May 2011

Microsoft CEO Steve Ballmer and Skype CEO Tony Bates seal the deal. Photograph: Susana Bates/Reuters

Little more than a decade after the dotcom bubble burst, the internet business is once again partying like it is 1999. The frenzy of deal-making in Silicon Valley, which is turning social media entrepreneurs into multibillionaires, moved up another notch when Microsoft splashed out $8.5bn for the loss-making internet telephone service Skype.

Tuesday’s buy is a record for the software giant and takes the total value of worldwide tech-related deals so far this year to $85.5bn (£52bn) – the strongest spell since the months before the dotcom bubble burst on 10 March 2000.

Analysts said the deal would give Microsoft a boost in its increasingly bitter battle with Apple and Google. Skype boasts about 170 million users every month and is adding 600,000 a day. But most calls are free and the service has struggled to make a profit. Last year it lost $7m.

Steve Ballmer, Microsoft’s chief executive, said that with Microsoft’s backing Skype would be able to build a future where “talking to friends and colleagues around the world will be as seamless as talking to them across a kitchen table or a conference room“.

Buying Skype gives Microsoft a recognised brand name on the internet at a time when Google and Apple are both building up their internet phone and video services. “Google has Google Voice, Apple is building up Facetime, Skype is a great brand,” said Colin Gillis, an internet analyst at New York-based BGC Partners.

Gillis said Microsoft was likely to add Skype to its Xbox video games system, Office software and its mobile and tablet software. “Skype addresses some major holes for Microsoft,” he said. “If they don’t screw it up.”

Skype was founded in 2003 by Swedish tech entrepreneur Niklas Zennström and the Dane Janus Friis. The service has grown far beyond its techie roots and is already a mainstream product. The retail giant WalMart started selling Skype hardware in 2007. At peak times there are more than 23 million Skype users online.

This is the second time it has been sold to a big tech firm. In 2005 eBay, the online auction company, bought it for $2.5bn. But eBay struggled to integrate Skype and argued with its founders and management, eventually selling it for $2.75bn to a private equity investor, Silver Lake, in 2009 but keeping a 30% stake.

Friis and Zennström also backed the sale as part of a consortium that bought 14% of Skype. Just a year and a half later eBay has made its money back and the founders are sharing a $1.2bn payday. The Skype deal ranks as the biggest in Microsoft’s 36-year history and follows multibillion-dollar strategic purchases by other tech giants including Intel, which bought the virus software specialist McAfee, and Hewlett Packard, which bought the handheld devices firm Palm.

Investors are also fighting over the new generation of tech firms including Facebook, Groupon and Twitter. Google is believed to have made multibillion-dollar offers for both Groupon and Twitter.

Private investors have fought to get a stake in Facebook, which is lining up a share sale next year that could value the firm at more than $70bn.

JordanTBH

Jordan Couzens is the man behind JordanTBH Technologies. He has a keen interest in Technology and Computer Programming.

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