Television: James Murdoch's generosity comes with a secret price tag

While the BBC and its allies dither, the market leader BSkyB is seizing the initiative and launching a loss-leader. Lucy Rouse reports

James Murdoch, son of Rupert and the youthful chief executive of his pay-TV company, BSkyB, unveiled his first new initiative last week since being controversially installed at the head of the company seven months ago. Murdoch junior, running one of the UK's largest FTSE 100 companies aged just 30, is turning the pay-TV firm into a free-to-air service for the first time in its 15-year history.

James Murdoch, son of Rupert and the youthful chief executive of his pay-TV company, BSkyB, unveiled his first new initiative last week since being controversially installed at the head of the company seven months ago. Murdoch junior, running one of the UK's largest FTSE 100 companies aged just 30, is turning the pay-TV firm into a free-to-air service for the first time in its 15-year history.

Mr Murdoch plans to launch a subscription-free package later this year with about 200 channels for a one-off fee of £150, the price of the set-top box needed to get digital TV plus installation. To date, Sky's business has been about offering a range of premium sports and movies to paying customers. Mr Murdoch is clearly hoping that the new offer compares favourably with Freeview, a subscription-free digital TV service backed by both the BBC and Sky that provides around 30 channels for a lower one-off cost of £60 to £100.

"It's a big strategic move for [Sky] and hopefully it will work out," says Andy Duncan, BBC's director of marketing, with a hint of competitive feeling.

Despite the BBC's and Sky's loose partnership in Freeview, which launched less than two years ago, the subscription-free digital TV service available through normal TV aerials has become a thorn in Sky's side. It's forced a slowdown in the growth of Sky's pay-TV service, to just 1 per cent in the last quarter.

Faced with worries in the City about whether Sky will hit a target of increasing its seven million subscribers to eight million by the end of next year, Mr Murdoch had to act.

But, on one level, the decision to market a subscription-free package of channels is nothing new. Anyone desperate to get digital TV channels such as BBC 3 and BBC 4 without signing a subscription contract could have done so - it just wasn't in Sky's interest to encourage viewers to bypass its pay-TV services, which cost an average £382 a year.

Without any new investment or creating any new product, all that Sky did last week was to say it would encourage those who are reluctant to sign up to pay-TV to come to Sky anyway. And the only reason Mr Murdoch has done this is because those people were rapidly being won over by Freeview.

Freeview was invented in a blaze of competitive glory by the former BBC director-general, Greg Dyke, after the collapse of ITV Digital, the first digital terrestrial (as opposed to satellite) service. It's been a runaway success, overtaking cable as the second most popular means of getting digital TV and is now in 3.5 million homes.

But Freeview has its limitations. Because it is distributed via conventional TV aerials, it will only ever reach 73 per cent of the country. The only way to deliver digital TV to the remaining 27 per cent is by satellite. To this end, Mr Dyke - ever the fighter - suggested that the BBC, ITV, Channel 4 and Five should form their own free-to-air digital satellite service. But long after Mr Dyke's ousting over the Hutton report the talks are still going on, and - like a typical market leader - Sky has seized the initiative. Mr Duncan says the BBC wants to come on board and could bring its brand and public-service marketing to the venture. But the BBC is also talking to other broadcasters about setting up a rival satellite service.

Analysts were divided last week over whether Sky's free-to-air package was risky or not. Some pointed out that the move would cost the company virtually nothing and has won it brownie points with the Government, which wants to convert the entire country to digital TV within a few years. Others suggest that the free-to-air offer could cannibalise Sky's pay-TV business.

Sky's long-term aim with the subscription-free package - which contains lots of home shopping services and niche interest channels such as the God Channel and Gay Date TV - is to persuade viewers to upgrade to some form of pay-TV. "If anyone did wish to subscribe to pay-TV they can do it with a phone call," says a Sky spokesman, helpfully pointing out that the Sky Family bundle of channels costs less than £5 a week.

But TV viewers may win out in the end if, as the BBC and the Government predict, Sky's bold move means more low cost digital TV. Mr Duncan, the BBC's Freeview champion since Mr Dyke's departure, says that talks between the main broadcasters about free-to-air digital TV may not end just because of Sky's new offer. "It's not clear how this will play out," he says. "We've been having a lot of discussions with Sky and the other broadcasters and it's possible someone else will decide this is a market they could go at."

Likewise, Bill Bush, an adviser to Tessa Jowell, the Secretary of State for Media, says: "Our assumption is, from talking to the industry, that packages from Sky and other companies will get increasingly varied." In other words, Sky, the cable companies and Freeview will do all they can to keep increasing the number of people taking digital TV.

In the meantime, viewers must decide whether to pay a monthly charge for a load of decent extra channels or take a limited range for a one-off fee. Simple, really.