Ulrika Jonsson may have flicked the switch that put ONdigital on air in 1998, but the weather never improved for BSkyB's short-lived pay-TV rival. Four years later, the service, renamed ITV Digital, went under, and if it is remembered at all it is for the adverts featuring Johnny Vegas and a cloth monkey.

It struggled for many reasons, some of its own making: its channel reception was poor, its initial boxes were late, and the immediate reason for its demise was an overpriced £315m contract for the rights to second-tier Football League matches that few wanted to watch. Nor was it helped by the aggressively competitive approach adopted by Sky, which demanded high fees to carry the Football League channel to the point where ITV Digital decided it wasn't worth being on the satellite service. But behind the scenes lurked another problem: piracy.

In 1998, digital TV did not even exist. BSkyB's satellite service was poorer-quality analogue, but it launched Sky Digital in October. Its digital competitor arrived in November, using the so-called terrestrial network of TV transmitters. BSkyB had wanted to be a shareholder, but it was blocked by the then broadcasting regulator, and ITV companies Carlton and Granada ended up with half each. Either company, or cable, was the only way to get multichannel TV. Freeview did not exist.

In an era when most homes could watch just five channels, consumer demand for digital was immediate, with BSkyB signing up 100,000 digital subscribers in a month.

There was the possibility that ONdigital would win a significant market share as the new technology unfolded – and Rupert Murdoch had memories of the last head-to-head pay television battle in the UK: the epic BSB-Sky struggle of the late 1980s and early 1990s which nearly brought down his News Corp, and led to the two businesses merging.

Murdoch's rival, though, never made an effective challenge. One reason was ITV Digital's piracy problem. Stuart Prebble, the TV producer turned chief executive of ITV Digital, admitted in September 2001 that customers were using illegally produced smart cards to watch its services for free. ITV Digital's viewing card encryption technology was made by a subsidiary French company, Canal Plus, whose underlying codes had been cracked. They were circulating on the internet in a way that made it possible to produce pirate cards.

Canal Plus's problem was global: it owned a satellite broadcaster in Italy, Telepiù, where it was in loss-making competition with Murdoch's wholly owned subsidiary Stream. The French company complained that it was a victim of piracy in Italy, and in March 2002 launched a high-profile $1bn lawsuit in California against News Corp's NDS. Canal Plus accused NDS of being behind a "cloak and dagger" operation in which NDS was "engaged in a conspiracy" to hack into its encryption source code and have it distributed online. NDS responded by saying the accusation was "outrageous and baseless" – a denial that it maintains to this day. "NDS has never authorised or condoned the posting of any code belonging to any competitor on any website," the company said in a statement last week. One website that distributed codes was the British THOIC – short for The House of Ill Compute – which it emerged was part funded by NDS. However, NDS said then and now that it did so to "track and catch hackers and pirates".

The drama of the lawsuit, though, came too late for ITV Digital, whose 1.3 million customers were no match for Sky, then at 5.7 million. At the time, it was noted that ITV Digital may have been more popular than had been first thought with British viewers, but by the end of March 2002 the business collapsed into administration, unable to afford the costs of its Football League deal. It was estimated that 100,000 pirated ITV digital cards may have circulating. Defeated, ITV Digital went into liquidation later that year, and it was replaced by Freeview.

Canal Plus's legal challenge came to an end at about the same time. Parent company Vivendi had its own financial problems, and decided to get out of Italy. It sold its pay TV operation there to Murdoch, paving the way for the creation of Sky Italia, today the second largest pay TV company in or affiliated to the News Corp empire, after BSkyB in the UK. As part of the €920m deal, the Canal Plus lawsuit was also dropped, and it appeared the subject had gone away for good.

Only the old computer-hacking story returned, this time with one crucial difference. Panorama has talked to the man behind the THOIC site, Lee Gibling, for the first time. He alleges he was sent by NDS employees "the actual software" to hack into the Canal Plus encryption system used by ITV Digital, which would give "a full channel lineup without payment". NDS denies that it used Gibling or the THOIC site "for any illegal purpose", but the allegations give another part of the Murdoch empire fresh hacking questions to answer on a subject that was long thought closed, and a business – ITV Digital – that had nearly been forgotten.