Sky spending £250m on 'free' broadband

Sky has become the latest to join the 'free' broadband brigade - and has revealed its ISP makeover will cost it £250m in the next two years.

BSkyB CEO James Murdoch announced today that the company will start selling broadband services to its eight million Sky TV subscribers on one of three packages. The threesome will cost between nothing and £16 a month, with pricing dependent on speed and download limit. The most expensive 'Max' package will give users unlimited downloads and up to 16Mbps of fat pipe.

Using unbundled exchanges, Sky reckons it will have 28 per cent population coverage for the offers at launch and 50 per cent by Christmas. Coverage will centre around urban areas including Glasgow, London and Manchester but for those that fall outside Sky's exchanges, the broadcaster will also resell DSL access.

According to Murdoch, the company is pushing for partial, rather than full, unbundling for the foreseeable future.

"We think the BT platform is not ready for the prime time... we don't want our customers to be guinea pigs," he said.

Entering into the broadband market won't come cheap for Sky though. According to the company, the move is expected to cost Sky £250m in capital expenditure over the next two years, mainly due to subscriber acquisition costs, but by that time it still won't be able to match the likes of BT for population coverage. The broadcaster expects its ISP business to become profitable in the 2009 or 2010 financial year.

Sky estimates that by 2010, 30 per cent of customers will sign up for broadband access. The broadcaster is hoping to boost revenues by upselling the freebie hunters onto more expensive packages, although it says signing those customers set on spending nothing can still earn the company money if they stay with the ISP. According to Sky, a one per cent cut in churn will save it £100m over five years.

Sky has been slated to start selling broadband under its own brand since it confirmed its intention to buy ISP Easynet for £211m in October last year. The deal closed in February.

It has become the third company in recent months to offer free broadband. Carphone Warehouse was the first, offering users 'free broadband forever' if they sign up to an 18-month contract and pay £20.99 for fixed-line telephony. Orange followed shortly after with a similar 18-month proposition for those already spending over £30 on their mobile bill with the operator.

According to Jon Florsheim, MD for Sky's customer group, Sky is expecting to get some scalps, despite its relatively late entry into broadband. "The bloodbath won't be on our front lawn," he said.

Rival ISPs are hoping that Sky's delay in launching will temper enthusiasm. A BT spokesman said: "It's a very competitive market and we welcome Sky's late arrival to the broadband party."

Some industry watchers, however, believe that despite the late start, Sky will soon become a tier-one player.

According to Ian Fogg, analyst at JupiterResearch, the Sky brand and offer are likely to turn customers' heads and give rivals some real concern - but that might not be the only shake-up the product starts.

"To date, the companies that have been offering ADSL2+ speeds have been pretty niche players, not big mass-market ISPs," he told silicon.com. "That's the hidden gem in all this - I hope it spurs the other major ISPs to launch ADSL2+."