Why Did Microsoft Buy Skype for $8.5 Billion?

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Microsoft has agreed to the biggest acquisition in its history, buying the Internet telephone service Skype for $8.5 billion. The purchase price is sure to raise eyebrows, which has been the case each time Skype has changed hands.

Two Swedish entrepreneurs began Skype in 2003. Just two years later they sold most of the company to eBay for $3.1 billion. The financial world could not understand why eBay would buy an Internet phone company, or why it would pay so much for a company that was losing money.

eBay hoped that buyers and sellers on its auction site would speak to each other via Skype, but that never materialized.

In 2009 eBay gave up on the experiment, dumping 65% of Skype on private equity firms led by Silver Lake for $1.9 billion.

But just 18 months later, Silver Lake managed to flip Skype to Microsoft for the whopping $8.5 billion. (No truth to the rumor that Silver Lake is throwing a giant party this afternoon.) eBay will get $2.55 billion of that, so the auction giant ended up making money on the deal. Skype's Swedish co-founders will get $1.19 billion more.

But what does Microsoft want with Skype? First off, it gives Microsoft access to Skype's 170 million users.

The Associated Press writes:

Microsoft said it will marry Skype's functions to its Xbox game console, Outlook email program and Windows smartphones. All of these platforms already have other options for Internet calling, but the addition of Skype users would expand their reach, making them more useful.

Writing on Gigaon.com, Om Malik said the purchase was primarily made for Microsoft's sputtering smartphone business:

The biggest reason for Microsoft to buy Skype is Windows Phone 7 (Mobile OS) and Nokia. The software giant needs a competitive offering to Google Voice and Apple’s emerging communication platform, Facetime.

Skype lost $7 million on revenue of $860 million last year, according to papers that the company had filed in anticipation of an IPO. That offering was later put on hold. The reason for that is now obvious.


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