By Kate Holton and Keith Weir
LONDON (Reuters) - BSkyB
Shares in the British group, which had previously seen off three major challengers to its dominance of the home movies and sports market, tumbled more than 10 percent after it suffered its first major rights auction loss to once-staid telecoms company BT
The 168-year-old former state telecoms group agreed to pay 900 million pounds, or more than double the previous contract with BSkyB and ITV
The loss for BSkyB raises the likelihood it will have to ramp up what it pays for future content deals, including the next Premier League auction which is expected to be held in 2015 for the three seasons from 2016 through 2017.
It also suddenly leaves BSkyB looking vulnerable in a market it helped to build.
"It is hard to see how this does not signal a British crossing of the Rubicon and the end of peaceful co-existence in the UK telecom and TV worlds," analyst Robin Bienenstock at brokerage Bernstein said.
BT, which has spent years slashing costs and cutting staff after two major profit warnings in 2008 and 2009, stunned the sporting world last year when it won the rights to show 38 live Premier League matches a season.
While the new entrant to the market remained a minnow in comparison to BSkyB and its 116 games, the move was an early indication of how BT was willing to spend big to protect its core broadband and fiber services by combining it with an offer of high-quality sports programming.
The move was taken directly out of the book of Murdoch's Sky, which built up its business to broadcast in more than 10 million homes by outbidding its rivals such as ITV and the BBC
With annual revenue of more than 18 billion pounds and a market value of 29 billion pounds, BT was also in a completely different league to the three previous groups that had tried to challenge BSkyB - ITV Digital, Ireland's Setanta and ESPN.
The news sparked a raft of downgrades from analysts who feared not only a hike in content costs but a slowdown in the rate of broadband subscribers Sky could sign up.
By offering its sports channels for free as part of a broadband package, BT was targeting those Sky TV customers who had been switching their broadband service to Sky in droves.
With the sports service only launched in August, BT showed the early impact of its new strategy when it published first- half results in October showing consumer revenue up 4 percent, its best performance in 10 years.
The news of the deal also hit shares in Britain's biggest free-to-air broadcaster ITV, which currently has the right to show one live Champions League match a week, while BT stock was up 0.3 percent.
The last time an English club reached the final of the Champions League, when Chelsea beat Bayern Munich on penalties in 2012, more than 10 million people tuned in to watch the end of the game on ITV1.
The deal could be bad news for armchair sports fans who will likely pay a higher price to watch teams like Manchester United and Arsenal, as BT is expected to charge subscribers for Champions League coverage. One option would be to set up a premium sports service to carry the matches.
It is however good news for soccer clubs which are facing regulatory pressure to curb their losses or risk exclusion from European competition.
English clubs were already enjoying the benefits of the heavyweight battle between BT and BSkyB, having seen the value of domestic rights for the Premier League soar by 70 percent to more than 1 billion pounds per season after BT entered the market.
"One thing is for sure, unless you are happy to pay the extra for a BT channel on your Sky box, there will either be a wave of customers switching allegiance or thousands of UK football fans looking for a new hobby on Tuesday and Wednesday nights," said analysts at CMC Markets. ($1 = 0.6252 British pounds)
(Editing by David Holmes)