Skype Out

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It’s hard to believe that Skype has been around for more than 20 years…

So it may come as a surprise that this icon in messaging and communications is shutting down for good in two months, on May 5.

Skype was so far ahead of its time… leveraging the internet for IP messaging, phone calls, and even group video – things we all take for granted today.

Skype Circa 2013

Skype even enabled users to purchase a real phone number that could be used anywhere in the world. I was an avid user of this feature when I lived and traveled extensively outside of the U.S.  There was a time when international roaming charges were ridiculous due to inflated roaming charges levied by wireless operators.

For work, I often ran up cell phone bills in the thousands of dollars and I actually traveled with three phones – one for Japan, one for South Korea, and one GSM phone for the rest of the world. This was required due to Japan and Korea using different wireless standards than the rest of the world.

Skype enabled me to make and receive calls on my phone or computer at no charge (other than my U.S. domestic number annual charge). It was a fantastic service.

Given what we’re all used to today, that might not seem like much. But back then, in the aftermath of the dot-com boom – when Skype was founded – it was a big deal.

“But What Do We Do With It?”

Skype was founded by Niklas Zennstrom, a Swede, and Janus Friis, a Dane, who established Skype as a Luxembourg company (for tax reasons). But the real headquarters was in Tallinn, Estonia.

The application became one of the most successful software applications of its time with software clients that ran on macOS, Windows, and Linux for PCs, and Nokia, Symbian, Blackberry OS, iOS, and Android for mobile phones.

The imprints from Skype are still seen today on all modern messaging and communications platforms that we all use. And while its technology holds a special place in the history of communications, the mergers and acquisitions activity related to Skype are far more interesting.

Back in September 2005, online auction site eBay (EBAY) acquired Skype for $2.6 billion, an incredible price at the time reminiscent of the Dot-com boom. That year, Skype only generated $71.8 million and was very unprofitable. The acquisition by eBay was made at a crazy 36.2-times annual sales.

It was a terrible deal by eBay.

The acquisition made no sense at all, and eBay had no idea how to leverage Skype in its own business. It ended badly, with eBay taking a $1.4 billion write-down in 2007, and by 2009 the company decided to divest Skype.

70% of Skype was acquired by private equity firm Silver Lake and VC Andreessen Horowitz for $2.03 billion. eBay retained 30% of Skype and was able to stop the bleeding at eBay with regard to the acquisition. That transaction valued Skype at $2.89 billion at the time, slightly above what eBay paid for it.

After a couple of years and some restructuring, Silver Lake prepared to take Skype public in May of 2011, but it wasn’t meant to be.

Steve Ballmer, the then CEO of Microsoft (MSFT), wanted to make a bold acquisition and gain access to Skype’s ~160 million active users. In typical Microsoft fashion, it stepped up and paid $8.5 billion to purchase Skype in late 2011, which was still unprofitable.

With about $860 million in annual sales that year, Skype was sold at roughly 10 times annual sales, a far more reasonable multiple than eBay’s 2005 acquisition of the company. eBay really lucked out with the big-ticket sale to Microsoft, as its 30% stake brought in $2.55 billion at a gross gain of $2 billion, a $1.4 billion net gain after all its costs associated with Skype.

Microsoft, like eBay, struggled to figure out what to do with Skype. It was surprising, considering Skype was Microsoft’s largest acquisition to date. You’d think they’d have figured all that out.

But it was largely all downhill from there.

Skype’s Biggest Winners

Skype-related revenues dropped from $860 million a year in 2011 down to about $184 million by 2022. Skype for business was largely a failure. By 2016, the writing was on the wall, as businesses began to adopt more enterprise-focused solutions. Skype for Business was shut down officially in 2021.

Microsoft launched its Teams product in 2017 as an answer to how to compete with Slack (it clearly didn’t think Skype was the solution), a company that was eventually acquired in 2020 by Salesforce (CRM) for $27.7 billion.

Once Teams came out, it was a slow and painful death for Skype. It deserved better, given how innovative it was in its industry. While it hasn’t been made public, I seriously doubt that Microsoft made any money off the transaction. It almost certainly lost billions. And the launch of Teams was a tacit admission that it couldn’t figure out how to make Skype work at Microsoft.

Did anyone win big?

Silver Lake was definitely the big winner, acquiring 70% of Skype at a $2.89 billion valuation in 2009 and selling for $8.5 billion roughly two years later. That’s one heck of a deal.

And the other winners worth mentioning are the two founders of Skype and its first Estonian employee.  The two founders earned about $390 million in the 2005 sale of the company which they put to good use elsewhere.

• Niklas Zennstrom went on to co-found Kazaa, which was a rival to Napster, and set up his own venture capital fund Atomico. Atomico funded Supercell, the maker of the smash hit game Clash of Clans, 73.2% of which has been acquired by Softbank. The VC firm also funded Klarna, which was last valued at an impressive $12 billion and has recently filed confidentially for its IPO, one of the most anticipated tech IPOs of this year.
• Janus Friis also co-founded Kazaa with Zennstrom, as well as backing Starship Technologies, an autonomous robotics company with a last known valuation of $371 million.
• And the lesser known Taavet Hinrikus, an Estonian who was Skype’s first-ever employee, is perhaps the most impactful winner for Skype’s interesting history. He went on to found currency exchange platform TransferWise, which IPO’d in 2021 at a $12.2 billion valuation. The company is now known as Wise (London: WISE), which has been a great success.

It’s always interesting to see the follow-on effects of major acquisitions. eBay’s lofty price ended up becoming the capital that created more than $20 billion in value and a whole lot of job opportunities through the companies that the three executives funded.

eBay (EBAY) got lucky in the end through the Microsoft acquisition and made a profit.

Silver Lake was smart to sell Skype quickly before the competitive field became too busy, or before Microsoft built its own in-house product.

We’ll be keeping a close eye out for Klarna’s IPO…

And for anyone who still uses Skype today, I’m afraid you’ll have to move on before May 5.

Skype out.

Jeff