Sky Buys O2 Broadband: The Power Of Triple Play

It was announced this morning that Telefonica has agreed to sell its UK fixed-line broadband business, marketed under the O2 brand, to Sky for £200m.

Sky entered the UK home broadband business in 2006, and it currently has 4.2 million customers. O2’s home broadband customer base numbers around 500,000. On completion of the deal, Sky (which entered the home broadband business in 2006) will overtake Virgin Media to become the UK’s second largest fixed-line broadband ISP.

Commenting on the deal, O2 UK’s CEO Ronan Dunne said that it would enable O2 to focus on rolling out 4G mobile services, using the spectrum O2 acquired in the UK spectrum auction a week ago. Fair enough, but that feels a bit like making a virtue of necessity. In selling off its home broadband business, O2 is recognising the inevitable principle that in home broadband, scale really matters.

ISPs with a small customer base find it increasingly difficult to invest economically in the things that make broadband valuable: performance, coverage and, in particular, content. Triple play is an increasingly powerful tool for customer acquisition and retention among home broadband ISPs. Conversely, therefore, inability to bundle TV services with broadband and home telephony is an increasing disadvantage for an ISP.

The Sky/O2 deals leaves EE as the only one out of the four UK operators with its own home broadband business. EE must surely be looking hard at whether it makes sense to stay that way. Like O2, EE will also find it an increasing struggle to compete in the home broadband market against the power of triple play.

Indeed, competition in the UK around triple play looks set to intensify further in the near future, now that BT is about to beef up its BT Vision TV package on the back of its £1 billion-plus investment in rights for sports content, including 38 live Premier League football matches, English Premiership Rugby, live international football matches and ESPN’s UK & Ireland business.

Virgin Media and Sky both have well established pay TV businesses already, and BT is likely to use its new sports content to take its own TV business well above the current level of around three-quarters of a million subscribers. The UK’s fourth largest ISP, Talk Talk, has struggled to build a TV offering that can compete with the top three, and it has about 4 million customers. With a home broadband customer base of around 700,000, EE’s prospects for competing with triple play look even more daunting.

From Sky’s point of view, the O2 deal has the headline advantage of pushing it ahead of its pay TV rival Virgin Media to the number 2 spot in UK home broadband. The bigger Sky’s home broadband customer base becomes, the less it has to rely on other companies to reach pay TV customers who either don’t want or can’t have a satellite dish.

So far, though, Sky has not moved to compete with Virgin in mobile services, but that could change as demand increases for quad play packages. These have already proved very popular in France and, more recently, in Spain. Sky might also consider a move into the MVNO business as its Sky Go “TV anywhere” package increases in popularity and importance. Sky is likely to need more control over the mobile experience of Sky Go customers, and in the future it may make sense for Sky to look at becoming an MVNO for mobile data, as well as mobile voice, in order to defend its lead in the UK’s pay TV market.

John Delaney joined IDC in 2008 as research director of the Consumer Mobile service. In this role he is primarily responsible for research into telecoms and media services aimed at individual end users. A well-regarded industry commentator and analyst, John is a frequent contributor to the business news media and is a regular speaker at industry events such as seminars and conferences. Before joining IDC, he was a principal analyst in the consumer practice at Ovum. He has a BSc in physics from the University of Warwick.