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BSkyB to Start Online-Movie Service Rivaling Netflix, Lovefilm Offerings

British Sky Broadcasting Group Plc (BSY) will start an Internet-television service to gain new customers outside its traditional satellite offering after winning fewer TV clients in the second quarter than estimated.

The U.K.’s largest pay-TV broadcaster will start the movie offering in the first half of the year to help it compete with online-streaming rivals Netflix Inc. and Amazon.com Inc. (AMZN)’s Lovefilm. BSkyB, based in Isleworth, England, added 40,000 TV clients in the second quarter, it said in a statement today. Analysts in a Bloomberg survey had estimated 59,400.

“It’s a very quick and sharp response to the Netflix launch and an indication that management is extremely pragmatic,” Claudio Aspesi, an analyst at Sanford C Bernstein in London, said in an interview.

BSkyB, with more than 10 million subscribers, is facing increased competition from Internet TV offerings after U.S. streaming-service Netflix started offering movies and TV shows in the U.K. this month. BSkyB is also trying to distribute more content on mobile phones and games consoles, outside its traditional satellite transmission.

“Lots of people see an opportunity” in Internet TV, Chief Executive Officer Jeremy Darroch said today on a conference call. “I don’t see it as a threat to our business at all.”

BSkyB first attempted to offer content beyond the television with a wireless service, which it starting selling through mobile-phone operators in 2005.

The company has altered its strategy as subscriber growth slows. The broadcaster, in which Rupert Murdoch’s News Corp. (NWSA) owns 39 percent, has focused on selling Internet broadband and telephone subscriptions to existing clients and said today it will offer its first high-speed fiber broadband product from April.

Rising Profit

The company said today first-half operating profit rose 16 percent, beating analyst estimates, as it sold more broadband products. Earnings before interest, taxes and exceptional items in the six months ended Dec. 31 increased to 601 million pounds ($946 million). Analysts in a Bloomberg survey had estimated 585 million pounds. Sales climbed 6 percent to 3.4 billion pounds.

BSkyB climbed 3.5 percent to 689 pence in London trading as of 9:21 a.m., valuing the company at 12 billion pounds.

BSkyB said in July it would buy back 750 million pounds in shares after News Corp. abandoned its 7.8 billion-pound bid for the rest of the company. BSkyB said at the time that James Murdoch, the 39-year-old son of Rupert Murdoch, will remain chairman after his position had come under scrutiny as a phone- hacking scandal engulfed News Corp.’s U.K. newspaper unit.

Streaming Competition

Before today, the stock had fallen 22 percent from last year’s high of 850 pence when the Guardian reported July 4 that News Corp.’s News of the World employees intercepted murder victim Milly Dowler’s voicemails.

Netflix Inc. (NFLX) Chief Executive Officer Reed Hastings this month forecast the company will attract millions of subscribers within a few years to the Internet film and television service it started in the U.K. and Ireland. The service will offer films and TV programs such as “Top Gear” and “90210” from broadcasters and studios including Disney U.K. & Ireland, the BBC, CBS and Miramax, Netflix said on Jan. 9.

Other video-streaming providers in the U.K. include Lovefilm and free services such as Channel 4’s 4oD and the BBC’s iPlayer. Lovefilm had about 900,000 users in early 2008 and now has more than 2 million subscribers in the U.K., Germany, Sweden, Denmark and Norway.

“The strategic dilemmas for BSkyB are increasingly difficult,” Aspesi said. “The pricing structure will need to be competitive to stop Netflix but not competitive enough for people to cancel their existing subscriptions.”

To contact the reporter on this story: Jonathan Browning in London jbrowning9@bloomberg.net.

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net

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