Microsoft: Skype was right call

In a giant deal to buy Internet phone company Skype, Microsoft finally got what it has long sought: a consumer brand so powerful that it's a verb.

Microsoft Chief Executive Steve Ballmer has tried to turn its search brand Bing into a verb, like Google, but it hasn't caught on. Investors have turned up their noses at Microsoft's stock because the company has had a hard time romancing consumers who want iPads and Facebook, even though it makes billions of dollars selling software to businesses.

For the price of $8.5 billion, Microsoft now has that consumer brand.

"The Skype brand has become a verb, nearly synonymous with video and voice communications," Ballmer said Tuesday at a news conference in San Francisco.

The acquisition, the largest in Microsoft's history, will net Microsoft more than 170 million monthly Skype customers who use the service to stay in touch with friends in different countries, see their grandchildren grow up via video calls and send text messages, all free or at a fraction of the cost of landline and wireless calls.

Skype is one of the few companies that actually has lived up to the Web's promise of bringing people closer together. Many users now wonder how long the free ride will continue or, more bluntly, whether Microsoft will screw it up.

While Microsoft offers many free services, such as Bing and Hotmail, it also has a history of buying companies that never live up to the initial promise.

Asked specifically whether Skype would remain free, Microsoft said it is not commenting on how the product or features will change.

The acquisition signals Microsoft is stepping up its game and aggressively going after consumers with mobile phones, tablets and cloud computing.

"At Microsoft, we see enormous opportunity that brings together what people want — data, voice, video, IM [instant messaging], all on a single screen — whether it's a smartphone, a PC, a slate or the TV," Ballmer said. "Microsoft and Skype together will define this future and what it really, really looks like."

The company sees a future where Skype will connect the home, office and in between via Xbox, Windows, Office and Windows Phones.

Michael Cusumano, a professor at the MIT Sloan School of Management who just wrote about Microsoft in his book "Staying Power," said he was worried that the company had lost its edge.

"We used to use the phrase they would 'go for jugular,' " he said.

Over the past 10 years, he added, "They seem to be just a little bit too slow in reacting to things. ... Buying Skype is the kind of aggressive move I had hoped they would make."

The acquisition surpasses the $6 billion Microsoft spent in 2007 on aQuantive, a Seattle online advertising company.

Microsoft offered to buy Yahoo for $44.6 billion in 2008, but talks fell apart and the two companies now have a search partnership.

One reason for Skype's popularity is that it's used in a wide range of platforms, including Macs, iPhones, Android phones, BlackBerrys, televisions and Blu-ray players. Microsoft indicated it will continue to support Skype software built for competitors.

"Our vision is that products and services that Skype users know and love today will simply grow and be enhanced," Ballmer said."Part of that commitment is to continue investing and supporting Skype on non-Microsoft client platforms."

Observers say the deal makes strategic, rather than technological, sense for Microsoft.

Several Microsoft products do what Skype does — Windows Live Messenger instant-messaging software; Lync, its unified communication software for businesses; and the Xbox Live video-game network.

Microsoft plans to integrate Skype with those services, as well as its email-related offerings Outlook and Hotmail. Analysts see potential in building Bing into Skype applications and to selling online advertising on Skype.

Microsoft has a checkered history with acquisitions of companies with strong consumer success, such as mobile-device maker Danger, which made the Sidekick, a smartphone especially popular with teenagers.

The fruit of that merger, the Kin phone, emerged last year, only to be pulled from the market two months later.

And Microsoft had difficulty integrating aQuantive into its sprawling organization, eventually selling the most profitable piece, Razorfish, for $530 million, a fraction of the $6 billion Microsoft paid for the parent.

Skype, started in 2003, is still a fresh-faced tech darling that gives most of its software and services away, growing mostly by word-of-mouth and viral marketing.

The vast majority of people use Skype for its free service to make voice and video calls to other Skype users. The company makes money from SkypeOut, a subscription or prepaid service used to place calls from a Skype application to landline or mobile phones.

Only 6 percent, or 8.8 million, of Skype's 145 million users in December paid for services, according to a filing with the Securities and Exchange Commission.

The company recently added the ability to sell advertising on Skype software, but the filing says it is uncertain how much revenue it will see from ad sales.

In 2010, Skype lost $7 million on $860 million in sales. In 2009, which included 11 months when it operated as an eBay subsidiary, Skype lost $369 million on $719 million in sales.

Skype CEO Tony Bates calls it a member of the "100-100 club."

"We have over 100 million users who use us each and every month, 170 [million] at last count," he said. "But we also have a very, very engaged user base. Our user base on average uses 100 minutes per user, per month."

Bates will become president of a new Skype division at Microsoft and report directly to Ballmer.

Now based in Luxembourg, Skype was bought by eBay in October 2005.

An investor group bought the company from eBay for $2.7 billion in November 2009.

The company had been planning an initial public offering when Microsoft made an unsolicited offer.

With the sale, Skype's value has more than tripled in 18 months, prompting some people to question whether Microsoft overpaid.

"Strategically makes sense. Not sure about the price tag," said Sid Parakh, analyst at McAdams Wright Ragen in Seattle.

Yun Kim, an analyst at Gleacher & Co., was less concerned about price.

"I don't think it's necessarily the valuation that matters because they [Microsoft] have a lot of cash and financial resources," Kim said. "It's more important they make the right strategic move to continue to migrate their solution from the PC era to the post-PC era."

Microsoft is seeking regulatory approval for the deal from U.S. and European regulators, and hopes the merger will close by the end of the year.

Sharon Pian Chan: 206-464-2958

or schan@seattletimes.com