Microsoft just bought Skype for $8.5 billion. Not to get too personal, but that’s many, many billions more than I make in a year. But unlike buying a human writing machine like yours truly at an affordable price, Microsoft is paying $8.5 billion for something called Skype. Here’s what it’s getting.
Remember Kazaa?
Kazaa, in case you don’t remember or have never heard of it, was a peer-to-peer file sharing program used by millions of people in the early 2000’s just as Napster was getting shut down for enabling the illegal sharing of music files. Kazaa enabled people to share music files but it also let people share videos and programs as well, which made it very, very popular.
The basic structure of a peer-to-peer file sharing network is that whoever’s on the network is connected to everyone else on the network, with no official, central server or group of servers sitting in the middle holding all the files. The more people who are on the network, the faster the network can send files back and forth. And the more people who have the same file on their computer, the faster it could be sent to someone trying to download it.
So the magic of Napster and later, Kazaa, was that when a popular file—say, a music file labeled HumptyDance.mp3—was made available on the network, everyone could download it really fast. And better yet, no one person could really be held accountable for facilitating piracy since the file wasn’t stored on a central server anywhere—though as we’d see later, the people that actually owned Napster and Kazaa eventually got sued anyway.
Kazaa was initially built by some programmers in Estonia and then purchased by two guys: Niklas Zennstrom of Sweden and Janus Friis of Denmark. Zennstrom and Friis developed Kazaa a bit more and by around 2003, it became the most downloaded piece of software ever. They sold the company to Sharman Networks shortly thereafter and set out to build Skype.
Skype’s Peer-to-Peer Roots
Skype leveraged the same type of peer-to-peer networking idea that Kazaa was built upon, but applied it to voice transmission instead. The idea was that the more people that used Skype, the more reliable the connection would be for each of them. Oh, and it was free. That helped a lot. Skype’s big selling point was that users could make free voice calls (using their computers and a headset) to each other from anywhere in the world. After all, since it was a peer-to-peer network it was to Skype’s advantage to have as many people using the network as possible so that it’d be stable and fast.
And since it used peer-to-peer technology, calls from people in the middle of nowhere would sound fine as long as other people in the middle of nowhere used Skype, too—they didn’t have to be routed through some server in a more populated area—so a lot of people in the middle of nowhere started using Skype. People in populated areas did too because, hey, people like free calls. You could call someone in another country for zero dollars.
Skype very quickly became a verb, as in, “Skype me!” or “Yo Dawg, you Skypin’?” And when you become a verb, you know you’ve made it.
Skype also handled instant messaging, which is relatively easy compared to voice data and eventually added live videoconferencing—all of which was free between Skype users. Then it started making money by charging people for using Skype to call out to regular telephone numbers, and to accept incoming calls to Skype from outside phone numbers at rates that were pennies on the dollar compared what people were paying for standard phone service and long distance calls.
So Skype’s been one of those “disruptive” technologies we’ve all heard about. It took a business model like expensive phone service, applied a heaping helping of technology to it, and made it so affordable that people were willing to put up with having to make phone calls while sitting at their computers. And now as mobile phone technology gets faster and better, it’s starting to creep into the mobile phone space and shake things up there.
Why Microsoft?
A few years down the line, Microsoft’s $8.5 billion purchase of Skype will either seem outrageous or it’ll look like a good idea. You may recall that eBay bought Skype for $2.6 billion in 2006 and, up until this morning, that figure seemed outrageous. Now eBay’s actually looking pretty smart, which is something that hasn’t been uttered for quite some time.
But unlike eBay, Microsoft could end up putting its billions to good use, seeing that it can integrate Skype into almost any of its products. It’ll be able to handle live video chat on Windows computers and Xbox 360 consoles, help groups of people quickly collaborate on Office documents, and facilitate call-back and instant messaging features in Outlook, just to name a few of its potential uses. And don’t forget about Microsoft’s new Windows Phone 7 mobile platform. That’ll put just about every one of Skype’s features to work.
Skype also has around 700 million users, too, with whom Microsoft now has a pretty direct line of communication. Run the numbers and, all told, Microsoft paid about $12 per person for that sort of access.
More on TIME.com:
Microsoft Makes Skype Purchase Official: What You Should Know