If you look at the S-1 Skype filed in March, no doubt in hopes of attracting the interest of a suitor, the financial statements make for a discouraging read. That is, considering the $8.5 billion price tag.
In 2010 Skype saw revenue of $860 million, an operating profit of $21 million and a total loss of $57 million on the year. While net cash flow positive, the acquisition value sets an exceptionally high watermark for what the company will be expected to offer to Microsoft (MSFT) shareholders.
The one encouraging aspect about Skype? The subscriber base of 663 million.
So will the Skype acquisition turn out to be a boon for Microsoft? I'll list three reasons why it will:
1. Overhead control and shared marketing
Skype spent $132 million on sales and marketing last year and $105 million on general and administrative expenses.
If through shared marketing and central services Microsoft could eliminate 25% of those costs, it would save around $60 million a year and push Skype into the black. This would have to come with pretty impressive revenue growth to justify the price if Microsoft intended to run Skype as a separate operating segment, however.
2. Integration with Windows 7 phones and tablets
Integration with Skype and strong support for videoconferencing might help to expand the appeal of the Windows 7 mobile operating system as the company tries to break in to a crowded market with the likes of Apple (AAPL) and Google's (GOOG) Android platform.
The main way I'm hoping Microsoft will be able to use Skype, however, is in helping to make Windows phones the replacement to the BlackBerry in the business community. One area that I've seen Microsoft lose focus the most has been in the protection of its share of key markets. I'd like to see it more aggressively targeting the business community rather than being distracted chasing demographics Apple already dominates.
With integrated outlook, a mobile version of windows office and the ability to videoconference with other offices or people, Windows 7 mobile could be a powerful force in the business community.
3. It Will Transform the Xbox
Microsoft has already taken the Xbox from gaming platform to entertainment center with the integration of Netflix and Hulu Plus. The addition of Kinect offers a more interactive control setup and the potential to appeal to a more general population.
But what of Xbox as a communication hub? If Microsoft were able to offer a cheaper version of Cisco's Telepresence using Skype and a Kinect camera, you would literally be able to turn your TV and Xbox in to a landline phone on steriods. By offering Skype service bundled through Xbox Live, Microsoft could chip away at the market for landline home phones.
Now For The Execution
The key from this point forward will be how quickly Microsoft can integrate Skype in to the existing product lines and culture and capitalize on the opportunities I have laid out above. Otherwise, investors will wonder why the company didn't just increase the dividend.