Platform for change

BSkyB's move into broadband is about more than taking on a merged NTL-Telewest, writes Jeremy Lee.

BSkyB's decision to enter the high-speed internet market with its £211m purchase of broadband company Easynet is likely to be the first in a series of acquisitions by the satellite broadcaster as it seeks to ensure that its position as the biggest supplier of pay-TV remains unassailable.

The acquisition comes just three weeks after its pay-TV rivals, cable companies NTL and Telewest, announced they were to merge in a £3.3bn deal.

Given that the cable industry is pinning its hopes on consumers taking up its triple-play offering - broadband, pay-television and telephony from one supplier - it would be easy, although not entirely accurate, to conclude that Sky has made a pre-emptive strike against any threat posed by the merged NTL-Telewest.

In reality, Sky's purchase of Easynet has more to do with gaining an early lead over its competitors, as the convergence of technology leads to changes in the way television content is consumed.

It is a sensible strategy. Subscriptions to Sky's digital satellite television service may be nudging the 8m mark, but some believe it is now close to saturation point.

Despite its expensive 'What do you want to watch?' marketing campaign, new subscriptions have started to slow and Sky's self-imposed target of signing up 10m domestic customers by 2010 looks like a challenging goal.

By entering the broadband arena, Sky hopes it will be able jump-start this customer-acquisition process.

Down the line

Sky will be able to take advantage of Easynet's digital subscriber line (DSL) technology, which allows moving pictures and interactivity to be delivered down a traditional phone line, rather than via cable.

In the 80s and 90s NTL and Telewest spent billions digging up roads to install cable. Now, however, in a process known as 'local loop unbundling', Ofcom has given a small number of broadband providers, including Easynet, access to BT's telephone exchanges.

This will allow them to install their own DSL equipment, giving them direct access to the home and enabling them to offer a range of services, including high-speed internet connections and the potential to show TV content.

So far, Easynet has installed its equipment in 232 of BT's 5000-plus telephone exchanges and has plans to do so in another 100. The company has only 21,000 domestic customers, but the expansion plans will give it access to 5.8m people and 850,000 businesses.

The unbundling process is expensive, but given the size of Sky's coffers, it is feasible that this process could be extended to many more telephone exchanges.

For Sky the benefits of entering the broadband market are obvious. Despite having a universal footprint, there are still 2m households that cannot receive television via a satellite signal - listed properties, for example.

A broadband service will provide another platform on which Sky can show its content. The move, therefore, has less to do with taking on the cable companies at their own game than with ensuring Sky content is available on the broadest number of platforms.

As well as providing an additional revenue stream and the potential to cross-promote its other services, the acquisition will enhance the Sky proposition to existing customers, with the ultimate aim of preventing an increase in churn among those who might be tempted to switch to a cable offering.

Service expansion

Using broadband as a means of delivery, Sky will be able to package its sport offering as well as providing video-on-demand and the ability to download movies. The company already has experience in these areas through its Sky-by-wire service on the Top Up TV broadband service, which it is also rumoured to be interested in buying.

Expanding into broadband is consistent with the strategy of BSkyB's chairman, Rupert Murdoch, who is also its biggest stakeholder, with a 37% share.

The father of Sky's chief executive, James Murdoch, has recently become a convert to the internet. At a conference earlier this year, Murdoch senior declared that newspapers should embrace new media to expand their reach.

So, what are the odds of Sky pulling it off? With a reputation for delivering technology that benefits the viewing experience, such as Sky+, and a potent brand, the chances are that its foray into broadband entertainment will be a success.

Nigel Foote, EMEA managing partner at Starcom, believes Sky has a crucial advantage over its cable rivals. 'Sky has always been able to deliver and, now that it has shaken off its council-house image, it has a fantastic brand,' he says. Cable, on the other hand, has proven to be a very different customer experience.

For now, Sky is keeping its counsel on its ambitions. 'Sky intends to continue to set the pace of change in content and distribution,' says a spokesman.

The company is planning to launch a package of channels available on mobile phones later this year and has accumulated a £1bn war chest through a corporate rights issue earlier this month.

In light of this, it seems likely that Sky will continue to make further acquisitions of broadband companies to widen its distribution outlets as it fast becomes a content-, rather than a broadcasting-based, business.

TIMELINE

BSkyB

1989: Sky Television launches with four free-to-air channels.

1990: Sky reaches 1m homes. British Satellite Broadcasting launches and later merges with Sky to form British Sky Broadcasting. A subscription-only Sky Movies channel is launched.

1992: BSkyB secures exclusive rights to live FA Premier League football.

1993: The company launches a multi-channel package of 14 channels.

1994: 17% of BSkyB is floated on the stock exchange with a value of £4.6bn.

1996: Sky channels are available to 6m households across all platforms.

1998: BSkyB launches the UK's first digital TV service, with 140 channels.

1999: The company offers free digiboxes to boost take-up.

2001: Subscriptions hit the 5m mark, Sky+ is introduced and BSkyB switches off its analogue transmission.

2003: Subscriptions hit 7m and the company sets an 8m subscriber target by the end of 2005. James Murdoch is parachuted in as chief executive.

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