Tuesday, May 10th 2011

Microsoft to Acquire Skype for Over $8 billion

In what is turning out to be the mother of all tech acquisitions, Microsoft is working towards acquiring IP telephony giant Skype Technologies for nearly US $8 billion, the deal could be announced later today, according to the Wall Street Journal. The Skype acquisition will give Microsoft increased traction in the consumer market, as part of the company's efforts to provide more web-based convergence services. The deal could be the most significant development after Bing, a polished successor of MSN Search.

Skype is the company that propagated web-based telephony, which threatened to make conventional telephony obsolete. Founded in 2003, the company has 663 million registered users, including 8.8 million with paid accounts. In 2005, it was sold to Ebay for $2.6 billion, after which Ebay sold 70% of its shares to private investors by 2009. Microsoft is in the foray to acquire the company and its debt in a deal that can see up to $8.5 billion changing hands.Source: Wall Street Journal
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39 Comments on Microsoft to Acquire Skype for Over $8 billion

#1
btarunr
Editor & Senior Moderator
Many Thanks to Skellattarr for the tip.
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#2
FordGT90Concept
"I go fast!1!11!1!"
I wonder what Skype offers that Microsoft couldn't figure out for themselves. :confused:
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#3
F2K
@[USER=60463]FordGT90Concept[/USER]
Brand and "...the company has 663 million registered users, including 8.8 million with paid accounts."
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#4
FordGT90Concept
"I go fast!1!11!1!"
I wonder how many of those are active accounts and how many, further, overlap with Microsoft's exisiting services. Brand is about the only useful thing I see Microsoft getting out of it but seriously, is the name "Skype" worth $8.5 billion? I'm thinking this was a bone-headed move on Microsoft's part unless they got major undisclosed plans for them.
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#5
slyfox2151
the last i checked.... Facebook was looking at merging skype into it....
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#6
NC37
Probably going to turn it into an extension of XBL..."Now with Gold membership you can make calls from your Xbox with our new Skype service! Totally free!!"

Then a week later M$ announces. "We're raising fees on XBL again. We feel it is still a bargain to consumers because they get so much more now for their Gold membership."
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#7
SaiZo
So does this mean that Skype will not be "free" software when Microsoft buys it?
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#8
inferKNOX
NOOOO!!! I hope they don't start intergrating that damned windows live ID rubbish with Skype!
IMHO, Skype would have worked well with Facebook.
Why M$, Y U NO FAIR?
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#9
Fourstaff
by: SaiZo
So does this mean that Skype will not be "free" software when Microsoft buys it?
Windows Live Messenger is still "free". I think the founders of Skype split the company into two, with a holding company for the patents and another for the "front end" Skype, which is what Microsoft is aquiring. Based on that I think we will not see WLM integrating with Skype. I could be wrong though.
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#10
wolf
Performance Enthusiast
another interesting acquisition, as a free user myself, I am keen to see what changes Microsoft will make ....
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#11
Frick
Fishfaced Nincompoop
I don't really understand why people hate on MS so much, so I think this is interesting.
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#12
Benetanegia
by: FordGT90Concept
I wonder how many of those are active accounts and how many, further, overlap with Microsoft's exisiting services. Brand is about the only useful thing I see Microsoft getting out of it but seriously, is the name "Skype" worth $8.5 billion? I'm thinking this was a bone-headed move on Microsoft's part unless they got major undisclosed plans for them.
I think that $8.5 billion is a bargain for M$. It almost makes sense only based on the 8.8 million paid subscriptions. The monthly subscription varies between $10 and $20, so that should be 1.2 billion to 2.4 billion revenue a year, only based on paid subscriptions.

- That's not taking into account the incredible growth rate that Skype has seen in the last 5 years (around +20% each year), which will only continue to grow, more so under Microsoft's hood.
- That's not taking into account the potential pay-for-use revenue derivated from those 660 million registered users. Just think that for every $1 spent on average, we'd be talking about $660 million revenue increase at the end of the year.

I'm very well aware that my numbers are way off from the real revenue numbers that Skype has seen, and that Skype has been losing money for the most part, but there's a lot of potential for a company like Microsoft to attain good revenue from Skype. Skype has not been able to extract anything close to $1 average per user, IMO M$ (or Facebook) easily could. Also overlapping resources and infraestructures should massively reduce operating costs and make Skype pay for itself in say 5-10 years. Again that's only based on current growth, without taking into account that Skype could boom under M$ hands.

All things considered, Skype surely looks like a much much better deal for M$, than Youtube was for Google or Ati was for AMD.
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#13
DannibusX
Microsoft wouldn't invest 8.5 billion in Skype unless they were acquiring the patents that come with the technology.

I don't think you'll see much happen to Skype after the acquisition other than Microsoft integrating the tech into their existing services, and possibly integrating it into Windows itself.
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#14
Kreij
Senior Monkey Moderator
by: Benetanegia
I think that $8.5 billion is a bargain for M$. It almost makes sense only based on the 8.8 million paid subscriptions. The monthly subscription varies between $10 and $20, so that should be 1.2 billion to 2.4 billion revenue a year, only based on paid subscriptions.
It looks like Skype had under $600M in revenue for 2010 and reported a net loss of $7M.
Who pays $8.5B for a company with only a little over 1/2 billion in annual revenue and is reporting a net loss?
Something is odd here.

I would not put it past MS to kill the free offerings and require a small subscription fee to use the service at all.
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#15
Thefumigator
The only thought that comes to my mind is... Goodbye multiplatform skype app. Goodbye skype for symbian.
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#16
Benetanegia
by: Kreij
It looks like Skype had under $600M in revenue for 2010 and reported a net loss of $7M.
Who pays $8.5B for a company with only a little over 1/2 billion in annual revenue and is reporting a net loss?
Something is odd here.

I would not put it past MS to kill the free offerings and require a small subscription fee to use the service at all.
It's $860 actually: http://techcrunch.com/2011/03/07/skype-revenue-up-20-percent-to-860m-in-2010-paid-users-up-19-percent/

Anyway, like I said, I don't think it's so much about the actual revenue of Skype as it is now, but as how could it be, the potential within it. Belonging to M$ I can only see the user base and awareness factor growing a lot and that would increase revenue by a lot. There's two things that can increase revenue by 3x-4x easily, one is the user base and the next one is the revenue per user, both of which IMO can be much higher belonging to M$ (confidence would be higher for instance, IMO). Look at the link I provided, it looks like Skype could only extract $0.2 per user, for the whole 2010 year! If only M$ manages 2x, 3x that ammount either by increasing the user base, increasing the rate at which users use the paid service or by deals with partners like increasing Skype use in big enterprises, etc, they would be at least doubling revenue. I think they can easily pull that off.

Regarding profits, and hence the net loss that you talked about, IMO that part doesn't matter either. Most of that loss comes obviously from immense operating costs and I'm sure that Microsoft could handle it much better, maybe they don't even have to change/improve anything in order to include Skype's traffic inside their already massive network.

So if say by 2013-2014 they can improve revenues by 200% (I could even imagine a 500% increase only based on product awareness) and lower costs to $250-ish that's some great revenues they'd have right there.

There's one last factor, they'd be operating in and controlling a market that could otherwise become a nightmare for them, a really tought competitor down the line if say Facebook or Google ended up buying it (i.e. Android with Skype integration). Something like Skype could or could not be the future of voiced communications, but it's just better to have that service covered just in case and buying the one with the brand name and the highest user base is simply better that trying to compete with it.
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#17
Frick
Fishfaced Nincompoop
by: Thefumigator
The only thought that comes to my mind is... Goodbye multiplatform skype app. Goodbye skype for symbian.
Naaaah, that would be shooting themselves in the foot. It would only help them to keep develop for other OS's.
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#18
crazyeyesreaper
Chief Broken Rig
if i remembered right isnt Steams VOIP now handled by skype? so wouldnt this both allow microsoft to gain traction with games for windows live having new better features it also allows them entrance into a new market, probably gets them some patents, etc.
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#19
yogurt_21
gotta be patents, subscribers, brand, and market muscle. The fact that Skype is losing money doesn't mean much when you compare what microsoft's marketing team can do with it. Also due to the popularity of the free version, microsoft could use it as a continued effort to infiltrate the mobile device platform.
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#20
1Kurgan1
The Knife in your Back
I honestly hope this doesn't go through.
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#21
Nesters
Microsoft has been company with no real direction and this might even prove that after a while.
However, they may have a plan (with W8 getting closer) to integrate skype within some of their platforms (XBL,Office,Windows (except Windows Phone is questionable because carriers might lose revenue because of that),GFWL). Also they might be trying to keep others from getting hands on Skype (like Google, for example).

by: 1Kurgan1
I honestly hope this doesn't go through.
This already went through...
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#22
Phxprovost
Xtreme Refugee
by: Nesters
Microsoft has been company with no real direction and this might even prove that after a while..
Microsoft has a direction, they just have a problem following through with anything thats not an instant success. Am i the only one thats glad skype was acquired by Microsoft and not facebook?
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#23
Frick
Fishfaced Nincompoop
by: Phxprovost
Microsoft has a direction, they just have a problem following through with anything thats not an instant success. Am i the only one thats glad skype was acquired by Microsoft and not facebook?
No, Facebook + phone integration would be .. kinda useful at times but very scary as well.
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#24
Red_Machine
by: Phxprovost
Microsoft has a direction, they just have a problem following through with anything thats not an instant success. Am i the only one thats glad skype was acquired by Microsoft and not facebook?
Agreed. I also would hate to see Google get their hands on it. I think we all know what a commercialised mess they've made of YouTube.
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#25
Frick
Fishfaced Nincompoop
User wanorris at Ars made this very interesting post:
I don't know about spending $8.5 billion dollars, but I can see why they did this. They have a good solid enterprise solution gaining traction with Lync. They have a cool videophone thing with Kinect. Downside: limitations on who you can talk to outside the firewall and the living room. Skype has mindshare, and runs on virtually every platform in existence.

Sure, they have Messenger, but most people think of that as an IM solution, and zero people think of it as a leading edge platform for new innovations.

I predict Microsoft's top two goals will be:

1. Don't screw it up. They need this as a flagship consumer user base to complete their communications story, and the last thing they need is to turn it into the Danger acquisition. So no scratch rewrites in .Net or other poorly planned Microsoftization.

2. Make everything talk to each other. Lync, LiveMess, Kinect, and Skype should all be able to intercommunicate seamlessly using VOIP and video calling. Try to create a virtuous circle where each part of the network makes all the other parts even more useful.

If they can grow Lync Client/Server into as important a business as other core MS servers, they'll be printing so much money that it will justify Skype never earning a penny. If they can make a Kinect the default videophone for the living room (everyone can come sit together to talk to grandma!), they will dwarf other game consoles and set top boxes. If they can earn a default app install slot on everyone's cell phones, they can use that as a launching pad for a raft of other services (Bing being exhibit A). And, of course, if they can win in a market that Google, Apple, and Facebook also want a piece of, they are a step closer to earning back a little bit of their halo effect. The upside of this deal is totally justified.

Whether they can execute or not... that's the tricky part.
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