BSkyB took a bold move in January when, in the teeth of the economic downturn, it decided to go for customer growth rather than sit tight until the recessionary storm passes. Its chosen weapon to attract new subscribers and extract more money from existing ones? High-definition television.

The UK satellite pay-TV operator cut the price of its HD receivers from £150 to £49, which will require a subsidy of £100 per box and annual incremental costs of £30 million through the recruitment of 1,000 customer-service and installation staff.

Sky is the leader in HD in the European television sector and today offers 33 channels with more than 11,000 hours of HD programmes. No other European operator comes close to matching that: French cable operator Numericable offers 20 channels, plus 100 hours of HD VOD, and rival satellite service CanalSat has 13 HD channels.

As with the development of pay-TV in Europe, Sky could serve as a model for others. But some operators might be uncomfortable with subsidising equipment in the way that Sky is now doing.

The company has pledged to turn HDTV into a genuine mass-market proposition. Sky has recently announced it has 1m HD customers and chief executive Jeremy Darroch declared recently that HDTV was "the new emerging television standard in the UK."

BSkyB will not reveal targets but says that it will be pleased if between 25 and 30 per cent of its subscribers are taking HDTV within two years. That would mean up to three million homes.

The growth of HDTV has been strong rather than spectacular. There were about 7.5 million homes across the world watching HDTV at the end of 2005, rising to just over 42 million at the end of last year, according to researchers Informa Telecoms & Media which predicts 213 million global HDTV homes by 2013.

So far, HDTV has been concentrated in two markets: the USA and Japan, where the technology was largely developed. Europe, led by BSkyB, now has more than four million homes that watch HDTV programmes, compared with 30 million in the USA and 5.6 million in Japan. The UK, accounted for well over a quarter of European HDTV homes: 1.26 million at the end of 2008, with France just behind with 1.12 million. Germany had 483,000 and Italy 375,000.

Europe's first HD channel, the pan-European free-to-air Euro 1080, launched in 2004 and the first HD pay-TV from Nordic pay-television operator Canal Digital launched the following year. But it was only in 2008 that HDTV really started to take off. There are now HD services on cable, satellite, IPTV and digital-terrestrial networks in almost all western European countries and roughly half of these launched only in 2008.

BSkyB might have taken the gamble on subsidising equipment (and its ownership of manufacturer Amstrad makes this easier), but other pay-TV operators are more cautious. In Spain, for instance, the iPlus box from Digital Plus - an HD PVR which offers three Canal Plus premium channels in HD - costs €395. In many cases operators combine HD receivers with PVRs, tying together two new services.

Take-up of HDTV could be stimulated by the growth of the high-definition video format Blu-ray. About 10 million Blu-ray devices have been sold in the USA and while growth may slow as recession-worried consumers cut their spending, Blu-ray is likely to establish itself as the replacement for DVD and equipment costs will then fall sharply. Once people are used to HD for watching the latest movies, they are likely to seek higher quality for broadcast television. High-definition video games are also likely to stimulate demand for HDTV.

HDTV is well established in the USA where more than half of households had HDTV sets at the end of 2008, according to the Consumer Electronics Association. The main US DTH satellite operator DirecTV has more than eight million HD subscribers, with access to 130 channels. Rival Dish Network has around 1.5 million HD subscribers who take about 150 HD channels, while top US cable operator Comcast offers "over 1,000 HD choices" including VOD movies and entertainment programmes and live sports to more than seven million subscribers.

One factor that has driven take-up in the USA has been the notoriously bad quality of standard-definition format NTSC - long ridiculed as "never twice the same colour" - when compared with Europe's PAL and SECAM standards.

Much is made of the use of HDTV as a "differentiator" to enable an operator to gain competitive advantage. BSkyB, for instance, offers its own HD channels and those of some third-party broadcasters exclusively to Sky Digital satellite subscribers. Cable competitor Virgin Media, without access to these channels, has a more limited channel offer.

Pay-TV operators generally use one of two business models for their HD services. Most sell HD channels as a separate premium tier on top of standard-definition packages. But some, such as Canal Digital in the Nordic region and Dutch cable operator Ziggo, include HD channels as part of their basic-tier packages as a way to gain wider take-up.

For pay-TV operators there are two key benefits in adding HD to their line-up. It increases ARPU [average revenue per unit] and helps cut churn by boosting customer loyalty. In addition the offer of HDTV can be used to attract new customers.

For broadcasters, the equations are different. While the cost of making programmes in HD is now little more than making them in SD, the extra capacity for transmitting them might cost three times as much. The plus side is that HD channels get higher viewing levels than their standard-definition equivalents. According to BSkyB, the viewing share captured by Sky Movies is 28.5 per-cent higher in HD homes than in SD homes. This boost to viewing figures, however, is likely to lessen once HD channels become the norm.

Free-to-air HDTV broadcasting has been led by state-funded public-service broadcasters, such as the BBC and France Télévisions. Commercial players have been more cautious and many may wait until a critical mass of HDTV viewers has been established. Germany's ProSiebensat.1 launched a free-to-air HD channel in 2005 but closed it a year ago saying that there were still not enough HD receivers in the market.

HDTV is not simply a question of channels. Cable and IPTV operators are turning to HD films and other content on VOD as a way to differentiate their services from satellite competitors. In the case of Virgin Media, an HD VOD service compensates for the fact that it is not able to carry the linear HD channels of its main competitor, Sky.

Films are among the main content genres that benefit from being shown in HDTV and as the VOD "window" increasingly nears or matches that of DVD (and Blu-ray) release, the attraction to pay-TV operators of offering an HD VOD service will increase, although this will often mean having to go back to the Hollywood studios to renegotiate rights. Some VOD operators have successfully introduced higher pricing for HD VOD, a model that some studios - notably Warner Bros. - are now pushing.

As more operators launch HDTV, it becomes less of a differentiator in itself. Choosing the best business model and getting the pricing and packaging right are critical factors, along with getting the right content - films and sports, in particular - at the right price. With these in place, an operator can use the content to drive HDTV take-up.

Operators that are now defining or refining their approach to HDTV will face key strategic discussions and potentially tough negotiations if they are to reap the benefit of a television format now set to enter the mass market.

5th March 2009