Microsoft buys Skype to take on Apple and Google

By Andrej Sokolow and Daniel Schnettler May 11, 2011, 8:46 GMT

New York - Microsoft is on a voyage of self-discovery. For decades the world's software giant, it is now taking on the likes of Apple and Google in the online jungle.

Paying 8.5 billion dollars for internet telephony company Skype represents a huge gamble for the maker of computer operating systems and office programs that is clearly aimed at securing its future in the internet era.

Skype offers the Windows giant a host of new users and a tried technology in video calls for computers and mobile phones, but the price is much higher than paid for it in previous transactions.

And Microsoft's Windows Live Messenger is itself a direct competitor. Did the company really need this?

Microsoft, which has dominated the IT sector like no other for decades, is in an odd position. It makes billions every year, and Windows and Office remains dominant, but it feels itself under intense pressure from its more youthful looking rivals Apple and Google.

Microsoft's big problems all seem to start with a small 'i': iPhone, iPad and iMac. Apple has shaken up the mobile phone market with its iPhone and also heralded the end of the PC era with its iPad tablet.

Despite the continuing ubiquity of the PC, market data show a clear trend away from the desktop to slimline mobile devices.

This development has unnerved Microsoft. Windows and Office remain highly profitable products. The quarter to end-March showed operating profits of 5.7 billion dollars.

By contrast the company's internet division showed a loss of more than 700 million dollars - in sharp contrast to the record profits at Google.

Microsoft has been trying to catch up for years, recently in combination with internet pioneer Yahoo. Microsoft's Bing search engine has been gaining ground slowly on Google, but the software giant has paid a price for this success, as the figures show.

In the smartphone market, Windows Phone is battling low market share, putting its faith in an alliance with Nokia, the world's largest maker of mobile phones.

Experts note that the Microsoft platforms work well enough, but they face devices with strong cult status with hundreds of millions of primarily youthful fans. The competition looks to have the market of the future sewn up.

What has it gained through the Skype purchase? For one, there are the more than 660 million registered accounts, and for another there is the tried and tested technology.

With Skype on Windows smartphones, Microsoft and Nokia would have a total package with which to face down Apple's Facetime video telephony.

And the takeover takes Microsoft deep into enemy territory, as Skype is already in use on millions of iPhones and Androids.

For its part, Skype could make the leap into the living room using Microsoft's Xbox game console.

Microsoft chief executive Steve Ballmer has made clear Skype is to be fully linked into all services, right up to the widely used Outlook e-mail program.

Microsoft's partner Facebook could also be interested, as the world's largest online network aims to be the communications centre for its millions of users. Authors: Andrej Sokolow and Daniel Schnettler