Platform for change

unassailable.

The acquisition comes just three weeks after its pay-TV rivals, cable
companies NTL and Telewest, announced they were to merge in a £3.3bn deal.

Given that the cable industry is pinning its hopes on consumers taking
up its triple-play offering - broadband, pay-television and telephony
from one supplier - it would be easy, although not entirely accurate, to
conclude that Sky has made a pre-emptive strike against any threat posed
by the merged NTL-Telewest.

In reality, Sky's purchase of Easynet has more to do with gaining an
early lead over its competitors, as the convergence of technology leads
to changes in the way television content is consumed.

It is a sensible strategy. Subscriptions to Sky's digital satellite
television service may be nudging the 8m mark, but some believe it is
now close to saturation point.

Despite its expensive 'What do you want to watch?' marketing campaign,
new subscriptions have started to slow and Sky's self-imposed target of
signing up 10m domestic customers by 2010 looks like a challenging
goal.

By entering the broadband arena, Sky hopes it will be able jump-start
this customer-acquisition process.

Down the line

Sky will be able to take advantage of Easynet's digital subscriber line
(DSL) technology, which allows moving pictures and interactivity to be
delivered down a traditional phone line, rather than via cable.

In the 80s and 90s NTL and Telewest spent billions digging up roads to
install cable. Now, however, in a process known as 'local loop
unbundling', Ofcom has given a small number of broadband providers,
including Easynet, access to BT's telephone exchanges.

This will allow them to install their own DSL equipment, giving them
direct access to the home and enabling them to offer a range of
services, including high-speed internet connections and the potential to
show TV content.

So far, Easynet has installed its equipment in 232 of BT's 5000-plus
telephone exchanges and has plans to do so in another 100. The company
has only 21,000 domestic customers, but the expansion plans will give it
access to 5.8m people and 850,000 businesses.

The unbundling process is expensive, but given the size of Sky's
coffers, it is feasible that this process could be extended to many more
telephone exchanges.

For Sky the benefits of entering the broadband market are obvious.
Despite having a universal footprint, there are still 2m households that
cannot receive television via a satellite signal - listed properties,
for example.

A broadband service will provide another platform on which Sky can show
its content. The move, therefore, has less to do with taking on the
cable companies at their own game than with ensuring Sky content is
available on the broadest number of platforms.

As well as providing an additional revenue stream and the potential to
cross-promote its other services, the acquisition will enhance the Sky
proposition to existing customers, with the ultimate aim of preventing
an increase in churn among those who might be tempted to switch to a
cable offering.

Service expansion

Using broadband as a means of delivery, Sky will be able to package its
sport offering as well as providing video-on-demand and the ability to
download movies. The company already has experience in these areas
through its Sky-by-wire service on the Top Up TV broadband service,
which it is also rumoured to be interested in buying.

Expanding into broadband is consistent with the strategy of BSkyB's
chairman, Rupert Murdoch, who is also its biggest stakeholder, with a
37% share.

The father of Sky's chief executive, James Murdoch, has recently become
a convert to the internet. At a conference earlier this year, Murdoch
senior declared that newspapers should embrace new media to expand their
reach.

So, what are the odds of Sky pulling it off? With a reputation for
delivering technology that benefits the viewing experience, such as
Sky+, and a potent brand, the chances are that its foray into broadband
entertainment will be a success.

Nigel Foote, EMEA managing partner at Starcom, believes Sky has a
crucial advantage over its cable rivals. 'Sky has always been able to
deliver and, now that it has shaken off its council-house image, it has
a fantastic brand,' he says. Cable, on the other hand, has proven to be
a very different customer experience.

For now, Sky is keeping its counsel on its ambitions. 'Sky intends to
continue to set the pace of change in content and distribution,' says a
spokesman.

The company is planning to launch a package of channels available on
mobile phones later this year and has accumulated a £1bn war chest
through a corporate rights issue earlier this month.

In light of this, it seems likely that Sky will continue to make further
acquisitions of broadband companies to widen its distribution outlets as
it fast becomes a content-, rather than a broadcasting-based,
business.

TIMELINE

BSkyB

1989: Sky Television launches with four free-to-air channels.

1990: Sky reaches 1m homes. British Satellite Broadcasting launches and
later merges with Sky to form British Sky Broadcasting. A
subscription-only Sky Movies channel is launched.

1992: BSkyB secures exclusive rights to live FA Premier League
football.

1993: The company launches a multi-channel package of 14 channels.

1994: 17% of BSkyB is floated on the stock exchange with a value of
£4.6bn.

1996: Sky channels are available to 6m households across all
platforms.

1998: BSkyB launches the UK's first digital TV service, with 140
channels.

1999: The company offers free digiboxes to boost take-up.

2001: Subscriptions hit the 5m mark, Sky+ is introduced and BSkyB
switches off its analogue transmission.

2003: Subscriptions hit 7m and the company sets an 8m subscriber target
by the end of 2005. James Murdoch is parachuted in as chief executive.