UPDATE 3-BT offers free UK soccer action in challenge to Sky
* BT to offer new sports channels free over broadband
* Former telecom company takes a cue from Murdoch's BSkyB
* Sports rights holders benefit as value of TV deals soars
LONDON, May 9 (Reuters) - BT turned the British pay-TV market on its head on Thursday by offering free English Premier league soccer matches to its broadband customers in a direct challenge to Rupert Murdoch's BSkyB.
The move, announced at a high-profile launch for the BT Sport TV channels at the Olympic Park in London, sent shares in BT and its rivals tumbling in a sign of how nervous investors are that the telecoms giant's commercial challenge could reshape the industry and slash profits.
Shares in BSkyB fell 6.4 percent, smaller broadband provider TalkTalk dropped 12 percent while BT was down 2.2 percent, wiping a collective 1.6 billion pounds ($2.5 billion)off the value of those three companies in under two hours.
"UK sports fans have had a rough deal for too long," BT Chief Executive Ian Livingston said. "Many have been priced out of the market but we will change this by giving away BT Sport for free with our broadband."
Sky has dominated the British pay-TV market in the last decade, luring customers with its high-quality sports and movie programming and expanding into BT's territory to offer broadband and telephone services to its 10.7 million households.
BT, a former state monopoly, fought back by developing an online TV service, alongside its traditional telecom services, that was designed to persuade customers they should upgrade to its superfast broadband to watch the new TV service.
BSkyB was dismissive of BT's venture into sport, pointing out that it still had rights to more Premier League matches, as well as Formula One motor racing and English test cricket.
"BT Sport is not 'free' and customers are smart enough to realise they'll pay for it through more expensive broadband and phone services," said Stephen van Rooyen, MD of Sky's Sales and Marketing Group.
While the BT Vision service has taken time to get off the ground - so far it has only around 770,000 customers - analysts believe the acquisition of sports content will make the offer much more appealing and pose a real threat to BSkyB.
BT said it would offer its new channels to any broadband customer for free, while non-BT customers could pay 15 pounds ($23.35).
BSkyB, BT and Virgin Media, which is about to be taken over by cable group Liberty Global, are all fighting to offer customers so-called triple play - a combination of broadband, TV and voice services.
"It's all about ...reaching the consumer with as many products as possible," Panmure analyst Alex DeGroote said.
"If you're an investor in Sky the key point is that it's a risk to the business and it's a risk to the numbers. Almost inevitably they will have to cut their own subscriptions and spend more on marketing."
BT, which is spending 246 million pounds a year on the live UK rights to 38 English Premier League soccer matches, released its pricing details at the Olympic Park in London where it will base its new sports channels which will go live in August.
Gavin Patterson, head of BT Retail, said an overall investment of around 1 billion pounds over three years should boost revenues and profit in the "medium term".
BT has signed up familiar faces from terrestrial TV in the form of British presenters Jake Humphrey and Clare Balding, while former England striker Michael Owen and Manchester United defender Rio Ferdinand will be part of its soccer coverage.
It is the latest in a long line of companies which have tried to break BSkyB's two-decade dominance of the sports rights market in Britain. Ireland's Setanta and Disney-owned ESPN both had Premier League rights but quit the market after failing to make inroads.
Patterson said BT Sport would have higher profile Premier League matches than predecessors and a more complete offering after buying rights to English Premiership rugby and acquiring ESPN's UK business.
"We have the financial muscle. Both previous owners of the second set of Premier League rights were dependent on Sky, they were a channel only business, we're not," he told reporters.
BSkyB has retained the rights to 116 live Premier League matches, so a fight between it and BT is likely to be tough.
"We've got a very strong balance sheet and we generate very good cash flows and this is an investment we can afford to make without betting the farm," Patterson said.
BT's entry has driven up the value of sports rights, with the Premier League's domestic TV deal now worth more than a billion pounds per season.
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