BSkyB has entered exclusive talks to acquire the UK assets of Tiscali for around Â£450 million (â‚¬553.62 million). Such a move would mean further consolidation in the UK broadband market, leading to a triumvirate of major players dominating the broadband scene - BT, Virgin and now BSkyB - followed by a second league duo of Carphone Warehouse and Orange.
BSkyB's potential acquisition of Tiscali UK would be the crescendo of a wave of acquisition activity over the past two or so years. Last July, it was Tiscali that acquired Pipex's broadband unit for Â£210 million, which itself had previously embarked on a string of small acquisitions.
There were rumours of a deal earlier on this year with Carphone Warehouse, Vodafone and Orange swimming around Tiscali when a price tag of over Â£500 million was being rejected by Tiscali as too low.
A badly shaken economy will certainly have had a bearing on the current lower price, which could fall even further after due diligence. But Tiscali had already forged strong relationships with Sky via a deal cut last year enabling Tiscali to deliver Sky channels via its Homechoice IPTV service - this would also have helped develop ties between the two companies.
Shortcut to market share will bring challenges
Most importantly, this is a deft shortcut to Sky achieving significant scale in broadband; a smart move in a market where broadband growth is slowing, making customer acquisition more costly.
If the deal goes ahead it will double Sky's broadband customer base, and see Sky nudging close to Virgin, which has around 3.8 million subscribers. Sky is paying roughly Â£250 per subscriber. This is a lot less than Tiscali paid 18 months ago and a good deal for a company which is in a strong position to upsell customers to triple play.
The acquisition will demand a shift in strategy for Sky, which to date has only marketed broadband to its existing pay-TV customers. It will now have over 1.5 million customers on its books with a much lower ARPU: around Â£23 per month (according to Tiscali) versus Sky's Â£36 for its existing customer base.
Sky will obviously aim to upsell these customers to TV. It is certainly adept at aggressive marketing, but this will prove a considerable challenge and will rack up additional costs. Sky would also face a decision in whether or not to upsell satellite-based direct to the home (DTH) to the Tiscali base or use this as a starting point to roll out IPTV across the combined BSkyB and Tiscali bases.
BSkyB's action will affect competitor strategies
The deal would increase pressure on Virgin to step up its pace and could influence others to modify theirs. All players already have to contend with a rival which has made a relatively swift transition from a traditional pay-TV provider to a full blown and highly innovative triple-play competitor.
This acquisition would add more muscle and considerably expand its broadband network assets. It would place telcos' TV/video strategies in particular under the spotlight as they assess their positioning in what is a highly competitive triple-play market. Orange's recent announcement that it will be taking a careful look at its UK strategy before it considers launching IPTV would therefore make even more sense.
Charlie Davis, senior analyst, Ovum