Sky offers £180m for Telefónica UK’s broadband business

UK satellite broadcaster BSkyB has agreed to purchase Telefónica UK’s consumer broadband and fixed-line telephony assets for £180m ($270m), making it the second-largest provider in the UK broadband market.

The deal covers Telefónica UK’s O2 and BE brands, which together serve around 560,000 broadband and 377,000 fixed telephony customers, according to the telco’s 2012 results, announced yesterday.

These customers will join BSkyB’s 4.2 million existing broadband subs, and will be migrated onto Sky’s fully unbundled network, supported by a nationwide all-fibre core, which reaches 84 per cent of all UK homes.

The acquisition is expected to close by the end of April 2013, and will make Sky the second-largest broadband provider in the UK, behind dominant telco BT which has over six million retail broadband subs.

Commenting on the acquisition, Emeka Obiodu, telco strategy analyst at Ovum, said that the acquisition is significant on several fronts.

“Firstly, it makes BSkyB the second largest broadband provider in the UK. This strengthens the hand of BSkyB in the market as the company would now be able to boast of having a bigger TV customer base, and more broadband customers than its main rival – Virgin Media.

“Secondly, 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.

Obiodu added that as the UK’s largest pay-TV provider, BSkyB has now moved swiftly to become the second largest broadband provider. Such a consolidation will convert the UK’s pay-TV and broadband markets into a three-way fight between BT, Sky and Virgin Media, he said, adding that it doesn’t have to be bad for consumers, but some may not like it.

“Thirdly, 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.

But that costs money, Obiodu warned, and 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, he said.

“Fourthly, for O2, this is significant as it now 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,” said Obiodu.

“Fifthly, this sale reduces the power of UK mobile operators in the converged space,” concludes Obiodu. ”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.”

With Latin America now accounting for over half of Telefónica’s overall revenues, the Spanish telecoms giant appears to have decided to focus its efforts on other broadband and TV markets than the UK, and shore up its languishing Spanish IPTV service.