Three years after the £1.5bn ITV Digital fiasco, ITV took a second tentative step into the digital era last week with the debut of ITV3 alongside ITV2. It is understandable that ITV would tread carefully in developing a new digital strategy, but to some, the caution smacks of ponderous inertia.
By contrast, the BBC now has six digital channels, albeit funded through a £150m slice of the licence fee, and ITV's much smaller commercial rival, Channel 4, has two and will launch a third, More4, early next year.
Of course, unlike the BBC and Channel 4, ITV has to answer to shareholders.
Coming late to the party hasn't helped, as ITV has had to join a queue of channels waiting for access to the Sky digital platform. ITV3 only managed to get on to Sky as a result of an eleventh-hour £10m deal that saw ITV buy out Sky's interest in the Granada Sky Broadcasting (GSB) joint venture. This enabled ITV to rebrand GSB's Plus channel as ITV3 and take Plus' place on the Sky menu.
With a schedule of drama favourites such as Inspector Morse and A Touch of Frost, and movies targeting the 35-plus demographic, ITV3 complements ITV2, which aims at 16- to 34-year-olds. Both have an umbilical link to ITV1, with programming that in the main has aired previously on the mother channel.
Cut-price strategy
It is not the most exciting of strategies, but as Jonathan Lewis, ITV's director of digital channels, admits: 'Repeats are cheap and give you good ratings.' Indeed, ITV3 will be funded by a 12-month programming budget of just £13m.
The more established ITV2 is better resourced. Assisted by a doubling of its budget to £40m, it expects to overtake Sky One as the UK's most popular multi-channel station by the end of next year. This is largely due to its presence on Freeview, the fastest-growing digital platform, giving it access to 4.4m more homes than Sky One, which does not feature on the service.
In the short term, ITV2's strategy of repeats appears to be working, but there are doubts about its longer-term viability. For example, ITV2's current Sunday night schedule is comprised entirely of repeats from ITV1's Saturday night schedule. No doubt it appeals to Saturday night partygoers who missed out on the latest from Ant and Dec and Simon Cowell, but in the future their needs will be met by personal video recorders.
Lewis admits that ITV's digital channels will need to evolve through investment in more original and acquired programming to bring in viewers in big numbers. ITV2's highest ratings are generated by live UEFA Champions League football and behind-the-scenes supplements to popular ITV1 reality shows, such as I'm A Celebrity, Get Me Out Of Here and The X Factor. ITV3's debut featured an exclusive episode of detective series Rebus, which pulled in an impressive 498,000 viewers.
However, since the channels receive no subscription fees, either from viewers or their host platforms, funding for original programming has to come from advertising revenue. So the onus is on ITV Sales to deliver the goods.
There is an even bigger motive for pushing ITV2 and ITV3 to advertisers.
ITV1 faces a £50m decline in revenue next year as a result of Ofcom's Contract Rights Renewal mechanism, and ITV will be keen to offset as much of this loss as it can through the digital channels.
Indeed, since ITV1 faces a long-term decline in its audience share, the digital channels represent ITV's only means of revenue growth.
David Jowett, deputy broadcast director at MediaCom, believes it pays advertisers to move money onto the digital channels. 'Since they reach specific age groups, they enable you to target more efficiently,' he says.
'Though tiny compared with ITV1, the ITV2 audience is big in multi-channel terms, and it has a strong brand identity.'
Bundling issue
Media agencies' enthusiasm will be curbed if ITV Sales' aggressive promotion of the digital channels extends to conditional selling, where advertisers are forced to put money into one channel in return for getting bookings on another. Although the practice is illegal, Jowett points out that there is a fine line between conditional selling and the perfectly legal practice of channel bundling, where advertisers are offered packages of ads on different channels.
But if ITV can boost ad revenues for its digital stations while maintaining the goodwill of advertisers, many believe its digital prospects are rosy.
John Hardie, managing director of Disney Channels in the EMEA region and a former ITV marketing director, identifies four reasons why the strategy has every chance of success: ITV's buying power in acquiring content; its extensive programming library; its ability to use ITV1 to promote the digital channels; and the fact that, unlike the BBC's digital stations, it is not hindered by a public service broadcasting remit.
Hardie is not concerned that ITV has so far managed to launch only two digital channels. 'Multi-channel is not about acquiring as much shelf space as possible,' he says. 'ITV should resist the temptation to dilute its digital presence by launching a host of themed channels.'
The advice is not lost on ITV. Lewis says new stations will not rely on advertising for funding, but will generate income from transactional revenues. He cites shopping, betting and gaming channels as examples.
Lewis adds that the future of Men & Motors, the remaining GSB channel, is undecided. He would be well advised to consign it to the same graveyard as ITV turkeys such as Carlton Breeze and Wellbeing. Only then will the spectre of ITV Digital finally be vanquished.
DATA FILE - MULTI-CHANNEL COMMERCIAL IMPACTS (%)
Channel 16-34s All adults
1 Sky One 11.5 9.4
2 ITV2 6.7 6.7
3 E4 6.7 4.6
4 Living 4.4 3.8
5 UK Gold 3.7 5.3
6 Sky Sports One 3.3 3.7
Source: BARB Figures for 2004 average to 26 October