Microsoft Buys Skype for $8.5bn

Sooner or later, Skype is bound to redefine the whole concept of telephone service …

The once-dominant software company has agreed to pay more than three times Skype’s valuation just 18 months ago

Microsoft’s acquisition of Skype, its biggest ever, is an $8.5bn (£5bn) gamble to try to catch up with Apple and Google.

The software company, once so dominant, has been left behind by its more fleet-footed competitors as the pace of technological change – especially in mobile telecoms – has outstripped its ability to innovate.

Analysts saw the deal, which edges out the $6bn it paid for online advertising company aQuantive in 2007, as a sign of Microsoft’s ambition to become a bigger force in the consumer and smartphone market. They also interpreted it as a sign that Microsoft intends to broaden its appeal to businesses by using Skype to offer cheaper services than existing phone companies.

Skype, which has 663 million people across the world registered to use its voice-over-internet-protocol (VoIP) communications, is available on personal computers and mobile phones – though not yet on Microsoft’s new Windows Phone operating system. That is expected to be remedied soon.

The deal will see it established as a separate business inside Microsoft, dubbed Microsoft Skype. Tony Bates, the Skype chief executive, will become president of Microsoft Skype and report directly to Microsoft’s chief executive, Steve Ballmer.

Ballmer, who tried to buy Yahoo three years ago for $45bn, spelled out his vision: “Skype is a phenomenal service that is loved by millions of people around the world. 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.”

Others were less enthusiastic and highlighted the difficulty Microsoft faces in monetising Skype, whose telephony service is free between users. “It doesn’t make sense at all as a financial investment,” said Forrester Research analyst Andrew Bartels. “There’s no way Microsoft is going to generate enough revenue and profit from Skype to compensate.”

Another, Shanghai-based Michael Clendenin, managing director of the consulting firm RedTech, said: “If you consider Skype was just valued at about $2.5bn 18 months ago when a chunk was sold off, then $8.5bn seems generous and means Microsoft has a high wall to climb to prove to investors that Skype is a necessary linchpin for the company’s online and mobile strategy.”

But despite Skype never having turned a profit, analysts were mostly enthusiastic. “For me, this actually looks like a near-perfect fit for Skype,” said Dean Bubley of Disruptive Analysis. “A substantial part of Skype’s current user base is from PCs. Although mobile devices get all the glory at the moment, Skype epitomises what’s best about desktop VoIP.”

Next frontier

Horace Dediu, a former Nokia business development executive who now runs the Asymco consultancy, said: “I see this as a pattern of consolidation of voice business models. I don’t think it’s coincidental that Apple, Microsoft and Google are all trying to secure assets, intellectual property, experts and businesses in VoIP and in voice control.

“Voice is the next frontier both in IP-based communications and in user interfaces. Skype happens to have a very large pool of users who can be engaged with multiple services besides voice. These additional services can be the root of new business models. Microsoft has plenty of degrees of freedom to experiment with: Windows Live, [search engine] Bing, Windows Phone etc.”

Google and Facebook were last week rumoured to be in the running for Skype but Microsoft emerged as prime bidder.

The company already has three other VoIP offerings, via MSN Messenger, Xbox Live and Lync, used in its Office division. It is not clear how usernames will be integrated among them.

Ballmer confirmed that Skype will continue to be developed for non-Windows platforms.

Skype’s principal source of revenue is international calls made by people unwilling to pay standard voice rates, which can be far higher. The analysis company Telegeography noted that Skype’s international traffic volume grew by 39bn minutes in 2010 – twice the amount of all phone companies in the world combined.

“Demand for international communications is probably limitless,” said Stephen Beckert, a Telegeography analyst. “Skype has taught millions of callers they no longer need a telco to talk to friends, family and business partners abroad.”

Incorporating Skype into Windows Phone – which will be used by the Finnish phone-maker Nokia in forthcoming smartphones – could also have advantages in countries such as Latin America, where people find voice calls too expensive and prefer to use data services, said Stela Bokun of Pyramid Research. “At the end of 2011, 40% of handset users in Latin America and Mexico will be using handsets that are 3G+ enabled,” she told the Guardian.

That could offer a route for Skype. Other possibilities in emerging markets include using Skype credits as payment for internet access, she said.

Skype has never made a profit: in 2010 it recorded a loss of $7m on revenues of $860m – $1.30 per registered user a year, or $5 per “connected” user a year. While revenues have been growing it has been able to negotiate better call termination rates around the world with telephone companies.

The acquisition is the second in Skype’s eight-year history. In October 2005 it was bought by eBay for $2.5bn, but was 70% sold in October 2009 to a consortium of private equity and venture capitalists.

The purchase is subject to US regulatory approval, which the companies hope to secure later this year. © Guardian News & Media Limited 2011 | Use of this content is subject to our Terms & Conditions | More Feeds

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