The launch of BT’s Internet protocol (IP) TV service, BT Vision, brings another strong competitor for satellite operator BSkyB in the U.K. pay-TV market.

BT has set a subscriber goal of 2 million to 3 million customers within three years, an aggressive target, Sarah Simon, a media equity analyst at Morgan Stanley, said in a research note, "The main surprise for us was the aggressive target that management is setting: Our telecoms team had assumed that a medium term subscriber target of 700,000 would be reasonable on the basis of takeup of IPTV as a percentage of broadband subscribers in other European markets such as France, Italy and Germany," she said.

BT is counting on deals with content providers such as Warner Brothers and Setanta Sports to help meet its target. The deal with Setanta will provide BT Vision viewers with access to live Premiership soccer beginning with the 2007-2008 season, but that may not be the subscription driver that BT is banking on if it is trying to pull customers away from BSkyB, said Simon.

"Sports is still the weak point," said Simon. "Although from next season BT will be able to offer 242 Premier League near live matches as well as the live matches won by Setanta, for die-hard football fans, this won’t be enough. Still, we think this service will hold broad appeal for homes that have thus far resisted pay-TV and homes that today subscribe to basic and/or movie packages on Sky and cable."

Conor O’Shea, a media equity analyst at Teather and Greenwood, echoed Simon’s assessment. "We do not believe that these near-live rights will be very attractive for viewers," he said in a research note. "In their current form (‘Football First’ broadcast at 10pm on Sky on Saturday evening), they are attracting low viewing share (they are in direct competition with the BBC’s enduringly popular Match of The Day), and under the new contract, the games available will be restricted to those not due to be shown live (which limits the quality considerably). Again, we believe that Setanta’s packages, representing third-and fourth choice games will have limited appeal for Sky Sports’ subscriber base."

BT’s other main weapon is a plan to offer free customers free set-top boxes with personal video recorders (PVR), although subscribers will be charged an installation and connection fee of 90 British pounds ($178.10). "BT seems to have approached this project more aggressively than we had originally expected. The company will offer all customers a free PVR. This will likely up the ante in terms of what a new customer should expect when signing up to a pay-television service," Simon said.

"Although PVR giveaway by BT has come as a bit of a surprise, we do not believe that Sky will respond by handing out free Sky+ STBs," Nick Bell, a media equity analyst at Bear Stearns, said in a research note. "However, BSkyB may decide to do away with [the 10 pound] ($19.79) monthly charge to Sky+ customers not taking a premium channel. In our view, this would not have a significant initial impact on [average revenue per user] but could help protect the lower-tier subscriber base. Although this move could also encourage subs to spin down from premium."

Another BT strength is its video-on-demand offering. However, O’Shea does not believe that BT has been particularly ambitious with its IPTV offer.

BT’s live TV offering is one of the least ambitious among global telcos, who are all entering this space as a means of defending against loss of land lines and broadband (which is also BT’s principal motivation here)," O’Shea said. "As such, the principal target customer for BT are the 13 million pay-TV refuseniks (and 47 million non-pay-TV TV sets) in the U.K."

Simon said, "In this respect, we believe that BT Vision’s primary impact on BSkyB will be to make it more difficult for Sky, in the medium term, to gain new customers. We do not believe that the top tier Sky customer with a PVR and [high-definition] will find this product a suitable replacement. However, for the 14 million homes who do not currently have pay-TV, this third way looks pretty attractive, in our view. Equally, for customers taking basic pay-TV services, either via Sky or ntl-Telewest, who find that the majority of their viewing is still dedicated towards the free to air channels that are available on Freeview, this may well be an attractive option. In our view, these points will combine to make it more difficult for Sky and ntl to both gain new customers and, at the low end, to keep them.

"We continue to believe that, unless it makes changes to its business model, Sky will not be able to hit its 10 million pay-TV customer target by 2010," she said.