Microsoft says it's buying Skype in $8.5B deal

REDMOND, Wash. -- Microsoft says it will buy the Internet phone company Skype for $8.5 billion in cash.

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 smart-phone market.

Skype boasts about 663 million users worldwide who make voice and video calls over the Internet. The amount of calling on Skype's network totaled 207 billion minutes last year, according to regulatory documents.

Most people use Skype's free calling services, a penchant that has made it difficult for the service to make money since entrepreneurs Niklas Zennstrom and Janus Friis started the Luxembourg company in 2003.

Skype lost $7 million on revenue of $860 million last year, according to papers that the company has filed since announcing its intentions last summer to launch an initial public offering of stock. The IPO, however, has been in a holding pattern. An average of about 8.8 million customers per month pay to use Skype services.

Although it makes billions from its computer software, Microsoft has been accustomed to losing money on the Internet in a mostly futile attempt to catch up to Google Inc. in the lucrative online search market. Microsoft got so desperate that it made a $47.5 billion bid to buy Yahoo Inc. three years ago, but withdrew the offer after Yahoo balked. Yahoo is now worth about half of what Microsoft offered

Since hiring former Cisco Systems Inc. executive Tony Bates as its CEO last year, Skype has explored joint ventures or an outright sale with Google Inc. and Facebook, according to unverified reports in newspapers and blogs.

If Skype does sell to Microsoft, it would mark its second go-round under the ownership of a large company. Ebay Inc. bought Skype for $2.6 billion in 2005, but its attempt to unite the phone service with its online shopping bazaar never worked out. It would up selling a 70 percent stake in Skype to a group of investors led by private equity firms Silver Lake and Andreessen Horowitz for $2 billion 18 months ago.

Besides eBay, Silver Lake and Andreessen Horowitz, Skype's other major shareholders are Joltid and Canada Pension Plan Investment Board.