Media Spotlight: BBC's free-to-air initiative poses challenge to Sky

Even if a BBC platform fails, the Sky brand could suffer as well, Alasdair Reid says.

It's hard to think of many occasions when BSkyB has been comprehensively outflanked - and, of course, Sky executives would deny vehemently they have been embarrassed in this instance.

But the BBC initiative announced last week has manoeuvred the company into a ticklish sort of corner. Although it's hardly a crisis, it represents a tidy little strategic test for Sky's new chief executive, James Murdoch.

The BBC's document, the Digital Switchover Report, published last week, seems relatively innocuous from a Sky point of view. The report addresses the issue of reaching sufficient digital penetration (that's to say, not far short of 100 per cent) in UK homes - a goal that Sky, as a passionate believer in the digital future, has always backed wholeheartedly.

Over the past few months, the news has been unremittingly good. Sky has been growing modestly but the real driver (and its growth rate has surprised even the most optimistic of analysts) has been Freeview, which is already in 3.5 million homes and is expected to pass the four million mark during the summer.

The digital market is now divided into three distinct and robust market segments: cable, satellite and digital terrestrial Freeview for those who won't pay for subscription channels. More than 50 per cent of UK homes are now multichannel.

But although Freeview is the only one of the three options likely to appeal to digital refuseniks, the platform will never be the answer to the Government's prayers as it moves toward analogue switch-off by the end of this decade.

It doesn't deliver a signal to enough homes. Freeview's terrestrial technology reaches sparse population densities at a relatively cheap cost but there are still far-flung pockets of the civilised world that tend to get forgotten.

Building a multimillion-pound transmitter mast to reach a few hamlets in the Outer Hebrides is never going to be a high priority, even for a government nominally committed to Digital Britain.

The BBC's proposed solution is obvious when you think about it, but potentially deeply alarming for Sky: launch a free-to-air digital satellite platform. In other words, a Freeview-type package you can get via a dish.

It will, the BBC says, be the "final piece in the jigsaw", given that the satellite distribution footprint covers more than 98 per cent of the nation's homes.

"Freeview has been incredibly successful, but we believe there has to be a free-to-view satellite service too," Andy Duncan, the BBC director of marketing and the chairman of Freeview, says. "We don't mind how it happens and we would like to work with others to ensure that it does happen."

It's this last bit that is making Sky squirm - effectively, it's damned if the BBC does and damned if it doesn't. If this platform launches, it could stunt Sky Digital's growth, which is already slowing.

It's true that a type of free-to-air digital satellite already exists.

Sky customers who have subscribed for at least a year can cancel their contract, keep the set-top box and access the free-to-air channels. But as that just covers the BBC channels (ITV and Channel 4 need to stay encrypted because they sell advertising on a regional basis), it is not a hugely attractive option.

Sky's churn rates are creditably low. But if more channels were available through a government-approved, BBC-backed and properly marketed service, that picture might begin to change radically.

Sky has branding issues, too. It is synonymous with satellite. A second satellite brand would pose it some serious marketing problems, even if it were to be a backer of this second "Freesat" brand. And, in some ways, it would like to be a backer because it would then continue to retain its monopoly on box distribution and installation. It could also ensure that the boxes have a ready upgrade path to Sky Digital subscription tiers.

Sky can't drag its heels on the box issue, either - if the Government backs the BBC's plans, it will ensure that levels of box subsidy will match those offered by Sky. In short, if the free satellite product and service is good, it could cannibalise Sky's subscriber base. If it is bad, it undermines Sky's brand too.

The official Sky response is that it can't respond until it sees more concrete details. But many analysts are beginning to take the view that this represents the biggest political and strategic challenge Sky has faced in years.

But Jean-Paul Edwards, the head of media futures at Manning Gottlieb OMD, claims, the BBC's reasoning is by no means sound. "The refuseniks are refuseniks not because they have difficulty in getting terrestrial signals," he points out. "They are refuseniks because they only want five channels, they don't like technology and they just don't want to pay. There are millions of people who can get Freeview but don't. I'm not sure this new initiative will address that."

And all of this might just turn out to be an embarrassment for ITV as well. A free satellite platform wouldn't deliver the channel in its full range of regional variations. But that's not all - it is now becoming clear that the ITV signals are coming through unencrypted to many digital homes.

Scottish Media Group, in fact, has recently been playing up the fact that Scots in London prefer to watch STV rather than Carlton. So, one way or another, this BBC initiative is likely to set more than one cat among the digital pigeons.

As Andy Roberts, the executive buying director at Starcom Motive, puts it: "One of ITV's lasting strengths is its regionality. Elements of that have already been eroded and if it further loses the ability to limit the ITV signals to the regions they are intended for, that starts to become a real issue."

ITV, as well as Sky, has been placed on the spot by the BBC's recommendation.

THE UK DIGITAL UNIVERSE

SUPPLIER SUBSCRIBERS

Sky Digital satellite subscribers 7,200,000

Freeview digital terrestrial 3,386,700

Cable (ntl and Telewest digital TV subscribers) 2,317,873

Free-to-air digital satellite 211,000

Source: ITC (figures correct for December 2003).

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