Transmission impossible: the BBC zaps its heritage and reaches for Sky

Anything goes in the hunt for digital licences, so Greg Dyke has formed an alliance with Rupert Murdoch. But will their bid succeed?

When Rupert Murdoch flew into Britain as a royal enclosure guest during the golden jubilee celebrations, he characteristically kept his cards close to the chest.

After the festivities, he used an interview with the Financial Times to expound his well-aired republican beliefs, by predicting that "the British monarchy would not survive a bad monarch", and to pledge that his stable of newspapers would fight a campaign against the euro. Neither was exactly news.

But while the naturalised American was admiring the jubilee firework display, his UK management team led by Tony Ball was up to something far more newsworthy. They were secretly putting the final touches to what some in the media have called an "unholy alliance" with the heart of the British establishment.

Until the last minute, few had got even an inkling that the BBC, which not only won plaudits for its broadcasting of the jubilee celebrations but played a large hand in organising them, was getting into bed with Mr Murdoch's BSkyB to bid for the digital terrestrial television (DTT) licence.

The first news of the deal appeared in the pages of The Times, one of Mr Murdoch's newspapers, on Wednesday, although it was not clear whether this was a carefully placed leak or a story obtained by investigative journalism. Whichever, the news sent the media world into a frenzy of speculation about how two such culturally diverse organisations could function together, when historically they have frequently been at each other's throats.

"This would have been unthinkable before Greg Dyke," one Beeb watcher said. "Linking up with Sky and Murdoch is all part of the new commercially-driven and increasingly aggressive BBC under his leadership. Here we have two great monopo- lies teaming up in a calculated bid to dominate DTT. The BBC is changing fast."

Late on Thursday – the deadline set by the Independent Television Commission (ITC) for bids for the three digital terrestrial licences vacated by the defunct ITV Digital – details started to emerge of the BBC/Sky bid and its main competitor, an ITV-Channel 4 alliance.

Although Apax Partners, the private equity house, also emerged as a surprise bidder, the competition to replace ITV Digital and make rather more of a success of DTT is widely seen as a two-horse race. It is one the BBC feels it has to win so it can go on justifying its licence fee by providing, for the first time, almost all households with the chance to see all its eight channels without paying over the odds.

At present, many of these channels are available only through cable or satellite, and the BBC's interactive services, such as Wimbledon Interactive (where viewers can choose to watch any one of four tennis matches at a time), are available on satellite only.

The BBC, after exploratory talks with other parties, chose to hitch up with the Murdoch empire because Sky could bring to the party the much-needed digital expertise and infrastructure. What's more, Sky did not carry any baggage from the ITV Digital collapse (unlike the members of the ITV-Channel 4 alliance which the BBC is now dubbing "ITV Digital mark II").

Both parties also shared the belief that a "pay-lite" offering, a cheaper subscription service than either ITV Digital or Sky's £37-a-month premium pack- age, would not work. As many as 11 million households are not interested in pay-TV, BBC studies say.

"Our research shows that most non-digital households either reject paying these high prices or are made to feel too apathetic or confused by all the choice on offer," says Andy Duncan, director of marketing and communications at the BBC.

"What we are offering is both simplicity and free TV. After the one-off £99 cost of buying the box, you will never pay for these 24 channels again. In most cases, you will be able to buy the box, plug it in and start watching."

By contrast, the new ITV bid is part "free-to-air" but also comes with a pay-TV proposition, Freeview Plus, which offers seven pay channels for £10 a month and extra movie channels for another fiver.

One member of this team, who did not want to be named, says: "People who don't want to spend £37 a month want another, cheaper option, but one that can offer something more special than an entirely free-to-air package. What the BBC and Sky are doing is merely offering BBC News 24, some travel programmes and a few extra dross channels that people wouldn't pay for anyway.

"The ITC has to get its decision right this time about who has the material and the package to appeal to consumers. DTT can't be allowed to founder again, so the offering has to be good enough to bring people in. Our bid is different enough from ITV Digital, from Sky and the cable companies to entice new audiences."

Freeview Plus, which is run by former Sky executives David Chance and Ian West, is still negotiating with its content providers, though it hopes to offer Sky One, E4 and Paramount Comedy as part of the package.

The BBC, which has also teamed up with the transmission company Crown Castle, has yet to finalise the exact make-up of its 24 DTT channels either. What is certain is that the eight BBC channels would be on offer as well as three Sky ones, ITV 1, 2 and 3, Channel 4, Turner Classic Movies, UK History and Boomerang's children's channel.

As on analogue TV, there would be a mixture of licence fee-funded and advertising-funded channels. "We are replicating the existing analogue ecology in a digital world," Mr Duncan says.

The three Sky channels would be Sky Travel, Sky News and Sky Sports News, certainly a lesser offering than the old ITV Digital package of Sky One, Sky Sports 1, 2 and 3, Sky Premier and Sky Moviemax. But then it is more than likely that the DTT Sky channels would cross-promote their pay-TV stablemates in classic Murdoch fashion.

The decision on which bidder to back will be made by the ITC as its swansong before it becomes absorbed into Ofcom, the new media regulatory body. The announcement will be made on 4 July. Many careers hang on it.