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May 10, 2011

Microsoft News - Microsoft Strikes $8.5 Billion Deal to Acquire Skype

By Tammy Wolf, TMCnet Web Editor

In what seems to be an attempt to revive its place as a communications tool in the Internet space, Microsoft (News - Alert) has agreed to acquire major Internet telephone service Skype (News - Alert).

The whopping all-cash $8.5 billion arrangement marks the biggest deal yet for the software maker and confirms last week’s reports that it was in partnership talks with Skype. 

The calling service, which boasts about 663 million users around the globe who make video and voice calls over the Internet, will integrate with Microsoft as a business unit led by current Skype CEO Tony Bates (News - Alert). He will then report to Microsoft head Steve Ballmer.

A Luxembourg-based company, Skype hit the ground running as a VC-backed firm before being acquired in 2006 by eBay for $2.6 billion. While the deal didn’t pan out as expected, in 2009 eBay then sold a 65 percent stake in Skype for $1.9 billion to an investor group including Andreessen Horowitz, Canada Pension Plan Investment Board, Silver Lake Partners and Index Ventures.  

While Skype has functioned as a low-cost communications tool for international calls, the company had been struggling on the financial front. Last August, Skype filed for a $100 million IPO after reporting a 6.9 million net loss in 2010 on about $860 million in profits. As reported by TMCnet, the ongoing struggle for the company was that only 6.5 percent of its users as of December 2010 paid to make calls from their computers to landline and mobile phones.

At the time, Bates shared that Skype could offer more premium phone and video services in the future. He also mentioned the possibility of Skype embedding its service with other Web companies to accelerate growth.

For Microsoft, this move could potentially give the software company some traction in a consumer market flooded with real-time communications tools for connecting with family, friends, clients and colleagues across the globe.

According to the Wall Street Journal, Skype will provide support for Microsoft devices like the Kinect, Xbox, Windows Phone (News - Alert) and Windows devices. In addition, Microsoft will be connecting Skype consumers with Xbox Live, Lync, Outlook and other types of platforms, while investing in and supporting additional Skype clients and platforms.

While the acquisition can be seen as a method for Microsoft to strengthen its wireless phone strategy and place in the VoIP market, TMCnet’s own CEO Rich Tehrani (News - Alert) believes the deal is rather ironic, as the software company is re-entering a market which they once dominated but failed to keep due to lost focus.

Stay tuned to TMCnet for more developments on this story.

Tammy Wolf is a TMCnet web editor. She covers a wide range of topics, including IP communications and information technology. To read more of her articles, please visit her columnist page.

Edited by Rich Steeves

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