Sky's broadband offer spooks City

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BSkyB's share price fell sharply today as chief executive James Murdoch vowed to make life "uncomfortable" for competitors by launching its "free" broadband offering.

Mr Murdoch said he was confident the satellite broadcaster would grow its broadband business quickly and have some 3 million customers by 2010, 30% of its projected subscriber base.

Sky estimates that its broadband service - which will take %u00A3400m off operating profits and cost %u00A3250m in capital expenditure - will start to break even in 2009 or 2010.

The projected cost of the venture spooked the City, sending the share price down 4.25% following this morning's announcement to 518p.

Mr Murdoch said many of Sky's rivals in broadband had been overcharging their customers and were in for a shock.

"A lot of incumbent players have been charging a lot of money for a long time for not a lot. It could be uncomfortable for them.

"We can see huge growth in this market from a revenue perspective and for customer loyalty. We can also grow market share."

Jon Florsheim, the managing director of Sky's customer division, said research indicated that Sky would pick up new business from competitors. "The bloodbath is not going to be on our front lawn," he said.

The company is writing to all its 8 million-plus customers to update them on its broadband plans and how quickly they will be able to sign up to the service.

At the moment Sky has built out its broadband coverage to 28% of UK homes, using the "local loop unbundling" process that allows broadband operators to go into telephone exchanges and build a connection to households.

Sky is aiming to have access to over half the country by Christmas and 70% by the end of 2007.

Customers choose from one of three options - "Base", "Mid" and "Max" - the latter offering 16Mb broadband at %u00A310 a month.

The company said that compared with the %u00A334.99 a month cost of cable company NTL's top package, which offers a speed of 10Mb.

The company believes most of its growth initially will come from the "free" Base tier, where customers pay for connection and installation but are charged no monthly subscription fee.

Sky Connect

For those households unable to get Sky Broadband, the company is offering a Sky Connect service, which leases capacity from a wholesaler such as BT.

Sky Connect customers can then be transferred to one of the Sky Broadband packages once the local loop unbundling has been done in their area.

Sky is concentrating on growing its own broadband business rather than looking to make acquisitions, Mr Murdoch said, playing down suggestions that Sky would buy internet service provider AOL UK.

"We'd look at it on a purely opportunistic basis," he said. "But we don't have a huge appetite for acquisitions ... At some price it could make very good sense, but I haven't had enough information to say whether it is at this point."

He also said the company was happy not to become a mobile operator, in contrast with NTL, which has trumpeted the virtues of a "quad play" proposition after its acquisition of Virgin Mobile.

"The simple fact is we believe families do not make decisions about mobile phones the way they make decisions about TV, fixed-line telephony and broadband products ... We don't see that fit as comfortable for customers - they won't get it."

Sky also relaunched its Sky Talk fixed-line service today, offering unlimited landline calls within the UK for %u00A35 a month on top of %u00A311 line rental from BT. Sky is to offer a %u00A314 wholesale package later this year.

world-of-digital.com

Hopefully this will lead to NTL/Telewest having some urgent meetings and our broadband costs coming down