We are now less than one day away from yet another important milestone in the life of Project Canvas, the standards-based IPTV initiative between 7 parties including the BBC, C4, Talk Talk & BT.  For those not aware, Canvas is attempting to be “Freeview 2.0″ – offering a non-subscription way for people to watch video-on-demand (VoD), from sources like the BBC iPlayer and 4oD, via their TV sets. Like Freeview, the initiative will not actually produce or manufacture any equipment itself, but will licence a trademark to those devices that meet its technical standards, which will include a common EPG.

At some point tomorrow (Wednesday) the Office of Fair Trading (OFT) is due to make public its decision about whether Canvas qualifies as a merger under the Enterprise Act 2002. (It’s worth noting that the decision is at the end of an “invitation to comment” period, which was initiated because Canvas tactically submitted its case to the OFT proactively.)  It is widely expected that the final conclusions regarding Canvas approval from BBC governing body, the  BBC Trust, will follow & match OFT’s decision – so if the OFT decide Canvas does qualify as a merger, it will take a gargantuan effort to get the BBC Trust to approve the BBC’s continued involvement in any challenge or change that might have to happen to satisfy the OFT. The easiest path for Canvas to continue its development is for the OFT to decide the initiative is not a merger.

The technicalities of whether the initiative is a merger, however, will only form one part of the BBC Trust’s ultimate decision about whether to let the BBC proceed. The broader question they have to ask is ‘will Project Canvas simply replicate what the market will do on its own anyhow if left alone?’.

The argument on the ‘yes’ side includes – unsuprisingly – pay TV sat/cablecasters Sky & Virgin Media.  Both have been vocal opponents of the project from the start, but (partly because the initiative has taken so long to progress even to this stage) Sky in particular has recently been demonstrating in a practical way their argument that the market by itself is bringing connected TV to life: they have announced actual  carriage deals for their content on IPTV devices – 3View, & Fetch amongst them (& Xbox360 & PS3 which, while maybe not strictly considered IPTV from a tech definition, are the same consumer result). It added another one to the list too – Sky Player coming to Humax Freeview HD boxes was announced last month – significant because it is the largest set top box (STB) maker in UK.

Another stakeholder who believes that Canvas will duplicate what will occur anyway in the IPTV market is 3view. They are a much smaller outfit than either of the pay TV providers (as well as being UK owned & based), and have a STB that acts as a Freeview HD PVR as well as deals to carry the BBC iPlayer and Sky Player for VoD. 3View’s MD John Donovan made his views on Canvas clear to Digital Spy last month – available here. More vaguely & generically, there’s growing evidence that connected TVs generally will increase – this FutureSource report (PDF here) suggests 20% of flat-screen TVs sold in Europe in 2010 will be connected TVs.  And there is a rumoured, soon to be announced, partnership between Sony, Intel & Google that will bring Android widget functionality to a new range from Sony.

So, what are some of the BBC’s arguments for Canvas, and why it’s needed to boost IPTV penetration? While they don’t take as much room to explain, they are arguably just as important as the opposing case. The first is a paid vs free argument: that if the market is left alone most of the innovation in IPTV services will happen only in subscription TV rather than in both subscription and free-to-air areas. (This is largely where the comparison to Freeview / Freeview 2.0 comes in: the idea that yes, while there is some form of upfront cost in needing to buy a set top box or Canvas TV, for the life of the device the actual content is able to accessed without charge.)

The second argument is pure volume: left alone, the market will grow IPTV usage, but by having a common, clear standard that consumers can understand the implications of, fragmentation will not occur nearly as much, which will result in adoption in many more homes: some modelling included in the BBC Executive’s original application has a high case of penetration being 4.5mill homes by 2012 growing to 9 mill by 2015. Again there is a comparison drawn here between the effect that the Freeview trademark had here on DTT growth, and what could happen with a Canvas trademark.

Now we just need to wait for the OFT’s decision tomorrow, to see if there is a next stage in the development of Project Canvas …

(And an update – 4pm Wed – the OFT have said that Project Canvas has dodged one regulatory hurdle – it has decided that it does not constitute a merger – the full OFT media release is available here.)