Call of Duty and Halo kiddies have dorky headsets and lists of friends they’ve already fragged.

Now, Facebook’s business is one-third Mark Pincus... I mean, social gaming. Same thing. You know what I mean.

POPUP BOX DROPPING in 2012: “Thanks for logging into Xbox Live, we see you have a Skype account associated with your email -- would like to connect your Xbox Live and Skype IDs and contacts list?”

In other words, Xbox + Kinect + Skype + headset + two sets of friends = social game platform at scale day one.

Skype let’s Microsoft unify gaming across web and console -- that’s really big people!   

BOTTOM LINE #1: Skype has a social network THE SIZE OF FACEBOOK lying dormant. Microsoft spent $7B on the VOIP half of Skype and they’re dumping $1.5B of the purchase price into research projects called the “Skype Friends”

You do know that Microsoft spent $8.7B on research in fiscal year 2010, right? That's 14% of revenues and nearly $24M a day on R&D. Skype would have gone public at $7B, so the $1.5B premium $MSFT paid equals 63 days of R&D at Microsoft

ONE MORE TIME: The premium paid for Skype is 63 days of R&D at Microsoft.

Side note: $MSFT spent more on marketing than R&D -- $13.2B or 21% of revenues in FY 2010. MSFT shareholders please STFU about this brilliant purchase! Jesus Christ you guys are dumb.

Of course, if you were dumb enough to hold on to $MSFT stock for the past 10 years and not shift it to $GOOG, then you’re probably too stupid to understand how brilliant an acquisition this is.

SIDE NOTE: I’m going to bet the donkeys who held $MSFT for the past ten years and made, ummm, 0.0% return (yes, $MSFT traded mid-$20s in 2001 and is still trading in the mid-$20s) are going to now sell, and miss $MSFT doubling over the next four years as Ballmer has finally figured out how to buy an internet company (Skype had a no-shop according to reports).

Can you imagine if Ballmer had gotten $YHOO and then bought Skype? We would be talking about $MSFT ruling the internet right now, not $GOOG being crushed by the Facebook.


More Evidence, Need You Do? (Yoda Voice)
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The dog that is Hotmail still has 360M users. Hotmail has had only three major overhauls in the 13 years since Microsoft bought it in December 1997. Even the collection of Web 1.0 kibble known as Hotmail remains a driving force on the internet.

HEAD SMACK MOMENT: Wait a second -- if you put Hotmail, Bing and Skype together, do you hit a billion? If there isn’t a lot of overlap, $MSFT might send a press release out this summer saying it hit a billion web users before everyone else.

BOTTOM LINE # 2: Microsoft's purchase of Skype will go down in history as great or RFG (really frackin' great). People complaining about the price are idiots. These are the same Xbags* who give Microsoft a hard time about not growing. How the frack do you grow without taking risk? Sometimes you have to play 5/8 off suit and hit a board of 6 7 A 4 K and felt the folks playing AK, AQ and KK. Ask your poker players to explain how stupid it is to play 8/5 off in midfield, but then ask them to describe the biggest pot they ever won.

Anyway, I have to get back to work and stop worrying about Zuck, Ballmer and Larry marching to a billion -- I’ve got my own billion to worry about. Oh yeah, if you own a million videos and each video gets viewed 2,000 times a month, how many users do you have? GFY jaters! :-)

all the best,

@Jason


PS -- I wish I had a private community where the intelligent members of the LAUNCH community could discuss this kind of stuff in private. I think I’m going to start a $25/month private mailing list for ballers.

PSS -- I’m going to interview Yahoo’s Luke Beatty next week at the Crowdsortium event at the Googleplex. That should be interesting: a discussion about Google crushing crowdsourcing sites like Mahalo, Demand Media and Associated Content -- hosted at the building that created the evil Panda! I hope Matt Cutts comes by for coffee. :-)  

http://www.crowdsortium.org/crowdsortium-symposium-2/agenda/

PSSS - I broke from doing the standard royal “we” style for this article that LAUNCH has been using for 13 issues because I wanted to include the Ted Leonsis Aol bit. Do you like the royal, Economist, no-byline model or the byline model better?

PSSSS - We are looking to hire two more writers. We tried hiring seasoned folks like MG and Erick, but their Aol packages are absurd. We tried getting the salty dogs like Rafe and Savitz, but their locked into routines at big media companies. So, we’ve decided to develop talent. Anyone know the next Rafat or Xeni? If so, tell them to email jason@launch.is. If we can get two more analysts/writers, we can go daily.  

* We don't Skype with Ballmer (that much), and he didn't send us this mock up. However Gene from Mahalo's software educational group did. Gene does amazing work here: http://youtube.com/mahalophotoshop  

** xBags is a catchall word we've created for d@#$%bags and sc@#bags. Some folks are such 'bags you just have to give them a variable.


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