Has Sky got its eye on the broadband arena?

BSkyB is reported to be planning an aggressive move into the broadband market, which would put the satellite broadcaster into direct competition with BT.

According to The Guardian, BSkyB is planning to spend hundreds of millions of pounds buying a broadband service provider and rolling out a high-speed network across much of the UK.

BSkyB surprised City analysts on Tuesday when it announced plans to issue a corporate bond to raise up to £1bn. The company hasn't yet said how it plans to spend the proceeds of this bond.

As well as buying an existing broadband ISP, Sky is rumoured to be considering spending up to £200m to install its own broadband equipment in BT's local exchanges - a process known as local-loop unbundling (LLU).

LLU allows rival telecoms operators to compete with BT by offering different wholesale services while using BT's own telephone network infrastructure. Services can potentially be faster or cheaper.

Sky's current set-top boxes use a dial-up connection to the internet, and there has long been speculation that this could be upgraded to a broadband connection. Ian Fogg, senior analyst for broadband and VoIP at Jupiter Research in Europe, believes any plans Sky has in the broadband space could have major implications for the market.

Fogg said: "This will be a big strategic play. It can't just be about IPTV, or video-on-demand, or straight broadband access. It has to be all of them", adding that it has always been only "a matter of time" until Sky upgraded its dial-up connections.

If Sky does give its satellite TV customers a broadband connection, it would then be able to offer much better interactive services, including gaming and gambling. It could also offer IPTV over the broadband link, rather than broadcasting by satellite.

While Sky could set itself up as an LLU operator from scratch, it may make more sense to buy an existing ISP. It's unlikely that regulators would allow it to buy the newly-merged NTL and Telewest, and BT is much too big for Sky to consider acquiring.

Fogg believes Sky is more likely to buy a smaller ISP, perhaps Easynet, which already has a successful LLU network.

Graeme Wearden writes for ZDNet UK