The BBC called yesterday for the formation of an alliance of broadcasters to produce a mass-market free satellite system that would rival BSkyB's platform.
The corporation said it wanted to create a "FreeSat" option that would require no subscription to provide a digital free-to-air option for homes that use satellite technology.
The news came as some in the City voiced doubts about Sky's long-term growth prospects. Although many analysts remain bullish about Sky, which now has 7.2 million subscribers, others have suggested that most consumers willing to take pay-television have probably signed up by now.
In a report submitted yesterday to the Government, the BBC said it wanted a satellite system to replicate the runaway success of Freeview, which provides a non-pay digital system to households that take their television signal from a rooftop aerial a digital terrestrial option.
The Government has said it will switch off analogue television by 2010, and the Department for Culture, Media and Sport is believed to have asked the Treasury for £300m to fund the changeover to digital.
Although Sky has partnered the BBC in the Freeview venture, a full-blown free satellite system would challenge Rupert Murdoch's Sky in its heartland. Sky, which declined to comment yesterday, has spent about £2bn building its highly successful digital satellite pay-television offering.
FreeSat would serve households that cannot receive a good digital terrestrial signal currently about 25 per cent of the country. It may also prove to be a much more attractive proposition for digital viewers than Freeview, as the technical capabilities of satellite are more advanced. Satellite can provide many more channels than the 30 or so available on Freeview and it has superior interactivity available.
FreeSat offers about 100 channels already, such as CNN and The Golf Channel, that are "in the clear" or broadcast unencrypted. The BBC joined these unencrypted channels last summer in a move that provoked a war of words between the corporation and Sky.
Carolyn Fairbairn, the director of strategy and distribution at the BBC, said there was "no reason" for other free-to-air broadcasters, such as ITV, to pay Sky for its encryption services. The corporation called for ITV, Channel 4 and five to join it in pushing a new digital satellite platform where all stations were unencrypted. This would involve the sort of high-profile marketing campaign seen with Freeview, plus co-ordination with manufacturers of the decoder boxes and satellite dishes that would be needed by households to receive the signal.
Ms Fairbairn said: "This [FreeSat] is potentially a tremendously attractive proposition for the viewer."
ITV, Channel 4 and five are not currently "in the clear" and all pay Sky for "conditional access" services to appear on its platform. The ITV contract with Sky, which makes the network's channels available in satellite households, is worth £17m a year to Sky.
Ms Fairbairn said the BBC saw FreeSat as "complementary" to pay-television. She hoped that the cost of a dish, box and installation could be brought below £100. "This is for a different segment [of viewers] who are interested in more channels but are not interested in a subscription," she said.
Kingsley Wilson, an analyst at Investec Securities, said the move would be "more an irritant to Sky than something with a serious financial impact at this point". However, he added that if Sky changed its strategy to target lower-paying consumers, "FreeSat may be more of a threat down the road".