BSkyB, Britain's dominant pay-TV group, is to launch an online offering to enable it to better take on the likes of Lovefilm and Netflix, following some signs of slowing growth at its main satellite business.
BSkyB said on Tuesday it would launch the new service to tap in to the 13 million homes which do not pay for its television service, offering movies and sports without the need for a contract or satellite dish.
BSkyB made the announcement as it revealed it had added 40,000 net new customers to its main TV service in the second quarter, slightly below expectations despite being helped by strong customer loyalty.
With a strong focus on cost control and a new strategy of selling more products to existing customers, the group however posted strong first-half results and increased its dividend.
Sky shares should bounce on strong financial and operating trends but medium-term worries will persist, potentially exacerbated rather than assuaged by Sky proposing to retail BT's Infinity and to introduce a broadband-delivered low-cost Sky Movies product, analysts at investment bank Morgan Stanley said in a note.
Shares in BSkyB were up 3 percent at 685.5 pence by 4:37 a.m. ET, having fallen 11 percent year to date over fears the group would have to invest in faster broadband services, spend heavily to acquire soccer rights and compete with the likes of Lovefilm.
On Tuesday BSkyB said instead of investing in its own fiber network it would use BT Group Plc's superfast infrastructure known as BT Infinity on a wholesale basis to offer its customers speeds of 40 megabits per second.
The faster broadband speeds, which have proved popular with customers of rival Virgin Media inc, could help compliment BSkyB's push in watching more content online.
BSkyB has offered its own customers the opportunity to watch programming online before, but the push to offer its content to non-Sky customers is a new tactic for the group.
It follows the recent launch of the U.S. online DVD rental company Netflix Inc in Britain and Ireland, which prompted Amazon-owned rival Lovefilm to offer a new cut-price service. BSkyB has not yet set out its pricing plans.
The new offering will launch in the first half of 2012 and will enable customers to watch Sky content including movies and eventually sports on a range of flexible tariffs and without signing a contract.
BSkyB -- which also said it would create 1,300 new jobs in Britain and Ireland in a drive to improve customer service -- has grown through the economic downturn by attracting consumers to its range of sports, movies and broadband, but it has started to show signs of slowing in recent quarters.
The 40,000 net new customers added in the second quarter was above the 26,000 it added in the first quarter but below the 140,000 added in the second quarter a year ago. Analysts had expected net new TV customers of 58,000.
To balance out the slowing growth it sold an increasing number of different services to existing customers, such as high-definition TV or broadband, enabling it to post strong first-half results.
Revenue was up 6 percent to 3.4 billion pounds ($5.3 billion) and adjusted operating profit grew 16 percent to 601 million.
Amidst all the Netflix noise comes a reminder that Sky is not about to give up its crown lightly, said Richard Hunter, head of equities at brokerage Hargreaves Lansdown. The launch of its online offering further complements its existing technical reach alongside the potential for new customers.
The positive reaction to today's news should at least consolidate the market consensus of the shares as a cautious buy.
The company did not make any new comment on the position of its chairman James Murdoch, who has come under pressure for his handling of a phone hacking scandal at News Corp's UK newspaper arm. News Corp owns almost 40 percent of BSkyB.
($1 = 0.6377 British pounds)
(Editing by Matt Scuffham and David Holmes)