BSkyB has warned that operating profits will take a hit of up to £70m next year as it invests in on-demand services and technology in the pay-TV and broadband wars with rivals from BT to NetFlix.
Jeremy Darroch, the chief executive, is offering customers an internet-enabled TV set-top box for its cut-price service, Now TV, for just £10, as Sky aims to combat the threat from low-cost streaming websites.
Mr Darroch played down fears that consumers are cutting back on premium services such as Sky Sports and Sky Movies, but acknowledged that rivals such as NetFlix and LoveFilm, which charge as little as £5 a month, meant that "we're seeing the market segment a bit", with a wider range of offerings.
He said Sky had seen an "explosion" in customers wanting to watch on-demand content, with downloads up fivefold in a year. The number of people connecting their Sky+ HD box to the internet has jumped by 1.7 million to 2.7 million.
Sky's investment in hardware will result in a hit of £60m to £70m on operating profit in the next financial year to June 2014. The impact will be "broadly neutral" in 2015, before boosting profits in 2016.
Sky shares fell 3 per cent to 822p, despite announcing a £500m buyback.
Mr Darroch faces challenges on several fronts, with BT declaring yesterday that it had signed up 500,000 for its Premier League football coverage. He would not say if Sky Sports' estimated 5 million subscriber base has been affected, but described an 11 per cent jump in group revenues in the last quarter as "better than shabby".
Its annual operating profits rose 9 per cent to £1.33bn. Revenues rose 7 per cent to £7.23bn, while the dividend was increased by 18 per cent.