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MicroSkype: Andreessen settles accounts with Ballmer

Revenge of the Netscape Kid

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Computer history was turned on its head in Silicon Valley yesterday.

Until then, the story of Marc Andreessen, pioneer of Netscape, had been about how Microsoft fought dirty during the 1990s browser wars. Redmond, so the story goes, killed little Netscape by telling PC makers who dared drop Explorer from their machines in favour of Andreessen's rival browser that Microsoft would cut their Windows lifeline.

People are rightly noting that May 10 2011 will be remembered as the day Andreessen exacted his revenge.

On that date, Microsoft paid $8.5bn in raw cash for a tiny internet telecoms company called Skype, a company that had millions of active users but not much idea how to make money from them. Skype reported a $7m loss in 2010, compared to a $418m loss the year before. It is a company that nobody else seemed to want and that former owner eBay had quickly rid itself of.

Andreessen's venture company, Andreessen Horowitz, was one of a handful to invest in Skype after it was spun out by eBay. The consortium bought a $1.9bn stake in the company, valuing the unwanted Skype at $2.7bn.

Andreessen Horowitz wasn't the largest stakeholder: that was Silver Lake Partners, which put in $1bn and held 39 per cent. However, The Wall St Journal reckons Andreessen – like the rest – made out like a bandit: he is thought to have more than tripled his $50m investment in Skype.

The VCs and Wall St money men who brokered the deal, now feted as Ayn-Rand-style supermen, somehow managed to convince the chief executive of the world's largest software company to pay more than twice what was considered the "value" of the firm just a couple a years ago.

It seems the play was out of Ballmer's hands from the start. Ballmer was already in the market, and the consortium must have seen Microsoft's man coming a mile off.

"Microsoft was the only serious bidder at that number," Andreessen, told Bloomberg. No kidding, after the eBay debacle and with most waiting to see how a planned and delayed IPO would go.

Bloomberg reports Skype's owners actually refused to entertain offers for anything less – less – than $7bn, the figure they expected to reap from IPO. Somehow Ballmer managed to pay over the minimum price.

The justification for that $8.5bn is, naturally, potential: the potential to unlock Skype's 170 million customers' appetite to be subjected to even more online ads in return for using free versions of the service.

Announcing the deal, Microsoft talked in terms of supporting Skype on Xbox and Kinect, Windows Phone and "a wide array of Windows devices", and of connecting Skype users with Lync, Outlook, Xbox Live and other Microsoft communities.

Ballmer made his interest more than clear on Tuesday in San Francisco. "More than 40 per cent of Skype today is video and video ads are one of the biggest opportunities we see going forward. We estimate 45 per cent growth in video based ads over the next few years," he told press.

Silver Lake told Forbes Microsoft stands to make three to four times its purchase price "if it manages the acquisition well".

"The software giant will have the ability to integrate Skype's technology throughout its broad product portfolio," Silver Lake is reported to have said.

There's the catch. Silver Lake accepts no responsibility for any projections it might have made during the sale, and once Microsoft drives Skype off the dealer's forecourt, as with any vehicle the value could and probably will begin to automatically decrease.

In the VCs' minds, it'll come down to bad execution by Microsoft if their tales of wealth are unmatched by reality, not whether the underlying theory they sold was wobbly.

Microsoft already has plenty of web properties it could try to fling ads at. The largest of these is Xbox Live with 25 million members. Microsoft also has an ads and media agency – or what's left of one – called aQuantive. It bought the agency in 2007 and it was supposed to build and deliver ads across the Xbox community and Microsoft's other web properties.

Ballmer said at the time of the aQuantive acquisition, in 2007: "Today's announcement represents the next step in the evolution of our ad network from our initial investment in MSN, to the broader Microsoft network including Xbox Live, Windows Live and Office Live."

Four years later, Microsoft still can't find that next step, having failed to monetize the web properties it already has in volume and after it fumbled aQuantive. In 2009, two years after the aQuantive deal and with staff exiting, Microsoft sold aQuantive's online interactive ad agency Razorfish whose clients included AT&T, Kraft and Best Buy for between $500m and $600m.

Andreessen's partner and former Netscaper colleague Ben Horowitz congratulated Microsoft on its "smart play" and tipped his hat to an old rival.

Revenge is of course a dish best served cold. Just like cash. ®

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