Microsoft set to buy Skype for $8.5bn in biggest deal in history

Adapting for the future: Head of Microsoft, Bill Gates

Microsoft is on the verge of buying Skype for $8.5 billion - despite the Internet phone service making a loss last year.
The deal would be the biggest in the 36-year history of the world's largest software company.      
Microsoft has trailed Apple and Google in the mobile and Internet arenas.
Despite doubling sales and profit in the last eight years, Microsoft's stock has mostly languished at the same level.
It has left investors worried about its ability to counter new rivals or adapt to new ways of computing.
Skype was formed in 2003 in Luxembourg and originally sold to eBay in 2005 for $3.1 billion.
At the time, it was thought that Skype calls could be used in auctions by bidders or sellers but the idea never materialised.
In 2009, eBay sold a majority stake in Skype but retains about a third of the company.
Microsoft already has video chat as a function in its Windows Live Messenger service, but it is not available on its Windows Phone 7 software.        
Skype is a well-known name but its profits are on shaky ground. It recorded a loss of $7 million last year.
Although 663 million people are registered on Skype, most of its services are free as calls are made between computers or in some cases internet-enabled phones.

Potential: Teaming up with Skype could help Microsoft's position in the mobile and Internet arenas

It makes money on voicemail services and calls to landlines or mobile numbers.
Microsoft's most high profile Internet purchase was the $240 million it paid for a 1.6 per cent share in Facebook in 2007.

 Bill Gates's company has also invested in the MSN Internet portal and Bing search engine, racking up $7 billion in losses in the last four years.  

There is potential for Skype software to be combined with Microsoft's Xbox Kinect for an interactive gaming experience that would link up players across the world.
Apple's FaceTime video-calling service -- available on its latest iPhone and Mac computers -- has been a big hit with consumers.
Google recently followed suit by adding video to its popular Google Talk application for smartphones.

Competitors: Microsoft shareholders have been concerned about the company's ability to compete with rivals such as Apple

The deal is relatively small for Microsoft, which has $50 billion in cash and short-term investments on its balance sheet.
'I think the price is quite reasonable,' said Sean Lee, a Taipei-based manager of the Global Top Dividend Fund at Shinkong Investment Trust, which owns Microsoft shares.
Skype had recently been looking at other options including tie-ups with Facebook and Google.  

Microsoft and Skype declined comment.