5 reasons why Microsoft buying Skype makes sense

Microsoft's $8.5 billion purchase of Skype has prompted a lot of confused speculation, but Microsoft clearly spelled out its reasons, and the things it didn't say are pretty obvious. If it still doesn't make sense to you, here are five reasons why it should.

1. Microsoft can make money from Skype, which it has dismally failed to do from most of its online ventures. Yes, Skype has also been losing money, but in 2010, it had an EBITDA of $264 million on revenues of $860 million. Remove the debt and the new Skype division should soon be contributing $1 billion to Microsoft's revenues and more than $300 million in profits. It also has a lot of potential for growth. (EBITDA is earnings before interest, taxes, depreciation, and amortization.)

2. Skype can enhance other Microsoft products, and in the press conference call Microsoft chief executive Steve Ballmer said: "We’re committed to optimizing Skype for the TV with Xbox and Kinect for the Windows Phone and the Windows PC." He also said: "we want to extend the reach of Skype by connecting Skype users with users of our Outlook products, our Lync, Enterprise, Unified Communications product, Xbox Live, and other opportunities like Messenger and Hotmail".

3. Skype will extend Microsoft's reach across other platforms and devices, including TV sets (it's already on 50 million of those) in ways that Microsoft Messenger and Lync cannot. Ballmer said: "First, and I've got to underscore this, we're committed to the Skype user base." Since Skype will be a separate division reporting directly to Ballmer, other Microsoft divisions will find it hard to bury it or neglect the non-Windows versions. And if it's run as a standalone business, Microsoft should still be able to sell it, at a reduced price, if things don't work out.

4. Skype works for both businesses and home users. Microsoft didn't need Skype's technology because it already has successful audio and video chat systems in Messenger and Lync. However, Messenger is mainly popular with home users while Lync is only used in businesses. As Ballmer pointed out, Skype can be an option on both its existing systems and it bridges the gap between the two. In fact, Skype was going to bridge this gap anyway, but not to Microsoft's advantage….

5. Skype will help Microsoft's relationships with important partners. For example, Nokia likes Skype, and Skype for Symbian is already available for at least two dozen Nokia handsets. Skype for Windows Phone will enable Nokia owners to connect. Most if not all PC manufacturers like Skype, and could like the idea of shipping it as standard. Facebook might well like Skype, and if it happens, integrating Skype into Facebook would be a huge win for Microsoft.

Yes, but what about the price?

It does look as though Microsoft is paying over the odds for Skype, but the money really isn't significant as long as the purchase makes strategic sense (which it does), and as long as Microsoft doesn't screw it up (which it might).

Skype is based in Luxembourg, so Microsoft is able to buy it with overseas cash. If it had repatriated the money, it might have paid $1.5 billion in taxes. It may still be paying $2 billion too much ($7 billion instead of $5 billion) but that includes a premium for the unsolicited takeover, and possible competition from Google and Facebook, who were rumoured to be interested.

Microsoft could certainly have bought Skype for less in 2009, when the global economy was in a bad way, prices were depressed, and Skype was owned by a company who'd finally figured out that its strategy was wrong (eBay buyers and sellers generally don't want to talk to one another). However, it's still not a bad price compared with the $6 billion Microsoft paid for aQuantive or the ludicrous $44.6 billion it bid for Yahoo, or the $13.5 billion that Symantec paid for Veritas. It's not in the silly league from the last bubble, where Yahoo paid $3.6 billion for GeoCities and $5.7 billion for Broadcast.com.

Either way, it doesn't matter. Microsoft has about $50 billion in the bank and has already given more than twice that amount back to its shareholders. This includes a windfall gift to shareholders of $32 billion in a single pay-out. If it hadn't bought Skype, the money would either have sat in a foreign bank account doing not very much or been used to buy Microsoft shares, and neither of those would have been of any real benefit to the business. Skype just might be.