The latest salvo in multichannel TV's ongoing battle for customers kicks off this month with the new football season. Setanta Sports is tackling Sky's traditional dominance of Premiership football by airing 46 matches on a pay-TV channel available via Freeview and Top Up TV. It's the perfect example of how multichannel TV now means any combination of free, pay and "pay-lite" services.
True, multichannel television used to be synonymous with pay-TV. But it's no longer that simple. Freeview has overtaken Sky as the most popular digital TV service, Virgin Media is offering TV beyond its cable network and new players such as BT Vision, Setanta and Top Up TV are vying for a share of the multichannel TV market with varying costs to the viewer.
With Sky being scrutinised by both the Competition Commission (over the implications of its stake in ITV) and by Ofcom (over its proposed pay-TVdigital terrestrial services), and with digital switchover just five years away - when every household in the UK will have multichannel TV by virtue of the digital signal - the stakes in the multichannel TV market have never been higher.
Ofcom's latest report on the take-up of digital TV, published in June and covering the first three months of the year, shows 81.7% of UK homes now have multichannel TV and most of those - 80.5% - are digital, with analogue cable accounting for the remainder.
But just under half of all UK TV sets still don't have multichannel services - meaning a lot of sets need upgrading if they are to work when the analogue TV signal is turned off in 2012.
Meanwhile, the issue for broadcasters is: what is the model for the future of multichannel TV - advertiser-funded or paid-for by the viewers?
Channel 4 appears to believe in the free-to-air model, having made its E4 digital channel free two years ago and its Film4 channel free last July. Results have been positive, with E4's share of viewing rising from 0.72% to 1.59% after the switch and Film4's share increasing from 0.1% to 1.06%. What's more, advertising revenues on E4 have doubled since it has been free-to-air.
Meanwhile, Top Up TV, the service which launched in 2004 and allows Freeview homes to take a limited number of extra channels for around £10 a month, has launched a channel funded by advertising. Showcase debuted on Freeview on 17 July with Audi and Camelot as founder sponsors, demonstrating more faith in the market for advertiser-supported channels.
Malcolm Wall, chief operating officer of content at Virgin Media, says: "In virtually any market it's unusual for one system to prevail. There are supermarkets and boutiques and they co-exist. Undoubtedly there's an appetite for pay-TV because, between us and Sky, there are 12 million households paying for TV and eight million have gone for Freeview, so there are more people who pay for TV than those who don't."
Wall says the most important thing is the battleground for the next five million homes or so that have to make a decision about multichannel, ahead of digital switchover. He believes the Freeview market will begin to fragment over the next five years, as those coming late to multichannel TV make their choices.
"BT Vision has launched a Freeview broadcast package allied to a video-on-demand system. Sky will launch a pay-lite service. We'll launch Offnet, a TV service which goes beyond our cable network, in the second quarter of 2008, which will incorporate pay elements, VoD and channels. We're all targeting the Freeview space with pay-lite propositions," he says.
Wall doesn't see the launch of a free-to-air channel, Virgin 1, as a contradiction to Virgin Media's pay-TV business model. This is despite claims that the £30m-40m cost of the new channel could have been used to keep the Sky basic channels, including Sky One, on the Virgin Media service. (They were withdrawn earlier this year in a row about pricing Virgin's and Sky's channels).
"We are a pay-TV operator," says Wall emphatically. "We are looking for Virgin 1 to be successful by gaining audience and advertising, but it's a vital cross-promotional tool. We believe that some people enjoying Freeview would like a pay-lite service and this gives us a vital interface with them."
As for the Sky stand-off, he concedes that Virgin has lost customers because it no longer carries the basic Sky channels and admits: "Ideally, we would have their channels." But, he adds: "It's hard to see a trigger that will change anything. We would love to do a deal, but the value of their channels changes, following their withdrawal."
While the showdown between the two pay-TV players may steal the headlines, Freeview represents another significant contender for viewers' attention. Ofcom's figures show Freeview is on the main set in 8.4 million homes but, if Freeview on secondary sets, such as in bedrooms, is included, it's in 11.7 million homes. Freeview general manager Ilse Howling agrees with Wall about the increasing complexity of the multichannel market. "In many ways there are two markets which are very separate - there's the free TV market and the market for people who want to pay," she says.
"Freeview's success to date has been based on its single-minded free proposition. We knew when we launched Freeview it was likely to have a strong consumer appeal, but we had no idea just how appealing it was going to be."
She believes a mix of free and pay-TV services will become more marked as digital switchover looms, and suggests: "Some homes will have pay-TV on their first set and free TV on their second and third sets."
In fact, all the multichannel TV operators, from Sky to Freeview, are having to shift their focus from the 24 million households in the UK to the total number of television sets - 60 million by Ofcom's reckoning. By this measure, 27.8% of all TVs have Freeview; 15.5% have Sky's pay-TV service and 1.5% have free-to-air satellite, while just over 6% have cable. That leaves 49% of all TVs to battle for.
Of those who went digital for the first time between January and March this year, 81% took Freeview, making the group confident about growth in the next five years. Howling also expects Freeview Playback, which allows viewers to pause and rewind live programming, to boost take-up in the run-up to Christmas this year.
As to whether the pay-TV market will stagnate at current levels, Howling recalls that, when Freeview launched five years ago, predictions about how pay-TV was about to stall abounded. "What's clear is that pay-TV has great consumer appeal," she contends. "A large group of people might want some pay channels. There's a range of options for that."
But just how big a threat are Freeview and new players, such as "pay-lite" option Top Up TV and BT Vision, to Sky? More than 90% of Sky's annual £4bn revenue comes from pay-TV, with less than 10% accounted for by advertising on the likes of Sky One. BSkyB chief operating officer Mike Darcey says: "While advertising makes an important contribution to Sky's business, it is the strength of our subscription model that enables us to invest around £1.5bn a year in content."
But the company isn't complacent about the speed at which Freeview has taken more than a quarter of the multichannel market. "The growth of Freeview means pay-TV providers need to work harder than ever to differentiate their proposition," he concedes.
"We are obsessive about focusing our spend on programmes and channel brands that add to the distinctiveness and quality of our offering. We've targeted an expanded Sky One budget towards primetime and on big name acquisition and commissions, like 24, Lost, Hogfather and Prison Break. These types of shows get people talking, attract a loyal audience and make a real contribution to customer acquisition and retention."
Sky's growth has remained positive despite the success of Freeview, he adds. "Sky has grown its customer base every year since the launch of Freeview, despite the additional competition it brings. Last year, more customers joined us than at any time in the last six years."
But some observers believe Sky is finding it trickier to grow its pay-TV business now it's reached eight million customers and facing new competition, such as BT Vision. However, BT is offering a different proposition to Sky whose customers are happy to pay up to £40 a month for TV services.
"We're not trying to attract that sort of customer, but the market is more complex," says a BT Retail spokesman. "We're talking about convergence and there's a possibility every TV customer will take a broadband connection as well. Now that companies have bundled offerings, if you lose them for one service, you might lose them for another."
BT aims to sit somewhere between the free model of Freeview and the top end of Sky's subscription services. "We aim to be the nation's most flexible TV service," the spokesman says.
BT's results on 17 May showed it had 7,500 BT Vision customers, but that was early days for a service that only launched in spring. Second quarter results later this year are expected to show a fuller picture and BT is hoping the launch of its Vision Sport service in June will boost its offering.
So, as the rivals limber up for kick-off, there is no doubt that the battle for multichannel TV customers is going to be hotly contested. It seems most likely there will, as now, be a mix of free and pay-TV services across the 2.4 sets a typical household owns.
The Freeview market will fragment as Wall and Howling predict. Advertising will be a crucial source of revenue for individual channels (as has been demonstrated by Sky One, Virgin 1, E4 and Film4), but platforms will rely on a mixture of pay-TV revenues, from subscription to pay-per-view and, eventually, pay-to-own as pioneered by C4's 4degD VoD service. There is no "either/or" answer to the question of multichannel TV any more
RUN-DOWN OF THE MAIN PLAYERS
- Freeview - in 8.4 million homes. Launched in October 2002. Offers more than 40 TV channels with no monthly subscription. Viewers have to buy a set-top box, digital TV recorder or digital TV.
- Sky - in just over eight million homes. Launched in 1990. Offers TV on subscription, with packages ranging from £15 to £43.50 per month. Sky also supplies a free digital satellite TV service to a further 885,000 homes and offers broadband services.
- Virgin Media - in 3.4 million homes. Launched in February 2007. Offers free TV with phone service costing from £11 to £19.99 per month, plus broadband and mobile services.
- Tiscali TV - in 62,000 homes. Launched in March this year after Tiscali bought Video Networks' Home Choice service last year. Offers TV via phone lines for around £19.99 a month. Also offers phone and broadband services.
- BT Vision - in more than 7,500 homes - aims to be in two to three million homes in the "medium term". Offers programming via its own V-box or Freeview, either pay-per-view or through subscription costing up to £14 a month. Also offers broadband.