Microsoft has announced it is making its biggest ever acquisition and will buy the Internet phone service Skype

Software giant Microsoft plans to acquire Skype, the online video conferencing service for $8.5bn, both companies have announced.

"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," Steve Ballmer, Microsoft chief executive, said on Tuesday.

The price tag makes it Microsoft's most expensive acquisition to date, topping the $6bn it paid for online advertising service aQuantative in 2007.

The deal will also bring the US-based software giant at least 600 million users worldwide, who use Skype to make free voice and video calls over the internet. Around 8.1 million of those are paying customers, who use the service to make traditional phone calls at discounted rates.

Microsoft said that Skype would become a new business division within the software company, and that Tony Bates, the Skype chief executive, will assume the title of president of the Microsoft Skype Division.

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

The service is said to have lost $7m on revenue of $860 million last year.

Buying Skype could be a way for Microsoft to shed some of its business software image and gain momentum in a growing smartphone market.

Three years ago Microsoft attempted to buy Yahoo Inc for $47.5bn, but the deal was never closed. Yahoo is now worth about half of that.

Skype, which had delayed plans for an initial public offering, had recently been looking at other options, with reports that Facebook and Google were considering joint ventures with the company.

In 2009, eBay sold a majority stake in Skype to an investor group that included Silver Lake, the Canada Pension Plan Investment Board and Andreessen Horowitz for $1.9bn in cash and a $125m note.

EBay retained about a third of the company.

Source: Al Jazeera and agencies