Rumor: Microsoft entering into Skype deal talks?


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Last week rumors hit the Internet that the VoIP based telephone company Skype was in talks to either be acquired or join in a huge deal with a major Internet company. Now yet another company has supposedly entered the fray, at least according to a new story at GigOm. Using unnamed sources, the story says that Microsoft could be in talks with Skype for "partnering with, acquiring or investing in Skype;

Last week Reuters reported, again via unnamed sources, that social networking company Facebook was in talks to either flat out acquire Skype or partner with it in a joint venture. The same story said that Google was also in talks with Skype about creating some kind of partnership. The talks were supposed to be in an early stage, according to the Reuters story. However today's GigaOm report claims via its own sources that some kind of major deal will be announced by Skype sometime this week "perhaps as soon as Monday." It adds that its sources have reported that "corporate attorneys and other senior managers are burning the midnight oil this weekend, ahead of some kind of announcement."

Skype's executives had previously set up the company for a public offering of stock but recently those plans were delayed until the second half of 2011. GigaOm speculates that;an investment from one of the three could give Skype the cash cushion as it waits out for its initial public offering, and could also be a way to buy out an antsy investor."


Microsoft near deal to buy Skype

SAN FRANCISCO (AP) - Microsoft Corp. is nearing a deal to buy the popular Internet telephone service Skype in what could be the biggest deal in the software maker's 36-year history, according to a published report.

If Microsoft does buy Skype, The Wall Street Journal reported that the deal could be valued at $8.5 billion, including assumed debt. At that price, a Skype takeover would top Microsoft's biggest previous acquisition - a $6 billion purchase of the online ad service aQuantive in 2007.

Citing unnamed people familiar with the matter, the Journal said Microsoft could announce an agreement with Skype as early as Tuesday. The newspaper reported the same people also cautioned the talks could fall apart.

Spokesmen for Microsoft and Skype declined comment on the report late Monday

Buying Skype would give Microsoft a potentially valuable communications tool as it tries to make a bigger splash on the Internet and become a bigger force in the increasingly important smartphone market.

Skype boasts about 663 million users worldwide who make voice and video calls over the Internet. The amount of calling on Skype's network totaled 207 billion minutes last year, according to regulatory documents.

Most people use Skype's free calling services, a penchant that has made it difficult for the service to make money since entrepreneurs Niklas Zennstrom and Janus Friis started the Luxembourg company in 2003.

Skype lost $7 million on revenue of $860 million last year, according to papers that the company has filed since announcing its intentions last summer to launch an initial public offering of stock. The IPO, however, has been in a holding pattern. An average of about 8.8 million customers per month pay to use Skype services.

Although it makes billions from its computer software, Microsoft has been accustomed to losing money on the Internet in a mostly futile attempt to catch up to Google Inc. in the lucrative online search market. Microsoft got so desperate that it made a $47.5 billion bid to buy Yahoo Inc. three years ago, but withdrew the offer after Yahoo balked. Yahoo is now worth about half of what Microsoft offered

Since hiring former Cisco Systems Inc. executive Tony Bates as its CEO last year, Skype has explored joint ventures or an outright sale with Google Inc. and Facebook, according to unverified reports in newspapers and blogs.

If Skype does sell to Microsoft, it would mark its second go-around under the ownership of a large company. Ebay Inc. bought Skype for $2.6 billion in 2005, but its attempt to unite the phone service with its online shopping bazaar never worked out. It would up selling a 70 percent stake in Skype to a group of investors led by private equity firms Silver Lake and Andreessen Horowitz for $2 billion 18 months ago.

Besides eBay, Silver Lake and Andreessen Horowitz, Skype's other major shareholders are Joltid and Canada Pension Plan Investment Board.

MORE Report: Microsoft near deal to buy Skype | KBOI 2 - Boise News, Weather, Sports and Breaking News Boise, Idaho | Technology


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Re: Microsoft near deal to buy Skype

Just days after reports that Google and Facebook were interested in partnering with, and possibly buying VoIP company Skype, comes a claim from the Wall Street Journal that Microsoft is planning to buy the company for $7 billion, in a deal worth closer to $8 billion after Skype's debts are considered. This mirrors an earlier rumor of a Microsoft-Skype deal published by GigaOm. An annoucement could be made as early as Tuesday.

Update: It's now being confirmed by AllThingsD; a deal valued at around $8.5 billion, with a press release expected at 5 AM Pacific time.

Last year, Skype had revenue of $860 million on which it posted an operating profit of $264 million. However, it overall made a small loss, of $7 million, and had long-term debt of $686 million. A $7 billion purchase price would represent a huge premium over the $3-4 billion conjectured in the Facebook and Google deals.

A Microsoft purchase would not be the first time Skype has been bought out; after being started in 2003, it was bought by eBay in 2005 for $3.1 billion. eBay then sold the majority of its stake in 2009 to a private investment group for $1.2 billion less than it paid.

Such a purchase would be Microsoft's biggest ever, surpassing even the $6 billion purchase of advertising firm aQuantive in 2007. That alone makes it surprising; the company's track record with large purchases is decidedly mixed. Danger, the exciting mobile technology company that produced the Hiptop, better known as the T-Mobile Sidekick line, was purchased for an estimated $500 million in 2008; the result of that purchase was the disastrous KIN phone and a complete failure to integrate the bought-in talent. The aQuantive purchase too had mixed outcomes, with Redmond unable to find a role for the Razorfish division before eventually selling it off in 2009, and the company's continued inability to make a profit from online advertising.

Microsoft has in the last couple of years shied away from similar large acquisitions, sticking to buying smaller, easier-to-manage organizations, leading some to argue that this was a direct result of the digestive difficulties faced with the large purchases. A $7 billion Skype acquisition would show that perhaps Redmond believes it has resolved such problems.

A deal that's hard to understand
Microsoft's own software already has considerable overlap with Skype. Windows Live Messenger offers free instant messaging, and voice and video chat. It currently boasts around 330 million active users each month, typically with around 40 million online at any one moment. Microsoft has an equivalent corporate-oriented system, Lync 2010 (formerly Office Communication Server) that allows companies to create private networks that combine the communications capabilities of Live Messenger with corporate manageability. The underlying technology of both platforms is common, allowing interoperability between Live Messenger and Lync. The company also plans to integrate Kinect into Lync to create more natural virtual presences.

Skype, in contrast, has around a third the number of active users—124 million each month—as well as fewer simultaneous online connections—typically 20-30 million. Its instant messaging and voice and video call features are broadly similar to those found in Windows Live Messenger, though arguably more refined.

Though the Skype userbase is very much smaller than that of Windows Live Messenger, it does have one key difference: about 8 million Skype users pay for the service. Skype integrates telephone connectivity, able to make both outbound and inbound phone calls, and while its online services are all free to use, these phone services cost money. Skype also has points of presence across the globe, making it easy to buy phone numbers in foreign markets to cheaply establish an international telepresence.

Skype certainly has some things of value. The telephony infrastructure would make a valuable addition to the Messenger/Lync platform. It could also tie-in well with Exchange 2010, which offers voicemail integration. Adding telephony to Lync, Exchange, and Live Messenger is certainly a logical way to extend those products.

Perhaps more adventurous, integrating Skype-like functionality into Windows Phone would be something of a game-changer. Integrated multinational VoIP support would potentially be enormously disruptive to the cellphone market. However, as good as this might be to end-users, it would probably serve only to kill Windows Phone stone dead for carriers.

As much as telephony integration into Microsoft's communications products and VoIP integration into its telephony product makes sense, it's hard to make sense of the deal. $7 billion is a phenomenal amount of money to spend on a company that has long struggled for profitability, and it's hard to believe that it's truly the most cost-effective way of getting access to telephony and VoIP technology.

$7 billion would buy a lot of points of presence and software development effort, after all. Microsoft could build equivalent telephony infrastructure for much less, just as Google is doing for Google Voice.

Similarly, although Skype is in many ways a better instant messaging and voice/video calling client than Live Messenger, it's hard to believe that it's $7 billion better. The Skype client itself is written almost as if it were a piece of malware, using complex obfuscation and anti-reverse engineering techniques, and it would be disquieting for Microsoft to release something that behaved in such a shady way; at the very least, the client would surely have to be rewritten to avoid the obfuscation and outright hostility to managed networks that Skype currently has.

Even the access to paying customers is hard to justify. The terms of the deal mean that for each Skype customer, Microsoft is paying about $1000. And on average, those customers are worth a profit of about $30, presuming most of Skype's income comes from subscriptions and call charges. That's a huge disparity.

Windows Live Messenger users have shown no propensity towards paying money, unlike Skype's 8 million paying users, and it may be a challenge to convert them from non-paying to paying. However, since at the moment they have essentially nothing to pay for, it's difficult to use that as evidence that they wouldn't pay if there were services worth paying for. Especially as there's likely to be quite a bit of overlap between the customer bases; people aren't giving Skype the money instead of Microsoft because they prefer paying Skype, they're doing it because Microsoft simply doesn't sell Skype-like telephony facilities. And Lync customers are already on the payment treadmill, so it should be far easier to extract further payments from them for additional services.

Ultimately, it's hard to see how the Skype purchase is worthwhile from a technology or user access perspective. The technology isn't good enough and the users aren't lucrative enough or plentiful enough to justify it. But that doesn't mean it won't happen—and the prospect of keeping the company out of reach of Google and Facebook may just make the purchase irresistable.

Source: WSJ: Microsoft to buy Skype for $7bn. Rest of world: for real?

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