Microsoft Splurges with $8.5 Billion Acquisition of Skype

Matt Lonsdale is a JD candidate at Dalhousie University.

Software giant Microsoft has acquired Internet telephony firm Skype for a cool $8.5 billion. Microsoft’s purchase comes in the wake of Skype filing to become a publicly traded company. Microsoft CEO Steve Ballmer commented that “Skype was on a path to IPO, and we said, ‘Hey, we think at least from our perspective, it would be better if we owned this company.’”

Skype was founded in 2003 and rose to become one the largest players, if not the largest, in the Internet telephony sphere. Internet telephony requires a fair amount of bandwidth. Skype makes use of the decentralized peer-to-peer networking model usually associated with file sharing networks to distribute this burden to the end users of their products, saving them from having to invest heavily in servers and expensive bandwidth. Skype’s business model relies on offering Skype-to-Skype calls for free, while charging for calls made to regular phones and other premium services. Skype has posted a profit only once in the last five years.

The acquisition places Microsoft in a position to bundle Skype’s telephony capabilities with other Microsoft products, potentially allowing users to make calls from within the Outlook email client, from their Xbox game console or via mobile phones based on the Windows Phone platform. Microsoft has pledged its support to “continue to invest in and support Skype clients on non-Microsoft platforms.” This may not be welcome news for law enforcement agencies, who have long bemoaned the difficulties in eavesdropping on calls made using the service. In 2009, The Register reported that the National Security Agency was offering a bounty to anyone able to offer a reliable solution to the eavesdropping problem.

While some commentators speculated that Microsoft’s purchase was motivated by a desire to keep Skype out of the hands of Google and Facebook, other analysts suggested that the purchase might be good news for Facebook. Microsoft is an investor in the social networking company, and could use Skype’s peer-to-peer technology to offer voice and video chat services to Facebook’s over 500 million users without incurring crippling overhead costs.

Skype has had a complicated history of ownership. The company was purchased by eBay in 2006 for $2.6 billion. The two companies proved to be a poor fit, and eBay later sold 70% of the company to a group of investors which included the Canada Pension Plan Investment Board. In 2009, Google considered making an offer to purchase the company, but ultimately decided against it. The company has over 107 million users, who average 100 minutes a month of usage.