News Corp in talks with internet phone group Skype

Rupert Murdoch's News Corporation is understood to have made a bid approach to the fast- growing internet phone group, Skype, which may have valued the two-year-old operation at almost US$3bn ($4.3bn).

Talks have broken down and Skype has denied it is for sale. But sources in the telecoms industry say they expect it to be taken over shortly.

Skype, which is based in Luxembourg but run out of London, was founded in 2003 by the 39-year-old Swede Niklas Zenn-strom and 29-year-old Dane Janus Friis.

The duo were the brains behind KaZaA, the music download business, which they left in 2002 because of the weight of legal actions launched by the music industry.

Previously, Mr Zennstrom was involved in Tele2, the Swedish group that specialises in cheap phone connections.

Skype is a leading player in the Voice over internet Protocol market, where telephone calls are made via broadband internet connections for minimal cost.

Along with US group Vontage, it has been eating into the revenues of traditional phone groups, such as British Telecom (BT) and AT&T.

Skype has been the most successful company in the market, having signed up over 47 million customers in less than two years of operation.

Internet giants Yahoo! and Google have now moved into VoIP, while BT has recently launched its own version, called Communicator.

However, Skype's lead in customer numbers and its brand-leading position has given it "first-mover advantage", which has attracted the interest of more established companies.

According to well-placed sources, Skype entered into talks with News Corp over a potential US$3bn sale.

This would have made a massive profit for the two founders and their backers - Hotmail investor Howard Hartenbaum and four venture capital firms - which together put just US$20m into the business.

However, talks fell apart last month, just before Rupert Murdoch's son Lachlan quit his father's empire.

Skype would have fitted in well with News Corp's satellite TV interests, which include controlling minorities in DirecTV in the US and BSkyB in the UK.

Bob Cringely, a US technology expert, said: "What's most interesting about News Corp and Skype isn't that the deal fell through, but that News Corp even knew Skype was available."

- INDEPENDENT