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Posted at 01:18 PM ET, 05/10/2011

Microsoft buys Skype for $8.5 billion

Skype is expected to support Microsoft devices such as the Xbox, Kinect and Windows Phone. (DENIS BALIBOUSE - REUTERS)
Microsoft said Tuesday it agreed to buy Skype for $8.5 billion in cash, the company’s biggest bet yet against Google, Apple and Facebook, who are leading the race to bring Internet services to any device.

Through its acquisition of Luxembourg-based Skype, Microsoft bought the world’s biggest Internet voice and video calling service, with 170 million users around the globe.

In a conference call with reporters, Microsoft chief executive Steve Ballmer said Skype’s service will meld with the Redmond, Wash., company’s diverse range of businesses to help it woo more customers who play games, socialize and conduct work over smart phones, tablets, PCs and televisions.

“By bringing together the best of Microsoft and Skype, we are empowering people around the world with new technologies that bring them together,” Ballmer said.

Skype has a deep footprint in Internet voice and video conferencing over smart phones, which make up about 45 percent of its business. That service gives Microsoft’s struggling Windows-based line of smart phones a big brand name that it hopes will draw in new consumers and better compete against Google Voice on Android phones and Facetime on Apple’s iPhone.

Microsoft’s edge in gaming entertainment, with its XBox consoles, gives Skype a new entre into the U.S. living room. Through the acquisition, Microsoft and Skype plan to provide better communications and video services for XBox and Kinnect users to keep them playing longer. Greater engagement with games and other services over mobile devices and television spells greater advertising revenues, the firms said.

“We want to approach the market around a rich media experience,” said Tony Bates, Skype’s chief executive. Skype will remain a separate division of Microsoft, and Bates will stay as president and report directly to Ballmer.

But the company, whose main business is business software, has struggled to compete against Google, Apple and Facebook. Google’s cloud-based business software including Gmail, calendar and documents, has been adopted by local governments and businesses as an alternative to Windows Office suite. Apple and Google are going head to head for smartphone and tablet customers, while Microsoft struggles with its Windows software for mobile devices. Facebook has become the world’s biggest platform for information sharing and entertainment such as games.

Ballmer said in the call that he first made his offer to Skype in April as the VOIP provider prepared for its initial public offering. The deal was signed Monday night, and Ballmer said he hoped to get regulatory approval for the deal by the end of the calendar year.

Analysts said the deal will likely get the go-ahead by antitrust authorities. Either the Justice Department or Federal Trade Commission will review the transaction for any anticompetitive concerns. The European Commission will also have to review the acquisition.

The acquisition comes amid a scramble by communications, entertainment and Internet services firms to best position themselves in a world where information converges on the Internet.

Comcast bought NBC Universal to add entertainment to its offerings. AT&T wants to be the biggest wireless provider through its acquisition of T-Mobile. Dish Network is buying Blockbuster and satellite companies to be a stronger provider of entertainment over wireless devices.

“This tie-up puts more pressure on other industry players to consider their own strategic deals,” said Rebecca Arbogast, an analyst at Stifel Nicolaus. “And while AT&T/T-Mobile could still get blocked, Microsoft-Skype likely wouldn’t, so it furthers cements the industry trend toward consolidation.”

As for consumers, Microsoft said current Skype users won’t be affected. Ballmer promised that Skype will continue to operate on non-Windows platforms.

On question, though, is whether Microsoft can use Skype to its full potential. Microsoft doesn’t have the greatest track record with acquisitions: Products such as Hotmail have been left to languish, while a series of other promising acquisitions have been shut down. On the other hand, Business Insider has pointed out some notable exceptions: Microsoft’s 2000 acquisition of video game company Bungie yielded the mega-hit Halo and gave the Xbox a solid following.

Staff writer Hayley Tsukayama contributed to this report.

Skype users: What do you think about this deal?

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By  |  01:18 PM ET, 05/10/2011

Tags:  Microsoft, Skype

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