As reported in today’s Wall Street Journal (wsj.com), Microsoft (ticker MSFT) has announced an $8.5 billion all cash deal to acquire Skype. Skype will become a new business division within Microsoft, and Skype Chief Executive Tony Bates will assume the title of president of the Microsoft Skype Division, reporting directly to Microsoft Chief Executive Steve Ballmer.

The deal allows Microsoft to integrate Skype’s free and low-cost Internet-based video and telephony services into everything from its Bing search engine to Windows smartphones and its Xbox videogame system. The need to add a communications component is seen as crucial with the growing popularity of Apple’s (ticker AAPL) Facetime video-chat service and Google’s (ticker GOOG) Voice.

About 170 million people log in to Skype’s services every month, though not all of them make calls. Skype users made 207 billion minutes of voice and video calls last year. “Skype is a phenomenal service that is loved by millions of people around the world,” Mr. Ballmer said in a statement announcing the deal Tuesday. “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.”

Not all of Microsoft’s past acquisitions have worked out very well for them. In 2007, Microsoft paid approximately $6 billion to acquire online advertising firm aQuantive Inc. Many current and former Microsoft executives believe Microsoft significantly overpaid for that deal. The deal for Skype ranks as the biggest acquisition ever made by Microsoft, which has traditionally shied away from such large deals.

For all its promise, Skype has had a mixed history as an operating business. It has produced little net profit in the eight years since it was founded. Profits continue to remain elusive as the company expands its business world-wide. Last year the company posted revenue of $860 million and $264 million in operating profits, but still had a net loss of $7 million. Microsoft will be challenged in making Skype a more profitable business than it has previously been as it integrates Skype’s operations into its other product lines. Skype could give consumers a way to make cheap phone calls over the Internet from mobile phones, without paying higher rates to the wireless carriers, hopefully enhancing Microsoft’s efforts to gain market share in the mobile phone market.

Microsoft shares currently trade at $25.48, below its 200 day moving average and down from yesterday’s close of $25.83 on the announcement.