PARIS — When pay TV giant Canal Plus announced it was stepping into the free digital terrestrial television market with Bollore Media’s channels Direct 8 and Direct Star, it rocked the French TV community and made the bosses of commercial networks TF1 and M6 fret over further market fragmentation.

But the frosting on the competitive cake was the decision by CSA, France’s broadcasting authority, to open a call for bids to create six more DTT webs — after the European Commission banned the allocation of extra DTT frequencies to TF1, M6 and Canal Plus — to offset expenses that are being incurred by the nation’s switch to digital.

Insiders now argue the CSA is simply thwarting the European Commission’s ban in a counterproductive way.

Nonce Paolini and Nicolas de Tavernost, presidents of TF1 and M6, respectively, recently voiced their discontent during a debate hosted by the ARP at the Rencontres Cinematographiques, a three-day confab of French film and TV execs, including all the network bosses.

“It’s an absurd idea to make the TV market more competitive than it already is at a time of economic crisis,” Paolini says. De Tavernost concurs: “The increasing number of channels is driving prices down and will eventually handicap investments.”

While the the French DTT market has declined since its 2005 boom, TF1 and M6 have been able to sustain their leadership positions in terms of ratings and ad revs, and ride out the economic storm. For instance, the share for TF1 Group (including TMC and NT1), has dropped only marginally, from 51% in 2005, to 49.7% over the first half of 2011.

But with Canal Plus and other players getting into the game, the competition figures to heat up.

By next fall, Gaul will boast 24 DTT nets, second only to the U.K., says IHS Screen Digest’s Daniel Knapp.

TF1 owns two free-to-air DTT webs, TMC and NT1, in addition to TV Breitz, a free general-entertainment channel based in Brittany that has been reformatted to become a DTT channel.

Meanwhile M6, which owns a single free DTT channel, W9, is hoping to snap up two additional such nets, Wiki TV and M6 Famille. It’s unknown whether Canal Plus will apply for DTT channel Canal 20 now that it has bought a controlling share in Bollore’s Direct 8 and Direct Star.

With the CSA auction, TF1, M6 and Canal Plus (if it participates) will likely be granted additional frequencies, but they will be joined by other applicants — and that’s what Paolini and De Tavernost dread the most.

A wide variety of indie players have submitted proposals. Candidates include NRJ Group and Next Radio TV — both present on DTT with one frequency each; and newcomers like Allocine, with its channel dedicated to classic movies and film news.

But industryites and analysts doubt these smaller entities will benefit the French TV and film market.

“The advertising market is near stagnation and the prognosis is pretty grim in the short and long term,” says Francois Godard from Enders Analysis.

Even if these independent DTT groups attract new advertising revenues and bring some dynamism into the sector, they could be detrimental to the local advertising market, because they’ll undercut it by selling cheaper ads, Godard adds.

Knapp says the key problem in France is that TF1 and M6 aren’t allowed to bundle ad sales across all their channels as they do in Spain, for instance. “And as a result, they have difficulties monetizing their fragmented audience shares,” he adds.

Meanwhile, producers and filmmakers point out the new DTT nets won’t bring extra coin to fund production, since they have little or no investment obligations. The CSA requires only general entertainment channels that program more than 52 films per year to invest 3.2% in the acquisition of European features, most of that in French pics. All DTT nets also have to invest 16% of their annual revs in French and European original programming, but insiders say there are too many ways to work around these obligations.

Salome says he fears these newcomers could weaken the market altogether. “If the advertising revenues get more (fragmented), budgets for film and TV productions will suffer.”

On Gaul’s two commercial networks, TF1 and M6, the number of films broadcast reached a decade low in 2010, according to the CNC. Only 8.3% of the films broadcast across all DTT channels in 2010 were new, and most were American pics (39 pics from U.S. vs. 13 French films, according to the CNC).

“The CSA will need to step in and establish further guidelines for these DTT channels to invest in French content,” Salome says.

But the prospect of Canal Plus, France’s most powerful backer of French cinema and homegrown fiction programs, entering the free DTT biz is perceived as a good omen for most of the industry — apart for TF1 and M6 , which have a lot to lose in audience and advertising share.

Rodolphe Belmer, exec VP of Canal Plus, who was attending the Rencontres Cinematographiques debate along with De Tavernost and Paolini, said the company’s two free-to-air channels, Direct 8 and Direct Star, will allow the cabler to “put more money into original TV content” and better finance French cinema, which has been let down, he says, by TF1 and M6.

“We think local groups have the capacity to produce world-class programs, but we have an industry that isn’t structured for that,” Belmer says, adding that Canal Plus’ priority is to strengthen its premium content to compete with global companies like Netflix, Google and Apple, as well as U.S. productions, which spend three times more per episode than Canal Plus.

Canal Plus will be able to invest substantially more than $1.3 million per episode in select drama programming for its pay TV channel and two DTT nets.

In the past five years, Canal Plus has bolstered its image with ambitious French and English-language TV commissions, including Gallic crime skeins “Spiral,” “Braquo” and Tom Fontana’s period drama “Borgia.”

Manuel Alduy, head of film and TV series acquisition at Canal Plus Group, says the company aims to draw an additional $275 million in advertising revenues from Direct 8 and Direct Star within the next three years. And if the paybox group invests a portion of its advertising revenues from Direct 8 and Direct Star into original programming and films, as Belmer claims it will, the two DTT channels could become as vital to the French film and TV biz as Canal Plus is itself.

Down the line, Knapp says Canal Plus will push TF1 and M6 to think harder about redefining their brands, and about developing ambitious exclusive content to draw new audience segments in order to maintain their leadership on the free-to-air landscape.”