Media: Perspective - BT and Sky still hold plenty of aces in theinternet arms race

BSkyB, usually such a trailblazer in the UK media market, has seemed more cautious in recent months despite frenzied activity from other established players.

First, there was ntl's Virgin Mobile deal, which created a business that, in theory, can offer pay-TV, mobile, broadband and fixed-line telephony. Then came Carphone Warehouse's offer of free broadband, with Orange swiftly following, which put pressure on their rivals to unveil similar deals.

Ntl's chief operating officer, Neil Berkett, tried to turn up the heat last week when he was talking about his company's roll-out of video on demand and a Sky+ equivalent. "This is real, this is happening, so BT and Sky look out," he said.

Sky, however, does not seem too concerned about ntl's show of strength. Perhaps this is because James Murdoch, BSkyB's chief executive, has confirmed Sky will unveil its own broadband strategy later this month. The broadcaster is expected to offer "free" broadband internet access to subscribers to its Sky World package, essentially meaning customers would receive the premium TV package plus broadband for the £42 per month it costs to subscribe.

Analysts are worried about the cost of introducing the new service, with some predicting initial losses of close to £100 million on the broadband strategy.

But Sky will have thought its plans out carefully - it is not as though it has been sitting on the sidelines twiddling its thumbs while the digital landgrab has been going on around it. Its deal to buy easyNet last year paved the way for the offer of a high-speed internet and telephony package, a surefire way, despite the cost, of keeping current subscribers and attracting new customers.

Sky has also been linked with a £660 million acquisition of AOL's UK internet business. However, some sources indicate that Sky would only be interested in a deal at a sum vastly reduced from the one that AOL reportedly wants. This might be unlikely now that France Telecom is reported to be interested in acquiring the business.

Regardless of whether the AOL deal comes off, Sky still has aces in its hand owing to the content it already supplies online (last month, it began to make Sky Movies available via broadband, a further way of keeping customers by embracing web-based activity). So perhaps the future is not too gloomy for Sky as it tries to meet its target of ten million subscribers by the close of 2010.

BT might also have some cause for optimism, despite ntl's warning. It has just started to sign programming deals for its own TV service, BT Vision, as it attempts to become a broadbased media company. So, despite some caution in the City, both Sky and BT might not be the long-term losers some have painted them to be.