As anticipated, Rupert Murdoch's satellite TV service provider British Sky Broadcasting Group PLC (NYSE: BSY) is buying its way into the British broadband market with the £221 million ($392 million) acquisition of {dirlink 5|45} (London: ESY). (See Sky May Dabble in DSL and Sky Buys Easynet.).

The move represents further convergence between the entertainment sector and the telecom market. In the future, BSkyB, or Sky as it's better known, plans to use the acquisition's full VOIP capabilities, real-time interactive entertainment services, personal TV scheduling, search-based video on demand services, IPTV-based content delivery, and a home gateway that would incorporate personal video recorder (PVR) capabilities with up to 1 terabyte of storage.

Sky has offered £1.75 per share, a 38 percent premium on Thursday's closing price of £1.27, for Easynet. This morning Easynet's share price is up by 45 pence, more than 35 percent, to £1.72.

The move pitches Sky directly into competition with {dirlink 5|21} (NYSE: BT; London: BTA), the U.K.'s two cable operators, ntl group ltd. (Nasdaq: NTLI) and {dirlink 5|189} (Nasdaq: TWSTY), and others in the race to sign up and retain triple-play (Video, voice, high-speed Internet access) customers.

Sky's CEO, James Murdoch (Rupert's son), told a conference call that buying Easynet will enable Sky to offer "a whole home solution" to residential customers. "That's our focus – that's what this acquisition is all about," said Murdoch Jr.

For its money, Sky gets an operator with 4,450 kilometers of fiber, metro rings in London, Birmingham, Glasgow and Edinburgh plus another 50 towns and cities in the U.K., 36 points of presence, and operations in eight European countries, including France, Spain, Germany and Italy.

Most importantly, though, Sky is buying the operator that has pioneered local loop unbundling (LLU) in the U.K., and which already has its own DSL equipment installed in 232 of BT's local exchanges.

Easynet formed a residential customer business called UK Onlineto add to its enterprise customer focus this year, and planned to increase the number of unbundled exchanges to 350, but Sky has much bigger plans.

James Murdoch said Sky will invest between £60 million ($106 million) and £70 million ($124 million) installing DSLAMs in another 1,200 of BT's exchanges, and that the "near term" aim is to have 1,000 exchanges unbundled, which would cover 70 percent of the U.K.'s homes.

The CEO noted that it makes a lot of sense to own the broadband infrastructure. "It will give us the flexibility to configure the equipment, control the quality of the services, and innovate and differentiate" in a way that using lines wholesaled from BT would not.

Sky plans to continue using its satellite platform, though, for the delivery of broadcast, one-to-many content delivery. "We see a hybrid solution," a combination of satellite downlinks and high-speed broadband, "as the best way forward. For areas where satellite dishes cannot be used, we have the option to use IPTV delivery."

Graham Finnie, senior analyst at Heavy Reading says the deal makes a huge amount of sense from a technology point of view, and the hybrid model of combined satellite and broadband makes a lot of sense.

The home gateway could be a key piece of technology in this deployment, as it's shaping up to be a key battleground as service providers ramp up their multimedia, IP-based residential service offerings. (See BB Forum: Gateway Goals for Carriers and Telcos, Vendors Battle Over Gateway.)

While Sky stands to gain a lot of know-how from the staff at Easynet, its key strength lies elsewhere. "Where Sky has the edge over many of its broadband competitors is its existing access to content, and its experience and established brand as a provider of entertainment," reckons Finnie. "It understands how to make money from selling content to consumers -- it's one of the most successful companies in the world in that business."

Even with that advantage, Sky will have to face a highly competitive U.K. broadband market where more than 8 million homes already have a high-speed connection. As well as BT and the cable operators (which are merging), Sky will be battling against other well known brands, including AOL UK,Tiscali UK, and Wanadoo UK. (See NTL & Telewest: Together at Last! and BT Touts 8-Mbit/s Plans.)

Easynet was the first to unbundle BT's copper, but plenty of others are doing the same as costs fall, and are planning to offer their own triple-play services, including IPTV. (See C&W Has $150M Broadband Plan, UK ISP Uses Alcatel's MSAN, BT Cuts Unbundling Rates, and Unbundling Heats Up in UK.)

In addition, UK Online has very few customers at present -- just 21,000 in August this year -- so Sky will be starting from a low installed base with a provider already planning access speeds of up to 24 Mbit/s.

Murdoch isn't discounting further acquisitions. With the Easynet purchase using up only 22 percent of the £1 billion ($1.77 billion) being raised from a new bond issue, there's plenty left in Sky's war chest.

There's also the challenge of converting Sky's existing customers to the planned triple-play offer. Nearly half of Sky's current customers already utilize a broadband service from other providers. Murdoch believes the "whole home offer will be very attractive, and it will be a very differentiated service."

BSkyB, which is 37 percent owned by Rupert Murdoch's News Corp (NYSE: NWS), has 8 million pay TV customers, and is aiming to have 10 million by 2010. In its financial year to the end of June 2005, BSkyB reported revenues of just more than £4 billion ($7.1 billion), and profits of £631 million ($1.1 billion).

In 2004, Easynet reported revenues of £144 million ($202 million) and a loss before tax of £19.5 million ($34.6 million).

Sky's management says it will honor existing broadband wholesale and enterprise customer agreements, but declined to say whether it would continue to offer the wholesale DSL service once the acquisition is completed later this year. Sky will also review the future of Easynet's non-U.K. European operations after the deal is closed. (See PlusNet Trials 24-Mbit/s DSL and Tiscali Reports H1, Debt Facility.)

— Ray Le Maistre, International News Editor, Light Reading