Microsoft buys Skype for $8.5bn in its biggest purchase and gamble yet

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Microsoft chief executive Steve Ballmer and Skype's Tony Bates announce the deal. Photograph: Justin Sullivan/Getty Images

Microsoft chief executive Steve Ballmer and Skype's Tony Bates announce the deal. Photograph: Justin Sullivan/Getty Images

The once-dominant software company has agreed to pay more than three times Skype’s valuation just 18 months ago

Microsoft‘s acquisition of Skype, its biggest ever, is an $8.5bn (£5bn) gamble to try to catch up with Apple and Google.

The software company, once so dominant, has been left behind by its more fleet-footed competitors as the pace of technological change – especially in mobile telecoms – has outstripped its ability to innovate.

Analysts saw the deal, which edges out the $6bn it paid for online advertising company aQuantive in 2007, as a sign of Microsoft’s ambition to become a bigger force in the consumer and smartphone market. They also interpreted it as a sign that Microsoft intends to broaden its appeal to businesses by using Skype to offer cheaper services than existing phone companies.

Skype, which has 663 million people across the world registered to use its voice-over-internet-protocol (VoIP) communications, is available on personal computers and mobile phones – though not yet on Microsoft’s new Windows Phone operating system. That is expected to be remedied soon.

The deal will see it established as a separate business inside Microsoft, dubbed Microsoft Skype. Tony Bates, the Skype chief executive, will become president of Microsoft Skype and report directly to Microsoft’s chief executive, Steve Ballmer.

Ballmer, who tried to buy Yahoo three years ago for $45bn, spelled out his vision: “Skype is a phenomenal service that is loved by millions of people around the world. Together we will create the future of real-time communications so people can easily stay connected to family, friends, clients and colleagues anywhere in the world.”

Others were less enthusiastic and highlighted the difficulty Microsoft faces in monetising Skype, whose telephony service is free between users. “It doesn’t make sense at all as a financial investment,” said Forrester Research analyst Andrew Bartels. “There’s no way Microsoft is going to generate enough revenue and profit from Skype to compensate.”

Another, Shanghai-based Michael Clendenin, managing director of the consulting firm RedTech, said: “If you consider Skype was just valued at about $2.5bn 18 months ago when a chunk was sold off, then $8.5bn seems generous and means Microsoft has a high wall to climb to prove to investors that Skype is a necessary linchpin for the company’s online and mobile strategy.”

But despite Skype never having turned a profit, analysts were mostly enthusiastic. “For me, this actually looks like a near-perfect fit for Skype,” said Dean Bubley of Disruptive Analysis. “A substantial part of Skype’s current user base is from PCs. Although mobile devices get all the glory at the moment, Skype epitomises what’s best about desktop VoIP.”

Source: Charles Arthur, technology editor, Guardian news

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