Skype could be designated illegal in China

A man uses a Skype internet phone next to a laptop in Taipei November 11, 2005.

BEIJING/NEW YORK (Reuters) - The popular Internet telephone service Skype could be dealt a major setback in one of the world's largest markets as the Chinese government cracks down on what it called illegal Internet telephone providers.

A Chinese government circular from the powerful Ministry of Information and Industry Technology called for a crackdown "on illegal VoIP (voice over Internet protocol) telephone services" and said it was collecting evidence for legal cases against them. It did not name any phone companies.

Skype was still available in China on Friday evening through its joint venture partner TOM Online.

Skype had not yet been contacted by Chinese government officials, a Skype spokesman said on Friday in the United States.

The timing of a ban in one of the world's fastest growing markets could dampen investor enthusiasm for Skype as it prepares a 2011 initial public offering. The Luxembourg-based company, which has about 124 million users worldwide, is expected to be valued at about $1 billion in the IPO.

The Chinese move appeared to be aimed at protecting three government-controlled phone carriers -- China Telecom, China Unicom and China Mobile -- that provide the bulk of China's telephone services.

The South China Morning Post quoted an unidentified ministry official on Thursday as saying VoIP services could only be provided by the big three Chinese operators.

China has been known to play hardball with foreign businesses. After a months-long stand-off over censorship, China finally gave Google approval in July to keep operating its Chinese search page.

Skype has 20 million users in Asia Pacific, or 16 percent of the company's total users as of the end of June, according to a U.S. regulatory filing. The filing did not break out China's user numbers and a Skype spokesman in the United States said he did not know how many Chinese users it had.

No single country other than the United States represented more than 7 percent of Skype's average monthly user, according to the filing.

The latest news is another setback after Skype's global service outage last week, which cast doubts on the reliability of the service.

In 2005, Skype was blocked in parts of China as the government sought to ban phone calls made over the Internet.

Skype, partly owned by Web retailer eBay Inc, has been growing in popularity among Chinese users and businesses to make cheap or free international phone calls over the Internet.

"Nearly 1 in 6 people in the world live in China, and a great many of them rely on Skype to connect with families and friends, run businesses, and call people around the world," wrote Skype's Josh Silverman in an October blog post about Chinese privacy.

The Chinese circular, dated December 10, did not say what amounted to illegal services and did not name any VoIP providers it considered to be breaking the law.

Representatives of the ministry and the ministry's office gathering information for the campaign did not answer telephone calls on Friday.

Representatives of China Telecom and China Unicom did not answer phone calls on Friday. A spokeswoman for China Mobile, reached in Beijing, referred calls to the firm's Hong Kong office. Attempts to reach the Hong Kong office were not successful.

VoIP calls allow users to make international calls for much less than commercial providers, or even for free if both parties are using VoIP. Many businesses that use VoIP services to cut down on their international telephone costs could lose access to the cheaper alternative.

(Additional reporting by Sui-lee Wee; Editing by Alex Richardson, Derek Caney, Gary Hill)