Microsoft has dropped a cool $8.5 billion to purchase internet phone service provider Skype, which it plans to integrate into Xbox Live, Windows Phone and other products.

Rumors about a possible Skype acquisition by Facebook, Google or Cisco have been floating around since last week, but it’s Microsoft who ultimately walked away with the prize, albeit at a very hefty cost. 8.5 billion smackers makes the Skype purchase the company’s biggest, surpassing the $6 billion it blew in 2007 on aQuantive, and it has some analysts suggesting that the company spent way too much on it.

Skype has a massive worldwide audience of 660 million but the vast majority of its services are free and while the company brought in revenues of roughly $860 million for 2010, it still managed to record a loss of $7 million. eBay bought the company for $2.6 billion in 2005 but wrote down its value by $1.4 billion just two years later and sold off 70 percent of its stake.

“If I was in Microsoft’s shoes, I think there are better deals they could have done with $8 billion,” said Tim Daniels, technology sector strategist at Olivetree Securities. “With Skype, only ten percent to 12 percent of customers pay for the service. I’d be surprised if Microsoft’s stock went up on the deal.”

Microsoft plans to integrate Skype connectivity into Lync, Outlook and of course Xbox Live, with support for the Xbox and Kinect platforms, Windows Phone and other devices. It will also continue to support and invest in Skype on non-Microsoft platforms. “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,” Microsoft CEO Steve Ballmer said in a statement.

“Microsoft has undoubtedly overpaid for Skype in the short term, but potentially not in the long term,” noted Informa Telecoms and Media Senior Analyst Giles Cottle. “Buying Skype gives Microsoft the ability to do whatever it wants with voice to an audience of 700 million users. That kind of scale does not come cheap.”

Sources:, The Globe and Mail

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