The last couple of years has seen some spectacular failures in the digital terrestrial TV (DTT) market, with the UK's ITV Digital and Germany's Kirch leading the way. Given the struggling world economy, what is the future for digital terrestrial TV? Governments have a major interest in making DTT work - potentially huge licensing fees could be generated by freeing up parts of the spectrum used by current analog TV. Despite governments mandating the switch-off of analog TV, consumers are not moving rapidly to make the transition.

In some ways, governments are to blame for this. Must-carry laws in most countries force cable companies to carry local programming. When applied to digital services, these usually require cable companies to carry terrestrial signals. Given this, where is the incentive for customers to buy digital receivers for free-to-air services that are available as part of digital cable services. In countries like Taiwan, where the cable penetration rate is upwards of 80%, this is a potentially major issue as cable companies go digital.

As with the other editorials on this site, this is purely my opinion, and is based on my experiences. I'm not going to guarantee that everything I say here is correct, because it's based on my understanding of the industry. Any different views are welcome, especially from people who know and understand the business aspects of this industry of ours.

The DTT business model - who pays for the box?

In the current environment, digital terrestrial TV has some restrictions that cable and satellite business models don't. One of the main reasons for this is the business model under which the different markets operate. Typically, terrestrial TV is either government-sponsored or supported by advertisements. Ignoring things like merchandising and selling content to other broadcasters for now, the whole of the network's income comes from advertising revenue in the case of commercial terrestrial services.

Commercial cable or satellite services operate on a mixed business model. Some of their revenue comes from advertising, while some of their revenue also comes from subscriber fees. Since you have to pay a monthly fee for the service, this offers a regular income for the network operator.

In the early days of the move to digital, this difference in business models makes a big difference. Since customers need a set-top box to watch digital TV, they have to buy or rent one. For those companies with a subscription-based business model, the rental of the STB can be included in the (increased) subscription fees and the network operator can partially recover the cost of the STBs. For a business model based purely around advertising, this isn't possible, and so the consumer has to buy their STB.

With the current high rate of change in the DTV field, buying a set-top box is a risky business for the consumer. As features change and products gets smaller and cheaper, who wants to buy a product that may be obsolete tomorrow? When you add to this the interoperability issues that surround DTV receivers operating in the current vertical markets, it's not surprising that people are nervous about buying an STB.

While most of the digital TV networks that are in operation in Europe and Asia are based around the DVB system, there are still differences - mainly in the areas of conditional access. Free-to-air receivers generally aren't capable of decrypting pay TV signals, and STBs from one network can't decrypt signals from another, even with the correct subscription. This means that any DTT viewer that moves house to an area covered by a different network operator (or wants to move from free-to-air services to a pay TV service) needs a new set-top box. It's no wonder that consumers are nervous about buying receivers.

This particular problem may be solved using pluggable encryption modules that follow open standards (such as DVB's Common Interface and POD standards) instead of conventional smart cards. Due to the cost of these modules, their popularity is limited, and this isn't helped by the security concerns that some companies have regarding these specifications.

In general, these factors conspire to make the consumer nervous about buying an STB as opposed to renting it. After all, who wants to buy an expensive product that may need to be replaced when you move house or choose to subscribe to a pay TV service, and which will probably be obsolete in the near future? Not me, and not many other people. This reluctance to buy receivers can only be hurting advertising-based networks, since fewer viewers are willing to tune in, resulting in lower advertising revenues.

At the same time, the lack of a retail model also hurts those companies that do operate via a subscription model. Let's assume that a network operator has 50,000 subscribers, and that each subscriber needs one set-top box. Let's also assume that the network operator buys all those receivers, and then rents them to their customers. Taking the STB cost at a not-unrealistic value of $100 per unit, that's a total capital investment of five million dollars on STBs alone. It's going to take a long time to make back that kind of investment from box rentals. Now add in the cost of the head-end equipment and other setup costs, and your digital deployment has just cost you a big chunk of money.

Content is still king

This may make the situation for free-to-air DTT look bleak. Given plummeting advertising revenues, a market share that's being squeezed by cable and satellite companies offering better content doesn't help the situation.

Without content, no broadcaster can be successful. This is one of the causes of ITV Digital's demise in the UK - their competitor BSkyB could offer more content that people wanted to watch, and as a result viewer numbers (and advertising revenue) didn't grow as quickly as was needed to match the capital investment. Free-to-air networks may never be able to offer the level of traditional content (e.g. Hollywood movies, sports broadcasts and other premium content) that's offered by pay TV services simply because the lack of a subscriber model gives them less revenue, and thus less free capital to spend on content. Without this kind of subscriber model, there's no way to offer more services to people who will pay more, no way to offer pay-per-view content, and generally, no reliable way to recover the investment in the content.

Unless you have high viewer numbers (which needs high-quality content), you don't get high advertising revenue. Without high advertising revenue, you don't get enough income to pay for the good content, which means you don't get the viewers. Catch 22, anyone?

Is interactivity the answer?

The promise of interactive TV may be the element that really lifts DTT out of the doldrums. Interactivity can offer so many advantages over conventional analog TV that it may look like there's no contest. Interactive gaming, EPG's, information services, email, web access and educational services are all so much more attractive on a DTV platform. The main issue here is the quality and availability of the applications. BSkyB in the UK is one of the leaders in interactive programming, and has made interactivity a success by providing high-quality applications that people actually want to use. Interactivity alone is not enough if the applications aren't what the viewers want.

So many companies are looking at EPGs, games and news services. These are nice, but they're not exciting. People won't pay for them. In particular, people won't buy an STB for them. Email? Maybe, maybe not. Other information services? It depends on the quality and whether I care about the information. Someone has to find the killer application and take advantage of that. Communication and community-building has been a big feature on the web. Maybe it will work on the TV, despite the user interface - just look at the success of SMS and reflect that people couldn't have designed a worse UI for messaging if they tried. But without services that give me as the consumer what I want, I'm not willing to pay for digital TV.

Finding this killer application will be an important step on the road to DTT adoption, and the interaction model of the TV is different enough from other platforms that many of the lessons from the PC and other markets won't carry over well. This killer application may not be just software - it could be combining a DTV receiver and a PVR, or with a DVD player, or with a home networking hub, but until the killer application is found, the number of people buying receivers in the retail market will still be limited.

New markets, new opportunities

Possibly the biggest chance for DTT to succeed is in new markets such as mobile. Using a DTT network to broadcast data to receivers in cars, trains, buses and even mobile phones (see the recent DVB-X announcement) offers a range of services that cable companies and analogue services can't compete with. Data services in these markets are as attractive as conventional TV services, and both have their place as more vehicles (cars, buses and trains, for instance) start to get displays and sophisticated entertainment systems for passengers. In this case, a subscription model may become possible since drivers (for instance) may subscribe to data services that could not be delivered by any other providers. Changing the business model doesn't necessarily mean the end of digital terrestrial TV for current viewers, but it does allow DTT operators to add subscription-based services and thus gain an additional revenue stream to support their conventional TV services. This marketplace has enough challenges already, and no company can afford to turn down an opportunity for some more income.

So, to summarise, here are some of the elements that are needed for digital TV to take off:

• A stable retail business model that enables the broadcaster to move the cost of the STB to the consumer.
• Open standards that allow the consumer to be confident their receiver will not become outdated too quickly and that their receiver will be interoperable. More than one or two standards will not work.
• Compelling programming (and other services) that give consumers a reason to make the jump to digital.
• Interactive content that viewers actually want to use.
• New business models that provide revenue streams which can't be cannibalised by cable or satellite operators.

This isn't a complete list obviously, and I'm not going to guarantee that these are correct. But in the current marketplace, something has to be done to increase customer confidence in digital TV as a medium. The DTV industry is still young, and there are still some growing pains ahead. Until the situation stabilises to the point where average consumers feel comfortable buying a receiver, it's unlikely that free-to-air digital TV will take off.