Microsoft shells out $8.5 billion for Skype

Microsoft today announced plans to acquire Skype, the Internet communications company, for US $8.5 billion. The acquisition has been approved by the boards of both companies and, pending regulatory approval, is expected to be completed later this year. The acquisition sets the scene for closer integration between Skype and Microsoft products, including Windows Phone. Given Microsoft and Nokia's recent tie up, it seems likely that future Nokia products may ship with Skype integration out of the box.

The transaction will give Microsoft access to 170 million users and 207 billion minutes of voice and video conversations (in 2010).

There appears to be plenty of opportunity for Microsoft to leverage Skype’s business model.

Microsoft is best known for its Windows operating software, but has expanded over the years into other markets to compete against competitors like Google (NYSE:GOOG), Sony (NYSE:SNE) and Apple (NASDAQ:AAPL). Among the company’s key products are the Xbox and Kinect gaming consoles, Hotmail email product, and now through today’s acquisition, Skype and Lync real time video and voice communications.

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?"

Skype lost US$7 million on revenue of US$860 million last year, according to papers that the company has filed since announcing its intentions last summer to launch an initial public offering of stock. The IPO, however, has been in a holding pattern. An average of about 8.8 million customers per month pay to use Skype services.