Microsoft to buy Internet phone company Skype

US software giant Microsoft is all set to buy the Internet phone company Skype for $8.5 billion in cash as it battles to stay relevant in an online world dominated by Google and Apple.

Buying Skype is giving Microsoft Corp. a potentially valuable communications tool as it tries to make a bigger splash on the Internet and become a bigger force in the increasingly important smartphone market.

Skype boasts about 663 million users worldwide who make voice and video calls over the Internet.

Microsoft chief executive Steve Ballmer reportedly championed the deal, which was estimated to have a price tag of $8.5 billion in what would be the decades-old technology company's most expensive acquisition to date.

Skype was launched in 2003 by Estonian software developers who were part of the group that created peer-to-peer file-sharing service Kazaa.

Millions of people use Skype to make low cost or free phone calls over the Internet using their computers or smartphones.

Buying Skype could be a way for Microsoft to shed some of its business software image and gain momentum in a hot smartphone market at a time when Internet lifestyles are going mobile.

Skype in January closed a deal to buy Qik, a California startup that specializes in allowing people to use smartphones to stream video to Internet-linked friends in real time.

The acquisition came amid surging popularity of video chat using smartphones, tablets and desktop computers.

Skype handled 24.7 percent of all minutes spent on international phone calls last year and 40 percent of calls between Skype users were video, Skype chief executive Tony Bates said while announcing the Qik takeover.

Bates said Skype was also continuing its push into living rooms, expanding a line of televisions embedded with its Internet telephony service and even infusing the software in a Blu-ray player made by Panasonic.

Online auction giant eBay in 2009 sold most of its stake in Skype to an investment group that includes the two founders of the Web communications company. That deal valued Skype at $2.75 billion.

The firm, which has its headquarters in Luxembourg, bypasses the standard telephone network by channeling voice and video calls over the Internet.

It allows users to call others free of charge and provides the ability to connect with land lines or mobile devices at low rates.

Skype last year announced plans for an initial public offering of stock and appeared on its way to profitability, but investors are evidently eager for a pay-off.

Vaunted technology blogger Om Malik wrote that Facebook could benefit greatly from Microsoft buying Skype. Microsoft owns a minor share of Facebook and powers Internet searches at the social networking service.

Facebook members would likely get access to Skype tools while Microsoft keeps the telephony service out of the hands of competitor Google, Malik said.

A Skype version 5.0 for Windows unveiled in October included a Facebook tab and integrated Facebook's news feed and phonebook into the Internet communications service.

A Skype buy could also play into Microsoft's efforts to promote its new Windows Phone 7 mobile software in a fierce smartphone market.

Microsoft joined forces in February with Nokia, the world's largest mobile phone maker. In an effort to radically change course and fight off encroaching competition, Nokia smartphones will be powered by Microsoft software, according to Nokia chief executive Stephen Elop.

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