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Summary:

Microsoft is close to finalizing a deal to buy Skype for $8.5 billion. The Wall Street Journal confirmed the news after we had first reported the news yesterday. The deal is especially good for Microsoft’s partners including Nokia and Facebook.

skype-android-featured
Skype CEO Tony Bates

Skype CEO Tony Bates

Updated at 12 midnight. Microsoft has bought Skype for $8.5 billion, in an all-cash deal. The deal closed a few hours ago. is close to finalizing a deal to buy Skype for between $7 billion to $8 billion. The Wall Street Journal confirmed  the news after we had first reported it yesterday. The announcement is likely to come out later today or tomorrow morning, according to several reports. Steve Ballmer, CEO of Microsoft, is said to be a big champion of the deal, the largest in the history of the company. Ballmer and Skype CEO Tony Bates will host a press conference in a few hours.

Skype has been up for sale for some time, thanks to some very antsy investors. My sources indicated both eBay and Silver Lake Partners have been getting nervous about the delayed initial public offering and have been pushing for a sale of Skype. Facebook and Google were said to be earlier dance partners for Skype, and Microsoft was a late entrant and is now close to walking away with the prize.

It won’t surprise me if Microsoft comes in for major heat on this decision to buy Skype — and the software company could always botch this purchase, as it often does when it buys a company. The Skype team is also full of hired guns who are likely to move on to the next opportunity rather than dealing with the famed Microsoft bureaucracy.

I also don’t believe Facebook and Google were serious buyers. Google, with its Google Voice offering, doesn’t really need Skype. In essence, I feel Microsoft was bidding against itself. Even then, I personally think this is a bet worth taking, especially for a company that has been left out in the cold for so long.

  • Skype gives Microsoft a  boost in the enterprise collaboration market, thanks to Skype’s voice, video and sharing capabilities, especially when competing with Cisco and Google.
  • It gives Microsoft a working relationship with carriers, many of them looking to partner with Skype as they start to transition to LTE-based networks.
  • It would give them a must-have application/service that can help with the adoption of the future versions of Windows Mobile operating system.
  • However, the biggest reason for Microsoft to buy Skype is Windows Phone 7 (Mobile OS) and Nokia. The software giant needs a competitive offering to Google Voice and Apple’s emerging communication platform, Facetime.

Guess Who’s the Big Winner

The biggest winner of this deal could actually be Facebook. The Palo Alto, Calif.-based social networking giant had little or no chance of buying Skype. Had it been public, it would have been a different story. With Microsoft, it gets the best of both worlds: It gets access to Skype assets (Microsoft is an investor in Facebook) and it gets to keep Skype away from Google.

Facebook needs Skype badly. Among other things, it needs to use Skype’s peer-to-peer network to offer video and voice services to the users of Facebook Chat. If the company had to use conventional methods and offer voice and video service to its 600 million plus customers, the cost and overhead of operating the infrastructure would be prohibitive.

Facebook can also help Skype get more customers for its SkypeOut service, and it can have folks use Facebook Credits to pay for Skype minutes. Skype and Facebook are working on a joint announcement, and you can expect it shortly.

Why Did Skype Want To Sell? 

Skype had filed for an IPO, was going to do about a billion dollars in revenues, and was on its way to becoming profitable. So why sell? Silver Lake and eBay were both getting impatient and wanted to lock in their profits. Some sources also believe Skype’s revenues had stalled.

The company had bet heavily on is video sharing service. The premium version of video calling and sharing was a way for Skype to increase its average revenue per user and move into the enterprise market. However, given Skype’s DNA is that of a consumer Internet company, the challenges aren’t a surprise.

So Who Made What?

  • Using the $8.5 billion price as the likely sale price, eBay gets $2.55 billion for its 30-percent stake in Skype. So in the end, eBay did make money on the Skype deal.

    Skype Founders

    The Skype Founders

  • Niklas Zennström and Janus Friis, the co-founders, with their 14-percent stake, take home about $1.19 billion. Damn, these guys know how to double-dip!
  • Silver Lake, Andreessen Horowitz and the Canada Pension Plan Investment Board (CPPIB) own 56 percent of the company, and that stake is worth $4.76 billion.
  • Andreessen Horowitz had three percent of the deal and made $205 million profit on their $50 million initial investment.
  1. AlanLindsay Monday, May 9, 2011

    Ummm… Microsoft already has a far larger footprint in the enterprise collaboration arena than Google or Skype – and even Cisco for that matter. I think you have it backwards. Microsoft wants to make the vast consumer VoIP network that Skype has interoperable with its own formidable enterprise network.

  2. Really need to change that title to “Why Microsoft is wasting $8 billion”.

    Honestly, some times this game of “tech keep away” means that smaller companies end up in the hands of giants which pretty much squander their talent and make the company disappear. I’d really like to see how spending $500 million on Danger turned out for Microsoft.

    It’s MUCH more likely they’d rather kill Skype than to see Google or Facebook get their hands on it, and that’s a real shame. Facebook would likely integrate it into their website even more (but I’d really hate that as I hate Facebook now). Google would FINALLY integrate a VoIP solution with Google Voice so telcos can shove it up their collective rear-ends. I’d just like these type of acquisitions to actually benefit the consumers for a change instead of wondering how they’ll gracefully degrade services for anything but their own integrated products.

    1. George Manuval Jeff Monday, May 9, 2011

      I agree with Jeff. Remember what happened to hotmail after MicroSoft acquisition? Where is hotmail now compared to gmail or yahoo mail?

      1. Actually, hotmail is far larger than both gmail and yahoo. it’s the largest email service in the world.

        Ofcourse, I like GMail better – but that doesn’t really count :D

      2. @George Manuval Hotmail friggen dwarfs Google! They are crap when you compare their footprints. Seriously you try to sound smart and throw a few facts and you couldn’t be more wrong. Oh wait you can be more wrong. You’re agreeing with @Jeff above you!

      3. Windows Live Hotmail is the world’s largest web-based email service with nearly 364 million users. Second and third are Yahoo! Mail (280 million) and Gmail (191 million). (wikipedia)

      4. I agree with Jeff, too.

      5. yet somehow i, personally, don’t even know one person of those 364 million hotmail users :)) how ironic :))

      6. Hotmail has got to be the most CRAPPY of the web based email services anywhere. Sometimes take email over an hour to arrive? Yeah, you queens keep touting how great hotmail is. I’ll stay with gmail…

    2. Do you own Microsoft stock? No? Shut up then.. No one cares what you think

      1. Dude, what’s the matter with you?

      2. No doubt a Skype employee … who will soon be looking for a job. No wonder you’re angry.

      3. Nor do we care what you think…so how’s about taking your own advice?

    3. The concern isn’t how Danger worked out for Microsoft — it is how it worked out for Danger’s users — very, very badly.

      As a heavy Skype user I am horrified by this news.

  3. George Manuval Monday, May 9, 2011

    I agree with Jeff. What happened to hotmail after MircroSoft acqisition? Now compare hotmail against gmail or yahoo mail today.

    1. Where is Hotmail today? Last statistics I read showed that Hotmail/Live has more active users than Gmail or Yahoo. Hotmail/Live also allows for bigger file attachments and large file storage on the “Skydrive”.

      As AlanLindsay sated, MS already has a great solution for corporate messaging/sharing with Communicator/Lync. Skype gets them into the consumer space and they will probably bridge the two.

      1. Define great. Microsoft has messaging solution with a wide adoption rate across the enterprise, but as an every day user of OCS I see absolutely nothing great about it. It is a pretty crappy IM client, really.

    2. Exactly Geroge. “hotmail” was dominating free email market at the time when usa.net was also favorite. See, hotmail is no more in the scene.

      You can imagine, with Microsoft what’s gonna happen for Skype.

      1. Hotmail is the largest e-mail provider in the world at this point.

        I don’t know what you guys are smoking, but please pass some of it over as I could use a break from reality for a while.

      2. Hotmail is the top e-mail service in the world currently.

        I don’t know what you guys are smoking, but could you please pass some down as I need a nice break from reality ;)

      3. Yeah… Hotmail is the most dominate email service in the world. Also, Hotmail provides their users with a SkyDrive which lets them store 20GBs of documents and pictures.

        Check your facts.

      4. Hotmail to gmail is pc to Mac is IE to Firefox…Does a greater number of users indicate a better product? No. That said, Skype trumps FaceTime in both numbers and product. Interested to see what comes of this acquisition.

  4. Pedro Henrique Monday, May 9, 2011

    Skype on WinXP? no more!

    1. Have you heard of something called as Windows 7? It is time to move on from Win XP. How long u r going to live in the past.

  5. Microsoft wants to hack into Macs via Skype.

    1. Hahaha!! :))

    2. Wow, for $8.5B, they could probably have hired elite crackers to tap into Steve Jobs’ cerebral cortex.

      All of which is saying this deal doesn’t look very good for the entities involved (see MSFT, NOK deal).

    3. Speedball*Zee Jon Friday, May 13, 2011

      haha, good one *wink*

  6. I’m glad Microsoft is buying it, because almost everything google buys falls into a black hole and nothing really happens, no growth nothing.

    1. Yeah, like Android

    2. Or Gizmo5 into Google Voice.

      1. Gizmo5 didn’t turn into Google Voice, although it did contribute to it. Google purchased GrandCentral and rebranded it. Interestingly, they actually reduced the scope, since GrandCentral supported Canada, while Google Voice is US-only. This is rather strange since there don’t seem to be any additional costs or complexity to serving Canada; indeed, Google Voice actually does support one single Canadian area code.

    3. > I’m sorry Google is not buying it, because almost everything microsoft buys falls into a black hole and nothing really happens, no growth nothing.

      fixed that for you, so it correlates with reality.

    4. Mostly Google does not buy, they create or greatly improve what they bought. When is the last time you can say that about Microsoft.

      I think Microsoft just rid themselves of some good cash they will need moving forward!

      Bye Skype, it was a nice run.

    5. Yeah, like Applied Semantics (AdSense), Youtube, Keyhole (Google Earth), or Android.

      Name a decent MS acquisition in the past decade (ie, since Ballmer has been running the show).

  7. LOL @ groupon for thinking that their site was worth more than 6 mill when google made an offer. There is no way that groupon is worth anything remotely close to skype!! GG skype, i hope microsoft does not ruin you!!!

    1. I hope the same :|

  8. Microsoft gets more or less nothing for this. By paying cash they avoid lowering their EPS, but they don’t raise it. They get an internet service that is not profitable and not demonstrably growing much anymore revenue-wise. And under Microsoft, it’s likely to grow less.

    eBay actually looks stupider than ever. Had they just held on a couple years ago, they’d be making the billions, instead of breaking even. Well done eBay. Or should you just rename yourselves to PayPal and be done with it?

    Facebook could’ve integrated Skype anytime. I don’t see how a piece of Microsoft is going to be easier to integrate than an independent Skype would’ve been. Honestly, if I’m Google, I’m thinking “embrace and extend” is the only way I’m winning in social and I start offering Google Voice integration at this point. I’m not beating Facebook at being Facebook, maybe I can continue to make tens of billions while they make billions.

    Microsoft gets nothing from this but some bloviating headlines for a few days (weeks?). This will yield nothing interesting.

    1. The synergies will allow it to become profitable. Out of $800MM+ in expenses. I’m sure they can squeeze out at least $7MM in synergies. Sharing servers, support staff, some development, etc.

    2. thoughtbasket Mark Tuesday, May 10, 2011

      If they do it right (I know, that’s a huge if), Microsoft can leverage Skype into a VOIP solution for the SMB market that could easily justify the purchase price. Plus some interesting consumer plays.

      http://thoughtbasket.com/2011/05/10/microsoft-skype-winning/

      1. Microsoft has Messenger and Link. Messenger needs a real VoIP service. Link has VoIP but it is enterprise only. I think the real key here is the access Skype gives Microsoft to a solid VoIP base that is already built up and available to the general public and business. They may do away with the Skype name and brand someday but they will certain use the underlying VoIP infrastructure/network to build their technologies and services on.

    3. thoughtbasket Mark Tuesday, May 10, 2011

      Integration into Microsoft’s SMB products could, if done right (a huge if) make the price worth it. Add to that the Facebook face on Google component, and it all makes sense.

      http://thoughtbasket.com/2011/05/10/microsoft-skype-winning/

  9. As the writer has identified, most of the staff are hired guns. So, if MS is not buying it for the staff (who’d already have jumped ship post eBay) what is it buying it for? The IP? $8 billion would hire 64,000 senior software engineers for a year. Or more realistically, a team of 10,000 for five years. They’d knock out a version superior to Skype (which has detiorated badly in the last two years) within 18 months. More Microsoft madness.

    1. No, no. Do you know how may registered skype users there are worldwide??? 660+ Million – last counted in 2009. Do you know how much money and how many years it took to get to this number? 4 years! This is what Microsoft is buying. A HUGE userbase – larger than anything else by far. 8 million is a dime in the bucket, and will be worth every penny.

      1. Michel de Ruiter jay Tuesday, May 10, 2011

        8 BILLION, not million.

      2. Perhaps, but of those users, how many constantly use it?

    2. “What is it buying it for?” .. the 100M+ active monthly Skype users perhaps … by anyone’s terms, that’s a large bunch of people …

      1. Do the math. $8Bn divided by 8M paying skype users, that’s $1000 per paying user. If these paying users are anything like me, they make $10 last about 1 year (I use it mainly to call 800 numbers in the US for free). $10 / year -> 100 years to get your money back.

        Good investment? What do you think?

      2. 700 million counted in 2009. Its probably 1400 million users by now. Do the maths- that about 6 dollars per user. If they are anything like me, ($100 per year) it is easy to see that they will soon make their money back. Its a bargain!!

        More than that, this also represents:-
        * An opportunity to squeeze out other operating systems (dont even imagine they are going to care for the Linux client).
        * An opportunity to know who phones who, and when.
        * An application for the xBox 360, another reason to put people on kinect connected to the internet, with microsoft (and the US Govt) in complete control of the hypervisor and the installed software, so they can look and listen into your living room.

  10. Roberto Valerio Monday, May 9, 2011

    I hope Microsofts lawyers are smarter than the ones from eBay that time and they buy all of Skype’s IP rights on their p2p technology.And this could make things difficult for others offering p2p communication services as Microsoft is well known to battle on legal grounds as well..

    1. Hi Roberto,

      Joltid transaction a hangman’s noose around Skype’s neck?

      On November 6, 2009 Skype ballyhooed:

      “eBay Inc. (NASDAQ: EBAY) today announced that the investor group led by Silver Lake, which had previously entered into a definitive agreement to acquire a majority stake in Skype from the company, has reached a settlement agreement with Joltid Limited and Joost N.V. that gives Skype ownership over all software previously licensed from Joltid and ends all litigation currently pending against the investor group and eBay at the closing of the acquisition.”

      However revealingly, on August 9, 2010 Skype filed a Form S-1 with the U.S. Securities and Exchange Commission (page 195) which described in more detail the above “settlement agreement” with Joltid (which in my personal opinion is now a hangman’s noose around Skype’s neck):

      The Joltid Transaction

      On November 1, 2009, prior to the completion of the Skype Acquisition, we entered into a transaction with Joltid Limited (“Joltid”) which comprised three components: we and eBay reached a settlement of outstanding litigation with Joltid, we acquired intellectual property rights to the “Global Index” technology from Joltid and Joltid made an $80 million equity investment in us. We collectively refer to these matters as the “Joltid Transaction.” The Joltid Transaction centered on Skype’s acquisition of intellectual property rights in the Global Index software technology that we had originally licensed from Joltid in connection with the founding of Skype. Global Index is software that, among other functionality, facilitates communication in a peer-to-peer network of Skype users. We describe the main terms of the Joltid Transaction below:

      Settlement and non-assertion. Skype and Joltid and all other related parties settled all outstanding litigation and claims between them, and each party agreed not to assert any claims against the other party and its customers and distributors under any patents with an application date prior to the fifth anniversary of the Skype Acquisition, which closed on November 19, 2009.

      Equity Consideration. Joltid received an approximate 10% share in the share capital of the Company (valued at the time at $224.0 million) and a cash payment of $85.0 million. In addition, Joltid received warrants to purchase an additional 98,680 Skype Global shares, equivalent to a 1% equity stake at such time, exercisable until the earlier of November 19, 2019 or the closing of a reorganization event, as defined in the warrant agreement. The warrant has since been transferred to SEP Investments Pty Limited, an entity unaffiliated with Joltid; for more information on the terms of the warrant, see “Capitalization-Warrants.”

      Joltid Investment.Joltid also made an investment in us by investing $80.0 million in cash for an additional approximate 3.4% of our ordinary shares.

      Acquisition of Intellectual Property Rights. We acquired from Joltid (a) ownership of Joltid’s intellectual property rights in the Global Index software provided to Skype, subject to the license-back to Joltid of certain rights described in the next bullet point, and (b) co-ownership with Joltid of patents covering database systems that are distributed across multiple computers for enhanced data storage and retrieval, which is a technology that we use in connection with the peer-to-peer architecture enabled by our software. We have the exclusive right to use and enforce these patents in the areas of (i) telephony and/or video communications between end users, and (ii) file transfer functionality, instant messaging and e-mail, when used as an ancillary service or application to telephony and/or video communications between end users, in each case, regardless of the form or method of communication or access thereto. We refer to these areas as the “Skype Exclusive Field.”

      License-back to Joltid. We granted to Joltid a non-exclusive, perpetual, royalty-free license to use, distribute, sublicense and otherwise exploit, solely outside the Skype Exclusive Field, the Global Index software that we acquired from Joltid. We retained our rights to use the Global Index software ourselves in any field of use, including outside of the Skype Exclusive Field. In addition, we remain free to license others to use the Global Index software on or in connection with (a) our platform, or publicly available products and services, or (b) the content, products or services of any third party that are enabled by or available through our platform and client or publicly available products and services. However, apart from these uses, we agreed not to license others to use the Global Index software outside of the Skype Exclusive Field.

      Other commitments. In addition, we made payments or commitments to pay or invest an additional $32.3 million to or in affiliated parties of Joltid and to reimburse $20.0 million to cover expenses incurred by Joltid. The aggregate settlement of $378.4 million resulted in a net charge of $343.8 million recorded in the Predecessor statement of operations for 2009 and reflects the estimated fair value of the equity relinquished in the settlement, less the estimated fair value of intellectual property received from Joltid.

      In connection with the Joltid Transaction, we also entered into a number of related agreements:

      Agreements with Rdio, Inc. We invested $6.0 million in Rdio, Inc a new social music service founded by Janus Friis with Niklas Zennstrom, Skype’s founders, who are indirect beneficial owners, among others, of Rdio, Inc., pursuant to a convertible note instrument. We have agreed that for a period extending until November 19, 2011, we will not provide, other than with Rdio, or engage others to provide, services for the broadcast of professionally-produced music that is accessible by computer, mobile device, television set-top box, or other device that is capable of accessing the Internet. These restrictions are subject to certain exceptions that allow us to engage in our communications business in the ordinary course. We are free to publish a generally available application programming interface enabling third parties to provide, embed or link our products, services, software clients, or platform through third party websites, software clients, product or services. We are also able to publish a generally available application programming interface enabling third parties to provide, embed, link or otherwise expose third party software, clients, products or services on our products, services, software clients, website or platform.

      Agreement with Baaima N.V. (formerly Joost N.V.) We entered into an agreement with Joltid and Joost N.V., an affiliate of Joltid, which is now called Baaima, N.V. Skype’s founders, Janus Friis and Niklas Zennstrom, are indirect beneficial owners, among others, of part of Baaima. We agreed that, until May 19, 2012, we would use commercially reasonable efforts to prominently promote a new video service under development by Baaima, on our website, in marketing e-mails and through in-client dynamic content, provided the video service was of sufficient quality. In return, we are entitled to receive 50% of the adjusted gross margin resulting from the revenue generated by Baaima from the video service on our platform. We have agreed that, until May 19, 2012, we will not provide, or engage others to provide, services for the broadcast of professionally-produced cable television, network television, feature films and similar content, in each case, that is accessible by computer, mobile device, television set-top box or other device that is capable of accessing the Internet. These restrictions are subject to certain exceptions to enable us to engage in our voice communications business in the ordinary course. In particular, we are free to publish a generally available application programming interface enabling third parties to provide, embed or link our products, services, software clients, or platform through third party websites, software clients, product or services. We are also free to publish a generally available application programming interface enabling third parties to provide, embed, link or otherwise expose third party software, clients, products or services on our products, services, software clients, website or platform.

      Euroskoon Patent License and Purchase Agreement. We entered into an agreement with Euroskoon, LLC pursuant to which Euroskoon granted us a non-exclusive, irrevocable license to a number of patents. These patents cover programming for peer-to-peer technology. Under the terms of the agreement, we may sublicense these patents to (a) Joltid, (b) end users and third parties in connection with the software based products and services that we and, to the extent they interface with our products and services, our licensees make commercially available and (c) our affiliates. In return, we agreed to make an initial payment of $2.5 million and an annual royalty payment of $1.5 million. Between September 1, 2010 and September 30, 2010, we have the option to purchase the licensed patents for $9.0 million. If we do not exercise this option, Euroskoon has the option between April 1, 2011 and April 30, 2011 to obligate us to purchase the licensed patents for $7.5 million. In connection with our agreement with Euroskoon, we entered into a sublicense agreement with Joltid whereby we granted to Joltid a non-exclusive, perpetual, royalty-free sublicense to the Euroskoon patents described above. Under the terms of the sublicense agreement, Joltid may sublicense these patents to (a) end users and (b) third parties to use, distribute, sublicense and otherwise exploit, in both cases only in connection with the software-based products and services that Joltid and, to the extent they interface with Joltid’s products and services, Joltid’s licensees make commercially available for use by or on behalf of Joltid.

      Investment in Atomico. We also agreed to invest $10.0 million in Atomico Ventures II, LLP (which we refer to as Atomico), an Internet, technology and telecommunication venture capital fund. Skype’s founder, Niklas Zennstrom, is a general partner of Atomico, and with Janus Friis, among the most substantial investors in Atomico.

      Sincerely,

      Brad Reese

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