Microsoft Musters $8.5B to Snatch Skype From Google’s Jaws

In “Glee” parlance, it looks like the football coach just sat down at the cool kids’ lunch table. Microsoft announced on Tuesday that it has entered into a definitive agreement to acquire Skype for US$8.5 billion in cash from an investor group led by Silver Lake.

The agreement has been approved by both Microsoft and Skype’s boards of directors.

Recent rumors indicated that Google and Facebook were both looking into buying the VoIP company. At the time, Microsoft was hardly mentioned.

Working It In

Skype has been connecting its users through online phone and video chat services since it was founded in 2003. Skype boasted 170 million connected users and 207 billion minutes of voice and video conversations in 2010. Skype was acquired by eBay in 2005 and then acquired by Silver Lake in 2009. Skype has made progress since Silver Lake’s acquisition, increasing monthly calling minutes by 150 percent.

Microsoft has experimented with real-time communications including Lync (which had a 30 percent revenue growth in Q3), Outlook, Messenger, Hotmail and Xbox Live. Skype will support Microsoft products such as Xbox, Kinect, Windows Phone and other Windows devices.

Microsoft said it will connect Skype users with its Lync, Outlook, Xbox Live and additional communities. It also aims to continue support for Skype clients on non-Microsoft platforms. Skype will become a new business division within Microsoft, and Skype’s CEO Tony Bates will become president of the Microsoft Skype division.

Microsoft and Skype declined E-Commerce Times’ requests for comment.

An Awkward Fit for Microsoft?

One advantage of Microsoft’s decision is that it takes Skype out of the reach of competitor Google. This could give Microsoft an upper hand, at least in the VOIP sector. It also keeps Skype out of the hands of Facebook, though Microsoft is a significant Facebook investor.

“The big question is why Microsoft needs to pay such a high premium to buy innovation,” Azita Arvani, principal of Arvani Group, told the E-Commerce Times. “It is hard to believe that Facebook or Google would consider paying $8.5 billion for Skype. The best part of the acquisition for Microsoft is using their overseas cash for a Luxembourg-based Skype, so they would avoid paying taxes on it. The next best part is that Skype is out of hands of Google and Facebook, and Cisco.”

It could be hard for Microsoft to successfully implant Skype into its ecosystem. Microsoft will have to use precision tactics to make Skype flow with its current offerings.

“Of course, as an Internet-based communications company, one can imagine Skype fitting in lots of different places within Microsoft,” said Arvani. “But in order to create any real synergies, you would have to have laser-sharp vision and perfect execution with accurate integration of technologies, organizations and cultures. That kind of perfect execution is hard to come by in any acquisition, and perhaps harder in this case.”

Skype could upgrade Microsoft’s communications somewhat, but the question remains: Is it worth the price? Microsoft could also run into some issues regarding the fact that it plans to provide Skype service for other mobile devices as well as its own Windows Phone platform.

“In the mobile space, Skype plans to keep its cross-platform strategy of being present on Apple, Google and Microsoft mobile platforms,” said Arvani. “So how would Skype be able to keep a fair cross-platform strategy while creating a differentiation for Microsoft’s Windows Phone platform? Skype can make Xbox Live and Lync more functional with better voice and video chats, but it comes at a very high price.”

‘A Big Gamble’

Is Skype really worth the price tag?

“That’s the $8.5 billion question. The truth is we don’t know yet,” Laura DiDio, principal analyst at ITIC, told the E-Commerce Times. “What we do know is that the $8.5 billion Microsoft paid is 10 times Skype’s 2010 annual revenue of $860 million. Skype also posted a $7 million loss in fiscal 2010. So this is a big gamble. And the answer will lie in the payday — if there is one. Microsoft’s decision to buy Skype will either be a big boon or a big bust.”

Underpinning that question is whether Microsoft can make Skype fit into the company’s portfolio.

“If Microsoft can truly integrate and re-brand Skype into its product portfolio and find a way to monetize those hundreds of millions of Skype’s consumer and desktop users into paying customers,” said DiDio. “The ink is hardly dry on the deal, and the blogosphere and analysts are already questioning why Microsoft would spend $8.5 billion to acquire Skype when it already has two voice over IP (VoIP) products?”

In the end, Microsoft was able to lure Skype away from the cool kids — DiDio was surprised that Microsoft was able to snatch Skype out of the jaws of Google and Facebook.

“Perhaps they were distracted, perhaps Google and Facebook didn’t think that Skype was a good fit or maybe they felt it was too expensive,” said DiDio. “At any rate, Microsoft now owns Skype. Let’s see what they do with it.”