Microsoft Buys Skype for $8.5 Billion!

Microsoft has bought Skype for $8.5 billion, in an all-cash deal. Steve Ballmer, CEO of Microsoft, is said to be a big champion of the deal, the largest in the history of the company. Ballmer and Skype CEO Tony Bates will host a press conference to announce it officially. The deal is Microsoft's largest cash purchase in its 36-year long history.

"The combination will extend Skype's world-class brand and the reach of its networked platform, while enhancing Microsoft's existing portfolio of real-time communications products and services," according to Microsoft's press release on the deal. "With 170 million connected users and over 207 billion minutes of voice and video conversations in 2010, Skype has been a pioneer in creating rich, meaningful connections among friends, families and business colleagues globally."

Skype has been up for sale for some time, thanks to some very antsy investors. Facebook and Google were said to be earlier dance partners for Skype, and Microsoft was a late entrant and is now close to walking away with the prize. Though this is contrary because Google, with its Google Voice offering, doesn’t really need Skype.

But this is a bet worth taking for Microsoft because:

1) Skype gives Microsoft a boost in the enterprise collaboration market, thanks to Skype’s voice, video and sharing capabilities, especially when competing with Cisco and Google.

2) It would give them a must-have application/service that can help with the adoption of the future versions of Windows Mobile operating system.

3) However, 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.

Who gets what:

1) Using the $8.5 billion price as the likely sale price, eBay gets $2.55 billion for its 30-percent stake in Skype. So in the end, eBay did make money on the Skype deal.

2) Niklas Zennström and Janus Friis, the co-founders, with their 14-percent stake, take home about $1.19 billion.

3) Silver Lake, Andreessen Horowitz and the Canada Pension Plan Investment Board (CPPIB) own 56 percent of the company, and that stake is worth $4.76 billion.

4) Andreessen Horowitz had three percent of the deal and made $205 million profit on their $50 million initial investment.

Why a sell-out?

Skype had filed for an IPO, was going to do about a billion dollars in revenues, and was on its way to becoming profitable. So why sell? Silver Lake and eBay were both getting impatient and wanted to lock in their profits. The company had bet heavily on is video sharing service. The premium version of video calling and sharing was a way for Skype to increase its average revenue per user and move into the enterprise market. However, given Skype’s DNA is that of a consumer Internet company, the challenges aren’t a surprise. Some sources also believe Skype’s revenues had stalled.

So who's the biggest winner?

The biggest winner of this deal could actually be Facebook. With Microsoft, it gets the best of both worlds: It gets access to Skype assets (Microsoft is an investor in Facebook) and it gets to keep Skype away from Google.

Facebook needs Skype badly. Among other things, it needs to use Skype’s peer-to-peer network to offer video and voice services to the users of Facebook Chat. If the company had to use conventional methods and offer voice and video service to its 600 million plus customers, the cost and overhead of operating the infrastructure would be prohibitive.

Facebook can also help Skype get more customers for its SkypeOut service, and it can have folks use Facebook Credits to pay for Skype minutes. Skype and Facebook are working on a joint announcement, and you can expect it shortly.