BBC hopes free service will convert 5 million homes

The BBC plans to attract 5 million households away from the doomed analogue signal and on to digital terrestrial television within five years after being awarded the licences to run the service yesterday in place of the failed ITV Digital.

Winning the contest for the licences is a giant leap forward for the BBC's grand empire-building ambitions, and that of its partner, BSkyB. For the first time, Rupert Murdoch's Sky has a way into the majority of British households. The news was a severe blow to ITV, which with Channel 4 had put in a rival bid for the licences.

Greg Dyke, the BBC's director general, said: "This is a fresh start for digital television in the UK and the best outcome for viewers.

"It won't be an easy task – the platform has been through a major crisis – but we believe that a simple, entirely free-to-view digital option has the best chance of success."

The regulator, the Independent Television Commission, went for the BBC's proposition of 24 free-to-air channels, which will be available from the autumn to any household with a digital decoder box. These boxes are now being sold for £99. The ITV-Channel 4 bid planned to offer a service with a pay-TV option.

Industry insiders said that ITV was just too damaged by the fiasco over ITV Digital, the digital terrestrial service that cost the network £1bn but had to be abruptly closed earlier this year.

The failure of ITV Digital endangered the Government's whole digital strategy, which is based on switching all households to digital TV by 2010, when the existing analogue signal is due to be turned off.

It was simply too great a risk for the regulator to give ITV a second chance at digital terrestrial television, despite the fact that going for the BBC shuts out pay services altogether, such as the blockbuster film and sports channels.

Carolyn Fairbairn, the director of strategy at the BBC, said: "After the previous disaster, the ITC wanted the best security that it would work this time.

"We're offering a very simple proposition to the consumer and our long-term commitment to digital is clear."

The BBC already spends more than £200m a year on producing channels available only in digital homes, including BBC Four, the new high-brow arts and news channel, and its two new children's channels, CBBC and Cbeebies. The corporation must find a way to get these channels to a bigger audience because they are funded through the licence fee.

Having won the digital terrestrial licences, the BBC will now launch its biggest on-screen marketing campaign and spend a further £35m a year running and promoting the digital terrestrial platform.

The regulator's decision leaves ITV without a digital strategy and no control over this platform.

Nick Markham, director of strategy at Carlton, which with Granada owned ITV Digital and is one of the main ITV companies, said: "The ITC has plumped for an uninspiring, licence fee-backed offer at the expense of viewer choice of free and pay services."

The alliance of BBC and Sky, the two dominant players in British free and subscription TV, had thrown up regulatory concerns but those were outweighed by worries over ITV's competence and its financial health. The digital licences will run for 12 years.

The BBC said it wanted to get a third of the 15 million households that don't yet have digital television to take digital terrestrial. The remaining 10 million homes pay for satellite or cable TV, while ITV Digital had garnered 1.2 million subscribers at its peak.