Microsoft has announced plans to buy internet phone service company Skype for $US8.5 billion ($A7.9 billion) in a move aimed at carving out a bigger presence in an online arena dominated by Google and Facebook.
The acquisition of Skype, which had reportedly also attracted interest from Cisco, Facebook and Google, is the largest ever by the US software giant.
'Skype is a phenomenal service that is loved by millions of people around the world,' Microsoft chief executive Steve Ballmer said in a statement on Tuesday announcing the purchase.
'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 will become a new business division within Microsoft with Skype CEO Tony Bates assuming the title of president of the Microsoft Skype Division, reporting directly to Ballmer.
Tens of millions of people use Skype to make low-cost or free phone calls over the internet using their computers or smartphones. Skype bypasses the standard telephone network by channelling voice and video calls over the web.
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.