ONdigital ITV merger fatally flawed

The merger between ITV and ONdigital may be a great idea for pushing digital TV to users but the structure is fatally flawed, according to one analyst.

Under the plan, ONdigital will be fully integrated with ITV's commercial television business. The shake-up is widely seen as a necessary response to dwindling set-top box sales and will see the ONdigital brand scrapped in favour of the more recognisable ITV Digital. ONdigital's chief executive Stuart Prebble will become chief executive of ITV.

Digital television is vital to government's plans for universal Internet access. All digital platforms come with interactive TV and email capabilities and these are becoming increasingly sophisticated. The government is keen to promote digital TV and will welcome any moves to give the platform a higher profile. At the moment digital television is confusing for consumers, and the government plans an education campaign. It is also trialling a free digital TV giveaway in deprived areas.

According to Forrester analyst Tim Grimsditch, while the concept of creating an integrated multi-channel media company is "perfect", the proposed structure is less so. "It is fundamentally flawed and should never be implemented," he said.

The newly-created ITV Digital will handle pay-TV operations and ONdigital's one million subscribers. Its biggest challenge, according to Grimsditch, will be to drive new growth and reduce ONdigital's ominous 22 percent churn rate. ITV.com will run the online business and become the umbrella organisation for all of ITV's Internet activity.

It is this division that Grimsditch believes ITV needs to scrap. "The idea underlying this reorganisation makes perfect sense. By merging the companies, ONdigital gets ITV's content expertise and massive cross-promotional benefit whilst ITV diversifies its flagging advertising revenue stream. However, by dividing the business by distribution channel, ITV has missed a golden opportunity," said Grimsditch.

"Separating content creation between ITV channels and ITV.com drives a wedge between the two divisions that should be getting closer. Rather than create content for specific channels, ITV must focus on creating media properties that can serve customers, irrespective of the channel they choose."

As a true multimedia company, ITV will be able to pressure its pay-TV competitors more effectively than Ondigital ever could predicted Grimsditch. BSkyB will finally get some competition. "BSkyB has always won hands down with its sports rights. However, through a twist of legislation, ITV digital subscribers will be able to get more football on ITV Digital than on any other platform," he said.

Analyst with research firm the Henley Centre Andrew Curry believes the move is a positive one because it focuses on what ITV is good at -- content. "It makes sense to move out of the box business," he said. He believes such a business was always likely to be an interim solution and was never likely to compete effectively with the satellite and cable platforms.

Curry predicts that far from becoming a Sky rival ITV Digital could partner with the media giant in the future. "In the past ITV has stayed off Sky in order to support the set-top box business. It was cutting off its nose to spite its face," he said.

Building a strong offering will encourage people to migrate to digital TV, believes Curry. This will be good news for the government, which wants to turn off the analogue signal sometime between 2006 and 2010. Earlier in the month ONdigital's Prebble attacked the government for not doing enough to promote digital TV

The government has its work cut out to persuade people to shift to digital. According to Consumer Association research 45 percent of people claim they have enough channels already and don't want anymore. If the government's digital plans are to be realised good quality free to air digital content will be vital. "The content has got to be of sufficiently good value to persuade people to upgrade to a digital set," Curry said.

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