BSkyB to buy Telefonica’s UK broadband unit for $300 million

Telecom Lead Europe:
British pay TV giant BSkyB is set to buy Telefonica’s UK broadband unit for around $300 million.

The deal will make the pay TV giant, in which Rupert Murdoch’s News Corp. owns a 39 percent stake, the second-largest U.K. broadband provider.

The deal for the operation, which has over half a million subscribers and uses the O2 and BE brands, will make BSkyB the second-largest U.K. broadband provider.

BSkyB is already the fastest-growing broadband and telephony business with 4.2 million broadband subscribers and 4 million telephony customers in 2012 in Britain.

“The acquisition will deliver further advantages of scale for Sky’s home communications business,” said BSkyB CEO Jeremy Darroch.

U.K. cable operator Virgin Media, which is being acquired by John Malone’s Liberty Global, ended 2012 with 4.5 million broadband subscribers. Telecom giant BT is the country’s largest provider with close to 6.5 million broadband customers.

BSkyB — that’s trying to benefit from home communications growth —  signed up 382,000 customers for standalone home communications services since it made the business a focus area in addition to its traditional pay TV operation in 2010. Recently, it launched broadband and telephony services in Ireland last month.

The battle for pay-TV and broadband supremacy in the UK has now intensified strongly. BT, the largest broadband provider, has spent heavily to win TV rights, and earlier this week, took over ESPN’s UK and Ireland TV channels. Now BSkyB, the UK’s largest pay-TV provider, has moved swiftly to become the second largest broadband provider. Such a consolidation, in addition to Virgin Media, will undoubtedly convert the UK’s pay-TV and broadband markets into a three-way fight. It doesn’t have to be bad for consumers, but some may not like it.

Emeka Obiodu, telco strategy analyst at Ovum, said: “For those who don’t like the consolidation of the market to three main pay-TV and broadband providers, this is the inevitable consequence of technology changes and intense competition.”

Local loop unbundling has largely run its course and any broadband provider that wants to remain relevant in the future will need to outline a path to fibre. With retail prices so low, and the return on investment tough to earn, pure-play broadband providers will struggle to survive. The market is now left with players that are able to spread the cost of fibre across more services, with its attendant economies of scope benefits.

For O2, this is significant as it puts its hopes for a broadband future on LTE, combined with Wi-Fi. In the recent auction it won spectrum in the 800 MHz band, which will be good for providing coverage, albeit with limited capacity.

But it is interesting that it didn’t get spectrum in the 2.6GHz band, which would have been good for high capacity broadband over shorter distances. Whether this was a strategic choice or a result of being outbid remains to be seen, as Ofcom is yet to publish the bid history.

However, it means that for its broadband services O2 will have to rely on 800MHz spectrum and its existing spectrum holdings (unless a rival is willing to trade spectrum) combined with the Wi-Fi push it instigated in 2011. Its own fixed line home broadband service is no longer an option.

According to Ovum, this sale reduces the power of UK mobile operators in the converged space. At a time when telcos across Europe are intensifying efforts to offer converged (fixed, mobile, broadband, TV) services, mobile telcos in the UK are making themselves much more reliant on mobile. EE still retains a presence in the fixed telecoms space but its offering is increasingly infrastructure-light. Ultimately, this is a dangerous scenario as it might reduce the strategic maneuvererability of the UK’s mobile telcos in a converged future.

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