Microsoft Buys Skype for $8.5 Billion

Internet and video phone service had 170 million users last year; company will use Skype across suite of products, including Xbox

Microsoft has completed a deal to buy Skype — the Internet telephone and video service — for $8.5 billion, the companies announced Tuesday.

The blockbuster acquisition — the most expensive in Microsoft's history — comes just days after rumors surfaced in the tech world that Google and Facebook were interested in partnering with or buying Skype.

Microsoft said it will use Skype to "increase the accessibility of real-time video and voice communications" across its suite of products, including Xbox and Kinect, Windows Phone and other Windows devices.

The deal gives Microsoft an immediate foothold in the VoIP world, as Skype counted 170 million users in 2010.

Skype, which launched in 2003, was acquired by eBay in 2005 for $3.1 billion; eBay then sold "the majority of its stake in 2009 to a private investment group for $1.2 billion less than it paid."

The company generated $860 million in revenue in 2010 last year, though had an overall loss of $7 million for the year.

Microsoft said Skype will become a new business division within the company — headed by Skype CEO Tony Bates, who will report directly to Microsoft CEO Steve Ballmer.

News of the deal lifted stocks on Wall Street in early morning trading.

Here's the full release:

REDMOND, Wash., and LUXEMBOURG, May 10, 2011 — Microsoft Corp. and Skype Global S.a r.l today announced that they have entered into a definitive agreement under which Microsoft will acquire Skype, the leading Internet communications company, for $8.5 billion in cash from the investor group led by Silver Lake. The agreement has been approved by the boards of directors of both Microsoft and Skype.

The acquisition will increase the accessibility of real-time video and voice communications, bringing benefits to both consumers and enterprise users and generating significant new business and revenue opportunities. The combination will extend Skype's world-class brand and the reach of its networked platform, while enhancing Microsoft's existing portfolio of real-time communications products and services.

With 170 million connected users and over 207 billion minutes of voice and video conversations in 2010, Skype has been a pioneer in creating rich, meaningful connections among friends, families and business colleagues globally. Microsoft has a long-standing focus and investment in real-time communications across its various platforms, including Lync (which saw 30 percent revenue growth in Q3), Outlook, Messenger, Hotmail and Xbox LIVE.

Skype will support Microsoft devices like Xbox and Kinect, Windows Phone and a wide array of Windows devices, and Microsoft will connect Skype users with Lync, Outlook, Xbox Live and other communities. Microsoft will continue to invest in and support Skype clients on non-Microsoft platforms.

"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.

"Microsoft and Skype share the vision of bringing software innovation and products to our customers," said Tony Bates. "Together, we will be able to accelerate Skype's plans to extend our global community and introduce new ways for everyone to communicate and collaborate," Bates said.

"Tony Bates has a great track record as a leader and will strengthen the Microsoft management team. I'm looking forward to Skype's talented global workforce bringing its insights, ideas and experience to Microsoft," Ballmer said.