Microsoft buys Skype for $US8.5 billion

Skype CEO, Tony Bates

US software giant Microsoft will buy Internet phone service company Skype for $US8.5 billion ($A7.9 billion), the companies have announced.

"Skype is a phenomenal service that is loved by millions of people around the world," Microsoft chief executive, Steve Ballmer, in a statement.

"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 said Skype would become a new business division within Microsoft, and that Skype CEO, Tony Bates, would assume the title of president of the Microsoft Skype Division, reporting directly to Ballmer.

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 gain momentum in a hot smartphone market where rivals Apple and Google have shined with iPhones and Android-powered handsets respectively.

Skype in January closed a deal to buy Qik, a California startup that specialises 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 per cent of all minutes spent on international phone calls last year and 40 per cent 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 $US2.75 billion ($A2.56 billion).

The firm, which has its headquarters in Luxembourg, bypasses the standard telephone network by channelling 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.

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