Microsoft Snaps Up Skype in $8 Billion Deal

— May 10, 2011

Microsoft Corp. and Skype Global S.à r.l announced that they have entered into a definitive agreement under which Microsoft will acquire Skype, an Internet communications company, for $8.5 billion in cash from the investor group led by Silver Lake. The agreement has been approved by the boards of directors of both Microsoft and Skype.

The acquisition will increase the accessibility of real-time video and voice communications, bringing benefits to both consumers and enterprise users and generating significant new business and revenue opportunities. The combination will extend Skype’s world-class brand and the reach of its networked platform, while enhancing Microsoft’s existing portfolio of real-time communications products and services.
 
With 170 million connected users and over 207 billion minutes of voice and video conversations in 2010, Skype has been a pioneer in creating rich, meaningful connections among friends, families, and business colleagues globally. Microsoft has a long-standing focus and investment in real-time communications across its various platforms, including Lync (which saw 30% revenue growth in Q3), Outlook, Messenger, Hotmail, and Xbox LIVE.
 
Skype will support Microsoft devices such as Xbox and Kinect, Windows Phone, and a wide array of Windows devices, and Microsoft will connect Skype users with Lync, Outlook, Xbox Live, and other communities. Microsoft will continue to invest in and support Skype clients on non-Microsoft platforms.
 
“Skype is a phenomenal service that is loved by millions of people around the world,” says Microsoft CEO Steve Ballmer. “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.”
 
Skype will become a new business division within Microsoft, and Skype CEO Tony Bates will assume the title of president of the Microsoft Skype Division, reporting directly to Ballmer.
 
“Microsoft and Skype share the vision of bringing software innovation and products to our customers,” said Tony 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 said.
 
“Tony 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 said.
 
Founded in 2003, Skype was acquired by eBay in September 2005, and then acquired by an investment group led by Silver Lake in November 2009. Skype has made impressive progress over the past 18 months under Silver Lake’s leadership, increasing monthly calling minutes by 150 percent, developing new revenue streams and strategic partnerships, acquiring the intellectual property powering its peer-to-peer network, and recruiting an outstanding senior management team.
 
ABI Research weighs in
Product-wise, this deal could be a nice fit. Microsoft has several areas in both consumer and enterprise sectors that will benefit from a top-notch VoIP, video, and sharing solution. It’s possible that not all of the synergies may come to fruition, but even the promise of them goes a long way toward explaining why the price may not seem that right. Skype may strengthen Microsoft’s Lync, which ties together email, instant messaging, and voice communications into a single offering. 
 
Whatever happens, Skype is still multiple times a better fit for Microsoft than it was for eBay, whose own purchase in 2005 was based on the assumption that it would boost its auction business. Who wouldn't enjoy calling to strangers, eh?
 
 A preinstalled, well integrated Skype client could be a potent differentiator for Windows Phone devices vs. Android, iPhone and BlackBerry smartphones. Thus far there aren't many, at least in the positive sense of the word.
 
As a third-party app, Skype has worked well on Windows Phone's rivals. So one interesting issue will be to see whether Microsoft will make it exclusive for WP handsets. That would probably unnecessarily hinder Skype's push into the mobile domain, and erode its brand and user base, so a likelier option will be that Nokia and other manufacturers using WP will instead gain some premium features. Video calling might well be one.
 
Telcos won't be happy to see another over-the-top front opening, but they have surely seen it coming. Just witness Telefonica's (Jajah) and Deutsche Telekom's (Bobsled) moves in this space - they're trying hard to make VoIP work for them rather than only against them.

But having said that, if they wished that the Nokisoft tie-up would result in a leading yet still operator-friendlier ecosystem they will be disappointed.

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