Skype’s Investors’ $6.5B “Told Ya So”

Defending the huge price Microsoft paid for Skype, investor Ben Horowitz suggests rivalry from Google and Apple had no impact on Skype’s continuing success. No surprise here: Along with other firms, they only paid $2 billion for it two years ago.

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Defending the $8.5 billion Microsoft paid for Skype, investor Ben Horowitz suggests rivalry from Google and Apple had no impact on Skype’s success. It was the resilience of the service itself in the face of serious competition. That’s what lead Horowitz’s firm and a group of others to fund Skype with $2 billion just two years ago, despite heavy criticism. In other words, he’s celebrating a … let’s see, carry the 1 … $6.5 billion “I told ya so.”

Horowitz responded to the news of the deal with a blog post that sets out some of the details of his firm’s decision in mid-2009. He notes that the $50 million his young firm Andreessen Horowitz forked over was one of the first checks written from its initial $300 million pool (albeit a small share of the $2 billion that AH, Silver Lake Partners, and Canada Pension Plan Investment Board put together). His stance on the success of this investment decision is firm:

While consistent with our stage-agnostic strategy, it was a very big deal very early on in the fund. To make matters more exciting, other investors and writers broadly criticized the deal. Joe Nocera of the New York Times wrote: ‘Many people on Wall Street–and a number of telecommunications experts I spoke to this week–were stunned by the price Skype sold for, and not just because we’re in the middle of a recession.’ That controversy ended this morning.

Skype sold for more than four times the 2009 price.

Horowitz suggests that the service, which many people had assumed was slipping, turned a pretty penny in part because of the confidence he and the other investors had in Skype’s founding European coder/owners. At the time of the investment, there was an ongoing legal battle over IP to Skype’s core tech with its then-owners eBay–the investment team was confident they’d win, and that the IP was truly valuable.

Then Horowitz noted the competing “giants” began a “direct attack” on Skype’s service, with Google launching its own-brand Voice system onto an unsuspecting world and not charging for it–unlike Skype’s paid offering. “Google then aggressively promoted these cheap products to their enormous Gmail user base by forcing every Gmail user to view Google’s Internet telephony advertisement before allowing them to access their email,” he suggests. The outcome? Skype’s use and new user growth has actually accelerated since Voice’s launch–peaking at 500,000 new registered users per day, and 209 billion voice and video minutes being consumed on Skype in 2010.

Then Apple built “video calling right into the iPhone” and made FaceTime the “default offering” for iPhone users. This too, apparently, had no impact on Skype–50 million users have “downloaded Skype’s iPhone product since the release of Apple’s FaceTime.” This is an interesting statistic, since we now know Apple has sold over 100 million iPhones–the greater majority probably before the arrival of the iPhone 4, with its front-facing webcam for video calls–which either suggests that Skype’s been aggressively pushing its services even to non-video-call iPhone owners, or word-of-mouth from iPhone 4 owners has pushed the mass download.


Skype was able to fend off these competitors because it retained its core technical talent–something that persuaded the 2009 investment team to commit their cash–and Skype’s tech rested on “groundbreaking” systems that were “highly resilient” and used “scalable peer-to-peer networking” and “dramatically superior codecs” to make “radically higher sound quality.” These combined meant Skype “out-innovated the competition” says Horowitz, and along with its user networking this enabled Skype to maintain and extend its position.

This may or may not be a valid point, because both Apple and Google have formidable cash funds to invest in R&D to perfect their own video and audio quality along with innovative business models … and Apple in particular is always keen to pursue high quality in user experiences in systems like this. But the gamble has evidently paid off. There may be a tiny hint here that the MS acquisition happened at what could’ve been the last minute for Skype–its competition is huge and moving swiftly. And Microsoft itself needed a system like this to pitch against its big rivals, which are the same two firms Horowitz is talking about.

Chat about this news with Kit Eaton on Twitter and Fast Company too.

Related: Why Microsoft Is Buying Skype For $8.5 Billion


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