News Flash: Microsoft to Acquire Skype for $8.5 Billion


Confirming rumors that began blossoming late last week, Microsoft this morning announced that it will purchase Internet communications firm Skype for $8.5 billion. The software giant lauded the deal's potential to increase the accessibility of real-time video and voice communications for both consumers and enterprises, but let's be clear: This deal is about one thing and one thing only, and that is to keep Skype out of the hands of competitors such as Facebook and Google.

"Skype is a phenomenal service that is loved by millions of people around the world," Microsoft CEO Steve Ballmer said. "Together we will create the future of real-time communications so people can easily stay connected to family, friends, clients, and colleagues anywhere in the world."

Put another way, Skype is one of many popular Internet services that has never made a profit of any kind. The firm was first sold to eBay in 2005 for $2.6 billion and proved so financially disastrous that eBay took a $1.4 billion write-down on its investment in order to jettison Skype less than two years later. (On its own, Skype posted a net loss of $7 million in 2010.) Since the eBay disaster, the investors who own Skype have tried different corporate link-ups—the firm was apparently seen as the tech industry version of a flipper house to these guys—most notably with Facebook.

These talks went nowhere for years but apparently heated up again recently when Google showed interest in stealing Skype away from an unsure Facebook. That's when Microsoft stepped in at the last minute to outbid the other companies and launch its biggest-ever acquisition. And it apparently did so only to keep Facebook and Google from gaining on it in the emerging market for Internet-based communications, since Microsoft already has compelling, mature, and successful communications products aimed at both consumers (Windows Live Messenger) and businesses (Lync).

Skype is, of course, popular. According to the company, it has more than 23 million users connected to the service during peak times and generated more than 95 billion minutes of voice and video calls during the first half of 2010. But I would point out that Microsoft's consumer-oriented Windows Live Messenger solution had more than 300 million active users at the same point in 2010, during which they no doubt engaged in even higher levels of voice and video chat than did Skype users.

The trouble for Skype—and now for Microsoft—is that customers have proven unwilling to pay for the service. Yes, millions and millions of people use Skype, but the company has always struggled to transition them from free to paid. (According to Skype, 8.1 million of its 124 million users pay in some way to make phone calls over the Internet using the service.)

We might learn more at a scheduled Tuesday press conference, but my guess is that Microsoft will broadly integrate Skype technologies into various consumer and business products, including the obvious choices noted above but also Windows Phone, Xbox 360, and the company's various online products and services. The big question, I suppose, is how much of a premium Skype commanded simply because key Microsoft competitors were interested. 

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