Media: All about ... Freesat from ITV/BBC

Should Sky be worried by the BBC/ITV satellite offer?

You could argue that the biggest problem ITV and the BBC will face in attempting to launch Freesat - a free-to-air satellite television platform - is that Freesat already exists. It was launched last year by BSkyB. Strange that no-one seems to have mentioned this to either the ITV chief executive, Charles Allen, or the director-general of the BBC, Mark Thompson; strange also that this rather important fact is missing from much of the press coverage of last week's announcement.

This, cynics will be tempted to conclude, is testament to Sky's ability to keep a secret. Few have heard about the original Freesat because Sky would much rather market its premium Sky Digital and Sky+ services rather than the utility product (its full title is Freesat on Sky) it was bumped into launching in October 2004.

One of the reasons Sky took the Freesat plunge was the notion that if it didn't do it, someone else would. And Sky is keenly aware that it's important, from a branding point of view, for the company to continue to be synonymous with satellite.

From that point of view alone, ITV and the BBC will reckon they've scored a very palpable hit with all the column inches they racked up last week - and indeed, the snap analysis in many quarters was that Freesat II will prove to be yet another threat to Sky's long-term growth prospects.

That remains to be seen - but it was interesting that last Wednesday, as news of the ITV/BBC initiative (the plan is to launch as early as next summer) was hitting the wires, the BSkyB share price was nudging up 5p to 571p, while ITV, even though it was also announcing an increase in profits, was flat at 114p.

1. In theory, there's now only one growth opportunity in digital TV - among those who don't want pay-TV but can't get Freeview, the free-to-air digital terrestrial service driven principally by the BBC. Outside of the UK's major conurbations, the network remains patchy and those living in remote areas can't access the signal.

2. Ofcom estimates that more than 445,000 homes now access free-to-air channels via satellite dishes and decoders. These households fall into two main groups: former Sky customers who have decided to stop subscribing to pay-TV services but have kept their decoders; and those that have signed up to Freesat from Sky since its launch almost a year ago.

3. Encryption is supposedly one of the issues at the heart of this latest initiative. Even free-to-air channels need to restrict access to their signals, usually for two reasons. First, because they acquire programme rights on a UK-only basis, they are required to stop non-UK households within the Astra satellite footprint (for instance, in Eire and France) from watching. Second, broadcasters whose output is regionalised need to ensure the right people get the right signal up and down the country. ITV has regional news commitments but, more importantly, sells its advertising on a regional basis.

4. ITV has been in a long-running dispute with Sky over the cost of encryption - it feels that the £17 million a year it is charged is exorbitant. Some observers believe this is a red herring. Freesat II may provide an opportunity to introduce a new and simpler way of encrypting its signal, but this is unlikely to be substantially cheaper.

5. Meanwhile, ITV will have to continue to work closely with Sky because 21 million people now watch ITV via the Sky Digital platform - and these viewers are younger and more affluent than average. ITV obviously can't cut itself off from this audience.

6. The BBC and ITV will have to negotiate significant logistical hurdles before they even contemplate launching Freesat II. They will not, however, need to sign up with another satellite operator. Instead, they will continue to use the almost limitless capacity of the Astra satellites used by Sky.

They will, however, have to come up with a specification for a new generation of decoders and convince manufacturers to make them. They also need to set up a structure to manage installation. Freeview is a self-install proposition; Freesat won't be. Few but the most hardened DIY enthusiasts will wish to go scrambling about on their roofs trying to put up a dish and then aligning it precisely to 28.2 degrees east. Sky has a superb record in this area and Freesat II's efforts may seem amateurish in comparison.

WHAT IT MEANS FOR ...

ITV AND THE BBC

- Audience levels for existing mainstream terrestrial channels, including the BBC's and ITV's, are strongest in homes where the viewing choice is narrowest. Analogue switch-off within the next six years will mean every home in the country will become a multichannel home, so it's in the interests of existing broadcasters to ensure that as many homes as possible sign up for "multichannel lite".

- For that reason alone, ITV and the BBC will feel justified in taking this elaborate and costly initiative while claiming they are actually doing it for good, sound public service broadcasting reasons.

- Closer to the truth, perhaps, is the notion that both broadcasters are now committed to putting Sky on the back foot at every opportunity.

SKY

- Sky argues that this move will hurt ITV more than it hurts Sky, since ITV1's audience decline tends to accelerate in multichannel homes. Furthermore, every home signed up for digital television represents a long-term opportunity for Sky, the ultimate destination for people choosing to trade up to greater choice and premium services.

ADVERTISERS

- Many advertisers are surprisingly ambivalent in their attitudes towards Sky. They admire what it does in continuing to extend choice but they suspect that Sky's long-term agenda is not entirely compatible with ad industry aims (they continue to be anxious about the ad avoidance technologies Sky has pioneered, for instance). They also feel it would be unhealthy for it to achieve a dominant position in UK broadcasting. So they will cheer Freesat II, while it is politic to do so.

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