AS BT begins promoting its new television service this weekend, Dan Marks, chief executive of BT Vision, is keen to stress the seriousness of the group’s intent.

“What we are doing is pretty dramatic,” he said. “We are building a new kind of television service – a very grand thing to do. It’s not often that you can make grand statements like that but it’s warranted.”

Working closely with Microsoft and Philips, which will provide the set-top boxes, BT Vision will offer a combination of Freeview and a wide range of on-demand programming – sport, movies, music and much else besides – that will be delivered through a BT broadband connection.

“We’re very confident that what we have offers compelling value and we’re going to make it simple for people,” said Marks. “A free set-top box and no mandatory subscription is pretty straightforward.”

Background

• BT slashes bonuses for managers

• BT pays for fiasco over Carphone’s broadband

• BT admits it made mistakes with Fusion

• BT to spark landline price war

• BT turns up heat on Virgin Media

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BT will have to stay on it's toes in the tough new world of convergence

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It is intended to appeal to the “millions” of people who want more than the 40 or so digital channels available on Freeview, but who are “absolutely resistant” to paying for more television on the terms on offer from Sky and cable. In other words, those who do not want to pay a hefty monthly subscription for a bundle of channels, some of which are of little or no interest.

BT will offer many movies and programmes on a pay-per-view basis that it believes many viewers will find both preferable and more affordable. In addition, it will undercut Sky and Virgin Media on the price it charges to watch Premiership football.

“We will have a very significant discount on what the customer would expect to pay for Sky Sports,” said Marks. Through a deal with Setanta Sports, the Irish company that has broken Sky’s monopoly over live Premiership games, BT Vision will be able to offer 288 matches next season.

BT’s arrival in the pay-TV market underlines the extent to which the convergence between telecoms and television is finally becoming a reality.

The satellite broadcaster BSkyB is recruiting hundreds of thousands of new customers as a provider of broadband and telephony. Virgin Media, the cable-TV group formed after last year’s NTL-Telewest merger, now includes Sir Richard Bran-son’s mobile-phone company, from which it takes its name.

Tiscali, the internet service provider (ISP), has moved into television after last year’s acquisition of Home Choice, a trail-blazer for video-on-demand over broadband.

Orange, the mobile-phone company that now includes the old Freeserve internet business, also has plans to offer television over broadband, as its sister company in France does already.

That leaves Talk Talk, part of Carphone Warehouse, which made a landgrab for the UK broadband market last year. It is the only leading player that has not set out plans for television, although it has dipped its toe in the content business after last year’s purchase of AOL UK.

Some analysts believe that the increasing competitive strain is already beginning to show. Last week, shares in Virgin Media lost about 10% of their value after it reported a grim-looking set of first-quarter results, the first since the company’s rebranding in February.

Despite spending £25m on an advertising campaign featuring Uma Thurman, Virgin Media lost nearly 47,000 customers, and suffered declining sales in every one of its operations: consumer, business, mobile and content. Customer and revenue losses were particularly marked in telephony and at Virgin Mobile.

Worse is to come because the figures have yet to show the impact of the bitter row with Sky over the price demanded for access to Sky One and other “basic” channels. Virgin’s loss of the Sky channels prompted 250,000 calls to the company’s overwhelmed call centres. Steve Burch, Virgin Media’s chief executive, admits there will be more customer defections in the current quarter.

Frustratingly for Burch, the contrast with Sky could scarcely be more marked. A week earlier, Sky reported strong progress in signing up new broadband and phone customers, on top of another 70,000 TV subscribers. (BSkyB is 39% owned by News Corporation, the ultimate owner of The Sunday Times.)

This week is likely to provide another unflattering comparison when BT reports its results. Analysts believe that BT has maintained the momentum in its broadband business, helped by the service and engineering problems that have slowed the advance of Talk Talk.

Neil Berkett, Virgin Media’s chief operating officer, insisted that the company is doing better than it might appear, and that signs of progress were overshadowed by worries about the loss of television customers. “You can’t withdraw channels like that [the Sky basic package] and not lose some customers,” he said.

Berkett pointed to Virgin Media’s success in signing up 88,000 broadband customers, and winning an award as best consumer ISP – unthinkable under the old, unloved NTL brand. He said the loss of 115,000 prepay customers was due to a new focus on more profitable contract subscribers.

The loss of 63,000 telephony customers was blamed on the company’s troublesome billing systems, which have restricted pricing flexibility. When the company completes a move on to new systems in September, this problem would disappear.

“We’ll return to growth,” said Berkett. “We ‘ll return to growth in average revenue per user.”

Some analysts are not so sure. Michael Williams at Citigroup told investors: “The business fundamentals remain under intense pressure. Telephony decline is set to continue due to uncompetitive price offering. TV is suffering from lack of content and competition from Sky. Broadband growth is declining in a fragmented market approaching saturation.”

In summary, the negative trends could get worse.

The problems that Virgin Media has suffered with billing systems and customer service are telling. Talk Talk has suffered similar difficulties, its call centres being overwhelmed by the response to its “free” broadband offer and its engineers struggling to move customers on to its own network of equipment in BT’s exchanges.

Carphone recently admitted that these unforeseen problems would cost it £10m-£15m this year, partly because Talk Talk is having to incur losses on hundreds of thousands of customers it is only able to supply via BT’s wholesale service.

Sky’s entry into the broadband market last year made less of a splash, and it set itself less demanding early targets.

However, helped by the army of engineers that it has to make house calls, Sky has grown more smoothly, and is finding 70% of customers are willing to pay for broadband, rather than accept a slower, free connection.

In the view of Enders Analysis, “Sky looks set to become one of the top three residential ISPs in the UK within four years”.

Claire Enders at the firm said: “Who would have thought that the market would move away from free because Carphone messed it up? People are happy to pay for something that works. It’s just the best thing that’s ever happened to BT.”

Many experts believe that BT Vison, and others hoping to offer television over BT’s copper telephone wires, are running a risk by using the network to delivera service for which it was never intended. A cable network, they say, is inherently better suited for video, and more easily able to offer more capacity and higher connection speeds.

Marks acknowledges that some customers in rural areas will not be able to receive BT Vision because they live too far from their local exchange.

However, like Sky, Marks believes that customers will place their trust in BT’s ability to execute on a nationwide scale. One of the appeals of “big BT”, he said, was “we can send an engineer round, we can explain [BT Vision], we can support it.

“When it sets its mind to do something, then the corporation is just hugely impressive.”

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