The Long Read: Hubris, skulduggery and "hysterical scaremongering" - the life & death of ITV Digital

This week's long read is a cautionary tale about the risks of putting all your financial expectations in the basket of a new digital television channel.

This week, we have the story of a harsh lesson about football's new financial realities in the Premier League era. When the Football League was left behind by its top 20 clubs in 1992, it was left to find its own television contract. And the emergence of digital television during the 1990s led to the league signing a contract that looked too good to be true, and was. This is the story of the life and death of ITV Digital.

When it comes to the finances of lower division football clubs, it always feels as though Armageddon is just around the corner. It's always there, like the car in the rear view mirror in Duel, a silent but ominous presence that may one day wreak havoc across the entire landscape of the game, but somehow hasn't yet.

When a football club collapses into administration, many of the rest of us have pause for thought, usually there but for the grace of God go I. But the clubs are almost always rescued. In the rare cases where they're not, a replacement is always quickly established. Life returns to normal for all concerned, apart from, of course, those who have lost their jobs, money or the loves of their life as a result of the recklessness of others.

People talk a lot about the inevitability that the football bubble will burst. but this hasn't happened yet, and the remaining space into the calendar into game can grow is rapidly being filled. Never mind the quality, feel the width. History, however, already has the story of what can happen when something as seismic as the collapse of a television channel occurs.

And when this one did, it was due to a mixture of incompetence, wrong-headedness, subterfuge and hubris. It could have strangled the life out of the Football League altogether. It's the story of the company that was doomed, more or less from the very moment it came into existence, and of the collateral damage caused when its obvious contradictions were exposed to the harsh glare of public opinion and the rules of the market.

To understand how this could have happened, we need to go back almost 30 years to the beginnings of digital television in the UK, satellite and cable broadcasting had begun in the 1980s but attaching a satellite dish to the outside of one's house remained anathema to many.

Digital television delivered by cable would make this unnecessary, but there were still issues. The technology owned by the market leaders in the field, Sky, was already somewhat outdated and lacked the capacity to be able to deliver what would be expected, while Sky's debts also limited their ability to update their infrastructure easily.

The source of Sky's debts could be traced back to just a few years earlier, and the vast amount of money paid to secure exclusive rights to live Premier League football. In 1990, the managing director of London Weekend Television, Greg Dyke, met with the representatives of the big five football clubs in England, Manchester United, Liverpool, Tottenham Hotspur, Everton and Arsenal, over dinner.

The plan was to pave the way for the breakaway from the Football League. ITV had already held the rights to live-televised Football League coverage since the start of the 1988-89 season, but Dyke believed that it would be more lucrative for ITV if only the biggest clubs in the country were regularly featured on national television and wanted to establish whether the clubs would be interested in a larger share of television rights money.

The five clubs agreed with the suggestion and decided to press ahead with it. The next step was to dot the I's and cross the T's, administratively speaking, of course. This might have proved difficult. Without the blessing of the right governing bodies, they might not even have been able to get their new league off the ground in the first place. Fortunately for them, though, David Dein of Arsenal had a good relationship with the FA, who themselves did not enjoy an amicable relationship with the Football League at the time and considered this a way to weaken the League's position within English football.

The FA released a report in June 1991 called the Blueprint for the Future of Football, which supported the plan for a Premier League, with the FA as the ultimate authority that would oversee it. At the close of the 1990-91 season, a proposal was tabled for the establishment of a new league that would bring more money into the game overall. The Founder Members Agreement, signed on 17 July 1991 by the game's top flight clubs, established the basic principles for setting up the FA Premier League.

The newly formed top division would have commercial independence from the Football Association and the Football League, giving the FA Premier League licence to negotiate its own broadcast and sponsorship agreements. The argument made at the time was that the extra income, would allow English clubs greater competitivity with teams across Europe.

Although Dyke played a significant role in the creation of the Premier League, ITV would eventually lose out in the bidding for broadcast rights They initially offered £205m for the television rights and later to increase their offer to £262m, but Sky Sports had a friend in high places. The Tottenham Hotspur chairman Alan Sugar's company, Amstrad, was in line to manufacture the dishes and receivers in the event of Sky winning this Premier League bid.

And in May 1992, the ITV football boss Trevor East reportedly heard Sugar on the phone to Sky, urging the satellite broadcaster to increase their bid in order to “blow them out of the water”. BSkyB won with a bid of £304 million over five years. with the BBC awarded the highlights package broadcast on Match of the Day.

On 27 May 1992, the 20 clubs of the First Division of the Football League resigned en masse, and the FA Premier League was formed as a limited company, working out of an office at the Football Association's headquarters in Lancaster Gate, London.

The referees would be kitted out in green and black. There would be cheerleaders. It would be a whole new ball game. Sky Sports Premier League coverage launched in August 1992 with a live match between Nottingham Forest and Liverpool.

The costs, however, were massive. A two-year contract for live match rights in 1983 had cost the BBC and ITV just £5.2 million between them, while the four-year contract, exclusively landed by ITV in 1988, cost £44 million, a four-fold increase per year. By 1992, though, this was £304m, and Sky's 1997 contract would more than double again to £670m.

With Sky already planning a £625m bid to purchase Manchester United, which was ultimately unsuccessful, the company's financial position was more parlous than many at the time would have admitted. The high costs of having set up their analogue service meant that Sky were a little more financially hamstrung when it came to setting up a digital terrestrial servicein the late 1990s.

Partnership, therefore, was the order of the day, and in January 1997, the ITV companies Carlton and Granada teamed up with Sky to form British Digital Broadcasting, BDB. Such a partnership, however, drew the attention of the Monopolism Mergers Commission, and they prevented the companies from pushing ahead together.

Carlton and Granada decided to proceed with BDB without Sky. Sky, meanwhile, had to renegotiate their supply chain and delivery contracts before going into competition with them themselves. And as anybody with the vaguest idea of Sky's business practices will already be fully aware, this can often lead to serious problems for those who would seek to oppose them.

OnDigital was the name chosen for BDB's service, and by the end of the summer of 1998, excitement was starting to mount at the prospect of these two new services starting. Sky launched their service on 1 October 1998, and OnDigital followed just over a month later.

Almost immediately, though, there were problems for OnDigital. Difficulties with supplying set-top boxes meant that the lucrative Christmas sales were missed, while Sky's alternative was aggressively priced and marketed, making the OnDigital service look expensive and unattractive by comparison. The month head start that Sky had with launching in the first place made a difference, as well.

The decision not to allow Sky to bid with Carlton and Granada had proved to be an expensive one for the ITV companies. Their service would have received heavy discounts for access to Sky Movies and Sky Sports, but with Sky in opposition, they charged a full market rate, an extra £60m per year. BDB had set their pricing against Sky's analogue satellite service of 20 channels. When Sky launched their digital service, though, their set-top box was £40 cheaper than OnDigital's and offered 200 channels. By April 1999, OnDigital had 110,000 subscribers, but Sky had 350,000.

By the start of 2000, On Digital's teeming problems had solidified into a perpetual feeling of crisis hanging over the company. Their signal strength wasn't as strong as had been expected, which led to reception problems in some areas, while the boxes themselves had confusing menus and no electronic programme guide.

And in addition to all of this, the encryption on OnDigital's subscription cards was hacked very early on, and the company's failure to properly address this meant that it was soon possible to produce and sell counterfeit subscription cards which would give access to all channels free of charge. There were said to be more than 100,000 of these counterfeit cards in circulation by 2001.

It has even been suggested that Rupert Murdoch's News Corp could have been involved in the hacking of these cards, but this has never been definitively proved. In March 2002, Canal Plus alleged this and took the matter to court, but the case was dropped after Sky purchased one of its subsidiaries.

Similar allegations were made at the time in an edition of the BBC's current affairs show Panorama. Just as British Satellite Broadcasting had found a few years earlier, ITV Digital had run headfirst into the Sky juggernaut and had come off considerably the worse, and it could hardly be said that they hadn't been warned either.

As early as January 1998, the media industry magazine Campaign had been warning that, “With the mix of channels on offer from OnDigital not straying too far from the choices already on offer through analogue, cable and satellite services, the company might have to work hard to build a market.”

Throughout the mid to late 1990s, English football clubs have been continuing their efforts to increase their financial clout. The sale of Premier League television rights for £304 million in 1992 had set in motion a chain of events that had increasingly come to resemble a mad rush for cash at any cost.

Clubs had, however, found to their cost that there were limits to this. Attempts to bring in more money from floating on stock markets have been broadly unsuccessful, whilst wage inflation and the Bosman ruling of 1995 had also radically changed the way in which they did business.

In 2000, the Premier League signed a further contract worth £1.1 billion over the next three years with Sky Sports. All very good news for clubs in that division, but not so good for clubs in the divisions below it, especially those who had been relegated from the Premier League and were hoping to get back up.

Newly emboldened by the arrival of a new chief executive, Stuart Prebble, in the summer of 2001, OnDigital decided to go all-in, bidding £315m to secure exclusive rights to show Football League and League Cup matches over the next three years. It was wildly above the market rate, but the hope was that pay-per-view television would make up that shortfall. 88 pay-per-view matches had been agreed. The Football League almost bit their hand off.

Sky had taken the rights from ITV in 1995 for £75m for three seasons. This was more than four times as much money per season. It was a vast increase. And those involved in the professional game seemed full of their own hubris as well. Barry Fry, then the manager of Peterborough United, said, “Everybody wants to see Northampton vs Peterborough or Cambridge vs Peterborough. It's like the Manchester Derby. They hate each other. Our revenue will double, but I just hope the clubs will spend it wisely and not just splash out huge wages on signing on fees for players.”

OnDigital had rebranded itself as ITV Digital a year earlier, and an advertising campaign featuring the comedian Johnny Vegas and a woollen monkey had proven popular. But there were those who already believed that this particular battle was already lost.

The Football League simply didn't have the same draw as the Premier League, and by the end of October 2001, ITV Digital had just 1.2 million subscribers compared to Sky's 5.7 million; not much more than half of their reported break-even figure of 2.1 million viewers. Viewing figures were pitifully low for matches. Some were so small that they barely registered at all. And as the 2001-2002 season wore on, the warning signs became louder and more clear.

ITV Digital couldn't afford this contract. This much was obvious. But the problem was that the clubs had already started spending the money. There are two schools of thought on the wisdom of this. On the one hand... it might be argued that the clubs were perfectly entitled to do so.

After all, a legally binding contract had been signed and businesses should be able to invest on the basis of contracts that will run over a period of time in the future. This argument, however, may be countered by suggesting that clubs have put too many eggs in the basket marked television and that any pretence of prudence in their spending activity went out of the window as soon as the contract was signed.

As the 2001-2002 season progressed, the situation became increasingly desperate for ITV Digital. In March 2001, the chairman of Granada Television, Charles Allen, wrote to the Prime Minister to warn that the company could collapse altogether without government support.

The Carlton chief executive accused Allen of “hysterical scaremongering”, a level of confusion and infighting which sent a fresh rave of nerves through the City of London. On 27 March 2002, ITV Digital was put into administration.

The company sought to renegotiate its contract with the Football League, offering £50bn for the remainder of the contract that they'd held, but the Football League turned it down. On 1 May 2002, all ITV Digital channels stopped broadcasting except for ITV Digital Sport, which kept going for a further 10 days. By the time the dust had settled, over 1,000 jobs had been lost. By the time that ITV Digital was formally liquidated in October 2002, they owed £1.25 billion. ITV Digital had spent, it was estimated, £750 million to get itself 1.2 million subscribers.

The Football League, with its member clubs having lost £178.5 million as a result of this collapse, took the matter to the High Court, but on 1 August 2002, they lost their case over insuring payment of their contract, with the presiding judge summarising as follows: “In my judgement, Carlton and Granada are entitled to the declaration that they seek that neither company is liable to the Football League for any sums due under, or damages payable for, breach of the June contract made between the League and OnDigital, now ITV Digital.”

There was no guarantee by either company of ITV Digital's obligations under that contract. The ITV companies had agreed to guarantee payments from ITV Digital in their original bid for rights, but this had never been written into the final long-form contract, and as such, Carlton and Granada had no liability in this respect.

Carlton and Granada, in other words, were off the hook. It was an astonishing oversight on the part of the Football League, although not completely uncommon in media contracts at the time. Up a creek and without a paddle, the Football League hastily agreed a television contract with Sky worth £90 million over the next four years.

For Sky, the Football League offered the chance to offer a football package that looked some way towards being complete, matches with which they could pad out their weekend schedules. For the Football League, Sky's offer was the only one in town, and they had little option but to accept it.

The chairman of the Football League, Keith Harris, resigned. The York City chairman and professional tyre kicker John Batchelor made pie-in-the-sky claims that he could rescue the service, telling the press that it is my intention to head up a bid for ITV Digital backed by a consortium of people from motorsport and football.

As with so many of his other public pronouncements though, nothing ever came of it. Carlton and Granada were heavily criticised for washing their hands of a problem that was their creation, and those that would seek to blame anything possible on the government blamed it on the government, with opposition claims that the failure of ITV Digital would mean the postponement of the switch from analogue to digital television. The analogue switch-off happened, on time, between 2007 and 2012.

For clubs of the Football League who had already started spending their ITV digital money though, the after effects of the collapse were quick and they were harsh. Bradford City were the first, falling into administration on the 16th of May. Notts County, Barnsley, Leicester City, Port Vale and York City followed them by the end of 2002. A total of 14 Football League clubs would be forced into administration by May 2006, four years after the collapse of ITV Digital.

Four Football League clubs had suffered the same fate in the previous four years. The economics of it was all very, very simple. In order to make ends meet, clubs immediately had to face falling into debt, relying on their owner to bail them out, or making drastic cuts in order to offset their loss in income.

With clubs unable to make substantial offers to players approaching the end of their contracts, huge numbers hit the free transfer market at the end of each season, while clubs were forced to slash staff from all areas of their businesses.

It was not just the relatively well-paid footballer bearing the brunt of this collapse, but the cleaners, the programme sellers, the commercial staff, the administration, everyone at a club in trouble had the threat of the axe hanging over them. As clubs cut costs, they were also required to raise more funds, so ticket prices increased as they tried to offset this loss.

Some have argued that the Football League has never fully recovered from this seismic event. It has been an ongoing and recurrent theme over the last decade and a half, and it's arguable that we still feel the after-effects of it today.

Football clubs had been flying by the seat of their pants for as long as anyone can remember, but the ITV Digital collapse had an effect almost immediately. Under the new deal, to which First Division - now Championship - clubs reacted so furiously, many believing it to have been signed in haste, their annual television money fell by almost two-thirds, from £2m a year to £700,000 a year, and this in turn completely stagnated football's internal economy.

Building projects were put on hold or scaled back at five different clubs. Premier League clubs had already started looking abroad for new players rather than towards the lower divisions, so already diminished transfer fees were unlikely to save the day.

Ultimately, all Football League clubs had to tighten their belts to some extent or other, and it felt for at least a season as though the entire Football League was teetering on the edge of a cliff, almost close enough to be able to see over the edge before they hauled their way back.

The same thing has happened again since, of course, with the collapse of Setanta Sports in 2009. But that company's contracts with the Premier League were relatively small and had a high resale value. The Football League didn't have that luxury in 2002.

What is probably more notable than anything else about the ITV Digital collapse is that almost no one who touched it comes away from it with their reputation enhanced. If that money was so critical to the well-being of so many of its clubs, the Football League should surely have had a clause written into the final long-form contract underwriting that payment. That they didn't feels like an astonishing oversight or concession, bordering on reckless.

The clubs themselves were broadly overspending anyway. Carlton and Granada made a bad decision after bad decision. Sky may even have been involved in the hacking upon digital cards. The regulators didn't regulate. The government was largely inert.

For all of that, though, the club game below the Premier League survived, just about, and despite occasionally crises at varying clubs over recent years, attendances are up, in the lower divisions, and some degree of regulation is coming. The non-league game in particular is thriving.

But that dependence on external broadcasting revenue below the top level of the game remains a concern, especially as the very top of the game stretches the game to breaking point. One can only wonder what might happen with something like the ITV Digital collapse to suddenly strike the game's finances from out of nowhere again.