Sky to enter Britain's mobile market with Telefonica deal

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By Kate Holton

LONDON, Jan 29 (Reuters) - Britain's dominant pay-TV group Sky (Other OTC: BSYBF - news) plans to launch a mobile service from 2016 through a deal with O2 owner Telefonica, ramping up pressure in the country's already crowded communications market.

Sky, which raced to become the country's second-largest provider of home broadband after entering the market seven years ago, will rent capacity on the O2 network to offer mobile voice and data services to all customers.

Financial terms of the deal were not given.

Among a wave of recent deals, Telefonica has just agreed to sell O2 UK to Hutchison Whampoa, which plans to combine it with its Three Mobile business to create the country's largest mobile network.

The biggest fixed-line provider, BT, is meanwhile in talks to buy EE as companies increasingly seek to offer a package of services including fixed and mobile calls, broadband and entertainment.

The new tie-up could be bad news for Vodafone, earlier seen as a leading contender for the wholesale partnership with Sky as they already have content partnerships in place. It plans to launch a broadband and TV service in Britain this year.

"Sky has a proven ability to launch new services, at scale," its Chief Executive Jeremy Darroch said.

Telefonica UK is already the network provider to a number of other brands, such as Tesco Mobile, and a willingness to open its network to Sky could help it gain regulatory approval for the Three-O2 deal, showing that new entrants can still join the market.

Sky, 39 percent-owned by Rupert Murdoch's 21st Century Fox , is present in more than 10 million homes in Britain and has in recent years succeeded in selling an increasing number of services to its customer base.

Analysts welcomed the capital-light entry to the mobile market which will enable Sky to test demand for multiple services.

"We ... would expect take-up amongst loyal customers to be relatively quick," analysts at Citi said.

The addition of a company well equipped to cross-sell services could further intensify pressures in the UK mobile market which is already one of Europe's more competitive, with operators' margins in the low-to-mid 20 percent range.

The deal also shows how the convergence trend - whereby customers buy bundles of Internet, fixed and mobile calling, and TV from one company - is taking root in Britain after gaining popularity in France and Spain. (Reporting by Kate Holton; Editing by Mark Potter and John Stonestreet)