BSkyB and BT set for landmark digital deal

Rupert Murdoch and British Telecom look set this week to reveal a long- awaited deal to subsidise the media tycoon's push into digital satellite television, fuelling concern at their increasingly close relationship.

Industry sources said BSkyB, the pay-television business 40 per cent- owned by Mr Murdoch's News International, had chosen last Friday to announce the agreement. It would create a new company to subsidise the cost of the set-top boxes that enable viewers to decode digital programme signals.

However, the news was postponed to avoid clashing with BT's press conference in Madrid which heralded its landmark alliance with Spain's main phone network, Telefonica.

Sources suggested the so-called Interactive Services Company (Isco) would now be launched later this week or early next week. BSkyB will also pledge to offer a digital service before the end of this year, matching the cable industry's timetable, despite delays to the launch of a new dedicated Astra satellite.

The pay-television group is thought to have raised an estimated pounds 500m, of which BT is likely to stump up as much as pounds 250m. Alongside BT and BSkyB shareholders will include Midland Bank, which has overcome reservations about the deal, and Matushita, the Japanese electronics giant behind the Panasonic brand. The initial order will be for around 250,000 boxes.

Sam Chisholm, BSkyB's chief executive, has been negotiating for months to pull off one of the most audacious coups in the group's eventful history. The satellite channel needed to cut the retail price of the set-top boxes from a manufacturing cost of some pounds 500 to around pounds 200-pounds 250, about pounds 100 more than an existing satellite box, to encourage homes to switch to digital. With limited resources, BSkyB looked for partners who would shoulder the burden, reducing its own commercial risk.

The prize for BT is the chance to squeeze greater use out of its domestic phone network. Unlike the cable operators, BSkyB satellite technology can only beam signals into homes one way. To offer interactive services the boxes need to be connected to a phone line. If the service proves popular, BT would gain significant phone revenues and a new weapon in its battle against the cable networks.

The main sticking point has been BSkyB's reluctance to inject its own cash into Isco, arguing that its ability to deliver a strong programme line-up to the 200-channel service was a guarantee of financial success. Equally, BT wanted a bigger slice of the equity to reflect its larger cash contribution.

Another stumbling block was the telecommunications regulator's new guidelines which guarantee broadcasters access to the boxes on fair terms. Don Cruickshank, the regulator, has been studying documents from both sides but is not thought to have blocked the arrangement.

The Isco deal will come as a huge relief to makers of the set-top boxes.