Can Microsoft put Skype at its core?

May 10, 2011: 3:06 PM ET

The one company that wanted Skype: Microsoft. Can the service unite Microsoft's far flung empire and raise its tech profile?

FORTUNE -- You'll be hearing about video chat a lot more over the next few years thanks to Microsoft's headline-making $8.5 billion acquisition of the popular Internet telephony company Skype, which both companies confirmed in a joint announcement earlier today. It's the largest sum Microsoft (MSFT) has ever forked over for a company, beating the $6.3 billion it paid for the digital marketing firm aQuantive in 2007.

Despite Skype's stated intention to go forward with an initial public offering, speculation over a buyout had been heating up over the last few days, pointing to several interested parties like Facebook and Google, who had allegedly expressed interest in partnering with and even acquiring the company. According to Reuters, a deal with either party would have been valued at between $3 billion and $4 billion, significantly more than the $1 billion the company's IPO would have raised.

But according to Marc Andreessen, co-founder of the venture capital firm Andreessen Horowitz, the only serious offer came from Microsoft, which entered the picture earlier this year, finalized the deal price in mid-April, and signed off last night.

"The only actual deal negotiation was with Microsoft," Andreessen told Fortune. "There were no other companies that we ran a process with. No other companies put an offer on the table like Microsoft did."

While tech watchers reel from sticker shock, whatever big company wanted Skype the most probably never had a choice but to ante up. Recent deals, and even recent failed deals, like the Google/Groupon talks, all point to one trend: when big companies like Microsoft want a shiny new company to acquire, they better be ready to suck it up and pay a huge premium, if they want to gain the talent and technology necessary to remain competitive.

With the deal done, what's more important going forward is what Skype can do for Microsoft and what Microsoft will do with Skype technology, which currently reports 170 million users and 40% growth year over year.

"This is definitely a doubling down," Andreesen continued. "Skype itself is one of the core, fundamental infrastructure Internet services. We talk about it as one of the 'Core 100 Club.' It's one of the very few things more than over a hundred million people use more than a hundred minutes a month. It's sort of the leading company and product in transition from offline to online."

As for Microsoft, the company has ambitious plans of integrating Skype into many of the products in its ecosystem. At its press announcement this morning, CEO Steve Ballmer broadly discussed plans of integration with Xbox Live and the Xbox Kinect motion controller, tying it into the Outlook and Hotmail email experience much in the same way Google recently did with Gmail, and perhaps most interestingly, offering it on Windows Phone 7 devices as a way to increase WP7 user adoption and "take it to the next level." As one example, Ballmer mentioned scenarios where parents can call in and video chat if they're running late to a PTA meeting, no special setup required.

"We're a super ambitious company," Ballmer remarked at the announcement. "We're irrepressible in moving forward and pursuing new things. … Sometimes we build things ourselves as we've done with Bing and Kinect. We'll form alliances to seize the moment and at other times, we'll make an acquisition as we're announcing today."

It's Ballmer's hope that Skype becomes their equivalent of FaceTime, the tightly-integrated video chat software Apple (AAPL) is pushing across its desktop, laptop and mobile platforms. Microsoft's goal in making Skype a new, independent business unit of the company is ambitious: essentially, Ballmer wants to bring in outsiders and make their technology part and parcel of Redmond's far-flung and notoriously fiefdom-driven ecosystem of software and services. If it works, it will not only improve user experience, but attract more customers to those products as well. If it doesn't -- if Skype executives are frozen out of big decisions or unable to defend their turf and integrate their technology into Microsoft products -- their fiscal performance should plain as day for all viewers of Microsoft's balance sheet to see.

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About This Author
JP Mangalindan
JP Mangalindan
Writer, Fortune

JP Mangalindan is a San Francisco-based writer at Fortune, covering Silicon Valley. Since joining in 2010, he has written on a wide array of topics, from the turnaround of eBay to the evolution of net neutrality. A graduate of Fordham University, Mangalindan has also written for GQ, Popular Science, and Entertainment Weekly.

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