While there might not be universal agreement about whether digital will truly be the second television coming or simply a more efficient delivery system, both passionate proponents and those less bullish about the new technology seem to agree on one thing: The children shall lead.

But despite the fact that it’ll be the tech-savvy kids driving penetration and playing a pivotal role in defining market realities, the transition to digital–and the kids diginets leading the charge–continue to face significant operational, legal, financial and social obstacles. Nicky Parkinson, marketing director for Nick UK, notes that while ‘we still have a very strong free TV market [in the U.K.]…, the digital market will potentially polarize free TV versus premium subscription channels.’

As digital penetration increases, the debate over who should be allowed to transmit what and to whom has generated some hotly contested issues. In the U.K., for example, Nickelodeon and Cartoon Network have been vocal in their opposition to the BBC’s plans to launch two new digital kids channels, in no small part because there are currently 23 kids networks already competing and because they feel allowing the BBC to transmit digitally free-to-air gives the channel an unfair–and unwarranted–advantage.

‘The government’s criteria for allowing the BBC to have digital channels was that they were supposed to fulfill an area where the commercial sector had, in fact, failed, and they were supposed to drive digital penetration up,’ explains Parkinson. However, those opposed to the BBC’s digital kids plot, which the government approved last month, point out that the new nets are unlikely to fundamentally change penetration figures since 80% of households with children already have digital.

Finn Arnesen, VP of programming, development and acquisitions for Cartoon Network Europe, further contends that ‘when the BBC launches shows, it excludes people from sharing programming.’ Some have also accused the BBC of playing with a blatantly commercial agenda because the preschool channel would prominently feature Teletubbies and Tweenies, each of which is worth US$150 million in licensing revenues. Others believe the public’s money would be better spent investing in BBC4 in order to encourage an older demographic to embrace digital. Such contention only promises to increase as the government-mandated transition to digital is fulfilled.

Europe’s five major TV territories–the U.K., France, Germany, Italy and Spain–ended 2000 with more than 15.7 million digital pay-TV households combined, while terrestrial accounted for an additional 900,000 homes. In Europe, satellite remains the primary mode of digital delivery, followed by cable and then free-to-air terrestrial. There is concern, however, that terrestrial digital will eventually fail as a delivery system because of the established strength of the pay cable and satellite services. As a result, some countries, such as France, are actively promoting terrestrial digital television. In July 2001, the French broadcasting regulator Conseil Superieur de l’Audiovisuel announced that it was putting 22 national commercial channels up for grabs.

Of all European countries, the U.K. is the digital leader, thanks to the efforts of Sky, which has aggressively promoted the technology via free set-top box giveaways. Currently, it is estimated there are nearly seven million digital homes representing a 26% penetration–with an astonishing year-to-year growth of 129%.

In stark contrast to this rosy picture is Australia. Digital terrestrial television launched in most Australian capital cities in January of this year, but the US$365 price tag for set-top boxes is prohibitive for most consumers and, as a result, only an estimated 2,000 boxes have sold.

Ian Fairweather, GM of Nick Australia, explains that unlike the U.K., where set-top boxes are used for pay-TV services, the boxes that are on sale in Australia ‘are for receiving digital free-to-air signals. The cost seems outrageous because you can buy a small analog television for about that much money. All we’ve done is convert a digital signal into an analog one, so you can look at it on your analog set. You’ve got to wonder, what’s in it for anybody? Why bother? Because you can see the analog signal anyway.’

In an effort to increase penetration, Australia’s pubcaster the ABC was granted the right to multi-channel in August, while terrestrials are denied the opportunity until 2008, the year the government has set for analog turn-off. Despite the head start, ABC Kids still faced a difficult launch, the biggest problem being the lack of an audience. With such a paltry number of set-top boxes in use, ABC felt compelled to enter into deals with pay services Optus and Austra, which have 200,000 and 450,000 subscribers respectively, a move that struck competitors as highly suspect.

‘It’s a very unfair advantage, but it gets worse,’ says Fairweather. ‘They are also lobbying the government for a must-carry provision. Now that seems to contradict the motivation and the whole purpose of going digital. Why would you bother going digital? You might as well subscribe to pay-TV because then you get the dozens and dozens of subscription channels, plus the free-to-air, plus ABC Kids. You’re only paying a subscription fee per month, and your set-top box is free.’ That the publicly funded ABC is at a financial disadvantage with the commercial networks for acquiring new programming also confounds Fairweather. ‘Why do they feel compelled to do a dedicated kids channel on digital when resources are so scarce?’

However, elsewhere in the world it’s not all sturm und drang. Canada, for example, recently approved the launch of 21 digital specialty channels, including Discovery Kids and BBC Kids, with another 262 digital licenses pending. The purpose behind the new channels is to boost penetration. As of September, Canada will have roughly two million digital households out of a total 10 million TV homes. Like the U.S., Canada has a high cable penetration at 80%.

Although the Canadian rollout hasn’t been fraught with the tensions facing the U.K. and Australia, Susan Ross, VP and GM of children’s television at Corus Entertainment, which is launching Discovery Kids, says just getting the channel noticed will be obstacle enough. ‘Discovery Kids is the new kid on the block, so the first thing to do is build awareness for it.’ Ross says that will be accomplished by promoting DK on Corus’s YTV and Treehouse TV. But, she adds, ‘it’s a little more complex this time because it’s not a matter of simply calling your cable company to find out if it’s going to be carried on the basic cable or analog tier; you’ve got to have the equipment or you’ve got to have a satellite package. So we will use YTV to drive interest among kids six to 12, who will then hopefully influence their parents to take the next step if they don’t currently have a digital box or a satellite service.’

Susan Schaeffer, VP of marketing for YTV and Discovery Kids at Corus Entertainment, says the key to building awareness and distinguishing any channel in such a crowded TV market is having a known brand. The advantage is twofold. ‘You’ve got to get in that front door with the distributors first, and a recognized brand makes that an easier proposition.’ Second, an established brand isn’t starting from ground zero in terms of building an audience. ‘It will take a lot more financial backing to launch a non-branded offering. Because digital channels have very, very lean financial models, being tied to an already strong brand like Discovery will give us a real leg up.’

In the U.S., digital home penetration now stands at between 24% and 26%, according to various estimates. An FCC report cites 69 million cable customers and 15 million satellite homes out of the more than 100 million homes currently in the State-side television universe, resulting in a combined penetration of 83.8%. As in Canada, the digital channel rollout has occurred without much fanfare.

Mark Offitzer, GM of Nick’s Games and Sports Network, says the diginet ‘will be in six million homes by the end of this year; we are actually doing better than our original projections.’ GAS has proven successful enough that Nick Latin America and Nick Australia are looking to put GAS programming blocks on their channels, and discussions have also begun with some European territories to launch GAS channels. Offitzer notes that ‘the only obstacle so far is penetration. Until digital reaches critical mass, 25 million to 30 million, it’s always going to be difficult to bring sponsors in because there are not enough homes to make it worth their while.’

However, Offitzer points out that a diginet’s narrowly targeted audience can be a boon for advertisers. ‘We have proven that even with a small penetration, if it’s a solid idea, advertisers are going to come along and want to play. We had two presenting sponsors in milk and Nabisco this year–it wasn’t about achieving a tremendous household number for them; they wanted to reach a very targeted audience. They may not be in 60 million homes, but they could be in six million homes of kids who like games and sports.’ Howard Litton, director of programming for Nick UK, agrees. ‘Having a channel that is more finely attuned enables a more finely tuned ad sale.’

Cartoon Network’s Arnesen says even though digital will drive more niche channels and programming, the cumulative effect will actually bring more people to the screen, which will benefit advertisers. He says research shows that ‘people watch more TV in multi-channel households, and they watch for longer. So you’re getting more overall viewing, but at the same time you’re getting more and more niche.’

But while the numbers reflect the growing public acceptance and appetite for the reality of a digital universe, the industry is struggling to create business models to fit digital’s brave new world. New channels will have to figure out a way to fund original programming to attract viewers. John Morris, VP of international television and video for HIT Entertainment, says content providers are also feeling the digital impact in rights negotiations. He says longtime clients still transmitting in analog are now demanding digital rights, without offering any significant compensation in return. ‘However, the most important thing in the end is visibility, so there must be a balance between protecting a property’s rights and upping the number of eyeballs that see it.’

In Australia, the issue of digital rights is at the center of a new controversy between ABC Kids and Nick Australia. Nick’s Fairweather says ABC Kids has picked up ‘blocked digital rights for anywhere from 50% to 80% of programming that Nickelodeon owns the pay-TV rights to–meaning it’s almost like a second Nick channel.

‘My argument is with the ABC for doing this deal and with the distributors. If they’ve given us the exclusive rights, what on earth are they doing giving the rights to the ABC into our territory? I am going to spend all of MIPCOM talking to our distributors to explain this because, the way I see it, they are licensing the property twice.’

As a result, Fairweather says from now on, Nick Australia will negotiate ‘to buy free-to-air digital rights to cut out the ABC. If we can’t do that, we’ll walk away from the program.’ As far as a long-term solution, Fairweather says ‘the industry will have to work out a new way of dealing with things–it’s a consequence of technology going faster than we can sort it out.’