Government digital TV plans under threat

The government's plans for universal digital television, and an analogue signal switch-off may be about to be taken hostage as digital terrestrial broadcaster ONdigital battles against rivals such as British Sky Broadcasting (quote: BSY) and digital cable companies.

ONdigital, which gives away set top boxes allowing ordinary televisions to receive digital terrestrial signals, has been less successful than many observers hoped when it launched a year ago, and may now have its funding slashed. But if the Carlton/ITV joint venture goes down the tubes, the government's digital television plans could go with it.

That's because ONdigital is the only significant company pushing terrestrial digital television to the public. The government hopes that by 2006 nearly 100 percent of Britons will have invested in digital terrestrial, allowing a switch-off of the analogue airwaves, and creating a new block of spectrum that could be auctioned off at a hefty profit.

"ONdigital's success is integral to driving digital terrestrial television," said analyst Adam Daum of Gartner Group. "They've been doing a good job of raising consumer awareness of it. But if they're already losing momentum now, and if their subsidy [of set-top boxes] goes, I can't see why people would buy it. There is a natural market for it, but it's pretty slim."

The Department of Culture, Media and Sport (DCMS) denies that it's digital plans are under threat. "The uptake of digital TV has been very promising, with 30 percent of homes now having access. All the signals that we are getting is that uptake is going to increase. Research shows that 50 percent of British homes willl have digital TV by the end of 2002," said a spokeswoman.

The government is still planning to switch off the analogue signal sometime between 2006 and 2010. It is not currently considering subsiding set top boxes. "There are no plans for the government to subsidise set-top boxes at the moment -- we couldn't be seen as spending public money in this way," said the DCMS spokeswoman.

Like BSkyB, ONdigital subsidises the cost of set-top boxes in order to give them away, a strategy estimated to cost them about £180 for each new subscriber. Last year the company lost £290m through the tactic, which brought in just over one million subscribers.

But advertising revenues to ONdigital's parents, ITV and Carlton, are falling due to larger economic factors, with ad revenue down one percent this year, and both companies' share prices are nearly half of what they were a year ago. And in a sluggish market environment, the option of raising cash via a flotation no longer exists.

Industry reports now suggest the parents will slash ONdigital's funding, making the ongoing subsidies difficult or impossible.

The main problem, say analysts, is that ONdigital's offering simply doesn't stack up to those of Sky or cable companies. Limitations of terrestrial spectrum mean the company can't offer the 100+ channels available on Sky, but has to pay similar costs for manufacturing set-top equipment.

Another stumbling block is market saturation -- more than one third of Britons say they will never sign up for pay television, and with pay TV approaching 50 percent penetration there is little market left to exploit.

Instead of costly set-top boxes, ONdigital may shift some of its focus to integrated digital televisions, which allow automatic reception of 15 free-to-air digital stations. Analysts believe Ondigital could work with television manufacturers to offer pay services on integrated digital sets, via a smartcard -- which would lower costs to about £20 per subscriber.

"People with integrated digital TV who decide they want premium channels could get into the pay-TV market through a plug-in module, which has a lower subsidy cost than a set-top box," said analyst Daum. "But that market is practically nonexistent today."

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