ONdigital, the pay TV company 50/50 owned by Carlton Communications and Granada, said the move would cost its two shareholders pounds 200m in additional investment over the next two years.
But the company said its counter-strike would enable it to reach its break-even point of about 2 million subscribers in three years' time, having already signed up 110,000 customers in its first four months.
Carlton's shares jumped 25.5p to close at 533.5p, while Granada's rose 19p to 1238p. BSkyB's shares were little changed, down 2.5p at 583p.
"This levels the playing field," Lehman Brothers analyst Julien Roch said. "The whole bet is that you lower your profitability, but you bring forward the number of suscribers, and on a net present value basis, it's worth it."
ONdigital offers a choice of some 30 channels through customers' existing TV aerials compared to BSkyB's 150-channel platform, which can only be received via satellite dish.
"Today marks the beginning of the end of analogue TV," ONdigital's chief executive Stephen Grabiner said, adding that the giveaway plan should speed conversion to digital TV.
ONdigital's move had been expected after BSkyB, which is 40-percent- owned by Murdoch's News Corp, announced earlier this month that it would give its pounds 200 digital TV equipment to subscribers free of charge.
Although ONdigital took three weeks to confirm it would match BSkyB's offer, it plans to be the first to the market with free equipment, trumping its rival by one working day.
Whereas BSkyB's offer takes effect on 1 June, ONdigital said its free boxes will be available this Friday. ONdigital's giveaway replaces its existing offer, which required customers to buy pounds 200 worth of goods in order to receive a free digital decoder.
ONdigital also plans to scrap its pounds 20 connection charge, whileBSkyB's SkyDigital subscribers need to pay a pounds 40 installation fee.
Besides scrapping the charge for digital decoders, ONdigital said it was subsidising the price of integrated digital TV sets so they cost roughly the same as analogue TV models. The new sets will have ONdigital decoding equipment built into them, eliminating the need for set-top digital TV decoders.Reuse content