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The deal could put video phone calls on a broad array of devices.

Associated Press

SAN FRANCISCO - Imagine using your Xbox and switching from a game to a video chat with a faraway friend holding an iPad. Or going into your office e-mail to invite Grandma to a virtual family reunion beamed on TV sets to relatives across the country.

Microsoft's $8.5 billion purchase of Luxembourg-based Skype is supposed to make using the Internet for video phone calls as common as logging on to Facebook or instant messaging is today.

If it wins regulatory approval, the deal announced Tuesday provides Microsoft, the world's largest software maker, with the means to sell more digital advertising and offer more popular conferencing tools to help businesses save money.

About 170 million people worldwide use Skype regularly for calls and chats. Microsoft believes it can attract hundreds of millions more by weaving Skype into its products. Not just Windows, which runs on eight of every 10 computers and servers on the planet, but also its Outlook e-mail program, software for phones and the Xbox video game console.

Skype allows users to make voice and video calls for free or just pennies. Calls from one Skype account to another are free. Those to a landline or cell phone using the regular phone network cost money, but much less than going through the phone company.

Skype is the largest provider of international calling services in the world, surpassing any single phone company, according to research firm TeleGeography.

Microsoft pledged to keep Skype in all the places it is currently available, including mobile devices that run on the software of two major rivals, Apple and Google. Skype users don't have to pay to install the software on Apple's iPhone, iPad computer tablet or devices running on Google's Android system.

The partnership would bring Skype to the Xbox video game console, which has sold 50 million units, making it the world's No.2 video game system behind the Nintendo Wii.

Although it makes billions of dollars selling software for personal computers, Microsoft has struggled badly in its effort to become a bigger force on the Internet. In the past six years, Microsoft's online division has lost more than $7.2 billion.

Skype has lost money consistently since its inception in 2003, mostly because it charges only a small fraction of its users. As a standalone company, Skype lost $7 million on revenue of $860 million last year.

That did not deter Microsoft. "We are a super-ambitious company," Microsoft chief executive Steve Ballmer said.

Skype will become a new business division of Microsoft. Skype's CEO, Tony Bates, will run it and report to Ballmer.

Microsoft can easily afford the purchase.

At the end of March, it had a cash hoard of $50.2 billion. Because Skype is based overseas, Microsoft plans to pay for the deal from the portion of cash that Microsoft holds overseas to avoid higher taxes in the United States.

Biggest deals

Here is a look at some of the biggest purchases in Microsoft's 36-year history.


Microsoft announces it will buy Skype for $8.5 billion.

Aug. 10, 2007

Microsoft completes its purchase of online ad service aQuantive Inc. for $5.9 billion.

Jan. 7, 1999

Microsoft completes its purchase of business software maker Visio Corp. for $1.5 billion.

July 12, 2002

Microsoft finalizes its acquisition of business and accounting software company Navisiona/s for $1.45 billion.

April 24, 2008

Microsoft completes its purchase of enterprise search company Fast Search & Transfer ASA for $1.3 billion.

April 5, 2001

Microsoft finalizes purchase of accounting and business software company Great Plains Software Inc. for $1.1 billion.

Associated Press