That would mean that Microsoft is paying 28x earnings. If we want to approximate EBIT as free cash flows (not the same, but this is back of the envelope) and assume a 10% discount rate, to break even Skype would need to be growing EBIT at 6.4% annually for the next 10 years or so.
I don't know how achievable that really is, but maybe they could test raising prices to get some of that growth.
1. Microsoft will gain from Skype's synergy with their existing portfolio. Think Skype + Live Messenger or Skype + Windows Phone 7.
2. Block competitors from purchasing. Microsoft, Google and Apple (to some extent even Facebook) have businesses that are increasingly overlapping. Skype in the hands of a competitor becomes an alternative cost for Microsoft.
I was going off an article that had skype revenue/profit as 859.8/20.6 for 2010 and negative the year before. I assume that the accounting tricks of having been bought by a PE firm that he mentions are responsible for the discrepancy.
If true, P/E is < 20, not bad.
Still, I doubt that is really what MS is after.
At that 6.4% rate skype has twice the earnings in 10 years it has today.
People are going to continue to buy Word, Windows, and Exchange because they have a commodity video product "integrated"? I don't think so.
They might if it is integrated (no quotes) with the call, chat, filesharing and screenshare client that they, their clients and suppliers use (and understand) if it is integrate in some useful way or maybe if it comes with some other corporate value add (data about who employees call, chat..).
Even though it really isn't marketed that way, skype is a business tool, something people use at the office. It is used by lots of people that use Office, Media Player and IE only.
I assume by the tone of your comment that you either don't think that something everyone knows and have already been using for 5 years is particularly valuable or that you are skeptical about people continuing to buy MS for any reason. Microsoft would disagree with both of these.
They get two things:
Technology: These are technologies Microsoft already has or could develop cheaply (say, for 1% of the cost of Skype?).
Users: Yes, no one will buy Microsoft because it is integrated in "some useful way" - whatever that means. 99% of the utility of Skype is already present without an integration - and other products can also integrate with Skype or other similar technologies if there is really a value add there. There is no sustainable market advantage and no value compelling enough to affect a purchase decision. Users have all they need from Skype - making calls one click away or some light simple integration like that is not a reason to spend 8.5B on a company.
Words like "synergy," "cross-sell," "eyeballs," etc. were no doubt tossed around the MS board room with this vision in mind. Abstract synergies don't work, and integrating unrelated products doesn't work.
Ebay bought Skype because they thought lack of telephony was the reason they were getting their but kicked by Taobao in China. Nobody cared and users weren't interested. Ebay was losing because their pricing and service model were wrong for the market, but it's easier to buy companies than fix your own, so that's what they did.
Not sure that adds up to $7b (I dunno how to evaluate anything that big), but it is something. I'm sure this has a big chance of being useless, but it also has a chance of being helpful.
If in 2 years (assuming skype can keep it's usebase) every windows pc tablet & phone is connected to skype by default, it could be strenthened. If skype integrates in some significantly useful way with outlook/exchange (scheduling calls, confirming meetings, emailing chat sessions, synching contacts) it could help strengthen the corporate MS position (the real cash cow).
Like many decisions, it's not the decision itself that is most important, it's the subsequent actions, the execution. That said, a 1m phone giveaway would be epic. MS have money to burn and big fish to catch. Burn. Catch.