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Microsoft to Buy Skype for $8.5 Billion

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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