Microsoft's Biggest Buy: Skype for $8.5 Billion

Microsoft is betting the billions it's spending to get Skype will translate into billions of users down the line.

By Stuart J. Johnston | Posted May 10, 2011
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Microsoft announced Tuesday that it is buying Internet communications provider Skype for some $8.5 billion in cash -- the largest acquisition in the company's history.

The two companies said the deal was the result of an unsolicited offer from Microsoft (NASDAQ: MSFT) and, if it passes regulatory hurdles, will make Skype a division of the software giant. The companies hope to finalize the purchase during the current calendar year.

Microsoft sees the acquisition as key to its vision of a connected world which will have, the two companies hope, billions of users over time.

"We want to stitch together the world," Microsoft CEO Steve Ballmer said during a webcast press conference announcing the deal.

Microsoft is acquiring Skype from an investment group headed by Silver Lake, which purchased the company from eBay in 2009. Skype was founded in 2003 and acquired by eBay in 2005.

"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 companies said in a joint statement.

Skype currently has 170 million connected users who consumed some 207 billion minutes of voice and video conversations in 2010, the companies said.

While Ballmer and Skype CEO Tony Bates see a huge consumer opportunity, particularly around advertising, in the hook up -- they also said that they see immense synergies around business applications, particularly Microsoft's recently launched Lync unified communications server.

"This is a big day for Microsoft and the promise of universal communications [because] it's core to our mission and core to our technologies," Ballmer said.

Of course, the enterprise aspects do not undercut what Ballmer sees as other key synergies with Microsoft's Xbox and Xbox Live gaming offerings, as well as the Kinect game sensor, along with Outook, Hotmail, and Live Messenger.

Key to it all will be video.

"Video is going to dominate [Internet] traffic in coming years ... [in fact] more than 40 percent of [Skype's] traffic is already video," Ballmer added.

Ballmer also tried to allay worries from critics and competitors regarding what they perceive as Microsoft's vaunted "Windows only" bent towards other technologies.

"We will continue to support non-Microsoft platforms [like iOS and Google] ... and we have a track record of doing this, such as Office on the Mac," Ballmer added.

Microsoft's previous largest investment was the purchase of online advertising firm aQuantive in 2007 for roughly $6 billion.

The company also made an unsolicited bid for then-search competitor Yahoo -- now search partner -- for $44.6 billion in 2008. That hostile takeover attempt ultimately was scotched by Yahoo's board, and Microsoft later negotiated a deal whereby Yahoo's sites are now underpinned by Microsoft's Bing search infrastructure.

Bates will become president of Microsoft's new Skype division and report directly to Ballmer.

Stuart J. Johnston is a contributing editor at InternetNews.com, the news service of Internet.com, the network for technology professionals. Follow him on Twitter @stuartj1000.

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