Microsoft Spends Big On Skype Microsoft is paying a premium to acquire Internet phone company Skype. Skype still isn't profitable, but Microsoft announced Tuesday that it will pay $8.5 billion in cash to make Skype its own. Did Microsoft overpay? And how does it plan to make money on Skype?
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Microsoft Spends Big On Skype

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Microsoft Spends Big On Skype

Microsoft Spends Big On Skype

Microsoft Spends Big On Skype

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Microsoft is paying a premium to acquire Internet phone company Skype. Skype still isn't profitable, but Microsoft announced Tuesday that it will pay $8.5 billion in cash to make Skype its own. Did Microsoft overpay? And how does it plan to make money on Skype?

ROBERT SIEGEL, host:

From NPR News, it's ALL THINGS CONSIDERED. I'm Robert Siegel.

MELISSA BLOCK, host:

And I'm Melissa Block.

Microsoft announced today that it is buying the Internet phone service Skype for eight and a half billion dollars. Skype has grown rapidly since it was founded in 2003, but it still loses money.

So as NPR's Wendy Kaufman reports, there were a lot of questions today about whether the deal makes sense.

WENDY KAUFMAN: This is Microsoft's most expensive acquisition, and it's one Microsoft CEO Steve Ballmer is excited about.

Mr. STEVE BALLMER (Chief Executive Officer, Microsoft): By bringing together the best of Microsoft and the best of Skype, we will empower people around the world with new technologies that should bring them closer together.

KAUFMAN: Ballmer, along with Skype CEO Tony Bates, spoke at a news conference this morning. The deal will combine the world's largest software company, Microsoft, with one of the leading Internet communications companies. Indeed, the Skype brand name is so strong that "to skype" has become a verb.

With an Internet-connected device, Skype's more than 170 million users can connect for free with family and friends using messaging voice and video. For a small fee, they can also call landlines or mobile phones almost anywhere in the world.

Microsoft hopes to integrate those services and more into its current line of products, including email, links, even its Xbox Kinect. Again, Steve Ballmer.

Mr. BALLMER: This Skype acquisition is entirely consistent with our ambitious, forward-looking, irrepressible nature. Sometimes we build things ourselves, and at other times, we'll make an acquisition, one that plays to our strengths and is much more than the sum of its parts.

KAUFMAN: Ted Shadler, a principal analyst at Forrester Research, thinks the deal makes sense. Microsoft, he says, has to compete in a post-Windows world and with the likes of Google.

Mr. TED SHADLER (Forrester Research): In order to do that, you need something that people want to use every day. And that's what Skype is. Skype is something that people want to use in the home every day.

KAUFMAN: Microsoft would like to see Skype become something that's used in the workplace every day, as well. Shadler says Skype could be integrated into Microsoft's business software.

Mr. SHADLER: So for example, you could be at work talking on a phone, and you could Skype out to a customer and have a video conference with a customer right from your office desk. And that's a very powerful thing.

KAUFMAN: Businesses do some of that now, but the combination of Microsoft and Skype could allow them to do it in an easy, secure and readily managed way and in a way that companies might be willing to pay for it.

Right now, just a tiny fraction of Skype's users pay anything at all, and the company has not produced much in terms of net profit. While Microsoft and Skype say there's lots of revenue potential in this deal, many analysts think Microsoft overpaid.

Michael Cherry, an analyst with the independent research group Directions on Microsoft, is one of them. He says Microsoft bought Skype partly as a defensive maneuver.

Mr. MICHAEL CHERRY (Directions on Microsoft): Microsoft saw the potential here to add to their existing services and keep a potentially viable asset out of the hands of competitors.

KAUFMAN: Google, Facebook and Cisco have all been talked about as potential Skype suitors, though Skype was considering an IPO when Microsoft made its unsolicited offer. The deal must still be approved by U.S. and possibly European regulators. The companies hope the acquisition can be completed by the end of the year.

Wendy Kaufman, NPR News.

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