ECONOMIC theory teaches us that new entrants join a market when they see the existing firms making excessive profits.

Someone clearly forgot to tell the big-name companies rushing to enter Britain’s fast-growing broadband market — a sector which, to date, has been more notable for excessive losses than for profits.

BT aside, few broadband providers are making much money. And Cable & Wireless’s disastrous experience with Bulldog Communications — it burned through £250m before being forced to abandon the retail market last month — should serve as a warning.

Yet last week, Sky, the satellite broadcaster, committed itself to invest another £400m to wade into a battle already being furiously waged by Carphone Warehouse, Orange, BT, NTL, Tiscali and a host of smaller companies. Vodafone and O2, which recently paid £50m for Be Broadband, are also working on plans to add high-speed internet access to their mobile-phone offerings.

One of the most striking things about this list is that four or five of the biggest brands — Sky, O2, Vodafone, Carphone’s Talk Talk, and arguably Orange — are newcomers to broadband. There is something else striking, too. The list omits AOL which, despite its problems, is still the world’s biggest internet service provider. AOL has put its UK business up for sale, unwilling to contest a battle that is increasingly being fought on cut-throat pricing.

This is a tribute to the strategic significance attached to broadband as the media and telecoms industries converge. Sky and BT, which will shortly launch its own TV service, are betting that people will increasingly turn to the internet for a greater choice of movies, sport and entertainment. These and many more services will be delivered over a broadband connection to a digital TV; viewers won’t have to be tied to the PC in their study or their bedroom.

Talk Talk turned up the competitive heat in April when it launched “free broadband forever” — a highly-successful campaign criticised as “misleading” last week by the Advertising Standards Authority.

Since then, Orange has offered free broadband to customers spending more than £30 a month on their mobile phone. Now Sky, which is 38% owned by News Corporation, owner of The Sunday Times, is offering a basic broadband connection free of charge to its 8m television customers.

None of these offers are truly free, nor are they universally available to all those who might want them. Sky’s network, for example, can only reach 28% of UK homes at the moment.

However, Talk Talk, Orange and Sky all have rationales that justify their broadband pricing, both economically and strategically. For instance, Orange and Sky could both save tens of millions of pounds if adding broadband enables them to hold on to customers and reduce “churn” in their core business.

Sky also recognises that the internet will be increasingly important both as an advertising medium and as a means for people to watch movies, sport and other programmes that it now broadcasts via satellite.

These and other reasons have encouraged newcomers to take a more aggressive approach to pricing than some of the traditional operators. Even Sky’s higher-speed broadband options cost only £5 or £10 a month. A comparable eight megabit per second package from BT costs £26.99 a month at present.

James Murdoch, chief executive of BSkyB, said: “For a lot of incumbent players, who have been charging a lot of money for a long time for not a lot, it could be quite uncomfortable. We can see huge growth.”

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