News Analysis: Battle is joined in digital television

News Analysis: To City relief, ONdigital is doing better than expected, and a flood of new sets is awaited

SO PERHAPS ONdigital has a future after all. Yesterday Stephen Grabiner, chief executive of the fledgling digital television joint venture, struck a confident tone when he faced the City for the first time since launching the service in December.

In spite of persistent rumours about software problems and poor coverage, and in spite of going head-to-head with British Sky Broadcasting, the rival satellite broadcaster, which launched its own digital service last autumn, ONdigital still managed to sign up 110,000 subscribers in the first four months of its existence.

The figures were ahead of City expectations, and the relief among investors was evident in the rising share prices of Granada and Carlton Communications, the ITV groups that each own 50 per cent of ONdigital.

The subscriber figures narrow the odds that the venture will reach its target of signing up two million subscribers - the number it needs in order to break even - without having to ask its shareholders for more cash.

Indeed, Mr Grabiner even claimed that ONdigital is outperforming BSkyB on a like-for-like basis. Although the satellite group signed up 350,000 subscribers in its first four months, all but 120,000 of these were already watching Sky's analogue service.

And as ONdigital can only currently be received by 70 per cent of the population, this implies that it is outselling Sky, which covers the entire country, in the areas where customers can choose between the two.

This is contrary to what analysts were predicting last year. At the time, it was widely expected that Sky's superior channel line-up - it boasts 140 channels compared to ONdigital's 30-channel offering - would roar ahead. Indeed, many observers think that it still will.

Nevertheless, it appears that ONdigital's attempts to appeal to people who have so far resisted pay-television have struck a chord. At the time of the launch, the venture made much of its "plug in and play" simplicity and the fact that, unlike Sky's service, it would not need a satellite dish

Research by CIA Medialab, the media planning group, shows that new subscribers have generally resigned themselves to the fact that there is no other way of watching Premier League football at home. At the same time, the prospect of dedicated cartoon and children's channels is also proving to be popular with children, who are pestering their parents to sign up.

Having cleared the initial hurdle, Mr Grabiner is now looking to make further inroads by offering different programming. Yesterday, he unveiled a line-up that includes exclusive feature-length editions of Coronation Street and Emmerdale, both of which will not be seen on ITV.

Fans of Inspector Morse are also being lured with a final edition of the detective series, while music lovers will be able to see concerts by Luciano Pavarotti and the girl band, All Saints.

The approach sets ONdigital apart from Sky, which has traditionally relied on sport - particularly Premier League football - and blockbuster movies to sell its service, although it has recently realised the need to invest in original programming.

Another aspect of the battleground is set to be in integrated digital television sets. Alba, the British-owned manufacturer that makes Bush televisions, is supplying a range of digital sets with an ONdigital set- top box decoder built into the television (see accompanying story). Although the sets will sell for as little as pounds 500, consumers will also have to sign up to ONdigital for 12 months in order to take advantage of the offer.

This autumn, a host of well-known electronics names, including Philips, Panasonic and Sony, are set to launch their own digital television sets. Some will come with Sky or ONdigital decoders built in, while others will require the attachment of a module - and, in Sky's case, a satellite dish - to receive either service.

Another key battleground will be interactivity. Digital television will allow viewers to buy products, order pay-per-view movies, or conduct home banking from the comfort of their armchairs.

Earlier this year Sky launched Open, its interactive shopping and banking service. It is also offering subscribers an e-mail service.

Yesterday, ONdigital announced plans to offer its own e-mail service from September this year. Subscribers can already play games online through a dedicated games channel.

In theory cable television, which has the advantage of being piped through a fibre-optic cable rather than transmitted through the air, should be able to offer the most attractive interactive television services.

But analysts now believe the cable companies are unlikely to be able to offer full interactive cable television before the first half of next year, giving both Sky and ONdigital the opportunity to sign up more subscribers.

Yesterday's subscriber figures have also increased the chances that Carlton and Granada will seek to float a minority stake in ONdigital as early as next year.

Charles Allan, Granada's chief executive, is thought to be keen to obtain a separate listing for ONdigital as soon as possible in order to give the stock market an opportunity to put a value on the venture, which he does not believe is properly reflected in either Granada's or Carlton's share price.

ONdigital still faces a lengthy road ahead to achieve its target scale of subscriber base and make a profit.

But, in getting the venture up and running, Mr Grabiner has cleared the first - and probably the most daunting - hurdle he will have to face.