Why Sky is not the limit

Greg Dyke has declared the break-up of the BBC's marriage of convenience with BSkyB. But the split is not likely to be amicable, writes Saeed Shah

Greg Dyke is a man with a big mission: to stop British television being taken over by BSkyB and to save the licence fee. This month, in one of the boldest moves of his career, he pushed forward toward those twin goals by jettisoning the seemingly cosy relationship that the BBC was building with Rupert Murdoch's Sky.

John Birt, Dyke's predecessor as director general of the BBC, was personally thanked by Murdoch when the BBC signed up, five years ago, to appear on the Sky service and to use its encryption technology. Now, Dyke has declared that the BBC "doesn't need Sky". From the end of May, the corporation's channels will be broadcast from a different satellite and will go out unencrypted – saving it £85m in the process.

This bold move, described as the "broadcasting event of the year" by Richard Tait, former editor-in-chief of ITN, must be seen in parallel with the corporation's aims with Freeview, the new digital terrestrial service. Dyke wants to ensure that BBC channels are available digitally, without forcing consumers to take out a pay-TV subscription, and that the corporation is not beholden to other media organisations for distribution. Dyke said last week: "We have to believe that everybody is going to receive all of our services; otherwise, how can we take £116 [licence fee] off people?"

The Government is committed to switching off the traditional analogue TV signal by 2010. That means that every household in the country must take digital TV, but, before the launch of Freeview last autumn, digital services were offered only by pay-TV companies, led by Sky. That left the BBC with a massive problem – how to justify the licence fee if households had also to pay for a TV subscription on top.

Freeview was the first part of the answer. The BBC grabbed the digital terrestrial platform when ITV Digital went bust last year; as Freeview, it offers up to 30 free-to-air channels via an ordinary rooftop aerial. Now, Dyke is adding another medium, satellite, for digital free-to-air services. The Freeview signal will never be available in the whole of the UK. Satellite not only plugs that gap but offers a whole new distribution platform.

The BBC states in a policy paper: "This could lead to the development of a vibrant free-to-view market in satellite, just as there is now a free-to-view market in digital terrestrial television following the launch of Freeview. Our proposals open the way for satellite to play its full role in the digital marketplace. Up until now, satellite has been developed primarily as a pay-TV service. This has limited its appeal to viewers who are not attracted to pay."

Satellite TV in the UK has always been the domain of Sky and its subscription service. However, Dyke now talks provocatively about "Free-Sat" as a way to break Sky's stranglehold on satellite. And Dyke is encouraging other public-service broadcasters, especially ITV, to follow his lead. ITV complains about the £17m a year it pays Sky to appear on its platform. Stuart Prebble, the ex-chief executive of ITV, says: "It's a brave thing to do. Greg Dyke is staking out a position of independence."

Sky is the gatekeeper of what appears on its service, thereby controlling distribution, and it is a content provider, too, with channels of its own. The BBC is so concerned about the power that Sky has that, last year, it called for the satellite broadcaster to be broken up.

More recently, it had looked as if the BBC and Sky had reached an accommodation when they teamed up to launch Freeview. It seemed that they would divide up British TV, with the BBC taking the free-to-air territory, while pay-TV was left to the highly aggressive Sky. That alliance is now coming apart – and the television world is waiting for Sky's revenge.

The BBC always had much more to gain than Sky from Freeview, which may actually take business away from the satellite company. Freeview is turning out to be a phenomenal success. Industry sources now estimate that there could be 3.5 million households with Freeview by the end of this year – that would be almost as many people that currently take cable TV and half the number of customers Sky has built up over many years.

Sky offers its customers 200 or more channels but, of Freeview's 30 slots, the BBC has eight, so it dominates the service. The digital terrestrial service can never compete with Sky for top films and sports, but it is proving a hit with consumers who want more choice of television without the financial burden of a monthly TV subscription – it just requires a one-off purchase of a £99 decoder box.

The beauty of Freeview for the BBC is that, not only does it offer a digital alternative to pay-TV but also lands a blow on its main terrestrial rival, ITV. Viewing figures for Freeview households show that, when consumers are watching digital television, ITV's share of viewing drops from 30 per cent in terrestrial analogue households (the majority of the country) to just 20 per cent. ITV sells advertising on its viewing figures, so Freeview is a commercial disaster for the already beleaguered network. More choice means less time watching ITV.

It is better for ITV to see households take Freeview rather than cable or satellite, because those homes watch ITV even less. And ITV has an additional channel on Freeview, ITV2, which is performing well and shows repeats and spin-off shows from the main ITV1 channel. However, Freeview is dramatically accelerating the take-up of multi-channel television in this country, and will therefore dramatically accelerate the long-term decline in ITV's viewing share.

As for Sky, it argues that viewers could always watch free-to-air television only via satellite but this required a special viewing card (which will no longer be needed to watch the BBC's unencrypted channels), and it was never marketed as a way to watch TV. Now the BBC is to campaign to tell viewers that, by June, they will be able to get its eight channels on satellite plus some 70 other free-to-view stations, all without a subscription. Households just need a dish and a decoder box.

Free-Sat or Freeview are not substitutes for a Sky subscription. Sky also has three channels on Freeview anyway, though not its main Sky One. However, without these new free digital services, every household would have been forced to take Sky or cable over the next few years, as analogue is switched off – which would have meant most people taking Sky.

The BBC and Sky have collaborated over Freeview, but their interests diverge. One TV executive describes Freeview as a "marriage of convenience, not a love affair". Only a few months ago, when Rupert Murdoch was in town, he railed against the "untouchable" BBC, to which "no rules apply".

The BBC has made sure that there is a subscription-free way to watch digital TV, which means that it is easier to justify the licence fee, which Murdoch despises. And the corporation is not dependent on Murdoch for distribution.

In a final plank of Greg Dyke's masterful strategy, it is the success of Freeview and the possible popularity of Free-Sat that means that the Government has a chance of meeting its 2010 deadline for analogue switch-off. When considering charter renewal, this gives the Department of Culture, Media and Sport reason to be very grateful to the BBC.