Microsoft and Skype

Norm Johnston

Background

Microsoft recently announced an $8.5 billion acquisition of Skype, the internet's leading voice and video calling service. It is Microsoft's largest ever acquisition, worth 400 times Skype's 2010 operating profit and ten times annual sales. The acquisition's value has been widely debated, with Microsoft's ability to integrate and leverage the technology to build advertising revenue a critical factor in various industry predictions of success or failure.

Details

The rise in broadband internet access in recent years has led to a massive increase in the use of free online phone and video calls. Skype now has over 170m active monthly users worldwide, including 10m paying customers. Of special interest to Microsoft is Skype's growing strength amongst 16- 24 year olds; 20 million have joined in the last year alone to use Skype for social calls that complement their usage of Facebook and other social networks. Indeed, keeping Skype from Facebook has been mooted as one of the reasons behind the acquisition. For with Skype, Microsoft now arguably has a rival social platform to Facebook, albeit with a different focus. Beyond buying a "social" platform, Microsoft will look to expand the reach, relevance, and revenue of its acquisition for both consumers and enterprise customers by bundling Skype into its OS and across devices, including the new Windows Mobile 7 and Xbox Kinect. So while the price tag may appear inflated, the commercial due diligence on the deal most likely forecasts significant gains in revenue and operating margin over time as the Microsoft machine fully exploits Skype's assets.

Implications