Digital revolution is still on fast forward 
Neil Blackley
Tuesday April 1, 2003
The Guardian 
http://www.guardian.co.uk/business/story/0,3604,926851,00.html
The convergence party hasn't been cancelled, only postponed. 
Despite the end of the telecoms, media and television bubble and concerns
about a consumer recession, internet penetration has quietly risen, the move
from analogue to digital TV has steadily progressed and interactivity has
developed, feeding off the low-hanging fruit of premium rate telephone lines
and SMS text messaging as consumers vote and play games within interactive
TV. 
In addition, DVD penetration is now approaching 50% of homes in the US, and
DVD players are a catalyst for the integration of domestic TV and sound
systems - and in future PCs. 
The telefusion stallion may have lost a shoe but it hasn't gone lame. But
the problems we have in the UK are funding, a restrictive legislative
environment and content owner caution about the security of and potential
cannibalisation from interactive broadband services. 
On the funding front, companies have been running out of juice. Granada and
particularly Carlton have been weakened by pouring £1bn into failed ITV
Digital. Cunningly, management decided to change the name from ONdigital
four months before its demise, maximising collateral damage. 
BSkyB - to finance free decoder offers and conversion to digital - had to
cut its dividend and built up £1.6bn of debt. 
Cable is in a far worse state, and still has more debt than many countries
in the developing world. Post high-yield bond refinancings, cable is being
run on a care and maintenance basis, falling behind BSkyB on innovation -
such as personal TV recorder boxes - let alone trying to leapfrog with video
on demand. Cable build-out has come to a standstill. 
Once NTL and Telewest are on a level and stable financial playing field, I
believe they should be allowed to merge, so a new national, triple play
local loop service can be branded and sold. 
Meanwhile BT has £13.5bn of net debt, and has sufficiently upset Openworld
subscribers on the issue of quality of service that a number banded together
to form a protest website. BT has maintained uneconomic wholesale pricing
for ADSL, or asymmetric digital subscriber line services, stifling the third
party market, which has protected its higher ISDN and leased line pricing. 
This brings me to legislation. BT has now belatedly reduced its wholesale
pricing of ADSL, both for fast internet and video on demand - just as third
parties are finding it impossible to raise money to enter the market. 
Although there has been a recent acceleration, we are way behind countries
like Germany and the broadband Elysian fields of Korea, which has 7.8m
connections out of a total 14.4m households - a 54% penetration rate. 
On the digital terrestrial front, the BBC should be playing an active role,
in marketing and financially, in driving digital TV and radio. It is
interesting to note that the Norwegian public service broadcaster, NRK, is
proposing to give away free digital set-top boxes to every home, believing
that the saving from cutting off analogue earlier will pay for it. 
Furthermore, following the passing of the communications bill, Carlton and
Granada should be allowed to merge. In any event, you have advertisers such
as Unilever and media buyers like Carat and Universal McCann in favour. 
If it doesn't happen, Carlton in particular has no plan B and would have to
substantially reduce its dividend again. Carlton and Granada's management
are putting up a united front, but it will be interesting to see what
happens after a merger. 
ITV chairmen are like a rearview mirror - relationships between them can
appear to be closer than they actually are. 
· This is an edited extract from a speech given to the Royal Television
Society last night by the former Merrill Lynch media analyst, Neil Blackley,
to mark his 'retirement' from the City 

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