Sky gambles £650m on broadband

'Free' access for TV subscribers. Brokers cut forecasts. Service set to break even in 2010
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BSkyB, the pay-television operator, will provide free broadband internet access to its eight million television subscribers, as well as very cheap high-use subscription packages.

The company's plan proved more aggressive than had been anticipated resulting in much higher investment costs than previously forecast, with at least £650m to be spent over the next three years. The broadband offer will be open to new and existing television customers.

Sky believes it is uniquely positioned to take on seasoned broadband competitors such as BT, Orange and NTL, as well as new market entrants such as Carphone Warehouse in the broadband market due to its large customer base and existing customer service strength. The company is betting that its investment in broadband will pay off in improved customer loyalty as competition in the UK television market gets tougher with the entry of BT this year and the continued strength of the Freeview digital service.

Sky will offer a tiered service, with three different packages to choose from. Its customers can subscribe to free basic broadband packages or pay a small subscription fee to get a faster internet with higher usage limits. The top-level package, which costs £10 a month for Sky customers, offers 16 megabit per second speeds and unlimited usage. All three packages offer a free wireless router and security products. Sky will also charge some subscribers to connect to broadband and to professionally install broadband in the home, if they desire. Users can also subscribe to a service offering unlimited voice calls for £14 a month, including line rental.

James Murdoch, Sky's chief executive, said its broadband customers could save up to £300 a year by subscribing to its new service. "Within an 18-month to two year period, our customers could save around £2bn, which currently goes into the pockets of BT, the cable providers and other operators," Mr Murdoch said. "For too long, too many people have been paying too much for too little." BSkyB expects around three million users by 2010, at which point the service would become profitable for the company.

Tim Wolfenden, senior product manager at the price comparison service USwitch, said: "This heralds the arrival of genuinely free broadband. The Sky offer could shake the broadband market up dramatically."

However, Sky's shares fell 4.3 per cent to 517.5p as a result of the higher-than-expected cost of entering the broadband market.

Sky will spend around £400m on the service over the next three years, on top of around £250m of capital expenditure in the first two years. The investment is double what most analysts had pencilled in, but Sky confirmed that it will not affect its dividend policy. The company has said it will pay out 40 per cent of 2006 earnings as dividends. The investment represents only one sixth of its projected operating profit over the next two years.

Numis Securities said: "The market has been taken aback by the scale of BSkyB's ambition. We believe that BSkyB should be able to carve out a substantial, and very profitable, position." However, with costs around double what it had anticipated, the broker cut forecasts to account for the higher investment.

In response, an Orange spokesman said: "This is a funny use of the word "free" when 75 per cent of the population have to pay £17 to get Sky Broadband. Plus, for the lucky few able to get broadband 'free', there's a £40 connection charge."

The competition

SKY: Free 2Mbps broadband for TV subscribers. Speeds up to 16Mbps, with no usage limitations, for £10 a month. One-year contract, free router and security products. Activation fee of £40 on the free service, professional installation will cost £50.

BT: Tariffs from £17.99-£26.99 a month. Nationwide coverage. No security or activation charge.

CARPHONE WAREHOUSE: Free 8Mpbs broadband with £20.99-a-month voice calls package on an 18-month contract. Activation fee £29.99.

NTL: 12-month contract for £17.99-£34.99 a month. Basic package is 1Mbps. No activation fee, no security included.

Orange: Free 8Mbps broadband for mobile users on £30-a- month contract. No activation fee but professional installation is £69.99. Discount on security products.