Some chance: The battle for a digital future

A former Sky man is out to stop Rupert Murdoch's bid with Greg Dyke for the digital future. Can David Chance beat this unholy alliance? By Saeed Shah

ITV Digital is dead. But from its ashes will soon rise a powerful new force in the British media. As the contest to decide the successor to the ill-fated digital-terrestrial broadcaster reaches its final stages, it has become a polarised race. The all-powerful BBC has cast aside the other main terrestrial broadcasters, ITV and Channel 4, with which it was expected to submit a joint bid for the licences vacated by the failure of ITV Digital. Instead, Greg Dyke, the BBC's ambitious director general, has teamed up with Rupert Murdoch's BSkyB in an audacious alliance of the giants of the free-to-air and pay-TV arenas. Their proposal is for 24 free-to-air channels to replace ITV Digital, which was a subscription service. There would be eight channels from the BBC, funded by the licence fee, while the other channels (including ITV, Channel 4, Channel 5 and three from Sky) would rely on advertising.

In the opposing camp are ITV and Channel 4. They have recruited David Chance, a highly rated former Sky executive, to put together a pay-TV component to their bid. ITV-Channel 4 would offer 21 free channels (the BBC content, plus advertising-funded channels) and up to eight subscription channels, such as E4 and Discovery, as an optional upgrade. This is far fewer pay channels than were available on ITV Digital, and compares with over 200 subscription channels on Sky.

David Chance, 45, a name barely known outside broadcasting circles, could become the key player in this battle. Chance joined Sky at its launch in 1989 and became deputy MD in 1993. He formed a powerful partnership with Sky's aggressive chief executive, Sam Chisholm. Chisholm had the public image. The more measured, low-profile Chance was the backroom strategist.

The pair left in 1998, both for health reasons. Somewhat cheekily, a year later they became consultants to the Premier League in their negotiations with Sky, but were sacked when the football clubs themselves realised what a lucrative deal the two had. But they did receive a £12m pay-off.

Since then, Chance has been working as a consultant and non-executive director for a number of companies, including Sunderland Football Club. His opponents in the digital war know his track record, and that he is a player to be respected.

The winner of this contest will broadcast digital pictures into any household with a terrestrial decoder box – initially the one and half million households still in possession of an ITV box. The set-top boxes are now in the shops for £99.

The BBC-Sky alliance stands accused of trying to kill one of its rival broadcasters in what one TV executive describes as a "David and Goliath" fight. The BBC strategy risks appearing like imperialism – the regulator and the Government have indicated that they would like to see subscription channels on digital terrestrial. To add to the competitive tension, two other independent parties have put in bids, offering to set up a neutral platform to carry 20 or more free-to-air channels.

After the demise of ITV Digital, it fell to the regulator, the Independent Television Commission, hastily to find a replacement broadcaster to fill not only this sudden commercial gap in the market, but to plug a gaping hole in public policy. On Thursday last week, the deadline for bids to the ITC passed. The regulator will announce by 4 July which of the four contenders is successful. There's no doubt that the digital-terrestrial platform will become mass-market television, so the holder of these licences will have a powerful role in shaping the future of TV in this country – probably for the majority of the 15 million UK households that have not signed up for cable or satellite.

The BBC says that it had to break away from ITV and Channel 4 because it does not believe that pay services can work on digital terrestrial. It says consumers want a simple proposition, and the technology of this platform does not provide enough capacity to carry both a compelling range of free channels and good subscription content – one of ITV Digital's biggest mistakes was trying to broadcast too many channels, in a doomed attempt to compete with Sky's monster channel line-up – with the result that signal quality suffered. The corporation has, unkindly, dubbed the rival bid "ITV Digital mark II".

Andy Duncan, the BBC's director of marketing and communications, says, "It is very clear that those who have not got digital, don't want pay TV. It [the other main bid] is a rerun of ITV Digital – it didn't work for them last time, so they're trying it again, except with a less strong pay line-up."

There are less charitable interpretations of the BBC's motives. Leaving out pay services means more room for BBC content, including some fancy interactive services. Furthermore, the more free-to-air channels that are available, that rely on advertising to fund them, the greater the competition created for the BBC's main rivals among the traditional broadcasters – ITV, Channel 4 and Channel 5 – who will have to fight harder for the attention of advertisers.

The BBC's opponents say that its long-term strategic motive is protection of the sacred licence fee. Mr Dyke does not want to see another mass-market pay-TV service emerge. If there is a mechanism for charging for TV in most British homes, as there would be if digital terrestrial had a pay option, then a future government could easily do away with the licence fee and turn the BBC into a subscription service.

But why would Sky, which has been constantly critical of the way the BBC is funded, now step in to help cement that funding arrangement and, for the first time, back free channels? Insiders say that Sky wanted to bid to set up its own limited pay-TV service on digital terrestrial but, realising that the regulators would never allow it, the broadcaster decided the next best strategy would be to block a competitor from offering pay TV on the platform – by supporting the BBC. The Sky contribution to the BBC bid is a token effort, three very basic channels – Sky News, Sky Travel and Sky Sports News.

ITV and Channel 4 maintain that the BBC is deliberately underplaying the amount of technical capacity available on digital terrestrial. They want to offer almost as many free channels as the BBC would, but would add a "lite" pay-TV upgrade, which would cater to households that want a few extra channels but cannot afford Sky or a cable subscription – Sky's most popular package costs £37 a month.

Mr Chance, who is a non-executive director at Granada, says: "My question is, what is on channels 22, 23 and 24 that would make this so good compared with our 21 channels? There is a very significant market that falls between free TV and the mid- to high-cost offerings from Sky and the cable companies."

The ITV-Channel 4 bid will offer seven channels for £10 a month, plus a film channel (possibly FilmFour) for an extra £5 a month. The Government also feels there should be a graduated range of pay options to drive the take-up of pay TV, and is worried that Sky and the cable companies concentrate only on the top end of the market.

These manoeuvrings may prompt the regulator to force a compromise between the two main contenders. The ITC could also snub both camps and pick one of the two outside bidders, neither of which is in the content business, and which are offering an independent platform for any channel. A digital-terrestrial phoenix will emerge, but only after a fierce contest.