The politics of digital TV in the UK

David Elstein
16 July 2002

Digital television in the UK has been politicised from the outset. Many times, ministers and civil servants have attempted to shape broadcasting technology, and have repeatedly burnt their fingers. D-MAC (a digital transmission technology), HDTV (High Definition Television), BSB (British Satellite Broadcasting) and now DTT (Digital Terrestrial Television) are the acronyms whose politicised nature have been the prelude to failure.

Yet, to this day, government ministers boast of the leading role the country has taken in digital television roll-out, claim credit for pioneering digital terrestrial television, promise to switch off the analogue transmission system between 2006 and 2010, and seek leadership in broadband amongst the G7 countries. But the evidence is that these ambitions have come at a heavy price: one that UK taxpayers and licence fee payers will continue to bear for many years.

The satellite and cable versions of digital television have been commercial enterprises, hedged in by political controls as is traditional in broadcasting, but essentially driven by investor and consumer decisions.

Digital terrestrial television – DTT – is very different. It would not exist at all in the UK but for political intervention. Indeed, a consultants’ report for the EU last November concluded that a number of EU countries may have adopted DTT for political reasons, primarily to protect their public service broadcasters – a breach of EU rules.

Layers of unreality : the story of DTT

DTT was touted in the mid 1990’s in the UK as a potential solution to two linked political issues. The first was the fear that Rupert Murdoch’s BSkyB would dominate digital multi-channel television as much as it had the analogue version. Complaints from cable operators and other rival broadcasters about Sky’s behaviour fuelled these anxieties.

UK politicians were also persuaded that a digital terrestrial platform would be much easier to regulate than satellite, whether in terms of licensed suppliers or content requirements. It would also be a limited capacity system, by contrast with cable and satellite, and therefore easier to control. So the crucial and paradoxical attraction of DTT was that, in the age of spectrum plenty, it would replicate the 1970’s: the age of spectrum scarcity.

At the heart of this argument was the BBC, as the old school broadcaster with the most to lose from unrestricted consumer choice: not just in audience share, but in funding – a BBC with 20% of viewership would struggle to sustain the licence fee. But other free-to-air broadcasters shared the BBC’s desire to hold back the future. As one disingenuously put it earlier this month, anticipating the collapse of ITV Digital and urging the salvation of the DTT platform, “we would rather secure our future in a 15-channel home with no subscriptions whatsoever than become hostages in a 200-channel home”. Recently, the Chairman of the UK’s Digital Stakeholders’ Group – representing all those with a commercial or political interest in pursuing DTT – has conceded that DTT is a political project designed to protect public service broadcasting.

Coupled with fear – of Murdoch, of choice and of loss of control – was greed. The carrot that proponents of DTT dangled before politicians was the prospect of switching off the analogue transmission network, and auctioning the recovered spectrum to telecoms operators. Figures of £5 billion to £15 billion were bandied about: and the multi-billion pound sale of UMTS telephone licences seemed to confirm such expectations.

The argument ran rather like this. 99% of homes receive television through an aerial. Research showed that at least a third of these were not interested in pay-TV, and would therefore never subscribe to cable or satellite. So there should be a large market for digital television sets that could pick up a range of free-to-air services through a domestic aerial, provided there was a digital terrestrial signal. Only that way could analogue switch-off be achieved, as cable and satellite had limited reach.

But DTT has turned out to be rather like the tar baby in the Brer Rabbit story. Every attempt to engage with it has simply entangled the participants in mounting difficulties. Since the collapse of ITV Digital, a hasty re-licensing of the system has seen the BBC assume an even more dominant role, with free-to-air now re-established as the rationale for DTT.

Paradoxically, BSkyB has been incorporated into the BBC scheme, such that there will be no competition for basic-tier pay-TV in the 30% of UK homes that cannot receive cable, and almost none at all for premium pay-TV (sports and movies), for which BSkyB is by far the dominant supplier. A key justification for DTT – challenging Murdoch’s dominance – has therefore disappeared without a word of comment. Meanwhile, the licence fee payer picks up an even larger proportion of the DTT bill. So yet another layer of unreality is added to the DTT story.

To begin with, DTT was launched prematurely, on the basis of a series of false assumptions. The first was that, if cable and satellite went digital first, DTT would miss the bus. The economies of scale would accrue to the first movers, and DTT would always be at a disadvantage. The difficulty with this argument is that DTT was sold to ministers as the free-to-air route to analogue switch-off. An early launch head-to-head with cable and satellite required commercial operators to be involved, and therefore led to 60% of the available capacity being reserved for pay-TV. Yet competing with cable and satellite in pay-TV was always going to be a high-risk proposition, given the technical limitations of DTT.

This led to a second error. In order to ensure that pay-TV operators would apply for the available licences it was essential to induce all the terrestrial channels to commit to DTT. The BBC needed no persuading, but was still allowed to keep the £244 million proceeds from the sale of its transmitter system and was in due course granted additional hundreds of millions a year to run new digital services. ITV was given a reduction in its licence payments for every home that went digital. Channel 4 was released from its obligation to pay up to £90 million a year to ITV, in part on the promise of launching DTT. Even Channel 5 was allocated additional DTT spectrum that it could rent out to cover its DTT transmission costs.

Cycles of illusion : four false assumptions

To complete the picture, the prospective pay-TV licensees were offered free spectrum. Unfortunately, the winners of the licences themselves made four false assumptions.

The first was that they had technology comparable to cable and satellite. But DTT signals were unreliable. The first wave of transmitters brought pay-TV DTT to only 40% of the country. Further transmitters would be decreasingly cost effective, reaching progressively smaller populations. Signal strength had to be limited to avoid interference with analogue signals and broadcasts in neighbouring countries: in any case, increased transmitter power simply meant more cost. Many rooftop aerials were not designed to pick up the DTT signal: and almost no indoor aerials could do so.

The second error was to believe that millions of potential subscribers to pay-TV were put off by satellite dishes or cable connections, and would prefer to use their domestic aerial. They might even be attracted by limited choice: some people buy Trabants even when Audis are available (though not often when their price is the same!).

The question was: how many such people were there? Research had shown that only 65% of homes were interested in pay-TV: but nearly half of these already had it in the shape of cable and satellite, and the presumption had to be that virtually all of them, if they upgraded to digital, would not change platform. That leaves 35% of homes apparently available for pay-TV, but if 60% of these could not receive the DTT pay-TV signal, the potential target reduces to 14%. To capture even half of these in competition with superior technologies would be a major achievement. But half of 14% is 7% – 1.65 million homes – which optimistic figure is actually below even the revised breakeven figure of 1.7 million homes that the licensees set themselves.

They took comfort from their third assumption: that over a period of time the whole population would upgrade to digital, through what they called the set replacement cycle. In due course, digital-ready televisions would displace analogue ones in the market, and they would automatically provide DTT. But digital TV sets were much more expensive than analogue ones, and had no source of subsidy. They could not compete with set-top boxes provided free by platforms able to recover their cost through a revenue stream. Three years into the digital revolution, the digital TV set market is still tiny.

Moreover, it is doubtful whether the set replacement cycle exists. Most people sell their old car when they buy a new one. But when they buy a new TV, they move the old one to another room. It still functions: there are 30-year-old TVs that can pick up all the terrestrial channels. The average household has three televisions: 65 million sets in all, with four million being added to the stock every year.

Not to worry, said the owners of ITV Digital: analogue switch-off will force all households to upgrade their entire stock of TVs. Their fourth assumption was that analogue switch-off is a straightforward, inevitable process, and that when governments say they intend to implement it, they mean it. Certainly, ministers – including the Prime Minister – have repeatedly committed themselves to a target range of 2006 to 2010. Unfortunately, this target range ignored the only two substantial analyses available, which suggested dates far beyond 2010.

Dreams of transition : the schedule of switch-off

A 1998 consultants report from NERA, commissioned by the Department for Culture, Media and Sport (DCMS), concluded that 2013 was the earliest possible date, and this was despite failing to take any account of the video recorder problem, as well as grossly over-estimating demand for DTT. When, in response to NERA, the Independent Television Commission compared the task of analogue switch-off with the previous process of converting from 405-line television to 625-lines, which took 21 years, it warned that the new process was bound to take at least as long, if not much longer – 2018 was the earliest date imaginable.

The reasons were obvious. In the 625-line switch, all factors converged. There was one delivery system. It worked with all indoor and outdoor aerials, even if reception was sometimes imperfect. There was enough available spectrum to allow 99% household coverage in 625-lines. There were no video recorders, rarely more than one TV set per home, and a flourishing rental industry to ease the transfer to 625-line sets. 625 also had the great advantage of adding 50% more choice – BBC2 – and upgrading all channels to colour, for a supplement on the licence fee of just £5 a year.

By comparison, the digital proposition is much less compelling. Multi-channel choice existed in analogue for those who wanted it. Interactivity is fun, but not in the same league as colour. Internet access is possible, but DTT is scarcely the best way of achieving it. Adding a third delivery system may have looked good in competition terms, but it confused consumers.

When digital TV launched in the UK, there were 30 million video recorders as well as the 65 million TVs, all of which will need upgrading to digital before analogue could be switched off. The main mechanism for upgrade is a free set-top box from a pay-TV operator: but because there is very little marginal revenue from a second installation, these operators have no incentive to subsidize more than one set-top box.

Ministers boast that 40% of homes have “gone digital”, implying that we are well on the way to analogue switch-off. In truth, 8 million set-top boxes have been installed, and growth is sharply tapering off: effectively, the UK “lead” in digital TV take-up is simply a function of rapid transfer of analogue multi-channel homes to digital, in a falsely competitive market. “New” digital homes have been added at the rate of 2-3% a year. Meanwhile, the number of analogue devices awaiting upgrade is growing by 4 million televisions and a similar number of videos every year. This means that in the three years since the launch of digital TV, the UK has actually added a net 10-12 million devices to the analogue mountain that has to be climbed. We are further away from switch-off than before digital TV was launched.

No government can conceivably switch off analogue signals to the vast majority of televisions and video-recorders in people’s homes. So the pre-condition the government has set for analogue switch-off – 95% take-up of a single digital installation – is worthless. Even a digital home, on that definition, would lose three-quarters of its TV functionality at switch-off.

However, even reaching that 95% level is dauntingly difficult, because DTT signals are much trickier than analogue, disappearing rather than degrading when they are weak. The only way to reach anything like nationwide coverage for DTT would be to convert most of the analogue spectrum to digital: so defeating the object of selling off spectrum which originally underpinned the whole DTT project. Indeed, the government has now restricted its ambitions to recovering less than a third of the analogue spectrum for re-sale: and expectations for revenue derived have dropped to the £500 million level, almost certainly a great deal less than the physical cost of switch-off itself,

Think of London, with several million homes served by a single transmitter. Before switch-off could occur, every home would have to be visited to ensure that every set and video had been upgraded to digital. Not all of them would yet be able to receive a signal, so tests would have to be done in every home, to ensure that a signal would be receivable when DTT power was increased after analogue switch-off. About a third of homes would probably need new outdoor aerials. Just this task alone would take some years, and involve a continuous programme of signal measuring.

When Channel 5 conducted its video retuning exercise, it visited 10 million homes at a cost of £165 million. But this was a simple 10-minute procedure. Preventing signals interfering with videos was a screwdriver job. Ensuring DTT signals can be received on four or more televisions and videos might require half a day’s work and considerable expense to put right. Nationwide, I would guess that the task is 40 times more complex than retuning (which took 8 months) and 20 times more expensive. By my rough maths, that’s 27 years and £3.3 billion.

The BBC rejects these estimates, claiming that, as cheap free-to-air set-top boxes become available, millions will be installed, and that when the analogue system is switched off, DTT power can be increased so as to provide a proper DTT signal. However, whilst the signal is still weak and DTT coverage is still poor (the BBC has cut back the number of channels on DTT so as to increase coverage of the system as a whole, but it is still only 60% of UK homes), people will not install set-top boxes speculatively, however low the price falls. And unless boxes are installed for all TVs and videos, the analogue signal cannot be switched off. This is a chicken that cannot hatch its own egg.

Costs of ambition : the politics of technology

In any event, the physical cost of switch-off is only a fraction of the total DTT bill, none of which – by the way – actually guarantees that we will ever achieve analogue switch-off.

First, there are transmission costs. For commercial companies, these are absorbed in the general inducements they have been granted, but the BBC’s are a direct cost to the licence payer: say, £30 million a year at the moment, rising as more DTT transmitters are deployed, plus the costs of marketing DTT – another £15 million a year – that the BBC promised the ITC as part of its campaign to win the re-advertised DTT licences

But on top of that is the cost of new BBC digital services. It is inconceivable that these would have been authorised purely for transmission on cable and satellite. Their £200 million a year current cost – due to rise considerably over time – can surely be attributed entirely to the decision to launch DTT. Indeed, it is reasonable to assume that the BBC’s main reason for now underwriting DTT as a platform is to preserve that £200 million a year of revenue. And the BBC’s ability to give a long-term undertaking to the ITC to sustain DTT is based on ministerial pronouncements that the licence fee is safe for another 15 years (even though review of the BBC’s Charter, expiring in 2006, has not yet even begun!). So a public body (the ITC) secures agreement from another public body (the BBC) to spend more public money on a non-commercial venture in order to protect the BBC’s access to yet more public money devoted to ventures that should never have been funded out of the licence fee.

The fact is that, in 1999, a government-appointed panel investigating the BBC’s bid for more cash to fund additional free-to-air digital channels concluded that an additional digital licence fee was the best way to do so, payable by those who could receive these services. But this eminently fair solution was overturned under pressure from the commercial operators, who feared it might inhibit digital take-up: so ITV’s brief foray into digital pay-TV led it to join BSkyB in opposing the digital licence fee. The result was that the main licence fee was increased instead: an outcome that was in due course to devastate ITV’s free-to-air service, as it found itself facing an overwhelmingly rich BBC just as advertising revenues collapsed.

The only comfort for ITV in this self-inflicted disaster was that it, too, had benefited from irrational governmental largesse in pursuit of DTT. The ITV digital dividend – whereby the companies are spared any additional licence payment on homes that have gone digital – is receivable by ITV whatever platform a household chooses: but it would never have been offered if ITV had not agreed to simulcast on DTT. The current cost of this concession is £100 million a year, which is predicted rise to over £300 million a year as digital take-up progresses. Abandoning DTT, by the way, would not now save that cost.

There are also costs borne by Channel 4 and S4C, either directly or indirectly as a result of DTT launch, of the order of £10m a year. All this, one way or the other, is public money, spent or foregone. Ironically, two of the Channel 4 digital adventures afforded by the ending of the old ITV funding formula – Film Four and E4 – have now been undermined by the BBC’s decision to disbar any pay-TV services from the re-vamped version of DTT.

Indeed, in terms of consumer welfare, the outcome of the DTT re-licensing is peculiarly unwelcome: none of the million-plus homes that have installed DTT boxes will be allowed access to any of the popular basic tier pay-TV channels, such as Sky One, UK Gold, Granada Plus, Discovery, E4, Living, Paramount or Nickelodeon. This is because the BBC, exploiting the political weakness of the government and the ITC (who are committed to DTT but cannot ensure its success), is determined to limit the number of channels on DTT and secure the largest share of audience for itself as possible as a result: thereby protecting its long-term funding through the licence fee, which might be at risk if the BBC’s audience share fell too far.

Overall, the minimum cost to the public of DTT, primarily through an unnecessarily increased licence fee and concessions to commercial broadcasters, would be £4 billion even if we achieved analogue switch-off in 2010. If it takes a decade or more longer – in my view, and that of the ITC, highly likely – the cost would rise to £10 billion, excluding the physical cost of switch-off. And if switch-off never happens, the bill is open-ended.

All this expense is to no purpose, as analogue switch-off would bring no benefit to consumers or anyone else. Indeed, not only has no cost benefit analysis of analogue switch off ever been done by either the DCMS or the DTI, but under the draft digital plan they published last year, the only such analysis that will be attempted is how to complete analogue switch-off, not whether the commitment to it should ever have been made. Even this is at least a year away. Indeed, the DTI has been quietly trying to persuade the EU to allow it to ban the sale of analogue televisions, so as to force what Whitehall calls the refuseniks to go digital: a measure of how far ministers and civil servants are willing to manipulate consumers to protect their political projects and how far divorced they are from reality.

Politicians and the BBC have also talked up the famous £100 DTT free-to-air box, seen as the possible salvation of DTT. But we have had a £100 box for three years, with much greater capacity, flexibility and interactivity than the DTT offering: it was the BSkyB offer to install a free satellite box even if you did not subscribe to Sky channels. In three years, 25,000 were installed, confirming that it is to obtain subscription channels that consumers will pay any significant one-off cost. New free-to-air channels have only a fraction of the budget of the existing five: they are not a compelling consumer proposition.

It is not just taxpayers and licence fee payers who are bearing the cost of DTT: shareholders and bondholders are also suffering. Carlton and Granada have had to write off well over a billion pounds, lured into a DTT venture whose intrinsic difficulties were compounded by a series of management errors.

Perhaps the cable companies ntl and Telewest – whose combined market capitalisation has fallen by nearly £20 billion in the last two years – might have run into deep problems anyway, given their expensive appetite for debt-funded growth. But the presence of a third, unnecessary, digital platform certainly increased marketing costs and reduced income as over a million pay-TV consumers were diverted into the dead-end of DTT. Just 200,000 each of those for ntl and Telewest might have saved those businesses from disaster.

Even BSkyB, the seeming winner in the digital race, has absorbed billions in costs, and seen its market capitalisation reduced by two-thirds, under pressure from state-sponsored competition.

And all this is on top of the £10 billion that the public does not even know it is spending on DTT. That adds up to 14 millennium domes, just to put it in context.

What was actually needed when ITV Digital failed was for the government to put DTT on the back burner, and quietly abandon not just its wholly incredible target dates for analogue switch-off, but analogue switch-off itself as an objective.

Allowing the DTT project to wind down would not save any of the ITV digital dividend, but it would at least cut off transmission costs when the current contracts expire. It might also allow the licence fee to be reduced by £10-12. After all, the BBC has acknowledged that its spend on new digital channels out of the licence fee would not be sustainable if the analogue switch-off timetable was not credible. The new services would therefore convert to subscription funding, through a digital supplement on the licence fee for those who wanted them, or by absorption in the UKTV joint venture with Flextech. So we might save at least half the £10 billion bill we currently face if ministers had the courage to acknowledge the facts and admit their errors.

The truth is that DTT is at best an intermediate technology that has fared no better in Spain and Sweden than here. Every government that has set a date for analogue switch-off has subsequently abandoned it. The failure of ITV Digital offered ministers a golden chance to detach themselves from the tar baby. History – and the British public – will judge them harshly for failing to take it.

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