Microsoft Acquires Skype for $8.5 Billion

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Microsoft announced that they have entered a definitive agreement to acquire Skype for $8.5 billion in cash.

The unprecedented deal is the largest ever for the Redmond, Washington-based software giant in its 36-year history, and one of the largest ever seen in the technology industry. The announcement comes just days after reports that Google, Facebook, and even Cisco were interested in partnering with or buying the company.

“Any time people talk about communications, they talk about Skype… Skype is a phenomenal service that is loved by millions of people around the world,” said Microsoft CEO Steve Ballmer. “Together we will create the future of real-time communications so people can easily stay connected to family, friends, clients and colleagues anywhere in the world.”

Skype will become a new business division within Microsoft, and Skype CEO Tony Bates will assume the title of president of the Microsoft Skype Division, reporting directly to Ballmer. The service will be integrated across multiple Microsoft business and services, including Xbox and Kinect, Windows PHone 7, Outlook, and more.

The deal shows how far Skype has come since it was launched in 2003 by Niklas Zennstrom and Janus Friis. While Skype was initially popular with techies, it increasingly worked its way to the mainstream.

Online auction giant eBay purchased the company in 2005 for over $2.6 billion in cash and stock, but despite the high price tag, they never fully integrated Skype with its own offerings. In April 2009, eBay gave up on Skype, announcing plans to spin off the company through an initial public offering in 2010, and later that year in November sold 70% of Skype to a consortium including the original founders, valuing the business at $2.75 billion.

Some industry analysts have questioned Microsoft’s decision, which breaks down to more than $1,000 for each Skype user, when they already have their own voice and video chat platform, Microsoft Live Messenger. For all its promise, Skype has struggled to be profitable as a business, last year posting a $7 million loss, off of revenue of $860 million and $264 million in operating profits, with long-term debt of $686 million.

Skype uses a technology called voice over Internet protocol, which routes calls over the Internet, instead of the traditional phone network. The Skype software, which is available on a variety of platforms and devices, can be downloaded for free and allows users to call other users for free, or to call land line telephones for a low rate, and has become the world’s largest international voice carrier.