Microsoft to Buy Skype - Calling for Profits?
Tuesday, May 10, 2011 2:19 PM

Microsoft Corp. (Nasdaq: MSFT) today -- May 10 -- announced the company has reached an agreement to purchase the online communications company Skype Technologies SA for $8.5 billion. Skype is currently owned by a private investment group based in Luxembourg. Skype has over 660 million worldwide users.

Microsoft generates the bulk of company earnings from the sale of software including Microsoft Office and the Windows operating systems. The company has struggled to generate significant revenue streams from online products.  Microsoft's attempt to generate a comparable online presence resulted in the company's online division reporting a loss of $700 million in the first quarter of 2011.

Skype was launched in 2003 and purchased by EBay in 2005 for $2.6 billion. EBay was unable to make the investment pay and sold 70 percent of Skype to the current owners in 2009. For 2010, Skype reported revenues of $860 million with a net loss of $7 million. Skype allows free computer to computer voice and video communications and earns revenues by selling connection services from Skype to regular telephone services.

In the press release announcing the acquisition, Microsoft stated Skype will form a new division within the company. The plan is to integrate Skype with Microsoft's existing communication, software and hardware products including Lync, Outlook, Xbox Live, Kinnect and Windows Phone.

At the end of the 2011 first quarter, Microsoft was sitting on a $50 billion pile of cash and short term investments. The purchase of Skype may be a productive way to put some of this cash hoard to work. The purchase, however, raises a few questions:

  1. Will Microsoft figure out a way to turn Skype into a profit generating division of the company? EBay and the current investment group were not able to turn Skype's widespread use and popularity into bottom line profits.
  2. Will the integration of Skype with other Microsoft communication products bring more users to the Microsoft products or turn existing users off from the stand-alone utility of Skype? For users, Skype is a single use tool instead of a Swiss army knife and that may be a key to its popularity.
  3. Is the online world and investment world ready to see Microsoft as a serious competitor to Google or will this be viewed as another failed attempt before it even gets off the ground?

The purchase of Skype is a bold move for Microsoft and less expensive than the failed $48 billion attempt to purchase Yahoo a few years ago. Focusing on Skype in the Microsoft portfolio, the company must be able to maintain and improve the Skype user experience for the acquisition to have any chance of being the catalyst to propel Microsoft to major online player status in both revenues and profits.



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