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Why Microsoft Is Buying Skype for $8.5 Billion

Updated at 12 midnight. Microsoft has bought Skype for $8.5 billion, in an all-cash deal. The deal closed a few hours ago. is close to finalizing a deal to buy Skype for between $7 billion to $8 billion. The Wall Street Journal confirmed the news after we had first reported it yesterday. The announcement is likely to come out later today or tomorrow morning, according to several reports. Steve Ballmer, CEO of Microsoft, is said to be a big champion of the deal, the largest in the history of the company. Ballmer and Skype CEO Tony Bates will host a press conference in a few hours.

Skype has been up for sale for some time, thanks to some very antsy investors. My sources indicated both eBay and Silver Lake Partners have been getting nervous about the delayed initial public offering and have been pushing for a sale of Skype. Facebook and Google were said to be earlier dance partners for Skype, and Microsoft was a late entrant and is now close to walking away with the prize.

It won’t surprise me if Microsoft comes in for major heat on this decision to buy Skype — and the software company could always botch this purchase, as it often does when it buys a company. The Skype team is also full of hired guns who are likely to move on to the next opportunity rather than dealing with the famed Microsoft bureaucracy.

I also don’t believe Facebook and Google were serious buyers. Google, with its Google Voice offering, doesn’t really need Skype. In essence, I feel Microsoft was bidding against itself. Even then, I personally think this is a bet worth taking, especially for a company that has been left out in the cold for so long.

Skype gives Microsoft a boost in the enterprise collaboration market, thanks to Skype’s voice, video and sharing capabilities, especially when competing with Cisco and Google.

It gives Microsoft a working relationship with carriers, many of them looking to partner with Skype as they start to transition to LTE-based networks.

It would give them a must-have application/service that can help with the adoption of the future versions of Windows Mobile operating system.

However, the biggest reason for Microsoft to buy Skype is Windows Phone 7 (Mobile OS) and Nokia. The software giant needs a competitive offering to Google Voice and Apple’s emerging communication platform, Facetime.

Guess Who’s the Big Winner

The biggest winner of this deal could actually be Facebook. The Palo Alto, Calif.-based social networking giant had little or no chance of buying Skype. Had it been public, it would have been a different story. With Microsoft, it gets the best of both worlds: It gets access to Skype assets (Microsoft is an investor in Facebook) and it gets to keep Skype away from Google.

Facebook needs Skype badly. Among other things, it needs to use Skype’s peer-to-peer network to offer video and voice services to the users of Facebook Chat. If the company had to use conventional methods and offer voice and video service to its 600 million plus customers, the cost and overhead of operating the infrastructure would be prohibitive.

Facebook can also help Skype get more customers for its SkypeOut service, and it can have folks use Facebook Credits to pay for Skype minutes. Skype and Facebook are working on a joint announcement, and you can expect it shortly.

Why Did Skype Want To Sell?

Skype had filed for an IPO, was going to do about a billion dollars in revenues, and was on its way to becoming profitable. So why sell? Silver Lake and eBay were both getting impatient and wanted to lock in their profits. Some sources also believe Skype’s revenues had stalled.

The company had bet heavily on is video sharing service. The premium version of video calling and sharing was a way for Skype to increase its average revenue per user and move into the enterprise market. However, given Skype’s DNA is that of a consumer Internet company, the challenges aren’t a surprise.

So Who Made What?

Using the $8.5 billion price as the likely sale price, eBay gets $2.55 billion for its 30-percent stake in Skype. So in the end, eBay did make money on the Skype deal.