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Sky’s the limit for pay TV upstarts

Satellite operation challenging Murdoch's BSkyB

BRISTOL, England — Move over, Rupert Murdoch.

A new breed of pay TV entrepreneur is making waves across Europe and causing old-style media services to sit up and take note.

The best known of these is Britain’s Freeview, which is run by an obscure exec named Lib Charlesworth out of an obscure office in a rundown part of west London. The other two are France’s Free, overseen by Xavier Niel and Michael Boukobza, and Italy’s Fastweb, under the care of Silvio Scaglia.

Charlesworth’s a reticent manager who, from deep inside a labyrinthine BBC building, runs the two-year-old pay operation. With a total of six staff members, Freeview has caught Murdoch’s BSkyB satellite service by surprise and deprived it of new customers.

Tapping tech

Like the services in France and Italy, Freeview deploys alternative technologies, such as broadband Internet and digital airwaves, to challenge costlier sat operations and entrenched media heavies.

Italy’s Fastweb and France’s Free double as telecom companies, providing Web and phone services over the same lines that run programming to TV sets.

Although the U.K.’s Freeview does not use telecom technology — it sends digital signals through the air to traditional rooftop antennas — its set-top boxes soon will receive broadband feeds through partnerships with telco companies.

“More and more telco guys are getting into this game, and they are a disruptive factor, making pay TV more accessible and more competitive,” Charlie Davis, an analyst with London-based market research firm Ovum, told Daily Variety.

Freeview packs multiple channels into traditional airwaves through digital terrestrial compression, which are then decoded by a set-top box.

One-time expense

Its beauty? No monthly fees. Consumers pay as little as $60 for a box they purchase in a consumer electronics shop, and can then fetch about 30 gratis channels — not the hundreds that Murdoch’s pricey BSkyB sat offers, but with apologies to Bruce Springsteen, 30 Channels and Something On.

The 30 include a mix of entertainment, drama, history and music channels, such as BBC3 and 4. There are no movie channels and no sports, but consumers can buy a package of extra channels like Discovery and Cartoon Network for $13 per month, and can cancel after one month.

Freeview doesn’t even have to buy programming.

Rather, broadcasters like the BBC and the U.K.’s commercial channels ITV and Channel 4 either operate their own digital transmitters or pay a transmission company like Crown Castle to carry their programs. Even Sky pays to air three channels.

In April, consumers will be able to buy Freeview boxes outfitted with digital video recorders.

Farther down the road, telecom companies are expected to run broadband lines into Freeview boxes, making it possible for viewers to receive video-on-demand — presumably for a fee.

‘Cheap, cheap, cheap’

With one-time charges of between $60 and $100, the lure of Freeview is unmistakable.

As Netherlands-based analyst Helen Omwando of Forrester Research noted, “It’s cheap, cheap, cheap.”

By comparison, premium Sky viewers can pay more than that each month; Sky’s basic monthly packages start at close to $40. Add in all the sports and movies, and Sky’s monthly fee is closer to $80.

Freeview launched in October 2002 and is on pace to have sold 5 million boxes by the end of 2004. That’s well over half the 7.4 million subs that BSkyB has signed up over 15 years of operations, in a country of 24 million homes.

“Some people are predicting that Freeview will overtake Sky by the end of next year,” Freeview’s former chair Carolyn Fairbairn said. “It’s a fantastically simple way for people to make the hop to digital television.”

Curiously, Murdoch, whose News Corp. controls BSkyB and whose son James is its chief executive, has himself to blame.

Footing the bill

Sky backs Freeview financially — it is one of three equal owners who ponied up at its inception, rebuilding it from a failed monthly pay service called ITV Digital. The other owners are the BBC and U.S. transmission company Crown Castle.

Sky bought in to Freeview in 2002 with the now-questionable thinking that Freeview customers who got hooked on the marijuana of 30 channels would eventually pay for the heroin of hundreds of satellite channels.

It doesn’t seem to be happening.

Along with co-owners BBC and Crown Castle, Sky continues to provide annual funding, believed to be in the single-digit millions per company, which funds marketing and call centers.

Each owner also provides three board members who meet about once a month, with a rotating chairmanship, to sort out issues like the marketing budget and the electronic program guide.

Charlesworth’s main task is to keep the call centers and retailers up to date on changes like things in set-top boxes, programming and signal coverage.

On autopilot

That’s what’s astonishing about Freeview. It practically runs itself, without bloated staffs or celebrity managers. With Charlesworth currently on maternity leave, Freeview’s daily operations are run by an even lower-profile exec, acting general manager Felicity James.

Freeview, which is a not-for-profit service, doesn’t even make programming decisions. Any broadcaster who cares to can transmit digitally, provided the broadcaster pays one of the four groups that operate Freeview’s six digital transmission “multiplexers,” or otherwise has use of the transmitters. Two of the transmission operators happen to be Freeview owners — Crown Castle and the BBC (Sky pays Crown Castle for transmission). The other transmitters are owned by partnerships including commercial stations ITV, Channel 4 and Five, and Welsh broadcaster S4C.

Freeview does not sell advertising. Rather, it’s up to the broadcasters like ITV, C4 and Five to sell blurbs on shows just as they do on their normal analog antenna programs.

Nor does Freeview sell the boxes — that’s done by consumer electronics vendors like Pioneer and Pace, which use their brands, not Freeview’s.

TV makers including Sony and Toshiba build the decoders into new digital TV sets. It’s all a precursor to Britain’s planned 2012 switchover to all-digital broadcasting.

BBC’s blessing

While Charlesworth might be the person who keeps operations humming, it certainly helps that the government-funded BBC houses and enthusiastically promotes it, with the backing of new director general Mark Thompson, and, previously, former director general Greg Dyke.

“I would put Mark Thompson’s face on Freeview, and before him, Greg Dyke,” said Fairbairn, who was director of strategy at the BBC until she resigned earlier this month to travel around the world.

She described Freeview as “one of the three or four legs” that Thompson is emphasizing at the BBC.

BSkyB all but admits Freeview’s success has taken it by surprise.

“I think it’s gone more quickly than most people thought it would,” said BSkyB chief operating officer Richard Freudenstein.

But, he claimed that Freeview’s success has had, if anything, only a marginal impact on Sky’s sub growth. Sign-ups have slowed because earlier campaigns to sign up viewers have naturally wound down.

In for long haul?

Given the negative impact Freeview has had on Sky, some people question Murdoch’s long-term commitment to it.

Freudenstein — one of Sky’s Freeview board members — said the company is in for good. After all, Sky has three channels on Freeview — news, sports news and travel — and those or others could one day start making advertising profit. Today, the advertising is unprofitable, although Sky won’t reveal by how much.

He also noted that the Freeview target audience is older than BSkyB customers, so Freeview at least gives Sky a chance to reach them with Sky programs, if not Sky service.

If Sky were to pull out, Freeview would have to find new funding, which raises a point that all the pay TV newcomers face across Europe: Can they sustain a profitable business?

Forrester’s Omwando doubts it.

Will they click?

“These operations will lose money,” she said. “The costs they incur to operate are more than they get back from consumers. The economics don’t add up. It smacks of the dot-com days.”

Others disagree, noting the operational costs are very low, and that Freeview is a nonprofit, so it’s not under pressure to make huge returns. It should continue to grow as long as there are financial incentives for its participants — for Crown Castle to generate transmitting revenue, set-top box makers to sell boxes and networks to sell ads.

With Freeview effectively serving as the government’s linchpin in the 2012 digital switchover, the government-backed BBC should continue to provide momentum.

“Digital terrestrial is a market that was going to develop anyway, so it’s better to be part of this than to be on the outside,” Fairbairn said.

That’s what Murdoch thought. Perhaps he’s not so sure now.

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