Did Microsoft overpay? A few datapoints.....

The discussion of Skype valuation has been largely a fact free zone (or at least there has been very little comparative data in the chat-o-sphere) so I decided to do my own, looking at their last SEC submission (shows total, connected and paying customers and revenue 2006 - 2010). I also looked at the reported data for 2005 (when eBay bought them) and what the Skype owners have told the press about early 2011 (c 6.5% paying customers, c 170m connected customers). The key data is set out above in the chart, explanation below.

The red line looks at ARPU/Connected user - total revenues have risen from c $75m in 2005 to reported revenues of 860m in 2010, and (on reported run rate) over $1bn for 2011 by May 2011. Total connected users have risen from c 10m users in 2005 to c 170m users. that means the ratio - ARPU/user - has declined from c $7 per connected user to c $6 per connected user - or from 100% of 2005 value to 85%, as shown on the chart.

(I used the 2005 basis set at 100% so you can see the relative shifts of different datasets to the same relative magnitude)

Similarly, you can do the same calculation for ARPU/paying users. In 2005 paying users were about 9% of all users, now they are c 6.5% (yellow line) - a decline from 100% to 72%. Fortunately they spend a little more each, up 18% from 2005 (maroon line).

As you can see, the data by and large is a slow slide to the worse, which is where the Microsoft valuation comes in. Microsoft paid c $8 bn (deducting Qik) for something that was valued at c $2.75bn about a year ago - a c 3-fold increase.

In fact, revenue jumped from c $620m in 2009 to $860m in 2010 (to a deduced c $1bn run rate now), a c 175% increase. Increase in users has been similar (yellow line shows fairly constant ratio 2009 - 2011).

Dividing a 3-fold increase in price with a c 175% increase in underlying revenue shows us that Microsoft is assuming that each user is roughly double the assumed value a short year or so ago. (To be fair, the 2005 eBay price had an assumed user value c 5 x the 2009 price - now that's overpayment!)

To which you then have to ask "what has this deal done that doubles the user value?" In fact its worse than that, as the last few years have seen a jump in use of video, which is increasing cost/user while revenue/user is at best static, and that is only going to get worse* - so this deal has to more than double value! By the ludicr...sorry, growth priced value/revenue multiples of Facebook (80x) a mere 8x sounds positively dull, but then you normally expect a company of Skype's age to be profitable.

Microsoft is clearly struggling with this same question, hence the suggestion today that "free" video will get advertising on it, which seemed to go down like a lead balloon. What this shows is that there is going to be a lot of pressure on Microsoft to make this perform economically, but without some very good execution skills, the relatively high privece (for what it is) makes it more likely to be a turkey than a high flyer than otherwise.

*Though as my colleague Paul Lancefield notes in the comments, owing to the P2P (Pay 2 Play ) nature it is a lot better off than "cloud" based video streaming servives