Microsoft on Tuesday placed its biggest bet yet - $8.5 billion for Internet voice and video communications company Skype - on a deal the software giant hopes will help it better compete in a world shifting away from desktop computers.
During a news conference in San Francisco, Microsoft Chief Executive Officer Steve Ballmer announced the all-cash deal for Skype and outlined grand plans to bring the technology to a wider audience of consumers and business customers.
Those plans included the potential for video chats between game players on Microsoft's popular Xbox platform, Internet audio calls by business associates through the Outlook e-mail program, or mobile conferencing through Windows Phone.
The deal - Microsoft's most expensive acquisition - also snatched Skype out of the hands of other potential suitors, which reportedly included Google and Facebook.
Though analysts questioned the price and Microsoft's spotty record of digesting companies it buys, the Redmond, Wash., firm stands to gain a bigger presence in mobile communications just as people shift away from the desktop computers that made Microsoft the world's most dominant software company.
"By bringing together the best of Microsoft and the best of Skype, we will empower people around the world with new technologies that should bring them closer together," an effusive Ballmer said.
Skype, based in Luxembourg, offers free voice and video communications over the Internet, a popular alternative to standard telephone calls, especially over long distances.
Net losses
The company makes money from charging for premium services such as group video conferencing and calls made to regular phones. Yet Skype posted a net loss of $7 million last year on revenue of $860 million, and has lost money in four of the past five years.
But Skype brings Microsoft a large customer base - more than 660 million registered members worldwide, including 107 million who use the service at least once a month. Those users log in for about 100 minutes each per month, according to Skype.
"We think this allows us to extend from hundreds of millions to literally billions," said Skype CEO Tony Bates, who will become president of a newly created Microsoft Skype division if the deal passes the normal regulatory hurdles. "We believe this is a platform and a set of services that can reach everyone on the planet."
Skype was created in 2003 by Niklas Zennstrom and Janus Friis, the software developers who also created the file-sharing network Kazaa. They sold Skype in 2006 to San Jose's eBay Inc. for $2.6 billion.
Analysts were always skeptical about eBay's plans to use Skype to better connect buyers and sellers, and were not surprised when the online auction firm sold most of its stake at a loss four years later to private investors led by Silver Lake Partners and venture capital firm Andreessen Horowitz.
The failed eBay-Skype marriage was even injected into the 2010 California gubernatorial race as an issue raised by opponents of GOP candidate Meg Whitman, the former eBay chief executive who engineered the deal.
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