Microsoft Buys Skype For $8.5 Billion, Now What?

Over the past week there were rumors that Google and Facebook were both interested in buying Skype. Then Om Malik reported that Microsoft was really the one interested and the Wall Street Journal confirmed yesterday that Microsoft would be paying a remarkable $8.5 billion for the company, making it Microsoft’s largest acquisition to date:

At a value close to $8 billion, the Skype deal would rank as the biggest acquisition in the 36-year history of Microsoft, a company that traditionally has shied away from large deals. In 2007, Microsoft paid approximately $6 billion to acquire online advertising firm aQuantive Inc. Many current and former Microsoft executives believe Microsoft significantly overpaid for that deal. But they are also relieved that Microsoft gave up on an unsolicited $48 billion offer for Yahoo Inc. nearly three years ago. Yahoo is valued at half that sum today.

eBay Double Dips

In 2005 eBay initially bought Skype for $2.6 billion in cash and stock but was never able to fully exploit or leverage Skype across its marketplaces. In 2009 eBay sold most of Skype to investors, while retaining a substantial minority stake that winds up making eBay as much in cash (roughly $2.5 billion) as what it originally paid for Skype.

Amazingly, as the WSJ points out, the transaction would make Redmond Skype’s fourth owner in eight years. Apparently, according to Malik, Skype’s investors and owners were pushing for a sale after the company’s widely anticipated IPO was delayed.

Last night the snark was out for the deal with many people dismissing Microsoft as overpaying and expressing skepticism that the company would be able to leverage Skype in any meaningful way.

Some Skype Numbers

Before a discussion of what Microsoft might be expected to do with Skype, a quick look at some numbers and financial data. The company had well over 600 million registered users in 2010 but “only” 145 milllion active monthly users and 8.8 paying users (mostly SkypeOut), on a global basis. Skype made roughly $900 million in revenue in 2010.

Google is one of the primary competitors identified in Skype’s IPO filing. And, as others have pointed out, the new “face” of IP Telephony is Apple (FaceTime), Google (Voice) and now Microsoft-Skype.

How Microsoft Could Deploy Skype

How might Microsoft try and use Skype to its competitive advantage?

• Microsoft will integrate Skype’s capabilities into its enterprise products: voice, video, etc.
• Microsoft will bundle Skype into Xbox/Kinect for video calling
• Microsoft will integrate Skype into Windows Phones for video chat and alternative voice calling over high-speed networks
• There’s also speculation that Facebook will get privileged access to Skype courtesy of Microsoft
• There will probably be some interesting integrations with Bing, especially in mobile — and perhaps IE as well

Given the above it’s not irrational for Microsoft to make this acquisition. The price may be inflated but there are solid consumer and enterprise use cases that come immediately to mind. However whether Skype can boost Windows Phones’ popularity and help make Windows Phones more competitive with the iPhone and Android is another question.

It’s also quite possible that Skype revenue growth could entirely offset the losses that Microsoft continues to rack up in online services — to the tune of nearly $2 billion annually now.

Like any major acquisition there will be organizational and execution challenges ahead but there is some very interesting potential across several of Microsoft’s product lines. The opportunity just comes at a very high cost.

Postscript: Microsoft has now officially confirmed the acquisition and the $8.5 billion price tag:

Microsoft Corp. and Skype Global S.à r.l today announced that they have entered into a definitive agreement under which Microsoft will acquire Skype, the leading 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 . . .

Skype will support Microsoft devices like 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 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.