Digital dazzles, but will it deliver?

Chris Townsend is excited by his new toy. He punches a couple of buttons on his remote control, waits for a few seconds as the phone connection is made, and up pops a credit card statement on the television screen 10 feet away. A few more buttons are pushed, and the statement disappears to be replaced by an HMV logo and menu, inviting him to buy Paul Weller's Stanley Road CD. Another set of commands, and this is replaced by a list of middle management jobs currently available in retail in the London area.

Townsend is the first, and so far only, employee of British Interactive Broadcasting (BIB), a joint venture between BSkyB, British Telecom, Midland Bank and Matsushita Electric of Japan (the Panasonic people). Its aim is to bring the British mass market into the interactive age with home banking, home shopping and information services that will arrive much faster and in better form than the current offerings from teletext, or on a computer.

BIB itself will form part of the service provided by digital satellite, a venture being masterminded by BSkyB, which promises 200 or more high resolution channels of sports, movies, specialist programming and "near video-on-demand", a service which aims to replicate the video shop and allow viewers to pay for and watch the latest video movie releases on more or less their own schedule. Viewers will need to buy a set-top box, costing around pounds 200, and will need to pay a monthly subscription along the lines of that demanded by current satellite and cable offerings.

It is a dazzling combination. But it is only one of several digital services (almost all, as will become clear, involving BSkyB) that will compete for viewers' attentions next year. Digital Terrestrial Television, a service that will be broadcast in the conventional way, will provide BBC, ITV, Channels Four and Five and a selection of around 30 commercial channels, will arrive at about the same time. The rights to provide that commercial service are still up for grabs, and the Independent Television Commission decides next month between British Digital Broadcasting (Carlton, Granada, and, yes, BSkyB) and Digital Television Network (International Cabletel, and - if the bid succeeds - United News & Media). Despite UN&M's surprise entrance into the race last week, analysts believe the odds are stacked in BDB's favour.

Then there is digital cable, a service planned by the cable companies to be launched at around the same time as digital satellite, and masterminded by CWC and Telewest, the largest cable players. Their offering will be broadly similar to that of digital satellite, using their own interactive service but incorporating some (or all) or BSkyB's movies-to-sports offerings. The advantage that the cable companies have is that their coaxial cables that deliver the service can also receive a lot of return information - known in the business as the "back channel" - that will give viewers/users much faster interactivity than digital satellite, which will rely on a residential telephone line to make the back-channel link.

At this point, amid this technological maelstrom, it is worth putting things into perspective. All these ventures are competing to put pictures and services on the television sets in our home. The technology behind them is the binary system of noughts and ones that gave us computers and digital mobile phones, and the pictures themselves will be of a higher quality than current analogue pictures as a result.

But aside from the interactive gizmos demonstrated by Chris Townsend, what is on offer - at least in the early years of this service - is not too different from what we get now. All the digital players, who will spend close to pounds 3bn between them to make these services happen, will bring their marketing power to bear on British viewers who are already stuffed to the gills with television (be it the five terrestrial channels, cable, or existing analogue satellite), and know how to go to the shops.

The question that remains tantalisingly unanswered is whether people will actually want this service and pay good money for it. So far the evidence is decidedly mixed. Trials of interactive television have proved that it is technically possible to deliver such things to consumers, but not that consumers want them. The British Telecom interactive trials in Colchester and Ipswich, which cost pounds 75m and ended last year, showed that only a limited number of people would be interested in interactive services, not enough to justify the cost of rolling it out in that form. Last year a trial of interactive television backed by Time Warner and Disney in Orlando, Florida, found that the most popular service was the one where users could order postage stamps. The shopping, banking and video on demand services got a disappointing response.

Meanwhile interactive digital television services that have already been introduced are hardly faring much better. In Germany, the satellite service introduced by Kirch last summer has so far only got 30,000 subscribers, versus a target of 200,000 in the first six months.

According to David Chance, deputy managing director of BSkyB, these omens are irrelevant. "The reason why we took so long to come up with the package is that we didn't want to make the same mistakes as digital operations in Germany and Italy. Our offering is carefully tailored and, unlike the German situation, we will have set-top boxes at pounds 200 instead of pounds 500." Indeed, the BSkyB/BIB offering depends on the fact that the large multinational companies in the joint venture are prepared to chip in to the cost of subsidising the set-top boxes to the tune of pounds 500m over the next five years to keep them to a level that will gain consumer acceptance.

The next tantalising question: if one accepts that British consumers will buy digital, which service will they buy? The battle between competing technologies has been characterised as another Betamax versus VHS, or even Sky versus BSB, when one standard emerged the winner and subsumed the competition. But such a simple analogy is not appropriate here. For one thing the market is not new. All the players in satellite, cable, and terrestrial already have a presence in the pay television market already, none more so than BSkyB, which will almost certainly find itself cannibalising existing customers for its new satellite service rather than winning new ones.

However BSkyB has two aces in the hole. One is the probability that it will have a piece of the action in each delivery system if its digital terrestrial consortium BDB is anointed by the ITC as the terrestrial provider. The other is its grip on the two things that have proven themselves as market-winning products: popular sports and movies.

Whether these two areas of programming can carry a 200-plus channel service remains to be seen. "The digital service that works will be the one with highest content quality," says a senior media industry figure. "It is all very well to multiply the number of delivery channels, but viewers will not want to watch 200 channels of rubbish. Without content, there is no viewer."

This is broadly speaking the attitude taken by the BBC, which has made a policy decision not to get financially committed to any of the delivery systems, but instead be a content provider for all of them. The subtext to this is that the Beeb thinks it will become the strongest player in the programming market after digital has launched, and will be able to auction off reruns of its licence-fee funded programmes for a handsome premium. At the same time it does not want to risk licence fee money on something that could go pear-shaped.

If anything, the advent of digital will hurt the BBC least and may put it in the driving seat. Audience research in recent years has shown that while channel offerings have proliferated, the BBC has actually strengthened its share of the viewing, with most of the defectors to the new channels coming from ITV.

This raises another issue: whether Britain's advertisers will benefit from the advent of a slew of digital channels. The prognosis here is again mixed. On the plus side big brand advertisers will naturally welcome competition, as well as the opportunity to reach specialised segments of the market. In addition, the gizmos attached to digital satellite television will allow companies to tie their ads directly into a home shopping page via a clickable "button" on the screen, making it very easy for consumers to take advantage of a special offer, for example.

On the downside, the fragmentation of audience will mean that advertisers probably spend more money on reaching the same number of people, or pay even more for such coveted spots as the ad-break in Coronation Street, assuming that it can pull a mass audience. Evidence from the US, which has had multi-channel cable for 20 years, shows that while the major broadcast networks have seen their share erode to about 60 per cent of the total audience, their power over advertisers has in fact increased as they are now the only ones who can deliver the mass audience for a Coca-Cola or Nike ad.

Indeed, nothing will be simple in the digital age. Yet a sense of perspective (and calmness in the face of technobabble) needs to be maintained. For all the talk, the bells and the whistles ("there is far more smoke than substance at the moment," admits one of the digital participants off the record), this is a nascent technology that will not materialise in our shops before the middle of next year at the earliest, which will not have been widely market tested, and which may backfire on its creators for lack of programming, lack of consumer interest, and lack of advertising revenue.

It is certainly exciting times. "Someone will be chucking a lot of money down the drain on this one," says one of the more sceptical media analysts. "We're just not sure who it is yet."