Pace in digital TV talks with BBC and ITV

Pace Micro Technology is talking to the BBC and ITV about producing a basic set-top box to allow consumers to receive free-to-air channels over the digital terrestrial platform.

It also emerged yesterday that the owners of ITV Digital, Carlton and Granada, are trying to renegotiate the contract that their ITV Sports channel holds with the Nationwide Football League. The cash crunch that has hit Carlton and Granada, which has led the companies to reconsider the future of ITV Digital, a terrestrial service, also means that they are looking to reduce future payments under the sports rights deal.

Without restructuring, Kingsley Wilson, an analyst at Investec Henderson Crosthwaite, estimated that Carlton and Granada would have to invest a net £450m over the next three years in the two ventures. "I don't think shareholders have the stomach for these losses," he said.

Signs that Carlton and Granada are moving towards remodelling ITV Digital and ITV Sports saw the companies' shares soar yesterday. Carlton closed up 15 per cent at 247p, while Granada gained 10 per cent to 155.5p.

ITV Digital has cost £800m so far and it needs a further £300m before it breaks even. One option being considered to reduce losses at the service involves an alliance with the BBC that would see ITV and the BBC run a co-ordinated campaign to promote their respective free-to-air channels over the digital terrestrial platform. Greg Dyke, director-general of the BBC, is thought to have taken a personal interest in the plan.

Instead of giving away the set-top boxes, as ITV Digital currently does, this campaign would try to entice consumers to buy a basic version of the set-top box, perhaps for around £100, in order to receive the free channels. The boxes could then be upgraded to receive pay television but the subscriber acquisition costs for ITV Digital would be dramatically lower.

A television industry source said: "If digital terrestrial fails, the BBC would be in the hands of satellite or cable. It's in their interests to make sure that doesn't happen."

Pace said it already had the technology to manufacture a cheap set-top box and it was ready to go into production.

Andrew Wallace, marketing director at Pace, said: "We've had detailed discussions with the BBC and ITV about this. I'm confident that a free-to-air digital terrestrial project will be launched next year."

Sean Eddie, an analyst at the Bank of America, said: "One of the sources of urgency for ITV Digital comes from the balance sheet constraints of Carlton. However, I'd be surprised to see any decision until the OFT review is over."

The Office of Fair Trading is investigating allegations that BSkyB, the satellite broadcaster, is over-charging ITV Digital and the cable companies for supplying its channels. The case will decide whether the premium content model is appropriate for ITV Digital, Mr Eddie said, or if it has to seek another strategy.

Granada has appointed a non-executive director, David Chance, to examine all options for the future of ITV Digital.