Blood sport

BT's free sports gambit tries to out-Sky Sky

BT's free sports gambit is an attempt to out-Sky Sky. The UK telco on May 9 surprised investors by offering new broadband users the chance to watch live Premier League soccer for no extra charge. The two per cent, six per cent and 12 per cent drops in the share prices of BT, BSkyB and smaller competitor TalkTalk may look like an extreme response to the move, but they reflect rational fears of a price war.

BSkyB and BT are the biggest players in neighbouring businesses, which are growing ever closer. BSkyB's fiefdom is pay-television. It has 68 per cent of the UK market, according to Enders Analysis. BT, the former telecoms monopoly, has a market-leading 30 per cent share in broadband. But bundled TV and Internet access deals means BSkyB's share of broadband is now 22 per cent, with cable firm Virgin Media on 21 per cent and low-cost TalkTalk on 19 per cent, according to industry website thinkbroadband. So, like BSkyB before it, BT is trying to gatecrash its main rival's core market. The idea is to boost average revenue per user (ARPU) and stop customers from switching.

BT's land grab isn't guaranteed to work. BSkyB viewers used to plentiful live Premier League soccer matches probably won't leap at BT's smaller offering. TalkTalk customers generally want the cheapest broadband and free TV packages. With each company addressing slightly different customer bases, the market may overestimate the chances of mass customer migration.

That said, price-conscious BSkyB broadband users who aren't football obsessed will make a small saving by switching to BT, according to Citi research. And the market reaction is probably focusing not on BT's new deal but on the wider competitive response. The risk is of tit-for-tat price cuts that are great for consumers, but bad for shareholders. As BT's strong results on May 10 showed, it has deep pockets should it come to a fight.

France provides an extreme example of how badly these battles can hurt. Internet service provider Iliad moved into mobile last year with a disruptively cheap service. That has already hacked 10 per cent off France Telecom's domestic mobile ARPU, and this could fall another 13 per cent in 2013. UK telecoms and media investors may be jittery, but they aren't being irrational.