UK: Winner takes all.

UK: Winner takes all. - BSkyB and Ondigital are gambling everything on the digital television revolution, but for one to succeed the other must fail.

by Emily Bell.
Last Updated: 31 Aug 2010

BSkyB and Ondigital are gambling everything on the digital television revolution, but for one to succeed the other must fail.

On 21 June this year an historic event took place. BSkyB, the multi-channel broadcaster launched a digital satellite service, firing the first shot in a revolution which will redefine the British television industry.

It was easy to miss. There was no launch party, no press conference, and no available pictures for the public to see. Some said there were no pictures at all - and BSkyB was unable to prove them wrong because only a few hand-built decoder systems existed and they were locked away in test rooms at BSkyB's West London headquarters. So complete was the shroud of mystery around this 'soft launch' that one programming supplier complained that although she had sold a number of channels to BSkyB's digital service she couldn't watch them because even she didn't have a magic box.

BSkyB's executives, however, did not care about the jibes that if its launch were any softer a dose of Viagra would be in order. Rupert Murdoch's satellite venture had said it would launch in June and had. Being first in being digital is everything. In what is most definitely a war, BSkyB, arguably the world's most-profitable broadcaster and jewel in the crown of Rupert Murdoch's News Corporation empire, has embarked on a mission it cannot afford to fail.

Just as Rupert Murdoch gambled his whole company on the success of his Sky multi-channel television service when it launched in February 1989 (see box, page 44), BSkyB stands on the brink of a similar gamble as it invests hundreds of millions of pounds in moving from a highly lucrative analogue business into an entirely untried digital one. BSkyB has 4 million subscribers with analogue dishes, and a further 2 million who receive its programmes through cable. Last year the company turned in profits of £314 million. Despite this enviable state of affairs, Murdoch, who still controls 40% of BSkyB, has decided that going digital is not only desirable but imperative. He reasons that if BSkyB ignores a digital future it will lose its monopoly pay-TV operator status, others will get ahead of BSkyB for the first time in a decade and the business will ultimately wither.

When, in the dying months of its long tenure, the last government passed the Broadcasting Act, it set out the framework for Britain's television industry to switch from analogue signals to digital. The autumn of 1998 would mark the start of this digitisation process with all Britain's licensed terrestrial broadcasters - the BBC, ITV, Channels 4 and 5 - encouraged to develop new services. To add spice the then government also provided for a new digital terrestrial broadcaster to be licensed; a digital 'multiplex' or bunch of channels would be made available to an operator who could prove to the Independent Television Commission (ITC) that it could run an enticing and commercially viable digital pay-TV service.

Underpinning all of this activity was the unspoken but inevitable threat that sometime in the next millennium, probably around the year 2015, analogue television signals would be switched off and the 40 million television sets currently in British homes, not to mention their video recorders, will be rendered useless. In other words, digital is coming whether it is wanted by consumers and broadcasters or not. Or as John Cummings, a director of media consultancy Hydra puts it wryly: 'digital television is a cure for which there is no known disease'.

If media historians are looking for a defining moment in BSkyB's history in decades to come they will not choose 21 June 1998, but a little over a year earlier. On Monday 16 June 1997, Rupert Murdoch was in London for a crisis meeting at BSkyB's unprepossessing offices in Osterley. The problem was that on Tuesday morning chief executive Sam Chisholm and managing director David Chance announced their departure. While Murdoch loses senior executives like some people lose socks, Chisholm's resignation for 'health reasons' and Chance's departure were a grave blow. Chisholm, a New Zealander who terrified competitors and his own staff alike, was a legend. He had taken BSkyB from a company on its knees with debt in 1990 and transformed it. Chance, an urbane and pleasant man, who played good cop to Chisholm's volatile sergeant act, was his natural successor.

Publicly it was easy to believe that Chisholm needed a rest. His respiratory problems would have been excuse enough for any normal executive to retire on a disability pension years earlier. But those who knew Chisholm also knew of two further reasons for his departure. Firstly, he did not like the presence of Elizabeth Murdoch, the boss' daughter, on the management floor at Sky. And to Chisholm the only opportunity digital represented was to squander the £10 billion business he had moulded over the past seven years. His final act of revenge was to take Chance with him, leaving Murdoch with an uncharacteristic succession problem.

Enter Mark Booth. The 41-year-old, Kansas-born TV executive who had already worked for Murdoch's Australian pay-TV enterprise, Foxtel, and was engaged in running the tricky Japanese start-up JskyB when the offer of the key London job came through.

Chisholm would stay until the end of the year but the launch of digital would now be down to Booth, with Elizabeth Murdoch acting as his right-hand woman.

What Booth could not have predicted was how other events that week would dog his first months at BSkyB. In central London, the ITC were meeting to discuss who should be awarded the commercial digital terrestrial TV licence which could form the chief competition to BSkyB's own digital launch. There was a problem, however. By far the best licence proposal on the table was partially backed by BSkyB in a three-way partnership with Granada and Carlton, the two largest ITV companies.

The killer proposition it offered was essentially 'Sky without a dish' and the partnership ensured that any digital satellite technology would be compatible with the digital terrestrial technology.

This was not, however, quite how the ITC's board members saw it. They thought that to allow BSkyB into the terrestrial loop as well as dominating the satellite domain would be highly anti-competitive and told the consortium that it could have the licence on the condition it dropped BSkyB as an equity partner. BSkyB was allowed to keep its programme supply contract which would guarantee Sky sport and movie channels being carried on the terrestrial service. But once the ITC took its decision it became inevitable that it would face a format war with BDB over technology and who would be the 'gatekeeper' in this new pay-TV age.

Therefore Booth arrived at BSkyB to find that not only did he have his own staff measuring him up against the revered Chisholm, but he also had an unscheduled battle with BDB and, in particular, Carlton chairman Michael Green. While Granada was in the compromising position of being both a BDB and a BSkyB shareholder, the ebullient Green was seriously testing BSkyB's patience. Carlton refused to pay its share of a £70-million settlement for BSkyB withdrawing from the BDB business. Green had decided that he should try and retain some leverage over BSkyB as it had not yet negotiated the crucial Premier League football rights for the sports channel it would offer BDB.

After a series of personal exchanges between Booth and Green, the matter was put in the hands of lawyers. This resulted in BSkyB issuing a writ for the repayment of the money. To add insult to injury, Carlton and Granada then announced that they would be using a proprietary software system in their decoder boxes which came from French company Seca, not the system developed by News Corp's NDS subsidiary. This would effectively ensure incompatibility between the BSkyB digital satellite decoders and those for BDB decoders, claimed Booth. No it wouldn't, said BDB. More litigation was drawn up, with BSkyB claiming the Seca contract breached an original agreement between themselves and BDB for compatible software.

Sitting in Sir Terence Conran's plush Bluebird restaurant just off London's King's Road, Booth, a normally affable character almost spills his cranberry juice when Green's name is mentioned. 'That guy (Green) comes into my office and says "Look I'll do you a favour". Do me a favour? He owes me money and he says he'll do me a favour!' storms Booth. Even his public relations shield admits that Booth's animosity towards Green has gone beyond conventional business rivalry. 'I think it's fair to say that if they were in a room together, Mark (Booth) would have to be physically restrained,' intoned one BSkyB adviser darkly. Booth says he 'is in no hurry to help BDB out with the purchase of key sporting rights. There is a faction in BSkyB which says that what is good for digital terrestrial is good for Sky, and another faction which hold 'F*** BDB' meetings. Booth, originally in the former camp, has migrated to the latter.

BDB dropped its moniker two months ago, becoming Ondigital - an identity unveiled by bungee jumpers over Battersea. 'What goes up must come down', muttered one observer. Booth's counterpart at Ondigital is Stephen Grabiner, a couple of years younger than Booth. A man from a newspaper rather than television background, he was offered the 'most exiting job in television' by Green in January 1998. His TV career threatened to get off to a farcical start when his then employer, United News and Media, said it would hold him to his year's notice period. United's proprietor, Labour peer Lord Hollick, is just behind Booth in the queue for the membership of the Michael Green fan club.

Grabiner firmly believes that although Ondigital will also have a presence in the shops this autumn, the real selling season for digital television will be this time next year. 'You cannot assume that consumers are stupid - they are going to take a considered view, which means that this is really an 18-month to three-year slow burn. I take the view that this is not about box wars. Ondigital is a television business. Retailers want to sell integrated televisions more than boxes, and consumers want to buy them,' says Grabiner. His job in managing a 'greenfield site' in media terms is very different from Booth, who has to convert the existing business at BSkyB.

'I'm running a business with about 160 people in it, which is roughly the same size as BSkyB's PR department. We have no offices, no company cars and the same set of terms and conditions for everybody. It's rather autocratic but that's because you have to be autocratic rather than collegiate when you are dealing with new rather than mature businesses,' says Grabiner.

What about Mark Booth? 'I like him, but he has a difficult job to do, particularly as his company is not entirely culturally dedicated to the idea of digital.'

It may be true that there are executives at BSkyB who share Chisholm's antipathy towards the arrival of digital, but Booth is very firmly 'on message'. 'Digital is great!' is the top line. Booth fills in with more detail: 'Digital gives us an extra opportunity to offer our customers different packages at different prices,' says Booth. He adds that the focus on sports and films has to shift in order to pull in new subscribers, particularly women who have become known as the 'handbrake on circulation'.

'We have other great channels that nobody knows about - Sky One is one of our hidden jewels.' When BSkyB rolls out its digital launch it will be aimed first at existing Sky subscribers and second at new customers, but there is a worry that simply providing more channels will not be enough of an incentive for current subscribers to make the switch. With this in mind, Sky Digital will be heavily subsidising its decoder boxes, dishes, and installation, which could cost the company up to £40 million.

At the glitzy relaunch of Sky's three movie channels in the Dorchester in July, it was Elizabeth Murdoch, rather than Booth, who was prepared to tackle this problem head on. 'If all you are going to do is offer customers more of what they don't find that compelling, then it's not much of a sell,' she said, pointing out how the Sky Movie plan on digital would initially be to quadruple the channels dedicated to films, not so the number of films shown would increase, but so the viewer could have more choice about when to watch a particular film.

Finding that 'sell' is the problem at the heart of the digital pay proposition.

Everybody will inevitably end up with a digital television set, enjoying new free-to-air services from the ITV and the BBC. But paying for more content? When BSkyB unveiled a new tranche of digital programming in June, which included BBC channels, three new Discovery channels and a number of other branded channels, one key executive could hardly hide a degree of scepticism. 'It's like a Monty Python sketch. You can have the Discovery Channel 1 with aardvarks or the Discovery Channel with orang-utangs, or you can have Discovery Surprise, which has neither aardvarks nor orang-utangs.'

Adam Singer, head of Flextech the multi-channel television company which owns UK Gold, UK Living, Bravo and Discovery, among others, is aware of the ennui which has settled on the viewing public who can no longer be wooed by choice alone. 'Multiplexing is just the digital word for "repeat"', says Singer who, as he supplies programmes to all distributors, sees the impending format war as particularly futile. 'If this were really a sophisticated market, all the programme providers would get together and the consumer would have the choice of one kilogramme of channels delivered by digital terrestrial, two kilogrammes by digital satellite and, if and when it's available, three kilogrammes by digital cable.'

Projections as to how quickly digital television will be taken up vary wildly. Continental Research, which has tracked attitudes towards digital, makes the very optimistic prediction that by 2003 just over half of all households in the UK will be multi-channel pay TV homes. Of that number, 7.4 million will be digital multi-channel homes. The growth predictions are that 75% of the new subscribers would come from digital terrestrial television. A forecast which makes BSkyB seethe and Ondigital triumphant.

Even John Clemens, chairman of Continental admits: 'you have to take these forecasts with a pinch of salt'. He continues, 'But what we do know is that by 2005 or 2010 digital will be a significant force. It is not a question of whether the parties can afford their investment in digital. It is a question of whether they can afford NOT to be investing in digital.' The only other certainty in a world where even Grabiner admits that 'there is no certainty' is that things will not turn out quite as anybody imagines.

Emily Bell is deputy business editor of the Observer

LESSONS TO LEARN FROM MURDOCH'S VICTORY IN THE WAR OF THE DISHES

It is almost a decade since the last format war in television technology.

In February 1989, Rupert Murdoch launched his Sky satellite service. In April 1990 a rival service - BSB - launched with a massive advertising campaign for its unique 'Squarial'dish. Seven months and £1.25 billion later, the two merged forming BSkyB. Though presented to the press and public as a 'merger' it was game, set and match to Murdoch, with Sky executives dominating the board.

The parallels between the launch of satellite television in the UK and the launch of digital border on the prophetic. Ondigital, with a keen sense of irony, set up home in Battersea's postmodern Marco Polo House where BSB started life. Like Ondigital, BSB was billed as the terrestrial TV companies' answer to Rupert Murdoch's more vulgar offering. The BSB backers included some of the UK's blue-chip media companies - Pearson, Reed, Anglia TV and Ondigital shareholder Granada.

Both Mark Booth and Stephen Grabiner will no doubt remember a man called Anthony Simonds-Gooding, the affable Whitbread marketing man and former Saatchi & Saatchi executive who took the chief executive's job at BSB.

Simonds-Gooding got off to a bad start by joining the company on 27 October 1987 - Black Monday. Despite a money-raising roadshow which made BSB a kind of 'Eurotunnel-in the-sky' there was an opulence about BSB's launch which reflected the 'spend spend spend' culture of the 1980s. Sky and BSB also had unrealistic expectations about the potential satellite TV market.

State-of-the-art equipment and terrestrial television production values at BSB could not disguise the fact that take-up rates on Squarials were too low to service the debts incurred by launch costs. Even the mighty Sky was finding the going tougher than Murdoch expected - when the merger was finally agreed the combined losses of the two companies was not only £1.2 billion, but Sky's 12-month head start gave it dish sales of around 1 million while BSB had only sold only 120,000 Squarials.

Grabiner, Ondigital's chief executive, says that the main selling season for his company will be autumn next year. Does he worry about a head start for BSkyB? 'I suspect that we will see them selling far more products next year than this year,' says Grabiner. If you ask him about Simonds-Gooding, or 'ASG' as he is ubiquitously known in the television industry, his answer is always: 'I must speak to him and find out where he went wrong'. There might be more than one person asking that question before 1 January 1999.

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