Microsoft confirmed plans on Tuesday to buy Internet phone service Skype in a deal worth US$8.5 billion.

The company allows users to make phone or video calls from their computer and has hundreds of millions of users.

The deal will mark the biggest purchase Microsoft has ever made.

BNN's Michael Kane said market reaction was positive on Tuesday morning despite the high price tag.

He said many investors and analysts were waiting for Microsoft to make a move to challenge Google Inc. for some of the Internet market share -- an area where Microsoft hasn't kept pace with the popular search engine company.

Ownership of Skype will give Microsoft another tool with which to chip away at Google's online stranglehold.

Kane said most observers Tuesday were viewing the deal as a positive move for the software company founded by Bill Gates.

"Microsoft is sitting on a pile of $45 billion cash and shareholders are going apoplectic wanting (CEO) Stephen Ballmer and the rest of the board of directors to do something with that money... and so $8.5 billion dollars to buy into Skype likely is a good use of cash," Kane told CTV's Canada AM.

Skype has a staggering 660 million users worldwide, and an average of about 8.8 million customers who pay to use the company's services each month. However, the vast majority use Skype's free calling service, making it difficult for the company to turn a profit.

Skype was purchased by eBay roughly six years ago for US$2.5 billion. The online auctioneer bought the service with the idea that buyers and sellers would use it to communicate with each other online.

"That never really came together and eBay wrote off its investment in Skype which is currently holding $686 million in debt," Kane said.

A group of investors currently owns 70 per cent of Skype. One of the major shareholders is the Canadian Pension Plan Investment Board, The Associated Press reports.