• by Mark Walsh  @markfwal, May 10, 2011

With its proposed $8.5 billion acquisition of Skype announced today, Microsoft has taken another step toward bolstering its mobile business and catching up with major rivals such as Apple and Google in the smartphone race.

Initial reaction to the deal faulted Microsoft for overpaying for a startup with less than $1 billion in revenue last year and a $7 million loss. But keep in mind, this is a company that was willing to spend $48 billion to buy Yahoo a few years ago. A mere $8.5 billion looks like pocket change by comparison and a better bargain. Skype also looks like a better fit with Microsoft than it was with eBay; Skype wound up offloading eBay in 2007 to a consortium of investors after acquiring it two year earlier for $2.6 billion.

For Microsoft, integrating Skype's popular Internet calling and video chat service could help boost the appeal of its Windows Phone 7 smartphone lineup, still trying to gain ground against the iPhone and Android devices. In a press conference today with Skype CEO Tony Bates, Microsoft chief executive Steve Ballmer also discussed leveraging Skype across its other platforms including Xbox 360, Kinect, Windows, Outlook and its Lync instant messaging service.

Despite the launch of competing products like Google Voice and Apple's FaceTime video chat software, Skype has continued to gain subscribers at a rapid clip. It boasts 170 million connected users and is adding 600,000 users a day, with video chat now accounting for 40% of use.

Think of it this way: Google is a verb when it comes to Web search; Skype has become a verb for Internet and video calling. And nobody yet says "I'll FaceTime you" to mean video chat via iPhone. Microsoft is poised to own an Internet-created verb of its own.

Skype's Bates indicated use of the service on mobile phones has increased 26-fold over the last five years, and VoIP and video chat in mobile have grown annually 42% and 104%, respectively. Certainly Microsoft would like to harness that growth by incorporating Skype into the Windows Phone platform.

Since Skype is now used across other smartphone platforms including Android and Apple's iOS, the acquisition has naturally raised concerns Microsoft would force mobile users only to access the service via Windows Phone or its other properties. That could also antagonize the wireless carriers like Verizon that Microsoft works with but that have also benefited from Androids' explosive growth.

Whether the company lives up to those promises will only be clear once the merger takes effect. But Microsoft should be smart enough not to alienate hundreds of millions of existing users with heavy-handed tactics aimed at punishing its rivals. The same goes for advertising, which Skype had just begun rolling out with the Skype client for Windows. Obviously, Microsoft's' relationships with brand advertisers and its own ad platform can help Skype as it seeks to build a new revenue stream.

And as a purely defensive move, if nothing else, the deal keeps other rumored suitors like Facebook and Google from snapping up Skype, and leaving Microsoft further behind in mobile and two-way video communication.