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Skype: Microsoft is Back in the Game

Note: This article is hosted here for archival purposes only. It does not necessarily represent the values of the Iron Warrior or Waterloo Engineering Society in the present day.

Earlier this month, Microsoft secured the largest deal in the company’s history: purchasing Skype for $8.5 billion. What most readers aren’t aware of is the story behind the transaction.

What you may not know is that the “For Sale” sign has been pitched in Skype’s front yard for a long time. Skype’s major investors, eBay and Silver Lake, were getting nervous about delaying the public offering of Skype. Many outsiders speculated the motive that could warrant investors to sell Skype, a program with so much unleashed potential. Actually, Skype had recently filed for an initial public offering (IPO) even in the light of nearly a billion dollars in revenue. Some, however, suggested that Skype’s revenues were stalling while others said that Silver Lake and eBay were simply too impatient and wanted to secure their profits.

Initially, Facebook and Google danced with Skype, while Microsoft came fashionably late to the party. With Google’s Google Voice, and Apple’s FaceTime, Microsoft had been left out in the cold blistering winds of insufficient voice communication for quite a while; thus, this purchase would’ve been the perfect opportunity to get Microsoft back in the game.

Why is Skype so attractive? Skype has a great team pushing its technology forward. Provided they aren’t forced to jump ship when dealing with the infamous Microsoft bureaucracy, they will be a source of bountiful opportunities for Microsoft. Skype also allows the Windows giant to step into the enterprise collaboration market with its voice, video and sharing capabilities. With this move, Microsoft will now be able to directly compete with Cisco and Google. The next logical step for Skype has been interaction with mobile phone carriers. Now, this is Microsoft’s next step. Partnering up with cellphone carriers will become rewarding as the transition to LTE-based networks sets in. Skype can also help Microsoft in the creation and adoption of future version of the Windows Mobile OS; hence, Skype will also compete in this market against Google Voice and FaceTime.

Another interesting aspect to this situation is that Microsoft is an investor in Facebook. Facebook needed Skype desperately; in order for Facebook to get levelled on the market, it needed to improve its chat system. However, if Facebook had pursued the conventional path of building its own offering of voice- and video-calling software, the costs would skyrocket. Now that Facebook can piggy-back off Microsoft and has access to Skype assets, it is able to do this relatively cost-free. Facebook can also help Skype get more customers for its SkypeOut service. Integration between the two could mean Facebook Credits used for Skype Minutes. Is Facebook the biggest winner?

Despite the cost, Microsoft needed to secure this software to stay competitive. Now that Microsoft has this weapon in its arsenal, we can see who made how much out of the deal. eBay received $2.55 billion dollars. The co-founders, Niklas Zennstrom and Janus Friis, take home a well-deserved $1.19 billion. Silver Lake, Andreessen Horowitz (a venture capital firm) and Canada Pension Plan Investment Board jointly own 56% of the company, earning $4.76 Billion. Finally, the last stake goes to Andressen Horowitz who made a $205 million profit on their $50 million dollar initial investment.

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