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Friday, 28 September, 2001, 07:16 GMT 08:16 UK
Digital TV's commercial woes
BSkyB's digital TV control room
BSkyB pioneered multi-channel broadcasting in the UK
By BBC News Online's James Arnold

Broadcasting pundits have long hailed digital television as an interactive revolution, the end of TV as we know it.

Investors may not agree.

Share prices
March 2000: 2,180p
Now: 604p
March 2000: $105
Now: $3.55
March 2000: 550p
Now: 27p
March 2000: 83 euros
Now: 0.3 euros
Last month, Denis Olivennes, the head of French broadcaster Canal Plus, admitted that digital TV had been a "disaster", and hopelessly "uneconomic."

In the boom and subsequent bust of the technology economy, no business has been more aggressively hyped, and then mercilessly punished, than interactive broadcasting.

Now, as the industry's leading firms struggle to make ends meet, experts predict a wave of retrenchment if anything is to be salvaged from the wreckage.

The digital future

In essence, digital is a new way of broadcasting, using computer technology instead of traditional "analogue" signals, allowing many more channels to be transmitted on fewer frequencies.

UPC's digital video centre
Digital networks demand huge technology investment
In due course, all TV will be digital; the UK government is aiming for a wholesale switchover from analogue broadcasting by 2006-10, and some private-sector broadcasters are well on the way there already.

ITV Digital is already wholly digital, and BSkyB - the firm that pioneered multi-channel subscription broadcasting in the UK - is switching off its last analogue broadcasts on Friday.

But what really set investors drooling in the mid-1990s was the notion that digital TV could be the platform for a wide range of paid interactive services - everything from ordering pizzas to booking holidays.

At the end of the very long tunnel was the Holy Grail of "convergence", the dreamt-of integration of TV, internet and telephony in one seamless media melting-pot.

Strong start...

Sounds attractive.

And indeed, by some reckonings, digital TV has made a perky start.

Global set-top box sales
2000: 91.5m
2001: 127.4m
2002: 178.7m
2003: 229.9m
2004: 282.2m
2005: 326.7m
2006: 364.7m
2007: 397.5m
Source: JPA
In Britain, the market where digital TV has caught on most quickly, just over 40% of households subscribe to some form of interactive service.

Thanks to heavy investment in the standard of programming across many of the new channels, cable and satellite broadcasters now capture 20% of the UK TV audience.

IDC, a technology research firm, forecasts that 79 million households across Europe will have interactive TV by 2005, representing a continent-wide penetration of 51%.

Jon Peddie Associates, a US research firm, predicts the number of set-top boxes - the medium by which digital TV is channelled into the home - to leap from the current 100 million to almost 400 million by 2007.

... shame about the money

But take a look at the financials of the business, and things don't seem so cheery.

The shares of the world's leading digital providers have taken a mighty battering since the collapse of tech shares last spring.

United Pan-European Communications (UPC), the Netherlands-based firm that is Europe's biggest cable provider, has seen its shares plunge from 83 euros last March to just 0.3 euros.

On 27 September, UPC floated Priority, a telecoms unit, on the Amsterdam stock market, where it humiliatingly failed to attract even the most meagre trading volumes.

Graph of telewest share price
Worst-hit have been those, like UPC and British rivals NTL and Telewest, which focus wholly on distributing broadcast material via their cable and telecoms networks; integrated broadcasters such as BSkyB have weathered the storm a little better, but still remain sharply down on the year.

Earlier this month, Telewest dropped out of the blue-chip FTSE 100 share index, and its corporate debt is being traded at around 60p in the pound, reflecting investors nervousness over default.

Inactive, not interactive

The main cause for this abject performance is the fact that initial projections for the market were so heady.

Because digital providers could, in theory, charge their subscribers for a whole range of services, they should enjoy far greater revenue per customer than traditional pay-per-view broadcasters.

The Royle family
Not interested in sending e-mail
So it has proved, but nowhere near enough to justify early hopes.

While many viewers, especially in the UK, have become comfortable with the concept of paying to watch movies or important sports events, almost none have any interest in the internet-type services that providers were keenly promoting in the late 1990s.

According to a recent report from the Office for National Statistics, while almost two-fifths of UK households have access to the internet, only 6% of those went online through their TVs - and that figure was not growing at all.

In the US, a survey from research firm SRI found that 72% of interactive service subscribers were interested in nothing more than watching TV.

"Consumers still need to be convinced that interactive TV is the indispensable enhancement the industry believes it to be," SRI dryly commented in a statement.

While digital TV has potential, says Linsay Watt, senior consultant at Cap Gemini Ernst & Young, "you're never, ever going to want to send e-mails over interactive TV; you're never, ever going to want to research your thesis during commercial breaks."

Ad slump

At the same time, the core broadcasting business is suffering the same problems of commercial broadcasters everywhere - only worse.

The advertising market is in a slump: even ahead of the US attacks, total advertising spend in the seven major economies was down $8bn on last year, according to analysis firm Zenith Media.

Most of the spending that remains is being targeted at top-quality outlets, which are few and far between in the digital world.

Although the 20% audience share in the UK looks impressive, that is spread across more than 200 channels.

Audience figures for individual programmes are hard to get hold of, but some channels must be counting their viewers in hundreds, rather than thousands or millions.

In one notorious recent example, a lower-league football match broadcast by ITV Digital was watched by fewer paying viewers than turned up to the stadium.

Drowning in debt

All this need not have been a huge problem, had setting up digital services not been such an expensive business.

But as share prices collapsed, the levels of debt taken on by firms like Telewest, NTL and UPC, which looked easily sustainable early last year, now loom terrifyingly.

Both UPC and Telewest owe about 4.5bn - NTL more than twice as much.

The firm's creditors, who once anticipated a speedy and generous repayment of their loans, now face at best a very long wait - at worst, default.

Time for a rethink

So is there hope?

Ms Watt reckons that the sobering effect of the share-price collapse might have encouraged a change of tack among the main firms.

First, she predicts consolidation in the sector.

A Pace gaming console
Pay-per-use games could be the way forward
This could mean mergers - a tie-up between NTL and Telewest has long been rumoured - or the sort of cost-sharing deals currently being agreed by third-generation (3G) mobile-phone providers.

Second, the bigger firms are kissing goodbye to the notion of "convergence", and zeroing in on the little niches of the interactive sector that stand a chance of paying off.

Although no one seems interested in sending e-mail through their TV, there is increasing interest in interactive gambling, video-on-demand services, and per-per-play arcade games.

At the beginning of September, Telewest announced it had launched the world's first live action interactive betting service.

In an industry used to gambling on a massive scale, that may prove a sound decision.

Charting its past, present and digital future
See also:

11 Sep 01 | Business
Old economy rebounds into FTSE
10 Sep 01 | TV and Radio
BBC digital: Commercial concerns
23 Aug 01 | Sci/Tech
Putting the ball in the net
16 Jul 01 | Business
UPC shares collapse
08 Jul 01 | Business
Cable giants join to boost broadband
02 Apr 01 | TV and Radio
Making sense of digital TV
22 Mar 01 | Business
Telewest losses widen
31 Oct 00 | Business
UK leads world in interactive TV
25 Aug 00 | UK
Q&A: Digital TV
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