The secret plot to stop Murdoch

In a couple of months' time, high-street shops will start selling a £99 box that can bring free-to-air digital channels to every home. The machine is part of a drive to convert the nation to digital television by a new alliance of BBC and ITV.

The genesis of that alliance is as remarkable as the technology in the new £99 box. It springs from a series of secret meetings at 10 Downing Street. Those meetings, sanctioned by the Prime Minister and involving figures as senior as the BBC director-general Greg Dyke, had one overriding aim: stop Rupert Murdoch.

Mr Dyke, as well as executives from ITV and senior figures from the City, were called in to Downing Street to discuss with the Prime Minister's media policy adviser Ed Richards, ways of stopping Murdoch's inexorable drive to control all paid-for digital television in Britain.

It is not just Rupert Murdoch who has been kept out of the new secret loop. Tessa Jowell, the Secretary of State for Culture, Media and Sport, has been bypassed. The industry figures went straight to Downing Street with their concerns – a damaging snub to Ms Jowell. The background to these meetings is the Government's commitment to switching off the traditional analogue TV signal between 2006 and 2010. After that, only a digital signal will be available. There are three ways to get digital TV: via cable, satellite or through an ordinary aerial (terrestrial). The cable network will never cover the whole nation. That leaves only satellite (BSkyB) or terrestrial, available from ITV Digital, as the national platforms.

The trouble is that, despite the success of its monkey ad campaign and attracting 1.2 million subscribers, ITV Digital is in dire financial trouble. So the BBC and ITV have come together in an initiative dubbed the "digital coalition", with the support of government, to reinvent and save the terrestrial platform. The clandestine grouping, which insiders admit is an "anti-Murdoch alliance", began over the summer. Charles Allen, the chairman of Granada, one of the two main ITV companies, wrote a private letter to Tony Blair in June. In it he said that ITV Digital was bleeding cash and was threatened with closure. This was disastrous news for Downing Street. The Government needs ITV Digital to survive, both to provide an alternative to Sky and to bring on board the majority of the population that still don't have digital TV.

"The aspiration of Digital Britain was in tatters," says one senior TV source. "Since it realised this, No 10 has been involved and kept briefed."

Ed Richards, No 10's newly appointed special adviser on media, and a former BBC policy researcher, took the lead. A procession of executives from ITV, the BBC and the City were called in to Downing Street, including Greg Dyke, to discuss a way to save ITV Digital. By late September, the BBC and ITV were convinced that a solution to both their problems lay in joining forces, and serious talks between the two broadcasters began.

For the BBC, this is a crucial project. The corporation has launched a series of channels that are available only on digital TV, and with more planned, such as BBC4, to start next month, it must ensure that there is a way of getting these stations to the licence-fee payers that have funded them. The new channels are free; but, to see them, viewers have to sign up to a pay-TV service. For the last year, Greg Dyke, has been trying to resolve this conundrum.

The Government knows that 15.5 million households do not have access to digital TV, and that, as things stand, the majority of these citizens will still not have it by 2010. How can it then switch off analogue TV, and sell off this spectrum? Furthermore, Mr Blair was as horrified as the BBC by the prospect that all television in this country may soon have to depend on Murdoch, to be beamed into our homes on Sky.

So a rescue plan has been hatched by the BBC and ITV. The proposed way out of this mess is to break the link between digital TV and pay-TV. Although Britain leads the world in digital TV, with almost 40 per cent of the population signed up to one of the pay-TV services, take-up is now slowing down. Sky launched its services in 1989 and has gained over 5.5 million customers. But it is feared that most of those that can be tempted have already forked out for a subscription – the most popular Sky package costs £444 a year. Not everyone wants 200 channels and the financial drain of a subscription. Getting the rest of the country on board requires a different approach, according to the digital coalition, which has spent months plotting a new course. An announcement confirming the coalition is due in the next few weeks.

Instead of getting a free set-top box with an ITV Digital subscription, which costs an average of £225 a year, consumers would be asked to spend a much smaller amount, say £100 or less, as a one-off payment to buy a basic digital terrestrial box themselves. This would enable them to receive all the free-to-air channels and then, if desired, this box could be upgraded to subscribe to the premium channels available on ITV Digital.

Last week, Mr Dyke told a Commons select committee that BBC research showed that two million homes would be willing to buy a cut-price box. All the pieces of the digital terrestrial rescue plan are, then, falling into place. A marketing drive to promote free-to-air content is imminent – with the BBC alone committed to spend £20m on the campaign.

Rupert Murdoch will be furious if the new campaign specifically promotes digital terrestrial rather than digital television generally. But if the plan comes off, Sky may just be forced to give one or two of its channels away for free, too.