What did Microsoft get for $8.5 billion?

Microsoft shelled out a lot of cash for Skype. Here's what they'll get in return.

SkypeIt’s the kind of deal that really gets the tech world buzzing — one titan buying another for an astronomical amount — and the question on many people’s minds now is what is Microsoft really getting for its $8.5 billion purchase of Skype?

From a technical perspective, it seems a little suspect. After all, Microsoft has already developed much of the same functionality that Skype provides. Windows Live Messenger offers free instant messaging and voice and video chat, it already works with Lync and Office, and Microsoft had previously announced plans to integrate Messenger into Windows Phone.

From a financial perspective it doesn’t look much better. Even though Skype is a massive (and disruptive) presence in Internet communications, it has never been very profitable. Last year Skype had $860 million in revenue, and a net loss of $7 million, according to its initial public offering filing. Forrester Research analyst Andrew Bartels told MSNBC:

It doesn’t make sense at all as a financial investment. There’s no way Microsoft is going to generate enough revenue and profit from Skype to compensate.

So why would Microsoft pay so much for a company that doesn’t have vastly superior technology or great financials? As far as I can tell, there’s five reasons:

1. Skype’s user base

Skype has a strong and loyal base of more than 170 million active users across multiple platforms. Microsoft will get instant access to Skype’s network, which represents a huge influx of customers and a big leap in Microsoft’s presence as a consumer Internet company.

2. Skype and the enterprise

Of course, it’s not all about consumers. Skype has been aggressively pursuing the enterprise market in recent years and has made some solid progress there. Microsoft likely sees this purchase as a win for both its consumer and business product lines, and we can expect to see Skype integration coming soon in all manner of Microsoft products and platforms. Already promised is Skype support for Xbox (and Xbox Live), Kinect, Office, Lync, Outlook, Hotmail, and Windows Phone.

3. Windows Phone integration

Along those lines, perhaps the most obvious outcome will be Skype’s integration into future versions of Windows Phone. This will allow Microsoft to compete squarely with Apple’s Facetime and Google Voice. Expect to see Skype on a Nokia Windows Phone in the near future.

4. International long distance

Interestingly, one of Skype’s biggest strengths was barely mentioned in the press conference announcing the deal: the massive amount of minutes Skype users represent on the public telephone network. Skype’s been in an all-out war with the entrenched telecom carriers since its inception — the carriers despise Skype and rightly see it as a major threat to their business model. According to Alec Saunders, a telecom vet and ex-Microsoft employee, with this purchase Microsoft instantly becomes the world’s largest carrier of international long distance minutes. How Microsoft will take advantage of this, and what impact it will have on their existing carrier relationships, is one of the open questions around this deal.

5. Blocking the competition

Let’s not forget another angle that surely motivated Microsoft to pursue Skype — keeping it away from the competition. It’s been common knowledge that Skype’s investors have been looking for a buyer for some time. Skype was on a rocky road to an IPO, and it sounds like the investors who bought Skype from eBay were concerned about the viability of that process and eager to get their returns sooner rather than later. When Google came to the table, you can bet the deal-makers in Redmond started some serious number crunching.

Reports are surfacing that Microsoft may have paid much more than they needed to get Skype. Anonymous sources close to the negotiations have said that Google came in second place in the bidding at just $4 billion. That’s a huge difference and it certainly suggests that Microsoft could have gotten Skype for much less. But some believe Google was never a serious suitor in the first place, and their interest may have been mostly about trying to keep Facebook from getting Skype.

As Microsoft is feeling pressure from the likes of Google and Apple, especially in the mobile space, the idea of a competitor getting their hands on Skype (and their network) was surely something Microsoft wanted to avoid. Microsoft is already seen as playing catch-up in the mobile space, and if Google got Skype that would put them even further behind.


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