01 June 2008

Something for nothing captures people in a way like no other. The power of the phrase "it's free" makes people suspend their usual criteria for making choices.

In Dan Ariely's recent book Predictably Irrational he underlines this phenomenon by describing a US study in which a high-end Lindt chocolate truffle was offered for 15 US cents next to a more plebeian Hershey's chocolate Kiss costing only one US cent. A substantial 73% of customers chose the Lindt truffle over the Hershey's Kiss. This seems reasonable, as Swiss-made Lindt is perceived as a much better quality chocolate (and therefore worth more) than the Kiss and 15 cents was already a huge discount.

However, when the researchers lowered the price of the Lindt truffle to 14 cents and offered the Kiss for free, a funny thing happened: some 69% of customers chose the Kiss over the Lindt truffle. Why is it that when the Kiss cost one cent customers were willing to pay more for the quality of Lindt, but once the Kiss was free, consumers snapped them up? It appears that "free" carries a kind of super-weight.

Extrapolating this into the TV space, UK broadcasters the BBC and ITV launched Freesat in May, a service that - for a one-off payment for the equipment (set-top box, satellite dish and installation) - offers a permanently free TV service.

The new service should make pay-TV operators very nervous indeed. Yes, yes, I know that pay-TV offers "more" and "better" but the "free" element of Freesat is significant. The Freesat service is being backed by the BBC and ITV who are each putting £3m (€3.8m) a year into the service and creating minimum requirements for how the EPG looks and where channels are positioned on it. There will be 80 channels from launch (many of them regional variations) but more will follow including channels from Five and even an HD channel from ITV accessible via the red button (which means it is effectively made exclusive to Freesat). In effect, Freesat is the satellite version of Freeview, the digital-terrestrial TV offer that has been a tremendous success, now counting 15m users in the UK.

And Freeview's success is what should make the pay-TV industry nervous about Freesat, because no one thought Freeview would be as big a hit as it has been. In fact, Sky is now lobbying to put some of its pay-TV services onto Freeview.

At launch, Freesat already has a competitor and from a rather unlikely place: Sky has been offering a very similar service for four years now. Cunningly called Freesat from Sky, for a one-off payment users can get a set-top box, dish and installation and never pay for any Sky services. Of course Sky doesn't spend a lot of time and energy marketing Freesat (they'd prefer you to sign up for premium pay-TV services, preferably with a telephone line and a broadband service as well) but the pay-TV operator's approach to its service is likely to change now there is a second, non-Sky Freesat on offer because this new version does not have an upgrade path to Sky's pay-TV services built into it.

Sky may not have been heavily promoting its Freesat from Sky service but if customers wanted TV without the pay-TV element, the lesser evil for Sky was to get one of their set-top boxes in those homes in the hope that maybe one day they will be able to entice users to upgrade to a paid-for service.UK regulator Ofcom estimates that there are already about one million owners of Sky set-top boxes that are no longer paying a Sky subscription in the UK. Some of these are owned by people who subscribed to Sky for a year in order to get the "free" box, dish and installation, while some others paid the one-off Freesat from Sky fee (£150) but have never subscribed to Sky premium services.

The important point for Sky is that if one of their set-top boxes is in a home, users could at some point become Sky subscribers. This is not the case with the new Freesat boxes because the set tops currently being offered do not provide a pay-TV upgrade path. The only upgrade that is being planned at the moment for new Freesat boxes is the activation of the ethernet port situated on each one to enable new Freesat users to access internet services such as the BBC iPlayer, the BBC's free online catch-up TV service, which is likely to happen in the next few months.

So, as "free" becomes ever more powerful, the game of tempting subscribers is changing. "Free" is also becoming a more sophisticated concept and there are lots of ways to make money even when the product being offered is labeled "free". The digital economics of the internet has taken "free" centre stage and Google is the master of the new digital economy where reputation (page rank) and attention (traffic) are the new monetisation tools. It's time TV bosses began discovering all these ways to give things away for free and still make money - it happens on the web and TV has to follow. And quickly.