Video killed the internet

Ashley Highfield is stepping down as director of future media at the BBC to head the Kangaroo Project, the joint venture between the three main broadcasters to make their content available on demand over the internet.

When it goes live later this year, the scheme, which was first put together at the end of last year, will give viewers a single place to access programmes from Channel 4, ITV and BBC Worldwide. And although it will initially function over the internet, in the longer term it could be available on other platforms such as Freeview, BT Vision or Virgin Media.

"Kangaroo will be an important shop window for UK broadcaster content", Michael Grade, the executive chairman of ITV, said.

Despite the warm words, the scheme is born of necessity rather than desire. All three channels already have their own web services, but they have recognised that the user-friendliness of a single portal stands a better chance of success against both internet aggregators such as Google and traditional rivals such as Sky.

Adam Daum, a media analyst at Gartner, said: "Ideally, the broadcasters want everyone to come to their own site because then they have complete control over both the user experience and, in the case of the commercial operators, over the advertising. Kangaroo is a trade-off between their interests and those of their customers."

One of the big issues in the short term will be copyright. The implications of on-demand viewing, rather than linear broadcast, are significant – as last year's writers' strike in Hollywood illustrated. The channels will face sticky negotiations with third-party producers over the rights to sell content worldwide, and on-demand, rather than as a one-off, or even with repeats, within the UK.

"It will be very messy for broadcasters who don't produce the majority of their content because they will have to renegotiate worldwide rights not just for the internet, but potentially also for IPTV, cable, even mobile devices," Mr Daum said.

The boom in on-demand services is not only raising issues within the TV industry. It is also causing major headaches over the capacity of the internet, and the multi-billion-pound infrastructure upgrades needed to handle the exponentially larger bandwidth requirements.

But the broadcasters are not far behind. The BBC's iPlayer, launched at Christmas, now attracts a weekly audience of 1.1 million and showed 42 million programmes in the first three months of the year, including hits such as The Apprentice. Channel 4's 4oD service is also growing fast, with a 110 per cent rise in active users this year and a 100 million rise in viewing figures since it launched popular programmes such as Shameless. ITV.com peaked last November with around 2.2 million viewers for programmes like Bionic Woman.

There is already a row brewing between online content providers and internet service providers (ISPs) faced with costs as high as £830m over the next three years to handle the extra traffic from video services. Industry representatives say discussions are constructive. But Mr Highfield caused a storm this month by threatening to name and shame ISPs that restrict iPlayer traffic. And Simon Gunter, the head of strategy at Tiscali, is leading a call from the ISP industry for the BBC to stump up some of the costs so they do not have to be passed on to consumers.

But the ISP question – which is caused by the cost of "backhaul" to the core network – is symptomatic of a longer-term issue about the massive amounts of investment that will be required to upgrade the UK communications infrastructure.

Antony Walker, the chief executive of the Broadband Stakeholder Group, said: "Today's services are within the capability of the existing network but as we look forward ... there will be an impact on the access infrastructure."

BT is already spending £10bn on its 21st Century Network programme, which will replace 17 ageing fixed-line networks with one internet protocol-based system by 2011. And improved broadband technology installed in local exchanges has helped push bandwidths up to current top speeds of around 20 Mbit/s, although average rates were still a measly 4.6 Mbit/s last year.

But while international rivals from France to South Korea push ahead with investments offering speeds of up to 100 Mbit/s, progress in the UK is slow. There are some minor trials under way. Some 10,000 homes in Ebbsfleet in Kent will have the option of 100 Mbit/s connections from August as part of a BT pilot. And Virgin Media, which owns the cable network spanning around half the country, is to extend its 50 Mbit/s service to 9 million homes by the end of the year. The bottleneck is the so-called "last mile" of copper telephone line that runs from individual premises to local exchanges. And it will cost an estimated £15bn over 10 years, plus untold roadworks, to upgrade it to the fibre-optic cable needed for super-high speeds.

BT, which owns the copper network, says the commercial case simply does not exist in the current regulatory climate.

Ofcom launched its consultation in December and is expected to report later this year. And a government review, led by Francesco Caio, the former group chief executive of Cable & Wireless, has begun. But there are no easy answers, not least because BT's preferred option – to increase the amount of money it is allowed to charge other operators for access to its exchanges – is widely opposed by its rivals.

With online viewing figures shooting up, the race is on to find a workable strategy. And developments in the mobile sector are likely to add to the pressure.

Mobile phone network operators are starting to put more weight behind mobile internet services. But the impact of widespread mobile internet on the already strained communications network will be astronomical, says John Roese, the global chief technical officer at Nortel.

"There is some evidence of slowing down caused by video-on-demand, but what is more of a worry is the advent of the new 3G and 4G wireless networks because the current architecture for backhaul is configured like the old voice network," Mr Roese said. "The existing infrastructure for mobile was just not designed with Google or iPlayer in mind."