Internet trumps telecomms

Morris Kaplan

Morris Kaplan is a guest blogger.

Morris Kaplan, one-time stockbroker and venture capitalist, brings his finance skills and recent experience as a business journalist and writer to IT, with a special interest in telecoms and how communications is being transformed by technology.

Business acquisition deals don’t get much bigger than the Microsoft purchase of popular Internet telephone service Skype for US$8.5 billion. It’s also in the biggest deal in the software maker's 36-year history. Business owners and internet entrepreneurs can only wonder at the scale of such deals; this one gives Microsoft access to a user base of about 170 million people who log in to Skype every month.

Originally bought out by eBay in 2005 for US$2.6bn from founders Niklas Zennstrom and Janus Fris, the purchase of the free online video and voice chat provider which last year made a loss of US$7m, presents as a lesson for digital business owners. It is not just about the power of scale but the opportunity to cross market to acquired customers.

In telecommunications terms, this is not a ‘disruptive technology’ at work; there is no new technology that is going to be cross-sold or up-sold from Microsoft to Skype customers but it is a highly visible version of cross marketing that has been well exploited by telecoms companies for years (voice-digital-sms-internet) . The banks do it too.

More surprising however is the stock market debut of online networking site LinkedIn, which saw its shares trade at $US104 each on listing day. Note that the IPO was priced at $US45 a share. At $US45 a share, more astute minds than mine viewed the issuance as priced too high based on such data as company revenues. The on market price for the the internet company that will be unprofitable in 2011, values the company at $US10 billion. It derives revenues from advertising and premium subscription from members. No doubt the market expects the company to extract more dollars from its members and advertisers and possibly adopt what banks and telecoms companies do with members and bundle their products and services.

Bundled product offerings can be highly optimised to very large data bases and pay rich dividends in terms of ROI on marketing dollars. As every marketing director or business owner knows, acquiring new customer can be costly while acquiring a mass of customers representing the kind of demographic you are targeting, can be a sublime exercise in marketing synergy.

Microsoft said it will marry Skype's functions to its Xbox game console, Outlook email program and Windows smartphones. All of these platforms already have other options for Internet calling, but the addition of Skype users would expand their reach, making them more useful. It’s a good case for cross selling.

Skype is the largest provider of international calling services in the world, surpassing any single phone company, according to research firm TeleGeography. Skype lost $7 million on revenue of $860 million last year, according to papers that the company has filed. This makes the purchase price seem generous yet none of the potential to cross is as yet fully evident to outsiders.

Whether Microsoft can make its acquisition pay or not, or whether retail investors in LinkedIn will make any money, may not be evident for a number of years but business owners could look at businesses which are already serving their target customers and search for any strategic alliances that could be forged. Such arrangements may not make the front page of the Wall Street Journal but they may make you some money.

Tags: internet, LinkedIn, skype, telecomms, valuations

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