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The new service will be offered to consumers through a broadband phone line and set-top box, and is expected to be fully operational late next year.

BT Entertainment will become operational on January 1 under CEO Andrew Burke, currently director of value-added services at BT Retail.

The company has also poached Dan Marks, president of Universal Studios Networks UK, to join the division early in the new year and lead video-over-broadband services. Marks will report to Burke.

BT Entertainment will operate within BT Retail and will incorporate existing BT services. These are: Rich Media, the content platform business; Click & Buy, the online payment system; and BT Learning Centre, the online learning business.

Content deals have so far been limited to internet distribution, with BT working with Fremantle Media to make episodes of 'The Bill' available for download.

It had been reported taht BT had started talks two months ago with the BBC, ITV and Sky about licensing their content for on-demand distribution. Burke said: "We are in ongoing talks with broadcasters and production companies."

BT faces potential competition from France Telecom-owned Wanadoo, which intends to provide video-on-demand through its similar Livebox service, on sale since August for £79.99. Livebox currently offers only wireless broadband and gaming and has delayed plans to launch video-on-demand. A Wanadoo spokeswoman said: "Voice over IP is planned for early next year, and video-on-demand is down the line from that."

Pierre Danon, BT Retail chief executive until next February, said: "A focus on entertainment service is the natural next step for BT in driving further value for new and existing broadband customers."

Marks said: "The setting up of this division shows BT's commitment to being at the leading edge of broadband development in the UK and maximising the opportunities enabled within the home."

Burke has previously been CEO of eVerger, the media venture capital fund, and before that chief operating officer of eVentures, the internet capital fund owned by News Corporation and Softbank. He was also the founder and CEO of LineOne, the UK internet service provider, and established News International's initial internet presence in 1995.

Marks' experience includes running the Sci Fi channel in the UK and a spell as head of programming at Video Networks, owner of the HomeChoice phone, broadband and TV service, where he negotiated some of the world's first video-on-demand deals with studios, film distributors, TV suppliers and major music companies.

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