Since its launch back in 2003, the pay-TV platform Sky Italia has proved to be a headache for Italy's terrestrial channels.
The public broadcaster Rai and the commercial TV group Mediaset have seen the News Corp-owned subscription service leach viewers away from their offerings.
Enticed by exclusive Italian football matches and Hollywood films, 4.5 million viewers subscribe to Sky Italia. According to the market research company ITMedia Consulting, worse is yet to come. By 2010, Sky Italia's share of pay-TV and ad revenue is expected to outstrip those of Rai and Mediaset.
In a bid to counter this threat, the pair have joined forces to set up their own digital terrestrial and satellite platforms. They are hoping that their version of Freeview, the British multichannel digital terrestrial service, will wage a successful war against Rupert Murdoch's local TV business.
In October, Rai and Mediaset, the company controlled by the Italian prime minister, Silvio Berlusconi, unveiled their plans for Tivu and Tivu Sat. Co-owned with its minority partner Telecom Italia Media, Tivu will use digital terrestrial spectrum to offer free-to-air channels from later this year.
If approved by Italy's media regulators, the free satellite version, Tivu Sat, will follow next year. Tivu will be available via a set-top box and any of the country's free-to-air broadcasters can join the platform.
Rai and Mediaset are confident that Italians will take to Tivu; according to the Milan-based media analysts Studio Frasi, digital terrestrial television grew by 30 per cent in the first half of 2008. With digital decoders now in 6.5 million out of 22 million TV homes, the government is even looking at plans to bring analogue switch-off forward from 2012 to 2010.
While this uptake is reassuring for Rai and Mediaset, it will do little to stop the erosion of their market and advertising shares. Although Italy's satellite broadcasters only collectively generated EUR67 million in ad revenue last year, this is expected to change dramatically.
According to ITMedia, pay-TV services will grow by 12 per cent a year. ITMedia also forecasts that Sky Italia will capture 32 per cent of pay-TV revenues and advertising spend in two years' time, with Rai and Mediaset trailing behind with just 31 per cent apiece.
This shift could potentially make a huge dent in terrestrial TV's finances and audience shares. Rai, which earned EUR1.3 billion in ad revenue from its three free-to-air terrestrial channels last year, saw its viewing share slip from 44.6 per cent in 2004 to 42 per cent last year.
This is despite airing hits such as Ti Lascio Una Canzone. Broadcast on its flagship channel Rai1 earlier this year, the Saturday-night talent show featured children singing and was judged by a panel of international celebrities including Liza Minelli, Dionne Warwick and Paul Anka. The final in April scored a 30.4 per cent average share.
Figures from ZenithOptimedia show that Mediaset's average audience shrank from 43 per cent to 41 per cent over the same period although its networks Canale 5, Rete 4 and Italian 1 brought in a healthy EUR3 billion in ad earnings in last year.
With such strong ad income and its own pre-paid digital terrestrial bouquet, Mediaset has less to fear from the subscription TV market than Rai. The public broadcaster's portfolio consists entirely of free channels. Both, however, are worried enough by Sky Italia to push ahead with Tivu.
"This alliance could be seen as a defensive move against Sky," Giulia Berni, the director of research of ITMedia Consulting, says. "Sky is constantly gaining audience share and its channels reached 8 per cent in September."
This figure has been achieved in part by the platform's Fox Channels commissioning local versions of international formats such as Wife Swap (Cambio Moglie) and Nanny 911 (SOS Tata).
Sky is also making its presence felt in the advertising market. "Sky is already the third player in terms of advertising revenue, with a 5 per cent market share and is likely to grow to 8 per cent by 2010," Berni adds. "The increase in Sky's advertising market is happening mostly to the detriment of Mediaset and Rai, who have 87 per cent of the market between them."
Although the platform has undeniably made an impact on the Italian TV landscape, Richard Broughton, an analyst at the media research company Screen Digest, believes Sky's menace to free-to-air services is overestimated.
"The platform has done OK but pay-TV hasn't succeeded as expected in Italy," he says. "We're only expecting Sky Italia to be available in 23 per cent of households by the end of this year. It's substantial but it's the only pay-TV platform to achieve mass penetration in Italy."
Alan Friedman, the chairman of the Italian-based international television production company FBC Media, also sees Sky Italia as a limited threat.
"It is reaching saturation point," he says. "It will have a problem getting above five million subscribers. Sky has an average churn of 10 to 15 per cent, so to grow by 10 per cent it has to attract 20 per cent more customers."
Cost may be another factor in turning viewers from pay-TV to digital terrestrial platforms. "Typically Italian consumers want free TV,"Broughton explains.
"There is an emphasis on low-cost television." Friedman agrees. "Digital will be a big hit with the middle classes, who will be able to get a family-priced bouquet of channels," he says. "All you need is a cheap box and TV sets are already set up for DTT. That gives digital an incredible advantage."
While all these factors point to the long-term success of digital terrestrial TV in Italy, only a handful of players, such as Rai, Mediaset and Telecom Italia Media, seem to be taking DTT seriously.
"Very few people in the media industry and advertising understand its potential," Friedman says. "Italians are not discussing it or thinking ahead, so Rai and Mediaset should be commended for doing that."
In a country without a comprehensive DTT package, Rai and Mediaset should be commended for bringing structure to the market. "Tivu's goal is to bring an electronic programme guide and logical channel numbers, which Italian DTT lacks," Berni argues.
More importantly, Tivu may provide a useful bridge between analogue and digital TV in Italy. "Branding is important when approaching switch-off," Broughton says. "It will have the advantage of educating people."