Source: Media Guardian

Next month ONdigital is expected to announce that it has 1m subscribers, 4m less than BSkyB. But its chief executive, Stuart Prebble, still believes it can become Britain's biggest pay TV operation - with the help of the analogue switch-off.

The omens are not good for residents of the Marco Polo building, that paean to 1980s hubris in Battersea, south London. The candy-striped marble office block, which sits at the bottom of Chelsea Bridge, was home to the ill-fated squarial satellite television venture BSB. It then witnessed sinking sales and the threat of closure for the Observer newspaper, which was eventually rescued by the Guardian Media Group and shipped to Farringdon.

ONdigital, which now shares the space with the home shopping network QVC, is aiming to break the curse. Stuart Prebble, its chief executive, has a touch of understated hubris himself. Next week the company will announce figures that are expected to show that the pay television group has hit the 1m subscriber mark. He maintains, with a deadpan expression, that the two-year-old company can still become the biggest operator of pay TV in Britain, despite the fact that it is currently lagging behind BSkyB by 4m households.

"We have reached this stage in two years when Sky didn't do that, NTL didn't do that and Telewest didn't do that," he says. "For a new technology and an entirely new brand to have reached that milestone is very significant. It's a soaraway success."

Some City analysts, however, are becoming increasingly cynical. Worries are being expressed over levels of churn (the rate at which customers leave the service), suggestions that the company has been massaging figures with one-off promotions, and boosted levels of investment needed to fund exclusive rights and internet services. When the two shareholders, Granada and Carlton, unveiled the platform in May 1998, they said it would need £300m funding, a figure which has since inflated to £950m.

BSkyB, in the meantime, has lifted its own subscriber targets to 7m by the end of 2003.

Among the critics is John Egan, a former ONdigital director who believes the company could go the way of BSB and find itself a part of Rupert Murdoch's empire. "They are pumping money into set-top boxes which aren't producing the revenues they had hoped for. Nothing they currently offer looks like turning into a big revenue stream."

The great hope on the horizon for Prebble is the sale of digital TV sets and, ultimately, the analogue switch-off. At that point ONdigital will have a clearer advantage over its cable and satellite rivals: it will simply need to supply a credit card-sized piece of plastic through the post that will slot into the back of the TV, reducing customer acquisition costs substantially. BSkyB will still need the satellite dish; NTL and Telewest will still need to dig up the road.

Ending subsidising the cost of supplying free set-top boxes alone will be significant. Prebble claims that ONdigital is currently paying around £130 in subsidy for each set-top box, as well as retailer commissions and door-to-door salesmen. "My sense is that the 15m households that have not yet adopted pay TV haven't been waiting for video on demand or for 40 channels to become 200; they are waiting for the barriers of entry to get lower, and we are in a much better position than any of our competitors to reduce the barriers to entry.

"Our cost of acquisition will probably go to a fifth of what it currently is, which means we can offer a multi-channel service that is much more flexible. If you only want to take two or three channels from us it will still be viable because the cost of acquiring the customer has gone down.

"We are all focused on trying to get more money from the 7m or 8m customers we've got. My objective is to get any money at all out of the 15m we haven't got."

However, the sale of integrated digital sets has not been as rapid as ONdigital had hoped, and there are concerns that, in the meantime, BSkyB might simply eat up the market. To accelerate the take-up of digital sets, Prebble is in discussions with ITV, the BBC and the government about developing a joint campaign to sell them, including a possible Kitemark to take away customer confusion.

"If you hear 40 times a month, 'Starting on ITV2 now ...' then over a period you are going to think, 'I really need this channel,' " he says. Prebble is also encouraged by the BBC's plans. "BBC3 and BBC4 is exactly what I'd want them to do. As a viewer, if I had BBC1 and BBC2, I'd know I only had half the set. There are very conspicuously two other channels I don't have and I'd be asking, 'How do I get them?'

"We know that between now and the end of the decade we will move to analogue switch-off. Well, before that point, digital TVs will be ubiquitous. At that point it is so easy for us to get a customer, it doesn't take a big leap of faith to believe we could match and outpace Sky."

In the here and now, the priority for Prebble is customer service and its effect on controlling churn. Since he took the helm at ONdigital 18 months ago, a new call centre has opened, more than doubling capacity, to ensure that all calls to the company are answered within 20 seconds - although he concedes that a technical hitch in the weekend before Christmas, with some customers losing many of their channels, saw the call centres jammed. He has also instigated a policy of calling customers a month after they sign their annual contract and a month before it expires to check on satisfaction.

Fears in the City were particularly focused on the end of the contracts for the first wave of people who took advantage of the free set-top box offer.

"I expect churn in the next figures to be between 15% and 20%. In some months they were a little higher and some months lower," Prebble says. "As an annual running average they won't be higher than 20%. I am absolutely convinced it will end up closer to 10-12% over a period of two or three years.

"We have to be utterly customer-focused. The cable companies have taught us an important lesson. They could have great customer service for five years before the perception that they have bad customer service evaporated."

Flotation of the business has temporarily been put on hold. The most obvious reason is the uncertain state of the markets, but equally important is the consolidation of ITV. Carlton and Granada's dominance of ITV has created far clearer synergies. "We need to have thought through and started to implement whatever is the sensible strategy between ourselves and ITV," Prebble says. "If you believe, as I do, that there is enormous value in consolidating that relationship, it would be a bit eccentric to try and realise value in this business short of having done so.

"Any time you wanted Des Lynam to say, 'You can see the next match on ONdigital,' you had one shareholder in ITV saying, 'Why would we do that?' The consolidation of ITV has taken that barrier away so it means the scope of our discussions can be much more interesting. We will review the situation again, possibly in the spring."

The delay, if nothing else, should quash rumours of Prebble's imminent departure. A wry smile appears when I bring up the subject of potentially lucrative share options that could make him a rich man by most standards if the business is listed. "I don't think that's cynical. I think it's sensible," he says.

ONdigital clearly still has much to go for. The service launched with 52% coverage of the population, which has expanded to 72%. Two strong selling points, Nickelodeon and the Paramount Comedy Channel, were added at the start of the month, and the platform will also carry E4, Channel 4's new entertainment channel. It is perhaps too early to judge the success of its web TV service.

ONdigital will also continue to pursue exclusive rights in addition to its Champions League football and ATP tennis. Prebble raises the prospect of buying film rights direct from the studios to launch its own channels. "We've made a couple of significant moves and will do more, because we have to. You can't be reliant on your main competitor for the key content that drives these platforms, especially when that competitor is Sky. It is costly, but in the end it won't be significantly more costly than having a relationship with Sky where every time we sell a Sky channel to one of our customers we lose money.

"It's not clear to me why we should take our movies from Sky. The studios are very willing to deal directly with us and so we are looking at a whole range of content."

Whether or not ONdigital has managed to break the Marco Polo curse will become apparent this time next year. The company has set a target for the end of 2002 of 2m subscribers, at which point it should begin breaking even. By the start of 2002 it should be clear how achievable that figure is.