Media: All about ... ITV, one year on

Profits are up at ITV, but how secure are its prospects?

Didn't Charles Allen look well in the hand-out photographs taken for the ITV results presentation last week? Colleagues had been worried that the ITV chief executive had been spending too much time down the gym in recent months and was becoming a shadow of his former self - but here he was, very much in the pink.

Extremely cheerful-looking too. And no wonder. A year ago, with a consolidated ITV plc a mere matter of weeks into its existence, Allen was subjected to a whispering campaign. A takeover bid was surely on its way. Or he was going to be ditched in a shareholder revolt that would sweep the former BBC director-general Greg Dyke to power.

So who'd have thought, a year on, that Allen would be announcing pre-tax profits well beyond expectations and indeed the wildest dreams of many observers?

No direct year-on-year comparison can be made (ITV plc wasn't trading in 2003) but profits were up about 57 per cent on the equivalent combined Carlton and Granada figures from their final reporting periods. So, gin and tonics, donuts and large bonuses all round.

With promised cost savings well ahead of schedule, ITV's pre-tax profits were £207 million on turnover of £2.05 billion. Which isn't half bad.

The only worry as it enters its second year is audience performance on ITV1 - down 6 per cent over the course of 2004.

Happily, this was somewhat offset by strong growth both at ITV2 and at the recently launched ITV3. But City analysts at the results presentation pointed out that, rather than taking the fight to the competition, ITV2 and ITV3 might merely be cannibalising the ITV1 audience. Wasn't this a worry?

In seeking to reassure his audience on this point, Allen found no difficulty in hitting upon an appropriate analogy. In a moment of almost painful honesty, he said: "I would rather eat my own lunch than someone else eat it."

1. Launched in 1955 as a federation of regional franchises, the ITV network survived as a patchwork of 15 competing media owners until the early 90s.

2. Consolidation proceeded rapidly over the decade despite objections from advertisers that if ITV were carved up between three or fewer companies, such companies would be in a position to abuse their market dominance. Even at the end of the decade, a "single ITV" was regarded as unthinkable by the ad industry.

3. But when the unthinkable inevitably happened, one important caveat was imposed by the competition authorities - a contract rights renewal mechanism to protect advertisers.

4. The architects of the new ITV insisted the merger would not be about holding advertisers to ransom. Also, they argued that the arrogant days of network fat cat culture were over - and that the merger of Carlton and Granada was about the economies of scale that could be achieved on the programme-making side.

5. That claim was undermined before the merged company could even begin formal trading when, following a shareholder revolt, Michael Green, the boss of Carlton and chairman-designate of ITV plc, was ousted. On top of a £13 million windfall for cashing in his Carlton shares at the top of the market, he also received £2 million compensation for "loss of office".

6. In protecting advertisers, CRR also forced ITV to do its utmost on the audience front - and arguably the network hasn't done badly, in the face of the proliferation of digital channels and the resulting audience fragmentation. Its commercial impacts fell by just 6 per cent year on year over 2004.

7. However, the network has hit real trouble on the audience front during the first two months of 2005 - down more than 10 per cent year on year. Last week, Allen was making light of this, implying that it could make good its ratings position over the rest of the year. He also implied that growth on total TV revenues would temper any erosion of market share. Lastly, growth in revenues at ITV2 and ITV3 would help make up any shortfall.

8. That analysis is hugely optimistic, media buyers say. The plain fact of the matter is that, under CRR, ITV's 2006 trading position is £100 million in deficit. It has already given itself a mountain to climb.

ITV

- The network will be relieved that its first year as a single company has been negotiated without major incident. It had much to prove, given all the rhetoric it expended in getting regulatory approval. So, judged against the crude but telling measure of the bottom line, it has delivered.

- ITV's position as the brand leader and largest player in the commercial TV sector means that it is under relentless competitive pressure - and unremitting scrutiny. Its critics will argue that it has bought its bottom-line performance largely by cost-cutting and disposals.

- In that respect, its underlying performance - particularly its ability to ameliorate long-term audience declines - is questionable.

- There's also a very real danger that ITV will take its eye off the ball on the programming side, especially if network bosses believe the BBC, which has been asked to become a public service broadcaster once more if it wants to retain its licence fee funding, becomes less competitive.

- The City will demand that ITV refrains from extravagance on the programming front in order to continue delivering attractive dividends. Allen's chief task this year will be to resist this idea.

What it means for ...

ADVERTISERS

- If ITV1's audience continues to slide, then advertisers will continue to seek ways to shift money off the network - as they will be entitled to do under CRR. Some of that money will find its way back again via ITV2 and ITV3 (if those channels continue to grow their audience) but not all of it. Not by a long chalk.

- The irony is that, much though the ad community grumbles about ITV's culture, the network is unique in delivering the large peaktime audiences that are indispensable in supercharging a campaign.

- They'll want to see some inspired programming this year and hope that ITV1 can really succeed in taking the fight to the BBC.

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