Tuesday, May 10, 2011

Microsoft Buys Skype for $8.5 Billion, What Does That Mean For You?

Microsoft Corp. and Skype Global today announced that they have entered into a definitive agreement under which Microsoft will acquire Skype for $8.5 billion in cash from the company's current owners which is led by  investor group Silver Lake. The news off the buyout sent shock-waves through the Skype community with millions of user voicing concerns over what Microsoft might do with their beloved Skype service.

Some background

Skype has had turmoil filled past. Back in 2005 the company was bought by auction giant eBay for a mere $2.6 billion. At the time many in the tech world wondered where the service was headed as there were no obvious synergies with ebay's online auction business. It didn't take long for buyers remorse to set in as just four years later ebay put Skype on the block, eventually selling 70% of the business (for approximately $2 billion) to an investment group led by Marc Andreessen.

Last year, Skype had revenue of $860 million on which it posted an operating profit of $264 million. However, overall it made a small loss of $7 million, and had long-term debt of $686 million.

Despite the exchanges in ownership, the less than profitability of the company and several hardships, Skype has continued to grow and flourish. According to their acquisition announcement the company now has 170 million connected users with over 207 billion minutes of voice and video conversations made in 2010.

Why did Microsoft pay so much?

This seem to be a question on everyone's minds. It really isn't clear why Microsoft wanted to shell out more than twice what the company is worth. The company already has its own, all be it not as polished, voice and video service in Windows Live Messenger. They have nearly double the amount of monthly users at around 330 million active users each month. Yet the one thing Microsoft is lacking is paid users which Skype can boasts a total of nearly 8 million users that actually pay for the service.

In addition to adding in paid users the other mostly likely reason for the acquisition is that Microsoft wanted to keep the company out of the hands of it competitors. Sources have said Google and Facebook offered to partner or buy Skype for $3 billion to $4 billion. Microsoft likely went on the defensive and made a preemptive strike but we still have to wonder why MS doubled that offering price.

Investors are just as confused. "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."

What can Skype users expect now?

Clearly Microsoft will have some decisions to make. This is reportedly Microsoft's largest acquisition ever, which means Microsoft is not simply planning on casting aside Skype in favor of its own services. Will we see Skype rolled into Windows Live or the Office platform or will Microsoft continue developing it as a standalone service. We just don't know yest. They have already stated that they will continue supporting Skype on competing operating systems and platforms, particularly mobile devices.

"We're committed to the Skype user base," Ballmer said. "We want to continue to build and engage that base. Part of that commitment is continuing to support Skype on non-Microsoft platforms. We all know that people have things that they do at home and do at work, what we want to do is to offer a tool to bring them together. Skype enables communication across all of people's lives and all of their devices."

So it seems the waters are murky now!

No one really knows for certain what we can expect from the buy out. One thing is clear, with huge investment it just made Microsoft won't look at just shutting down or radically altering Skype. In the short term at least, Microsoft will not run in and ruin the service. They simply can't afford to. So those of you scrambling to find alternatives can relax for now. The acquisition still has to be approved, MS still has to take full control and things still have some ironing out to be done. In my opinion you are going to be safe from any Microsoft tinkering for at least a year or two.

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