BSkyB extends olive branch to ITV over digital rivalry

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Granada and Carlton Communications, the co-owners of ITV Digital, the digital terrestrial television system, and satellite rival BSkyB are considering terms on which to hold talks about closer co-operation, industry sources said yesterday.

The talks, should they occur, would focus on resolving the wide range of business, administrative, promotional and distribution issues which have kept the companies, once digital partners, at loggerheads. But BSkyB has categorically ruled out investing in ITV Digital, something that competition regulators turned down in 1997.

A source at one ITV group, acknowledging the willingness for talks, said: "What is true is that there is scope for more sensible competitive behaviour. Is it not to everybody's benefit to have a more collaborative structure?"

Tony Ball, chief executive of BSkyB, extended a potential olive branch to ITV over the weekend, saying: "We have had no substantial conversations with the ITV companies but they know that our door is always open to negotiations."

Should formal talks ensue, they would look to explore how some ITV Digital operations, such as customer support and billing management, might be combined with the larger scale capabilities that BSkyB has in these areas. The groups could also consider adopting common encryption technology and set-top boxes.

A wide-ranging digital settlement would also be likely to set terms for ITV's channels to be distributed over BSkyB's digital platform, while perhaps reserving space on the digital terrestrial network for a future Sky general entertainment channel. BSkyB's nationwide digital dish installation service could also take on the aerial upgrade work that ITV Digital currently contracts out.

The precipitous decline in the share prices of Carlton and Granada – due to the prolonged advertising market downturn and the escalating costs of ITV's digital ambitions – has pushed the management of both companies to consider radically reducing operating costs in the short-term. Both companies have invested a combined £900m in ITV Digital, an amount that is being swelled by continuing operating losses and sports programming costs.

Both ITV companies are pressuring the government for more frequency to expand ITV Digital's footprint beyond the 50 per cent of the country that can currently access its signal. They also want to boost transmitting power in areas where the signal is patchy.

BSkyB was forced to resign its one-third interest in the digital terrestrial network on competition grounds in 1998. Its dominance of the pay-TV market is even greater today, making any shareholding unlikely to be approved by UK or European regulators.

The satellite giant is also sceptical of ITV Digital's ability to reach profitability. "Sky's private view is that it's a fundamentally flawed business," a source said. "It will never make money."

Since the summer Cabinet shuffle all three companies have pushed the government to give a clearer lead on the date of analogue television switch-off. They have also pressed for relaxed cross-media ownership rules – something that could feature in a new Communications Act due over the next 12 to 18 months.

Though BSkyB has raised its market share to more than 60 per cent of UK multi-channel homes since launching digital services, securing that supremacy has seen it roll up long-term debt in excess of £1.6bn. Simultaneously, the group's share price has slid from nearly £22 at the height of last year's new economy boom to just 590.5p.