Microsoft puts $8.5bn on Skype to keep Google at bay

MicroSkype VoIP services coming to a range of Redmond wares...

Microsoft's acquisition of Skype will give it a "compelling set of consumer services", say analystsPhoto: Jon Ovington

Microsoft is to buy VoIP company Skype in a deal worth $8.5bn in cash, the two companies have announced.

The pair said they have entered into "a definitive agreement", under which Microsoft will acquire the VoIP telephony company from its investor group owners, led by Silver Lake.

The acquisition will increase the accessibility of real-time video and voice comms to enterprise users and consumers, the companies said, adding that it will extend Skype's brand and the reach of its platform, while enhancing Microsoft's existing portfolio of real-time comms products and services, such as Windows Live Messenger and Lync.

Skype will support Microsoft's products including Xbox and Kinect, and Windows Phone, according to the pair, and Microsoft will connect Skype users with its Lync, Outlook, Xbox Live and other communities. Redmond will continue to "invest in and support" Skype clients on non-Microsoft platforms, they added.

It's not the first time Skype has changed hands in exchange for a large sum of money. In 2005, online auction service eBay shelled out $2.6bn in cash and stock for the VoIP company. eBay had hoped the acquisition would enable it to offer customers the ability to discuss their transactions in real time but the purchase never lived up to this promise and four years later eBay sold most of Skype in a deal worth $2bn to its current investor group.

Skype, which has some 170 million connected users, will become a new business division within Microsoft and its CEO, Tony Bates, will become president of the Microsoft Skype division, reporting directly to Microsoft CEO Steve Ballmer.

"Skype is a phenomenal service that is loved by millions of people around the world," said Ballmer in a statement. "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."

"Microsoft and Skype share the vision of bringing software innovation and products to our customers," added Skype's Bates. "Together, we will be able to accelerate Skype's plans to extend our global community and introduce new ways for everyone to communicate and collaborate."

"Bates has a great track record as a leader and will strengthen the Microsoft management team. I'm looking forward to Skype's talented global workforce bringing its insights, ideas and experience to Microsoft," Ballmer added.

Analysts described the price tag for Skype as high, speculating that it was inflated by having more than one potential suitor circling it. In recent weeks, both Facebook and Google have been linked with Skype as potential partners or purchasers.

Gartner analyst Leif-Olof Wallin said fear of Skype falling into a rival's lap could have forced Microsoft's hand. "They didn't want this asset, this brand name to go to somebody like Google," he told silicon.com. "The price for this acquisition seems to indicate there might have been some kind of bidding exercise to drive up the price."

Nevertheless, he added, the deal is good for Microsoft. "It's a high price, absolutely. But they're definitely getting value for it. They're getting the most respected consumer brand for internet voice and video, with a strong, loyal, installed base.

Wallin envisages Skype being integrated...

...into a variety of Microsoft products - including Windows Live, Xbox and its Windows Phone platform - with a focus on consumer offerings first. "Over time it might creep into the Office products so you can Skype directly from inside the Office products. But the big value I see is with the consumer products and in enlarging the network of consumer users," he added.

Microsoft CEO Steve Ballmer and Skype CEO Tony Bates shake handsPhoto: Microsoft

"I see this as yet another proof point in the über-strategy that Microsoft seems to have to become more of a consumer company," Wallin told silicon.com. "When I take a step back and I look at Xbox and Bing for search and maps and what they're doing around Live and the acquisition of advertising company [aQuantive] it looks like a very logical step in their transformation to become more consumer-centric."

"The Windows Phone is definitely another testament of consumer first and business second," he added.

Giles Cottle, senior analyst at Informa Telecoms & Media, described the acquisition as "a strategic purchase" - and one that makes more sense for a company such as Microsoft than for its previous owner, eBay.

"It fits in well with a lot of different products Microsoft has," he told silicon.com. "If you're just looking at the balance sheet, $8.5bn doesn't make sense as a purchase. Skype is loss-making or it's only just making a profit - so it doesn't make sense in that respect. But it's about more than that for Microsoft.

He pointed out that critics say Microsoft already has a voice product for Windows Live Messenger. "But it's pretty basic compared with Skype," Cottle added. "Skype could certainly augment that. So if you stack it all up, they have pretty much the most widely used instant-messaging platform with Messenger and the most widely used VoIP protocol, Skype, so that's a pretty compelling set of consumer services."

"This is a piece of the bigger consumer puzzle that sits very nicely [for Microsoft]," Gartner's Wallin added. "It has some added value to products like Xbox that can create a stickier experience, so it's adding value to a lot of the other product lines. It's hard to quantify exactly how much but it definitely adds value."

The challenge of integrating such a large company into the even larger behemoth that is Microsoft was also flagged up by the analysts. Wallin described the integration challenge as the "biggest risk".

"It's going to be extremely interesting to see how successful Microsoft are at keeping this at arm's length, not invaded too much with the big company processes and policies," he told silicon.com.

"The press release talks about keeping it as a separate division but once you're sucked into corporate America, things tend to get a little bit different - even if you're just a division of it. That's basically the biggest risk I see - and that is innovation, creativity getting hampered by the Microsoft policy and big corporate mentality."

Informa's Cottle said: "Microsoft is famous for being a bureaucratic, many-layered company so there might be an issue."

The Microsoft-Skype acquisition is subject to regulatory approvals and other customary closing conditions. The pair said they hope to obtain all required regulatory clearances during the course of 2011.