Microsoft has bought Skype for $8.5bn (£5.2bn) despite the fact that the free calling service was reportedly making a loss just two years ago.

Skype, which allows users to make voice or video calls for free over the internet, will become a new business division within Microsoft.

Two years ago, Skype’s former owner, eBay, sold 70% of the business for 2 billion US dollars (£1.2 billion). At the tie the service was said to be making a loss.

Microsoft’s willingness to pay $8.5bn is said by analysts to be an indication of the company’s desire to gain new customers for its Windows and Office software. Skype currently has 663 million users.

Under Microsoft’s new acquisition, Tony Bates, Skype chief executive, will become president of the Microsoft Skype division, reporting directly to Steve Ballmer, Microsoft chief executive.

“Skype is a phenomenal service that is loved by millions of people around the world,” Ballmer said in a statement.

“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.”

Although Skype allows users to make free calls and video calls, a premium service has been developed which would give Microsoft a chance to cash in on the lucrative video-conferencing market.

According to sources, Facebook and Google were separately considering a tie-up with Skype. Google had held early talks for a joint venture with Skype, the second source told Reuters.

The Skype deal will be Microsoft’s biggest acquisition, exceeding the $6bn it paid for online ad agency aQuantive.

Skype will support Microsoft devices like Xbox and Kinect, Windows Phone while Microsoft will connect Skype users with Lync, Outlook, Xbox Live and other communities.

Here’s what Microsoft is reporting about the Skype acquisition: