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Wednesday, 1 May, 2002, 08:23 GMT 09:23 UK
The fallout from ITV Digital's collapse
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By Jeff Randall
BBC Business Editor
Launched amidst much ballyhoo and bravado, ITV Digital's pay-TV services vanished from our screens after the administrator threw in the towel and admitted that nobody wanted to buy this deeply flawed business.

With hopes fading that much can be gained from selling off the company's assets bit by bit, the search for culprits now starts in earnest.

Rarely in business does a robust fight end in a draw, and in this case BSkyB knocked its opponent ITV Digital out of the ring

Who was to blame for this debacle and will heads roll?

For many, particularly those on the left of Britain's political spectrum, the answer to the first question is clear: Rupert Murdoch.

As the controlling shareholder in BSkyB, ITV Digital's main rival, Murdoch's News Corporation is already being demonised as the monopolistic giant that bullied its fledgling challenger into submission.

But it's not that simple.

A bloody fight

When ITV Digital's owners Granada and Carlton formed a digital consortium in the mid-nineties, BSkyB was part of the gang.

ITV Digital - timeline
Jan 1997: BSkyB, Carlton and Granada form British Digital Broadcasting
June 1997: BSkyB told to quit project
Aug 1998: BDB renamed ONdigital
Nov 1998: ONdigital starts broadcasting
Apr 2001: rebranded as ITV Digital
Sep 2001: Sum invested hits 788m
Feb 2002: ITV Digital shake-up revealed
Mar 2002: Administrators called in
May 2002: Pay-TV services switched off
It was later forced out by competition authorities in Brussels, and faced with the prospect of losing viewers to the new kid on the block Murdoch went into competitive overdrive.

Let's not forget that he bet the bank in setting up BSkyB and almost wrecked News Corporation doing it. Too much was at stake for him to allow ITV Digital simply to walk in and slice off a chunk of the lucrative pay-TV market.

When in the early stages of the project, Granada and Carlton talked about competition being good for customers, they had clearly overlooked that competition invariably produces winners and losers.

Rarely in business does a robust fight end in a draw. In this case BSkyB, which has about 5.5m subscribers compared with ITV Digital's peak of 1.2m, knocked its opponents out of the ring.

BSkyB's master-stroke was its decision to give away set top boxes. That move sucked in millions of new subscribers to its satellite services and forced ITV digital to respond by giving away boxes for its own terrestrial operation.

It became a test of strength: who could bleed longest?

Murdoch, well practised in opening his veins to win a war, had the biggest blood bank.

Gambling on football

It was the ludicrous expense of the Football League contract that pushed ITV Digital over the edge

But it wasn't just about cash and who had the most to burn. ITV Digital made some heroic assumptions about consumer and government behaviour.

Nearly all were wrong.

Granada and Carlton bet heavily on BSkyB being forced by regulators to supply it with premiership football at a price it could afford.

BSkyB resisted and ITV Digital missed out. In a market dominated by the attraction of top-flight football, this was critical.

Spending more than 300m on TV rights for Nationwide League soccer was never going to make up for missing out on the sport's premier attractions. It was the ludicrous expense of this contract that pushed ITV Digital over the edge.

Fuzzy pictures, fading profits

After crowing about the simplicity of its equipment and mocking BSkyB's ugly dishes, ITV Digital failed to provide its customers with kit that could match BSkyB's broadcasting range and quality of reception.

Too many ITV Digital customers found their pictures were fuzzy or just not available.

It didn't take long for consumers to work out that ITV Digital's cheap-and-cheerful proposition of fewer channels at a lower price was poor value. The company suffered debilitating "churn", with about 25% of its customers choosing not to renew their subscriptions.

That was more than twice the cancellation rate at BSkyB.

Heads must roll

Granada and Carlton originally launched their digital service as ONdigital, but when it ran into trouble they rebranded it as ITV Digital, hoping that it would flourish under the umbrella of an established media brand.

Unfortunately they did this just as ITV was about to suffer a severe downturn in its fortunes (advertising revenues are in a slump).

If anything, far from ITV's clout boosting the digital business, the mainstream ITV companies began to suffer from their association with a loser.

Having blown 1bn of their shareholders' money, Granada and Carlton are now in the damage limitation business.

They would love to merge their companies, forming a single ITV goliath, enabling them to cut costs and restore profits. The government has signalled this will probably be allowed.

But what do professional investors have to say?

The big City institutions also favour a deal, but seem unlikely to give the go-ahead without changes in top management at either Carlton, Granada, or both.

When these two talked of getting together before, it was on the basis that Carlton's Michael Green would become chairman and Granada's Charles Allen the chief executive. That may have to change.

One big investor told the BBC: "I'm not going to vote for anything until I've heard how they're going to clear out the boardroom. You cannot waste this amount of shareholders' money and expect everything to sail on as normal".

The fall-out from ITV Digital is far from over.

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