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Microsoft to Buy Skype for $8.5 Billion

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In a deal cemented after Microsoft designers spoke highly of the new interface for Skype 5 on the Mac to CEO Steve Ballmer (kidding!), Microsoft has agreed to buy Internet telephony company Skype for $8.5 billion in cash. The acquisition is the largest ever for Microsoft, which paid about $6 billion for aQuantive in 2007 but had roughly $50 billion deals for SAP (in 2004) and Yahoo (in 2008) fall through.

Skype has had a bit of a checkered past. Launched in 2003, Skype was purchased by eBay for $2.6 billion in 2005, with the thought that buyers and sellers would somehow use Skype to communicate about auctions. That was craziness — the whole point of eBay is that you don’t have to talk with the other party — and eBay sold a 70 percent stake in Skype to a group of investors in 2009. Skype was considering going public in 2010, but put its IPO plans on hold after hiring a new CEO. The public offering was expected to raise about $1 billion, but with acquisition interest from Facebook, Google, and Cisco, among others, Skype’s management thought they could get $5 to $6 billion instead.

The $8.5 billion from Microsoft is thus a windfall, especially considering that Skype has generated little in the way of net profit over the years, posting a $7 million loss last year. Most of Skype’s revenue has come from those who pay for long distance phone calls to telephone numbers, since Skype-to-Skype calls are free. Nevertheless, Skype boasts about 170 million users every month, and Skype users made 2 billion minutes of voice and video calls in 2010.

Microsoft plans to integrate Skype into devices like the Xbox and Kinect, into Windows Phone running on a wide variety of devices, and into various other Microsoft products and initiatives. Although it’s understandable to wonder about the future of the Mac and iOS Skype clients (among many others), Microsoft says it will continue to invest in and support Skype clients for non-Microsoft platforms. If Microsoft really loves us, they’ll throw out the Skype 5 interface as an initial gesture of goodwill.

The acquisition makes sense from many perspectives, since Skype had never figured out a sustainable business model, and Skype’s primary asset — its best-of-class technology for voice and video calls — fits well into the technology portfolio of a large company that can utilize it in numerous products and services. The deal could cause problems for Microsoft in its dealings with cellular carriers, who consider voice-over-IP a threat to their core business.

Although this trend has been going on for some time, the acquisition shows how large technology firms see real-time voice and video communication as a key part of an overall technology platform. Apple has iChat (potentially on the way out, perhaps because of the reliance on AIM) and now FaceTime, Google has Google Talk, and now Microsoft has Skype.

For a nice graphical summary of Skype’s history and of the impact of the acquisition, see Muhammad Saleem’s infographic: “Skype: From Conception to Acquisition.”

 

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Comments about Microsoft to Buy Skype for $8.5 Billion
(Comments are closed.)

sfmitch  2011-05-10 14:41
This seems like a colossal waste of money.

$8.5Billion is SOOOOOOO much money and to pay it for a company that isn't making ANY money is very difficult to understand.

Michael Cohen  2011-05-10 15:41
Profitability is only one reason to buy a company. Intellectual property assets are another.
Does Skype have a significant patent portfolio? I know they've had to fight several patent lawsuits previously.
Adam Engst  An apple icon for a TidBITS Staffer 2011-05-10 18:28
And in Skype's case, it's not just IP, but a fully functional system. A lot of this stuff really is harder than it looks, and the fact that Skype has been at it for 8 years now gives them a leg up on newcomers to the field.
Chris Pepper  An apple icon for a TidBITS Staffer 2011-05-10 15:08
> Apple has iChat (potentially on the way out, perhaps because of the reliance on AIM)

What makes you say iChat is on the way out? Is it deemphasized in Lion? iChat's Jabber support is fine, and supports all the same features as the AIM protocol.
Adam Engst  An apple icon for a TidBITS Staffer 2011-05-10 18:24
Three things make me wonder about the future of iChat. First, why would Apple make FaceTime completely separate rather than integrating it into iChat? Second, iChat's use of the AIM protocol strikes me as one of those things Apple would be just as happy to control (hence FaceTime perhaps?). And third, it just feels as though Apple hasn't been putting much emphasis on iChat for quite a long time.
Paul Collins  2011-05-10 17:33
Adam, you had me going with that opening line (which Safari's RSS display cut off just before the "kidding")!

Sure Skype loses money, but look at it this way: at -$7 million a year, it could lose that for a hundred years and only add 10% to the cost.
"Redmond, start your copiers"

I wonder if this could have been (partly at least) driven by Microsoft seeing that Apple were becoming a viable platform for video chat (particularly with iPads and iPhones as clients), and wanted an effective response (ie, one with a large customer base and positive mojo).
Charles Robert Hayden-Gilbert  2011-05-17 01:48
Microsoft has a history of subsuming successful applications and I fear for the future of Skype as a cross-platform application. See http://www.wsws.org/articles/2011/may2011/skyp-m16.shtml for the full story: Microsoft and the future of Skype. This paragraph says it all: "The purchase by Microsoft poses a real threat to democracy and the free exchange of ideas. What has become an essential utility for millions of people is now controlled by one of the world’s largest corporations, and one that has a record of subverting technological advances in the interests of maintaining its own monopoly."
Adam Engst  An apple icon for a TidBITS Staffer 2011-05-17 12:38
There are plenty of things to worry about with Microsoft, but I do think that considering the acquisition of Skype as a "threat to democracy and the free exchange of ideas" is wildly over the top. I'm no fan of Windows, but you have to figure that the large majority of Skype users, and in fact the large majority of computer users, are using Windows without Microsoft impinging on their form of government or exchange of ideas.
Patrick Snook  2011-05-17 12:23
I'm struck by that reported $7 million operating loss (2010), and $8.5 billion price tag--a factor of a thousand between them.

Corporations, large companies, operate in a way that beggars the imagination when translated to an individual or family. Those large entities no doubt support many employees and their families, via their operating loss, but would any other family, one facing a foreclosure for example, persuade a bank to lend money, based on an operating loss of even a factor of two?

Wanting to ponder this a little more, I followed the link to the mostly helpful graphic, but could not understand the graph of "net income" and "net revenue".

Can anyone help interpret that?
Adam Engst  An apple icon for a TidBITS Staffer 2011-05-17 12:46
The net revenue and net income are a little hard to understand, I agree, but I think that's because Skype was first part of eBay, then privately held. So the numbers would have to be extracted from eBay's corporate reports or shared by Skype itself.

That said, and I'm no accountant, but I'm guessing that Muhammed is attempting to show the difference between the amount of money Skype brought in before expenses and the amount left over after expenses.
Adam Engst  An apple icon for a TidBITS Staffer 2011-05-17 19:21
Muhammed told me in email that "The losses in 2007 and 2009 are due to eBay's buying and selling portions of the company not operating losses." So that might account for the confusion...