According to recent reports, Microsoft Corp is believed to be close to buying Skype, the internet communications provider.
The news comes from several sources, first reported as a rumour by GigaOM, and later updated as a done deal, the news was also reported in the Wall Street Journal. According to these sources, the deal is thought to be worth $7 and $8.5 billion, making it Microsoft’s largest acquisition.
We announced last week that both Facebook and Google were entering negotiations to buy Skype [See: The Skype’s the Limit: Facebook and Google Eye up Skype], so it seems all of the big internet players have been swarming around Skype for some time. But did anyone predict that it would have been Microsoft? Not even analysts saw this one coming.
How will it work?
Sources say that Microsoft is paying well over the odds for Skype, but given their desperation to expand the online side of their business, beyond simply Bing, it seems they are happy to pay such an amount. Microsoft could use Skype in a number of different ways. Firstly, they could use it as a communications hub for businesses to make video conferences and online meetings – much like how many suggested Google would position it if they were to purchase Skype.
Secondly, the deal will give Microsoft more traction when it comes to the consumer market. For example, analysts believe the service could be integrated into Microsoft’s existing products such as Xbox 360 and Xbox Kinect and even Microsoft Office.
Other Microsoft services that would benefit from Skype’s service would undoubtedly be their Windows phone. However mobile phone service providers haven’t exactly been keen to push Skype, considering it provides free phone calls via data connections as opposed to voice connections. So it would be a bit of a gamble considering it would be incredibly difficult to keep mobile service providers happy at the same time.
Will it work?
The question on everyone’s lips is whether or not it’s worth the price, and more importantly, will it actually make any money?
Well, Skype was purchased by eBay in 2005 for $2.6 billion, the idea being that users could communicate more effectively when buying and selling. However the service never materialised and eBay eventually sold off a 70% stake in Skype in 2009.
In 2010 Skype’s revenue was $860 million; however, including acquisitions and other costs, they still recorded a loss of $7 million. At present, Skype has a debt of $868 million and whilst it is a huge name amongst consumers, it isn’t exactly much of a money maker – much like YouTube when Google purchased it.
It would certainly bridge the gap between Microsoft and Skype’s 663 million registered users, which is exactly what Microsoft want. However with most of Skype’s services being free, it is difficult to know how Microsoft is going to monetise from an integrated service.
Microsoft’s latest acquisitions have been questionable. Taking their partnership with Yahoo as an example, the YaBing merger has seen faltering revenues and net earnings, largely due to the need to improve their AdCentre technology [See: Yahoo’s 2011 Q1 Results: Revenues and Net Earnings Down].
Whether the deal will get ratified remains to be seen. There is always room for last minute bidding from other parties and even if Microsoft do manage to secure Skype, what direction will they take it in? There’s still plenty of mileage in this particular story.