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Ballmer’s Brilliant Black Hole Eats The GALAXY

Steve Ballmer’s purchase of Skype is a brilliant coup for Microsoft. It will beneficially impact Microsoft’s annual revenues and will simultaneously attack both Linux/Unix and Microsoft’s chief corporate competitors – including Google’s Android, Lucent, Apple, uniX, and a cluster of Young companies (The GALAXY). Why? Let’s look at some of the market segments in which Microsoft excels. These include:

  1. The Personal/Home Computer and SOHO segment
  2. Small to Medium business segment
  3. The Large Business (Corporate) segment
  4. The Mobility Market, Consumers and Carriers.

For this kind of impact, Skype was CHEAP at $8.5B. Why?

Skype has 170 million customers, and at the 30% discount Microsoft achieved with the use of offshore funds, Microsoft paid about $35 per pair of Skype customer eyeballs, which is a bargain in customer acquisitions. Banks and Phone companies typically pay about $200 in advertising costs for each new customer, $35 per customer is a bargain. How will Microsoft leverage their new customer base and increase it? Corporate Skype servers and advertisements for non-paying retail/small business customers.

Advertising and Skype for The consumer, SOHO and Small Business markets

Contrast Google’s advertising platform and Microsoft’s new Skype telephony application: People spend about 10 seconds looking at each Google search result, while they may spend hours a day running Skype on their computers. “Free Skype” users will continue to get Skype for free, but MS will put advertisements on their desktop or mobile computer, probably steered by the contents of Skype’s Instant Messages and data that MS/Skype collects from their customers. We estimate Microsoft will reap $40 to $100 per “free” Skype user the year after advertisements are included in the “free” Skype service, for a total annual revenue of over $17 Billion, with a ROE on the acquisition of 100%, in six months after the new versions of Skype software have been written, debugged, and deployed. Microsoft will decimate Google’s advertising revenues. As an advertiser, would you rather that someone looked at your ad for a few seconds, or would you prefer a platform which could repeat your ad at intervals, to maximize its impact and drive customers to you? Google is going to lose internet advertising market share to Microsoft.

Skype for the Small Biz and Corporate Segments — the Voice Application Takeover:

Fueled by the sale of Skype servers, and directory integration with Microsoft’s Exchange & Domain services, the combined voice, data, directory and email servers will increase sales of Microsoft Server software, and its Office 365 “cloud” service. These paid-for products and services will be free of advertisements. No corporation wants its employees looking at ads when they can be earning revenue.

Microsoft will be integrating voice, video, & data services and eliminating some of the vendors that are established in Corporate Communications, such as Cisco’s Voice products, and PBX manufacturers such as Lucent and Alcatel. Who needs that pesky, expensive, phone set when “there is an app for that?” Microsoft has proven its ability to act as a systems integrator; this time, they will integrate voice, video, and data stream support into their software, and provide delivery solutions to corporations and telecom carriers.

The uniXes, and Linux (including Ubuntu) will lose market share, because MS will bundle support for Skype’s voice and video services into its Windows-based software. Microsoft Office and its Office 365 “cloud”service will enhance MS revenues and make competing with the Windows OS much harder.

Microsoft’s revenues will flourish. With an estimated revenue of $1,000 per corporate employee over a period of 5 years, or about $200/employee/year to Microsoft, multiplied by the number of corporate employees worldwide give an estimate of MS’s annual increase in revenues. If, using round numbers, there are about a billion corporate employees worldwide, that’s about $200 Billion of potential increased annual revenue for Microsoft. Ballmer’s purchase of Skype, and the brilliant strategy behind it can lead to Microsoft quadrupling its revenues in 5 years. In terms of total annual revenue, that would Bill Gates looks like a mere piker.

The Mobility Market, Consumers and Carriers

Microsoft already has a partnership with handset maker Nokia. Nokia Microsoft and the Carriers are poised to make huge inroads into the Mobile Delivery of advertising through the new MS Skype services. Delivering a mobile handset which tightly couples advertising and mobility is potentially a huge win for Microsoft, their partner Nokia, and the Mobility Carriers.

Microsoft’s revenue increase comes both from sales of the servers to the Carriers, and from revenue sharing between Microsoft and the Carriers for Advertising delivery. The Carriers might lose 10% of their international (expensive) minutes because of Skype, but the boost to the Carriers’ revenues from advertising will exceed the potential loss of revenue for international Skype calls. The carriers will be happy to partner with Microsoft, because the advertising will increase their revenues. Expect Microsoft to provide a service to the Carriers including Microsoft’s servers and a stream of advertising content.

Estimated Advertising Revenue from 2 Billion Consumers at $1,000 per consumer per year: $2 Trillion annual revenue, split three ways, between Microsoft, The Carriers and Nokia.

Microsoft also attacks the Unixes, plus its corporate competitors – Cisco’s voice division, Lucent, & Alcatel. Microsoft’s Skype servers will replace old-fashioned PBXs in the corporate market, while rewarding the telecom carriers for using Skype products by sharing in advertising revenue. Microsoft’s somewhat open ad-revenue-generating server and handset businesses will be preferred by the Mobile Carrier over Apple’s closed (and not so generous) advertising system.

Google and Android? Toast. No advertising eyeballs, no ad serving mobility apps, and no voice and directory services integration. They will not be able to compete, either in the advertising-supported consumer and small business or the corporate segments. Microsoft’s purchase of Skype is going to redefine the corporate advertising and voice/video market segments, and many of the current major players will find it difficult to survive the changes.

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