Microsoft buys Skype for $US8.5b; outlines plans

UPDATE: Microsoft has has bought privately-held Skype Technologies for $US8.5 billion, beating rival bidders who reportedly included Google, Cisco and Facebook.

Skype's previoius owners have financially struggled with the free and low-cost voice and video calling service (see below), depsite its giant user base of around 660 million worldwide (though a more modest 170 million who use the service every month).

But in announcing the deal on a conference call this morning, Microsoft chief executive Steve Ballmer said his company has bought a company that makes money - at least before tax.

"We're buying a company with Ebitda over $250 million," he said. "We see an opportunity to accelerate its revenue and profit base."

Cellphones, Xbox, business calling
Mr Ballmer said Microsoft sees opportunity to expand Skype's reach integrating it into existing Microsoft products including the mobile phone version of Windows, its Xbox videogame console's online Live service, Windows Phone 7 and Lync communications product for businesses.

Mobile phone focus
In the mobile phone arena, Skype faces competition from the iPhone and iPad-only Facetime, and Google's (so far US-only) Voice service which, unlike Skype, lets users keep their old number from the traditional phone system.

Even before the deal, Microsoft had promised there would be a version of Skype (already available for Android, iPhone and BlackBerry for its Windows Phone 7 software (along with the music streaming service Spotify and - cough - Angry Birds).

Developer Ben Gracewood, one of the few local champions for Microsoft's mobile efforts, told NBR the changes coming in Mango (the next version of Windows Phone) would make a Skype app possible.

Largest deal in Microsoft history
The deal is the largest in Microsoft's 36-year history.

Skype chief executive Tony Bates will stay on as president, reporting directly to Mr Ballmer.

Traditional phone companies have already had plenty of grief from Skype, and other internet calling products, which have eaten away at their once-lucrative national and international calling business.

Now, for the Telecoms of this world, the pain is likely to get worse.

TUESDAY 10 May: Microsoft is close to a $US7 billion-plus deal to buy Skype Technologies, according to a Wall Street Journal report - beating out a range of suitors including Google, Facebook and Cisco.

The paper, which has a reliable track record predicting major deals, said negotiations were wrapping up Monday night US time, and that a deal could be announced as soon as Tuesday (Wednesday NZ time).

Eyes will then turn to how Microsoft will utilise its new asset.

Skype's free and low-cost chat, calling and video calling services have more than 600 million users worldwide, and have proved a major competitor to more commercial solutions like Microsofft's Unified Communications (UC) products.

Skype could be rolled into an entry-level UC solution or, alternative, used to boost Microsoft's online Live services, which include Hotmail, Live Mail and Bing, a search engine.

Show me the money
Despite its hundreds of millions of users, Skype has always struggled to make money.

eBay bought Skype in 2005 for $US2.6 billion in cash and shares.

Nothing gelled, and the US auction giant sold Skype in 2007, taking a $US1.4 billion charge on the investment.

It sold a 70% stake to a group of technology investors including Silver Lake Partners, venture capital firms Index Ventures and Andreessen Horowitz, and the Canada Pension Plan Investment Board, who now stand to make a major gain on their investment.