Microsoft Rocks Industry with Skype Buy

By Josh Long Comments
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Microsoft Corp. is becoming a bigger force in the communications industry through an $8.5 billion acquisition of Skype, the Internet calling sensation that has radically changed the way people connect with loved ones, friends and business associates around the world.

Subject to regulatory approvals and other closing conditions, Luxembourg-based Skype will become a new business division within Microsoft, the Redmond, Wash.-based software giant that announced plans earlier this year to form a strategic partnership with Nokia, the world’s largest handset manufacturer.

Skype CEO and former Cisco executive Tony Bates will serve as president of the new division and report directly to Microsoft CEO Steve Ballmer.

The deal is Microsoft’s largest acquisition in its 36-year history, according to The Wall Street Journal.

Microsoft is purchasing Skype from an investor group led by Silver Lake and that also includes eBay International AG, CPP Investment Board, Joltid Limited in partnership with Europlay Capital Advisors and Andreessen Horowitz.

The companies said Skype will support Microsoft devices like Xbox and Windows Phone – Microsoft’s operating system for smartphones – and Microsoft will connect Skype users with such features as Outlook and Xbox Live.

Microsoft vowed to continue investing in and supporting Skype clients on non-Microsoft platforms, such as Google’s Android and Apple’s iOS. 

A pre-installed Skype client could distinguish Microsoft's Windows Phone devices from other smartphones such as iPhones and BlackBerrys, noted ABI Research in response to the blockbuster deal announced Tuesday.

“Product-wise, this could be a nice fit," the research firm added. “Microsoft has served areas in both consumer and enterprise sectors that will benefit from a top-notch VoIP, video and sharing solution."

But at least one analyst doesn’t think the acquisition will help Microsoft in the enterprise space.

“Skype, while having some nice communications features, is still a consumer-grade solution," said Steve Hilton, head of enterprise research with Analysys Mason. “Enterprises don’t want low quality communications services. Mobile has become a huge driver of enterprise purchasing requirements and Microsoft is still miles behind in the development and support of mobile-enable[d] solutions."

With an average of 124 million connected users per month in the second quarter of 2010, Skype recorded 207 billion minutes of voice and video conversations in 2010.

Skype’s software allows people around the world to make free calls over their computers, often bypassing the traditional telecommunications companies that used to charge hefty rates per minute for international calling.

In 2010, Skype reported 190 billion minutes of so-called on-net Skype to Skype voice and video traffic, according to TeleGeography, the market research and consulting firm. TeleGeography estimates that roughly 96 billion minutes of Skype’s on-net traffic last year was international, up from 57 billion minutes in 2009.

“While Skype is not a phone company, they are by far the largest provider of cross-border voice communications," TeleGeography analyst Stephan Beckert said.

Skype also offers paid services that allow subscribers to make calls to and receive calls from fixed and mobile telephones. Those paid services represented 12.8 billion minutes of traffic last year, according to TeleGeography.

Skype was founded in 2003 and previously owned by eBay. In November 2009, eBay completed the sale of Skype in a deal valued at $2.75 billion. The online auction company retained a 30 percent stake in Skype.

In August 2010, Skype filed a registration statement for an initial public offering. The company also was in talks with potential buyers and joint venture partners, including Cisco, Facebook and Google, according to the Journal. But with the Microsoft deal solidified, those talks and the planned IPO are ancient history.

Skype and Microsoft hope to get all necessary regulatory approvals later this year.

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