Brits embrace land of the free TV

Good news for program and film distribs, but is pay TV under threat?

LONDON — For the first time, total European pay TV revenues overtook revenue from advertising sales last year. A recent report from industry think tank Informa predicts that by 2014 subscription revenues will account for the lion’s share of commercial TV revenues in Europe.

But that situation is very different in the U.K. Free channels — in other words, advertiser funded — are proliferating in what pay competitors are describing as a “digital land grab.”

Blighty’s three main terrestrial broadcasters — the BBC, ITV and Channel 4 — now operate around 10 extra free channels, with more planned. Five network, wholly owned by RTL, is gearing up to launch further advertiser- funded webs.

This is good news for program and film distributors, but is pay TV under threat in the U.K.?

“It’s bloody difficult for us because ITV and Channel 4 are launching channels on Freeview (the digital platform in which both have a stake) in order to grab territory from the pay market,” concedes Dick Emery, CEO of UKTV, Britain’s second biggest supplier of pay TV channels after Sky.

In July Channel 4’s dedicated movie channel, FilmFour, will complete the broadcaster’s move out of pay TV when it goes free, following the example of youth-skewed E4 that went free last spring.

A free movie channel offering premium movies, including new releases — in March C4 inked a landmark deal with 20th Century Fox giving the combo valuable film rights well into the next decade — may prove to be a defining moment in the expansion of digital TV in the U.K. and dent Sky’s subscriber growth rates further still.

“I think people in the industry are underestimating the significance of Channel 4 turning FilmFour into a free-to-air channel,” reckons a veteran U.K. film buyer. “Audiences will always find movies when they are scheduled in regular slots.”

C4 CEO Andy Duncan, one of the architects of Freeview in his former job as the BBC’s marketing honcho, reckons he has a better chance of earning money by making FilmFour freely available on all U.K. digital platforms than by pocketing subscriber coin.

Currently 350,000 subscribers pay £7 ($12) a month to receive FilmFour. When the service is relaunched in the summer, the channel will be accessible to around 20 million viewers. This figure will expand as Freeview becomes the default system in the run-up to analog switch-off, planned for 2012.

Freeview is now in around 7 million U.K. homes, while Sky has about 8 million subscribers. It is predicted that Freeview will overtake Sky later this year.

“Since we took E4 free-to-air last May, revenues have doubled,” says Duncan. “When E4 was a pay service subscriber revenue was £40 million. It’s now running at £80 million and will continue to grow, generating more than £100 million next year.

“By making our channels freely available we can leverage the C4 brand and serve our public purpose by making all our services universally available. Already, More4 (an upscale channel that bowed last fall) is bigger than BBC4 and ITV4.”

Over at UKTV, Emery is skeptical regarding Duncan’s strategy.

“The U.K. television market is too small not to have a significant pay component. The BBC licence fee and spot advertising will only fund so much,” he says.

But realizing that his future growth prospects are looking less secure than at any time since UKTV launched a decade ago, Emery thinks UKTV will survive as a pay service by forming a closer rapport with its audiences.

“We are investing more in original programs,” he says, “and intend to use new media as a way of getting close to our viewers and their special (viewing) interests.

“Because Channel 4 is increasing its share of the U.K. advertising market they can use that power to launch new free channels, but in the long term they have to be in pay because there is only so much advertising money available.

“Once this growth starts to slow down the first thing they’ll cut is the budgets of their peripheral channels, which will put pressure on their production budgets.”

Ultimately, the amount of advertising revenue will determine if the free model can work in the long term.

It remains to be seen whether the U.K. remains the odd one out in a digital Europe, or if it is setting a trend that other markets will have to follow.