Microsoft To Buy Skype For $8.5 Billion

Microsoft is acquiring Skype for $8.5 billion in cash, a deal Microsoft CEO Steve Ballmer said will enrich Internet voice and video communications for both consumers and business users.

"Anytime, around the planet, people talk about communications, they talk about Skype," Ballmer said in a news conference Tuesday, noting that Skype has "become a verb" that means to place a voice or video call over the Internet.

Microsoft pledged to continue to invest in and support Skype clients on non-Microsoft platforms, but emphasized the value of integrations with Microsoft Lync unified communications, Outlook, and consumer products like Xbox, Kinect, Xbox Live, and other online communities. Ballmer assured those who might be mistrustful of Microsoft operating system bias that Skype interoperability is in his company's best interest.

"We obviously love Windows and love Windows Phone, love the Xbox, and we're going to do a lot of work together. But fundamental to the value proposition of communication is being able to reach everybody, whether they happen to be on your device or not," Ballmer said. "The products Skype users know and love today will simply continue to grow and be enhanced."

Microsoft also sees great potential to create new experiences on phones and in living rooms through its consumer initiatives, while strengthening professional communications through integration with Lync and Outlook, Ballmer said. Because people work from home and conduct parts of their personal lives from work, the ability to bridge between commercial and consumer communications also is important, he said. "It enables communication in all of people's lives."

Skype will become a new business division within Microsoft, with Skype CEO Tony Bates as its president, reporting directly to Ballmer. Microsoft said it hoped to obtain all regulatory approvals and close the acquisition by the end of the year.

Rumors of a major acquisition or partnership involving Skype had been circulating for the past week, originally revolving around talks with Google and Facebook, which Reuters reported to be the leading suitors. GigaOm's Om Malik reported Sunday that Microsoft had entered the bidding. But Ballmer said the purchase price was set in mid-April, even though the agreement was only signed Monday night.

Asked at the press conference whether Skype had in fact been courted by other companies, Bates sidestepped the question, referring only to the unsolicited offer from Microsoft that his board ultimately accepted.

Malik, who had previously advocated for a Facebook/Skype combination, blogged that Facebook gets the best of both worlds by having Skype acquired by Microsoft, which is an investor in and partner of Facebook, rather than having to fund an acquisition itself. The deal also keeps Skype out of the hands of Google, a more contentious competitor.

Faisal Hoque, founder of Business Technology Management and author of the forthcoming book The Power of Convergence, said that despite having its own Internet voice and video products, such as those built into Lync, Microsoft benefits from acquiring the Skype brand and technology. "It's the same reason why you use Google versus Bing--it's a much more popular environment," he said. "I think people are more inclined to have both internally and externally focused communications over Skype." 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.

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. Microsoft said it was impressed by Skype's progress in the last 18 months, which included increasing monthly calling minutes by 150% and developing new revenue streams and strategic partnerships. Video traffic has been particularly growing and now represents 40% of all Skype calls, according to Microsoft.

Ballmer and Bates particularly emphasized the potential of expanding the use of Skype on mobile phones and television sets. Bates said the core asset Skype brings to Microsoft "is being able to create a very engaged user base."

How will a Microsoft acquisition affect those Skype customers? Gartner analyst Bern Elliott said he expects Microsoft will want to retain them. "I don't want to say it's positive, but I don't think it's negative," he said.

Microsoft sees "multiple synergy areas" in the acquisition, including improved voice and video for users of the Microsoft Lync unified communications platform, Elliott said. Through integration with Skype, Microsoft will be able to better serve voice and video connections between enterprises and business partners that are not necessarily on the same communications platform, he said. Skype can also be more tightly integrated with enterprise directory services, he said.

Microsoft also will get the benefit of the partnerships Skype has established with enterprise players in Internet call trunking, Elliott said.

"If this is going to good, and the acquisition is going to be work, then I think the benefits will be more to Microsoft than to Skype," said Steve Hilton, head of enterprise research at Analysys Mason. "I don't think Microsoft has done a great job over the years with voice communication. They've had a bunch of fits and starts." Adding Skype ought to be beneficial for Microsoft Lync users and for the broader Microsoft communications strategy.

Meanwhile, Skype will benefit from a larger developer community and better integration with enterprise technologies, Hilton said. Even though Skype has tried to break into the enterprise market, it does not understand enterprise needs, he said. "Skype may have something to learn from Microsoft on that front."