ITV FTA decision: Not before April...

Satellite subscriber battle hinges on ITV

Jane Martinson and Dan Milmo
Thursday November 18, 2004
The Guardian

ITV and BSkyB are in the final stages of negotiations that could determine whether there is a BBC-backed satellite version of Freeview in the UK. ITV has until this weekend to renew its contract with the pay-TV group governing how and where its services are seen by satellite subscribers.

At stake is the £17m a year that ITV pays BSkyB to encrypt ITV1 and ITV2 and beam them on to the Sky Digital platform. The ITV channels are scrambled and beamed to 7.4m BSkyB dishes, where the signal enters a set-top box in living rooms. The box unscrambles the signal if it has the correct decryption card inserted.

BSkyB technology stops satellite viewers in mainland Europe and the Republic of Ireland from picking up ITV broadcasts and ensures that the correct regional service is seen by ITV viewers.

The negotiations are being keenly watched by the BBC, which wants to launch "Freesat", a satellite broadcasting package for viewers who want more channels than the 30-odd offered by Freeview but refuse to pay a monthly subscription.

Freeview is backed by the BBC, BSkyB and the transmission company Crown Castle. The BBC took a big step towards setting up its own satellite platform last year when it scrapped its encryption deal with BSkyB, a necessary precursor to setting up a rival service.

If ITV also tears up its encryption contract, Freesat could become a reality. Freesat would involve buying a self-install set-top box and satellite dish from a retailer. Once installed, the service would provide all the television channels that are not encrypted by BSkyB: some 140 stations, plus dozens of radio services.

BSkyB and ITV would not talk openly about the contract because negotiations are at such a critical stage. Industry speculation puts BSkyB's latest offer at £13m - £4m less than the current deal - but ITV is holding out for a single-digit figure.

Price is just one of the issues at stake. ITV must decide between paying for an encrypted service or following the BBC's lead and broadcasting unencrypted, or "in the clear" in industry jargon.

The benefits of signing another deal with BSkyB are two-fold. First, encryption protects the rights deals for premium programming such as Champions' League football matches, formula one racing and Hollywood films. Second, encryption allows broadcasters to target regional audiences. This is particularly important for ITV as it needs to fulfil its requirements for regional programming under the terms of its broadcasting licences.

Also, a large chunk of its advertising is targeted at regional audiences, or is derived from regional advertisers. So both advertisers and programme-makers have a vested interest in ensuring that viewers in the central belt of Scotland, for example, receive the right service.

The BBC faced a similar problem when it quit the Sky Digital platform last year. Under a new deal with BSkyB - which costs several million pounds a year - BBC regional channels still appear on the Sky Digital onscreen channel menu. ITV is expected to strike a similar "regionalisation" deal if its broadcasts become unencrypted.

Few analysts believe that ITV will continue paying £17m a year to BSkyB for encryption. In a note to investors, Kingsley Wilson, analyst at Investec Securities, said: "We suspect that ITV will... not renew the contract, but even if it re-signs, we would expect the fee to be substantially lower than it currently pays."

Nursery slope

BSkyB's own launch of a free service is seen by competitors as a way of deterring the BBC. It is also a "nursery slope" to pay-TV for viewers reluctant to pay for their daily TV fix.

Following the BBC's decision to trademark "Freesat", BSkyB can only use the term "descriptively" without receiving lawyers' letters. The term, which applies to a service without a monthly charge, is not traceable on its website.

BSkyB, Europe's largest pay-TV operator, is also doing little to market its free offering. A customer service representative contacted by the Guardian was keen to point out the benefits of all the company's other options, particularly its £19.50-a-month "family pack". He was dismissive of the non-pay offering.

However, a BBC-backed Freesat could pose a threat. Freeview, which is expected to be in 5m homes by the end of the year, covers only 75% of Britain because reception is too poor in the remaining 25%. This market is to be targeted by Freesat.

As one broadcasting executive put it: "Basically, 25% of the country - or 6m households - is up for grabs." BSkyB would like to reach some of those homes. It has 7.4 million subscribers and has set an ambitious target of 10 million by 2010.

The BBC has made no secret of its desire for a "viewer-friendly, non-subscription digital satellite option". The director general, Mark Thompson, also told a parlia mentary select committee last month: "One of the reasons why Freeview works so well is because there are a lot of companies offering boxes, and that's helped drive prices down. We'd like to see that sort of market, where consumers have real choice opening up in free satellite."

Carolyn Fairbairn, the BBC's director of strategy, has said that Freesat was unlikely to launch until early next year. There will be no further movement until ITV makes up its mind.

It has put all the preparations in place to broadcast unencrypted. ITV3 and ITV2 have good slots on BSkyB's onscreen channel menu already and ITV1 is guaranteed a berth on 103. Indeed, ITV3, the classics channel showing Inspector Morse and Cracker, broadcasts unencrypted.

Most importantly, ITV has acted to head off the legal ramifications of going unencrypted. The Astra 2D satellite, which would beam ITV's unencrypted signal, has a tightly defined broadcasting footprint that centres on the UK. However, there is some "overspill" into mainland Europe.

This is an important issue for Hollywood studios and sports bodies such as Uefa, which sell films and events on a country-by-country basis and do not want broadcasts drifting into different territories. ITV has factored this into recent rights negotiations with media owners, in effect "pre-clearing" the overspill issue.

Reconciliation

But there is room for reconciliation. Talks over a new encryption deal have not ended, despite the large gap on price. It is possible that ITV will sign up with BSkyB again. That would still allow ITV to join a new BBC platform, but Freesat viewers would need a decryption card to watch ITV.

BSkyB would rather keep ITV within its broadcasting fold. It can live without an annual £13m from the terrestrial broadcaster, but does not want the BBC and ITV to form an alliance that would preach the virtues of non-pay satellite TV.

Freesat could also become a pay-TV rival. If Freesat viewers need a decryption card, then Freesat boxes will have slots that can be used to set up a pay service. A new encryption deal is about much more than money for BSkyB.