Freeview's success sets big test for Sky

The battle for the UK's digital TV viewers has entered a new era with news that Sky's free-to-view rival has sold more than 10 million set-top boxes. Ian Quinn reports on the stakes involved for both parties.

Oh to be a fly on the wall at the latest Freeview board meeting, if only to see the looks on the faces of the BSkyB contingent.

What must they have felt, as one of the loose coalition of broadcasters behind the digital terrestrial television platform, as shareholders discussed news it had smashed through the 10 million boxes sold mark?

"People love Freeview's simplicity, our great channels and the one-off payment," declared Freeview general manager Ilse Howling. ITV even placed an advert in The Times and The Daily Telegraph which declared "congratulations to the little guy".

So is the pay model for digital TV, so brilliantly led by Sky to date, at risk of succumbing to its free-to-view rival?

It's easy to see why ITV welcomes Freeview's success. Take for example its first digital spin-off, ITV2, which loses nearly half its viewing share in Sky homes, compared with the DTT platform.

The broadcaster spent £136m last April, becoming owner of the SDN multiplex and gaining 38% control over the capacity on Freeview. ITV's latest arrival, the CITV kids' channel, launched only on Freeview.

Channel 4 is also in the Freeview camp, last year adding E4 and More 4 to the DTT platform, with Film Four to come in the summer.

Money spinner

"It's much more attractive economically," says Andy Duncan, C4's chief executive, when describing the move made by E4 to free-to-air model.

"The fact is we make a lot more money. Two years ago we made over £40m; this year, it will be over £80m and next year we expect it to be over £100m. That's a massive difference."

E4 - neck and neck with ITV2 as the biggest digital channel in Freeview homes - also sees its share of viewing nosedive by nearly a third in Sky homes.

RTL is also expected to invest heavily in Freeview when it finally launches digital spin-offs to Five, having bought bandwidth from the subscription outfit, Top Up TV.

And with more than seven million households already and on course to pass Sky by the end of the year, Freeview has a lot to celebrate.

"Nobody would have believed we could have done this in the space of three years," says Freeview's Howling, who predicts it will snap up most of the estimated two million-plus people who will switch to digital in the coming year.

There are even reports it will join forces with BT, allowing Freeview branded set-top boxes as part of its "next generation" offering, due for launch in the autumn, although quite how Sky would react to that remains to be seen.

"Up until this point you've had two very distinct audiences," says Howling. "The people who are fundamentally pay-TV viewers - those who want the sport, movies and want 400 channels - and those that have a fear of subscription and are happy with a lot less."

Sky greeted Freeview's announcement with its most outspoken criticism to date of the DTT platform. A Sky spokesman says: "We believe the limitations of the DTT platform will become increasingly apparent over time. Freeview has little channel choice, little scope for HDTV in the near future, little scope for interactivity, there is no customer service and there isn't a user-friendly PVR."

He also brands Freeview's audience as ageing, with little interest in any but the main terrestrial channels. "ITV is launching a kids' channel on Freeview. It will be the only commercial kids' channel but Freeview isn't where the kids' audience is," he says.

Triple play

This year Sky will reveal its so-called triple play offering and should roll out its high-definition TV offering in time for the World Cup. It still has the option to give away its Sky+ personal video recorders, but has denied this is a plan. Yet Sky+ is just one of many technological advantages that Sky claims to enjoy over Freeview.

However, the BBC is testing high-definition technology for use on Freeview channels, although the platform might have to wait until analogue switchover before sufficient spectrum can be freed up for launch.

But Howling says she believes the ongoing problems of lack of bandwidth encountered by Freeview, which helped push up the price paid by C4 for the latest slot on offer to a reported £12m a year, would be tackled with advancements even before then, allowing more channels to launch, with better quality picture, HD-enabled or not.

Then again, only a brave person would bet against Sky coming up with an answer to its increasingly powerful rival.

FREEVIEW VS SKY

- Freeview snapped up 75% of those viewers who went digital last year. More than two million of the remaining 7.5 million UK households without digital TV, are expected to make the jump in the coming year - nearly half of those in time for the World Cup, according to a BRMB survey conducted for Digital UK.

- Last December alone, more than one million Freeview devices were sold, from £30 set-top boxes, to top-of-the-range TVs with inbuilt receivers.

- Barb figures show Freeview accounts for only about 14% of UK viewing - less than the second biggest pay platform, cable, which is in half as many homes.

- Sky has managed to keep driving up subscribers - adding more than 1.7 million since Freeview's launch in October 2002, with the last recorded quarter the biggest rise to date. Yet analysts say it will have to attract 800,000 new customers this year, simply to stand still, with a churn rate of more than one in 10.

- Sky accounts for more than three times as much multichannel viewing as Freeview. Barb says Freeview households consume more than 40% of their viewing via analogue TV - hardly the stuff digital revolutions are made of - and in an average week, more than a third do not watch any of the extra channels available.

- Digital satellite households contain 80% more 16-34s and 80% more children than Freeview households. This is something that will need more than the arrival of CITV to turn around, despite the audience for Freeview showing signs of getting younger, with less of a reliance on over-65s, although they still make up nearly a third of its sales.

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