Why Microsoft Is Buying Skype for $8.5 Billion

206 Comments

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 (s nws) 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 (s 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 (s goog) were said to be earlier dance partners for Skype, and Microsoft (s msft) 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 (s csco) 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 (s nok). 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.

206 Comments

Julius

Well, goodbye to Skype support on anything but Windows and likely goodbye to the level of encryption Skype currently has for voice and instant messages. M$ will probably also introduce a slew of new electronic cavity searches into Skype (kinda like the Genuine Advantage thing for Windows only worse) to violate your privacy all in the name of “protecting the children” or some crap like that.

manyuabhi

do you think microsoft can use skype and its enterprise influence to convince mobile network companies to offer free calls to people using skype on wp7. Now that they are under no restriction I cannot see any reason why such thing can be ruled out?

Also, can microsoft use skype integration into facebook to increase its share in facebook overall. they have a very minor stake and a very large presence in facebook, besides mark favours microsoft over google any day

Laurent

As I understand it, Skype revenues for 2010 are $860m for a Loss of $7m.
There are 800ish employees at Skype which is the majority of their Fixed cost.
It tends to prove that variable cost are pretty high (In country call termination fees) and that Skype advertised prices are too low to make it a profitable business.

The $5 billion valuation Microsoft put on Skype (from 3ish to 8.5) is very unlikely to be reflecting future expected profits. It seems Skype never made a profit and its likely to keep it that way if they dont raise their prices.

It is obviously a brand name with some key technology IPR (I am assuming that) and lots of loyal users.

smash

dude microsoft already has windows live messenger which has a far bigger user base than skype while offering the same features plus a whole bunch of other features skype does not offer. you havent mentioned anything about messenger and how the acquisition of skype will affect that. what about that?

karina

I just noticed that the prices were raised in skype, now I see why, the rates are more expensive now.. I use skype because I live far from my family so I call all the time to the other side of the world, now I will start searching something else, another option.

alan

Massive shame will def not be supporting Microsoft so sadly Skype will have to go.

Nik

“If (facebook) 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”

That’s a ridiculous statement. Building a peer to peer video and chat service is trivial. For connectivity to the legacy phone system, there are many VOIP companies out there that do just that. Skype’s main value is its popularity, and that’s the one thing that facebook really doesn’t need.

Microsoft is throwing its money in the wind… I’ve been looking for a Skype-like service because the Skype client is getting worse with each version. I have no investment in my Skype contacts list; I imagine many of Skype’s customers are in the same situation.

The big winners are the Skype shareholders.

Annkay

So has Skype failed to be loyal to us, its user’s

hdw

@George
Crappy? I beg to differ; It won the PC world editor’s choice award for the best web based mail last year.

Jeff

Great, another product the Microsoft got their paws on and will more than likely drive into the ground because of their sweaty bald ape of a CEO has absolutely NO VISION as to where to take Skype..It was nice while it lasted…How Ballmer stays in control is beyond me….

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