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Microsoft snaps up Skype to keep rivals at bay

Microsoft CEO Steve Ballmer, right, listens to Skype CEO Tony Bates speaking about the deal in San Francisco on Tuesday.

Justin Sullivan/Getty Images/Justin Sullivan/Getty Images

For Microsoft Corp. , the only thing better than acquiring Internet communication powerhouse Skype is ensuring that Google and Facebook didn't.

Under immense pressure to make up ground to its rivals in the smart phone and mobile communication market, the Redmond-based software giant has opted to spend $8.5-billion (U.S.) on Skype, a company it hopes will immediately vault it back to the top of the leaderboard, thanks to Skype's 107 million active users and presence on almost every type of personal computing device on the planet, from desktops to iPhones.

Skype offers users free or relatively cheap Web-based audio and video calls. The all-cash deal - the largest in Microsoft's 36-year history - ends months of negotiations that are believed to have involved heavyweight suitors such as Google and Facebook. Both rivals had entered the bidding war for Skype with the same strategy as Microsoft, hoping to integrate audio and video-calling services into their existing products.

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However, Microsoft appears to have presented the richest offer, and is now left with the daunting but potentially lucrative task of building Skype's services into everything from instant messaging to e-mail to productivity software. Perhaps most importantly, Microsoft will also try to use Skype's technology to boost the appeal of Windows-powered smart phones, which currently lag behind devices from companies such as Apple Inc. and Research In Motion Ltd.

Like RIM, Microsoft also faces a second challenge: bridging the divide between its enterprise and consumer products at a time when many corporate employees don't want to use different software and hardware for their work and private lives. With Skype, Microsoft hopes to integrate a well known and popular communication product across software such as Microsoft Outlook, Office and the Xbox gaming platform, giving users a consistent access point to communicate with their friends or co-workers. On the enterprise side, Microsoft will try to use its newest acquisition to address the growing need for tools that allow employees to work together regardless of their location.

"E-mail is becoming about much more than just e-mail," said David MacDonald, chief executive officer of Softchoice, the biggest reseller of Microsoft products in Canada. "People are looking for full integration into collaboration tools and documents and voice over Internet protocol."

Microsoft had previously tried to address such requests with in-house software such as Lync, its communication service, but with limited success. Now, with companies such as Google threatening to take business away from Microsoft's profitable business software division, the company likely determined it didn't have time to build its own Skype-like service from scratch.

"This is a big day for Skype and this is a big day for Microsoft," an upbeat Steve Ballmer said during a press conference Tuesday. The Microsoft CEO added that the fusion of Skype's communication technology and Microsoft's myriad software products represents a union that is "core to our mission and core to our technology direction."

Most of Microsoft's competitors in the smart-phone market have built audio or video-calling software for some or all of their mobile devices. But with Skype, Microsoft gains an important advantage over its rivals' products, because Skype's software already works on multiple platforms, making it much more alluring to users whose friends don't use the same hardware they do. That's in large part why the company was so aggressive in pursuing Skype: To keep its competitors from getting their hands on a multi-platform communication service which would further widen the gap between Microsoft and the leaders in the mobile space.

But Microsoft's strategy won't be easy to implement. In 2005, Web retailer eBay purchased Skype for $2.6-billion with the intention of integrating the software with the company's existing products. However the vision of eBay buyers and sellers communicating with one another through Skype's technology never materialized, and eBay ended up taking a massive writeoff on the acquisition.

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Given that Microsoft will pay more than triple what Skype was valued at less than three years ago, the company will be under intense pressure to make the acquisition work. It will also be hard-pressed to convince its carrier partners that a service offering free or very inexpensive phone calls is a good thing.

Besides an active user base of more than 107 million (and almost 700 registered accounts in total), the Skype deal also gives Microsoft a quick way to catch up with similar communication products from rivals in the mobile sector, such as Google Voice and Apple's FaceTime software.

"Microsoft undoubtedly has overpaid for Skype in the short term, but potentially not in the long term," Giles Cottle, senior analyst at Informa Telecoms & Media, said in a note. "Buying Skype gives Microsoft the ability to do whatever it wants with voice to an audience of 700 million users. This kind of scale does not come cheap."

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