$8.5bn for Skype? Good call, Microsoft

Microsoft is buying internet telephony service Skype - but the price tag is raising a few eyebrows...

by Emma Haslett
Last Updated: 01 Jun 2011
There’s been plenty of speculation lately about whether there’s a new tech bubble developing, and today's announcement by Microsoft that it's buying internet telephony business Skype for a whopping $8.5bn (£5.2bn), the biggest deal in the tech giant's history, will do nothing to dispel that speculation. Skype might have 663m users, and it might have had the likes of Google, Facebook and Cisco sniffing around it as a potential target recently. But $8.5bn, for a loss-making company that provides an essentially free service? Really?
Skype’s chequered history is partly what's making analysts nervous. The service, which uses a ‘freemium’ subscription model where it’s free to make PC-to-PC calls but makes users pay (albeit reduced rates) to phone real phones, was bought by eBay for $2.6bn in 2005 - the idea being that users could incorporate it into auctions. But eBay found this more difficult than expected, and it ended up writing down its value by $1.4bn before selling 70% of its stake at the end of 2007. Although with this price tag, its 30% stake will be worth about $2.5bn, meaning it will virtually make its money back. (And VC backer Silver Lake will make an absolute killing.)

As to what Microsoft will actually do with Skype, it's all a bit speculative. Some think it could integrate the service with its Xbox 360 (which, lest we forget, includes Kinect, its new motion detector - plenty of fun and games to be had there), or even its Office products, so it can raise its game on sharing and collaboration. The other option might be to bundle it in with Windows Phone 7, its mobile operating system - although in the past, carriers haven’t been keen on the idea of having Skype on their phones, since it does have a tendency to encroach on their revenues.
Analysts’ scepticism is understandable: despite Skype's huge user base, a relatively small proportion are taking advantage of its premium service. That's why Skype has accumulated debts of $686m (which Microsoft will apparently take on) and why in 2010 it recorded a $7m loss on revenues of $859.8m. What's more, there isn't much sign of things improving. So it does seem to be a bit of an odd decision for Microsoft to shell out a sum of this magnitude. Perhaps it's just desperate to find somewhere to park the billions in cash currently burning a hole in its bank account...

Unfortunately, Microsoft's previous forays into the online area haven't been terribly successful: although most big tech companies (even Google) have had the odd flop, Microsoft’s online service division, which includes search engine Bing, is doing particularly badly, having lost $8bn since the end of 2005. A $48bn takeover bid for Yahoo also fell through (although that was arguably no bad thing, given that the latter's value has since halved). Investors will hope that this time around, it knows what it’s getting into.

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