Analysis: Trying to use ITV Digital to break BSkyB's monopoly has only strengthened Murdoch

When ITV Digital was formed, Rupert Murdoch's BSkyB was meant to be a part of it. But after objections from both the European Commission and the UK regulator, the Independent Television Commission (ITC), Sky was forced out and the business was left to the two ITV companies, Carlton and Granada. Without Sky – and with hindsight – ITV Digital was doomed from then on.

The new service was launched as ONdigital at the end of 1998 (it was rebranded ITV Digital last year). However, from the moment Sky was excluded, digital terrestrial TV became one of its rivals and, true to form, the highly aggressive Sky moved to kill it.

Paul Richards, an analyst at the stockbrokers Numis, said: "The only people who could have made it work was BSkyB."

In 1999, the killer blow was applied when Sky announced that it would give away the set-top boxes that both it and ITV Digital had previously asked customers to buy. That dramatically changed the economics of the business.

The original business plan from Carlton and Granada envisaged funding of £300m or £400m before ITV Digital became profitable. By the time it was put into administration, at the end of March, Carlton and Granada had blown nearly £1bn on the venture and, though it had accumulated 1.2 million customers, it was nowhere near breaking even.

But the big mistake came in 2000 when, in a desperate bid to provide unique content to compete with Sky's offering, which included the Premier League, ITV Digital paid £315m for the rights to televise Football League matches.

The League did not prove to be a star attraction and some of the matches had just 1,000 viewers. It would have been cheaper for ITV Digital to pay the expenses of these fans to attend the games. At the end of 2000, a sector-wide advertising recession set in. This turned out to be the most severe advertising downturn in at least a decade, lasting throughout 2001 and into this year. This destroyed the ability of Carlton and Granada to continue to fund ITV Digital.

ITV Digital turned out to be a corporate disaster but it was not all the fault of its owners. Sky did not always play fair. An inquiry by the Office of Fair Trading into the prices it charged ITV Digital to distribute Sky's channels has reached the preliminary finding that Mr Murdoch's business abused its dominant market position.

The Government also let ITV Digital down. There is still no firm date when the traditional analogue TV signal will be switched off – a deadline would have driven people to take up digital television, such as ITV Digital. Instead, there is just a vague commitment to switch off analogue by 2010.

And, technically, the signal that ITV Digital bought was never as strong as the Government had promised, making it unavailable across large parts of the country.

Tim Yeo, shadow Culture Secretary, said: "Before the ITC can arouse interest in the re-advertised licences, the Government must publish a timetable for increasing the strength and reach of the digital terrestrial television signal and mount a public information campaign so consumers understand what digital switchover involves and what this means for their televisions."

Only about half the country is covered by cable television. The collapse of ITV Digital means that many households that want pay-TV will now have to go to Sky.

Mr Richards said: "Sky was already in a very powerful position and the demise of ITV Digital can only add to that."

WHAT HAPPENS NEXT

What channels will ITV Digital subscribers no longer be able to watch?

Any pay-TV services, such as Sky's film, football and news content, became inaccessible yesterday.

What programmes can an ITV Digital subscriber continue to receive?

The free-to-air channels – BBC1, BBC2, ITV1, Channel 4 and Channel 5 – plus digital services offered by BBC and ITV, such as BBC Choice, BBC News 24, CBBC and ITV2.

What should people do about their subscriptions?

If they have a monthly direct debit they should cancel it. Anyone with an annual subscription is likely to lose the outstanding value of the contract.

What should customers do with their set-top boxes?

Most boxes do not belong to subscribers. Administrators may try to sell these boxes.

Is there now any pay-TV alternative to Sky?

Yes – cable. But the main operators only cover about half the country.

What if customers just want the free-to air channels in the future?

A new set-top box for free-to-air channels is now in the shops, priced at £99.

Who can ITV Digital subscribers contact?

ITV Digital's call centres closed yesterday. But the administrators say that "all individual subscribers will be contacted".