Microsoft to buy Skype for $8.5 billion

It could be the most expensive call Microsoft Corp. has ever made.

In acquiring Internet phone service Skype for $8.5 billion, the technology giant is seeking new ways to make money as its core computer software business faces a growing threat from a new generation of powerful mobile devices.

But some analysts believe the Skype deal, Microsoft's largest ever, could become a multibillion-dollar dud, as it once was for EBay Inc. The online auction site acquired Skype for $3.1 billion in 2005 but then sold most of its stake in the phone service after failing to wring a profit from it.

"The question is, what's the point here?" said James E. Schrager, a professor of entrepreneurship at the University of Chicago Booth School of Business. "They seem to be buying an interesting company to which Microsoft doesn't really add anything."

In explaining the purchase, Microsoft said it would weave Skype's Internet and video calling services into its Windows smartphone, Xbox gaming console, and Office e-mail and document software, allowing users to more easily call their friends and colleagues. Microsoft said it hopes to extract more revenue from Skype by showing users colorful advertising as they make calls.

Wall Street investors were not convinced, however, and Microsoft's stock lost about 1% in regular trading, falling to $25.67. The stock is down 8% so far this year, while the technology market overall is sharply higher.

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Microsoft Near Deal to Acquire Skype

Microsoft Corp. is close to a deal to buy Internet phone company Skype Technologies SA for between $7 billion and $8 billion—the most aggressive move yet by Microsoft to play in the increasingly-converged worlds of communication, information and entertainment.

A deal could be announced as early as Tuesday, people familiar with the matter said, though they cautioned that negotiations aren't yet final and a deal could still fall apart. Including Skype's long-term debt, the total value of the deal is about $8.5 billion.

Representatives for Microsoft and Skype declined to comment.

Buying Skype—a service that connects millions of users around the world via Internet-based telephony and video— would give Microsoft a recognized brand name on the Internet at a time when it is struggling to get more traction in the consumer market.

Microsoft has invested heavily in marketing and improving the technology of its Bing search engine. While it has made some market share gains over the past year, Google Inc. still dominates the search market with more than 65% of U.S. searches going through its site.

At a value close to $8 billion, the Skype deal would rank as the biggest acquisition in the 36-year history of Microsoft, a company that traditionally has shied away from large deals. In 2007, Microsoft paid approximately $6 billion to acquire online advertising firm aQuantive Inc. Many current and former Microsoft executives believe Microsoft significantly overpaid for that deal. But they are also relieved that Microsoft gave up on an unsolicited $48 billion offer for Yahoo Inc. nearly three years ago. Yahoo is valued at half that sum today.


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Skype Technologies Says It will Offer Refunds to Customers After Outages

Skype Technologies SA, the largest provider of international calls, will offer refunds to paying customers who haven’t been able to use its service because of an outage that lasted more than 30 hours.

About 20 million users, representing 90 percent of the traffic the company would normally expect, are now able to make calls, Chief Executive Officer Tony Bates said today in a blog posting, after an outage yesterday rendered the service unavailable to almost all global users.

Year-end holidays are Skype’s heaviest traffic period, Bates said in an interview this week. The disruption adds to challenges facing Skype as it tries to persuade companies to pay for calling and establish premium services, such as group video conversations, in the run-up to an initial public offering.

“We now know what caused a number of clients to actually crash,” Bates said in a video on the company’s blog. “We’ve been able to mitigate that crash risk and isolate that.”

He didn’t say what caused the crash and said the company had ruled out a malicious attack.

Skype will give pre-pay and pay-as-you-go users 30 minutes of free calling, and active subscribers will get a week’s extra subscription, the company said.

Skype has more than 560 million users. Of those, only 1.4 percent pay for the service, according to a regulatory filing. The Luxembourg-based company started as a way for consumers to chat for free.

What’s Working

Audio and video calls as well as instant-messaging capabilities are now working, the company said. Some features, such as group video calling, are still unavailable.

Rival service OoVoo LLC said it received 100,000 new registrations yesterday, double its previous record for peak usage. The New York-based company attributed the peak to defecting Skype users, Matt Houser, a spokesman for the company, said in an e-mail.

Skype said it will do a full post-mortem of the cause of the outage. It is using servers that normally support offline instant messaging and multiparty video calls to get its main products online, Bates said.

The company accounts for about 12 percent of international calling, according to the Washington-based research firm Telegeography.

EBay Inc., which bought Skype in 2005, sold most of its stake last year for about $2 billion to a group led by Menlo Park, California-based private-equity firm Silver Lake.

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Skype outage hits users worldwide

Millions can't make calls, or are dropped in mid-conversation, because of a network connection failure — the second major disruption in service this year.

Millions of Skype Internet phone users worldwide couldn't make calls — or were dropped in mid-conversation — because of a network connection failure that began about 9 a.m. Wednesday PST.

It marked the second time this year that the popular, low-cost calling service was hit with a major outage, and this one was more widespread than the two-day disruption in 2007.

"For a communications system this large to go down, it's almost unheard of," said Charles S. Golvin, a Forrester Research analyst. "Usually when phone lines are disrupted, the blackout is confined to a specific geographical area. This is worldwide."

Indeed. In the past, there have been network outages to auction site EBay and social networks Facebook and Twitter, but the impact wasn't as great, Golvin said.

"With those sort of disruptions, people have alternatives or they can wait it out," he said. "But with something like this — and you need to communicate with someone — it's far more significant."

Skype tried to reach its customers through its official blog and messages on the micro-blogging service Twitter.

"Some of you may have problems signing in to Skype — we're investigating, and we're sorry for the disruption to your conversations," Skype said on its Twitter account. "Our engineers and site operations team are working non-stop to get things back to normal — thanks for your continued patience."

In a blog post, Skype said it first noticed a problem when the number of people on the website dropped off. It "wasn't typical or expected, so we began to investigate," it said.

"Skype isn't a network like a conventional phone or IM network — instead, it relies on millions of individual connections between computers and phones to keep things up and running," the post said. "Unfortunately, today, many of them were taken offline."

The Luxembourg company said that engineers were working to get the system running and that it "may take a few hours."

But the outage in many areas lasted into the night.

Skype apologized, and said some features, such as group video calling, "may take longer to return to normal."

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