Our take...
Just under 1 in 5 of Sky's pay-TV base is a Sky Broadband subscriber. The pay-TV operator benefits from a compelling "free" entry level broadband product and an existing billing relationship with its TV customer base to whom it can target broadband and telephony products. Despite relatively high broadband penetration in the UK at 60 per cent, strong rivalry among ISPs and the likes of Orange and Tiscali seeing quarterly losses in subscribers, Sky has managed to leverage its competitive position and continue its success in broadening take-up of Sky Broadband products among its pay-TV base.

While the entry level broadband product from Sky is free, at 2Mbit/s and a 2GB monthly data cap, two in three Sky Broadband customers still opt for paid packages with faster connections –up to 8Mbit/s, (40GB cap, £5/month) and 16Mbit/s, (unlimited "fair usage" data consumption, £10/month). Sky's strategy of placing a comparatively tight data cap and low connection speed on the free package has helped persuade customers to migrate to less restrictive, faster paid products.

Nine in ten of Sky Broadband customers were on Easynet's unbundled network at the end of 2Q 2008. Those Sky TV subscribers living outside its network coverage area have only one relatively expensive option for Sky Broadband, served over BT's network, at £17/month, up to 8Mbit/s down, 40GB cap. Typically, these unbundled areas are more urbanised given that the economics of unbundling – with high set-up costs for each exchange area - favour more populated areas holding the widest potential subscriber base that can subsidise the upfront fees. Where take-up in unbundled areas is high, DSL provision for alternative ISPs is frequently more cost effective than using BT's network, meaning unbundlers can pass on savings to consumers in the form of lower-price packages - hence the price difference between Sky's broadband products for consumers living in different regions.

The pay-TV operator now claims just under 500,000 homes with broadband-capable Sky+ HD boxes. The operator could use any future video services delivered via broadband directly to these set-top devices for convenient viewing on the lounge TV (either within an IPTV or "over-the-top" service) to try to further increase the percentage of pay-TV customers upsold to Sky Broadband.

However, Screen Digest analysis shows that, like the other leading ISPs, Sky Broadband suffered from a slowdown in the UK DSL market, and has seen quarterly net additions drop off consecutively from 4Q 2007. Only Telefonica, positioned seventh in terms of customers, bucked the trend. The following gives a summary of other 2Q 2008 results:

• BT saw quarterly growth of 2.3 per cent in retail DSL customers to reach 4.5m, while quarterly net additions have been consistently down since 3Q 2007, to 103,000 in 2Q 2008. The telco has maintained a fairly steady share of between 34 and 35 per cent of the DSL retail market since March 2007, boosted by its acquisition of ISPs Plusnet and Brightview in 2007
• Virgin Media's broadband customers improved 1.3 per cent in the quarter to hit 3.8m cable and DSL subscribers combined. Like BT, the last three quarters have seen a drop in the provider's net additions, to 54,000 in 2Q 2008. The provider is aiming to consolidate its position by pushing a rollout of 50Mbit/s connection to "millions" of UK homes by year-end
• Carphone Warehouse, which offers DSL broadband through its TalkTalk, AOL and OneTel brands, expanded its retail subscriber base to 2.8m, of which 1.9m were unbundled. However, the last two quarters have seen a slowdown in the ISP's DSL net additions to 41,000 in the most recent quarter
• Tiscali, up for sale since 2006, lost 37,000 customers served over its own and BT's network to 1.8m DSL customers – a drop of just under 2 per cent
• Orange witnessed its single largest loss in retail DSL customers, and third consecutive quarterly drop in customers, shedding 44,000 subscribers down to 1.06m in total; of these 426,000 were unbundled
• Telefonica, which serves subscribers through its O2 and Be ISP brands added 63,000 DSL customers to reach just shy of 200,000. In May 2008, the company began offering DSL to customers outside its unbundled network coverage area to help drive take-up of O2 Broadband, albeit at a higher price point than products offered to those within its own network footprint. This will have helped the provider raise 2Q 2008 net additions from 61,000 in 1Q 2008 and buck the trend.