Granada's Charles Allen and Carlton's Michael Green are delighted they can now merge. But what does a single ITV really mean for advertisers and agencies? Jeremy Lee investigates.

So what's happened to ITV? Following a Competition Commission investigation, the Government has allowed the two ITV companies, Carlton and Granada, to merge and create Europe's largest single commercial TV company called ITV plc.

Does ITV plc own all of the ITV franchises?

No, but it has the majority of them. Scottish TV, Grampian TV, Channel TV and Ulster TV remain separately owned companies, but they are minnows.

It is probably just a matter of time before ITV plc snaps them up as housekeeping.

ITV has a common on-air look and branding anyway, so viewers could be forgiven for thinking that a single ITV already exists.

Who are the main characters involved?

The Granada chairman, Charles Allen, becomes chief executive of the new company and the Carlton chief executive, Michael Green, becomes its chairman.

But I thought Allen and Green couldn't stand each other? Historically, relations between the two have been fraught - they have very different personalities -but both are now putting on a united front (see Green embracing Allen, left). It will be fascinating to see how long this lasts.

So why did Allen and Green want to merge their companies? To cut costs.

The merger is the conclusion of a decade-long consolidation process. During this period, ITV has suffered from a fall in ratings as audiences fragment. The reasoning is that a merged ITV will be better equipped to fight back. Cynics could also say that the merger goes some way to restoring Green and Allen's reputation in the City - badly tarnished following their involvement in the doomed and costly ITV Digital venture.

What is going to happen to the cost savings? ITV believes a merger will release £55 million in savings that can then be invested into the schedule to attract bigger audiences and make it a more competitive player against the dominant BBC and Sky.

Where will the savings come from?

A large amount of this £55 million will come from redundancies. As Carlton and Granada were previously run as two broadcasters, there is an enormous amount of job duplication in sales, production and transmission that can now be stripped out.

So can we expect to see better programmes? Er, not necessarily. Despite the savings, ITV is maintaining its 2004 programme budget at current levels.

And more money doesn't necessarily equal better quality.

What? So no change on screen? Not so fast. The ITV director of programming, Nigel Pickard, has gone on the record to say that he wants ITV to attract "flighty youth". This is likely to mean that a number of ageing ITV celebrities could finally be pensioned off, a la Cilla Black.

What does this mean for the ITV sales houses, Granada Enterprises and Carlton Sales? Curtains for the majority of those boys too, I'm afraid.

To everyone's surprise, in the wake of the investigation by the Competition Commission, the Government has decided to permit ITV to consolidate its sales teams into one department with the proviso that ITV changes the way it trades its commercial airtime. This is likely to lead to several hundred redundancies.

That's not very nice is it? Not really. ITV sales has been a rather cushy number for years and staff at Granada have just been given pay rises and shares in the company.

Sounds generous. Well, Granada has also imposed pay freezes for several years and as part of the pay rise is in shares, the company does not have to include these as pay when it makes the mass redundancies.

Why did the Competition Commission investigate? Because ITV takes more than 50 per cent of TV advertising budgets, a single sales house is a monopoly and a merger therefore could be anti-competitive. There was also concern from advertisers and agencies that a single ITV sales house would abuse its position as market leader and hike up advertising rates.

Although an ITV merger was allowed under the 2003 Communications Act, a Competition Commission investigation was always a prerequisite because of this. The Commission made its recommendations to the trade secretary, Patricia Hewitt. Hewitt has agreed that a merger would be anti-competitive but has allowed it to go ahead on condition that the way that ITV trades its airtime changes to prevent a monopoly.

Why the surprise over the ruling? With one sales house, ITV now dominates commercial television. The conventional wisdom was that ITV would be forced to sell off both of its sales houses in order for the merger to be approved and assuage advertisers' fears that a merger would create a monopoly.

Isn't the Government doing anything to safeguard advertisers and prevent an ITV monopoly? Yes. Although the safeguards that it has come up with are controversial and will lead to a complete change in the way that TV airtime is traded.

What are the solutions? The Competition Commission has come up with a radical remedy called Contract Rights Renewal.

Sounds complicated. It is. An independent adjudicator is being appointed to oversee ITV's deals with agencies and advertisers to ensure fairness and to settle any disputes. Advertisers and agencies will also be allowed to roll over their existing airtime deals with ITV on the same terms for the next three years if they want to. If they do not, then the deals can be renegotiated and if the advertiser or agency is unhappy, they can ask the adjudicator to investigate.

There is also a clause that links an advertiser's or agency's share deal to ITV with its future audience performance - basically if ITV's audiences fall then an advertiser or agency can drop its commitment to ITV by a proportionate amount without being penalised. This is called the Audience Ratchet Mechanism.

The idea is that the Contract Rights Renewal solution gives advertisers the same flexibility post-merger as they enjoy now.

What has been the reaction to the merger remedy solution? Most agencies and advertisers are disappointed that the Competition Commission did not take their advice for the double divestment solution. There is also concern that the Contract Rights Renewal remedy is open to abuse and will make TV trading more complicated.

Will advertisers be forced to increase their TV share deals to ITV if the station increases its share of audience? Advertisers and agencies can adjust their share deals accordingly but ITV cannot force them to increase them above the levels to which they committed pre-merger.

Will this mean that advertising on ITV becomes more expensive? In theory, no. But price is related to audience levels and advertising demand. At the moment, ITV's audience is relatively stable but it is not taking much ad revenue so it is at its cheapest levels for seven years. If audience levels go down or ad revenue goes up, then the price will increase.

Will some agencies do better out of this than others? Potentially, yes.

The majority of media agencies have umbrella deals with broadcasters that guarantee a share of revenue against a total discount off airtime. The agencies are then free to balance their books by distributing this discount at varying levels to their advertisers, which will pay varying rates.

By offsetting the big discounts offered to new-business prospects against smaller discounts or premiums on existing business, most agencies attract new business. Those agencies that do not commit a large proportion of their TV budgets to ITV will be able to attract more clients that would not want to spend a large amount on ITV and vice versa. Those agencies that spend a lot on ITV, for example if they have over-traded and are paying ITV back, will now find it more difficult to reduce their commitment to the channel as a consequence of the rollover ruling. Agencies that deal on a line-by-line basis rather than through an agency umbrella deal may also look a more attractive option as clients will know exactly how much they are paying for their airtime.

Who will the adjudicator be? Surely not John Billett? This is still unclear, but it will be someone from the media community who both the agencies and the broadcasters find mutually acceptable. A number of names have already been mooted but Ofcom will make the appointment.

Who will pay for the adjudicator? Ultimately ITV will, but in order for the individual to be seen to be independent, the person will draw his or her salary from Ofcom, which will then extract the money from ITV.

When will we know who the adjudicator is?

The new trading structure has to be in place by 7 November, in time for the 2004 round of trading and ITV is in the middle of talks with Ofcom about the precise details of the Contract Rights Renewal remedy.

So who came up with this rather complicated solution? Granada did. The Contract Rights Renewal remedy was one of two that were shortlisted for consideration by the Competition Commission, the other being that ITV should only be allowed to merge if it sold off its two sales houses - the so-called "double divestment scenario".

What individuals make up the Competition Commission? In this case it was a team mainly of academics led by Professor Paul Geroski. The advertising and broadcasting communities were invited to put their arguments against the ITV merger to this body.

Has the Competition Commission recommended anything else? Yes. Because of the complexity of the TV airtime trading market, the Competition Commission has also demanded a wide-ranging investigation into the way that TV airtime is traded. The inquiry, by the Office of Fair Trading and Ofcom, will look at how the system of selling airtime might be changed to make it "operate effectively and competitively".

So is this a victory for ITV? Very much so. As well as being a personal triumph for Allen and Green, it is great news for ITV's shareholders who have seen the share price rocket.

What are the other broadcasters doing in response? For the time being, nothing. However discussions about merging sales operations have been going on for some time, and it will be difficult for the smaller broadcasters to compete with a more powerful ITV. Expect to see some more consolidation, with five's deputy chief executive, Nick Milligan, more than likely at the heart of it.

What's the future for ITV? Although there has been much trumpeting that the merger means ITV becomes the third UK TV power, it is no position to wield this power on the global stage. Following the ITV Digital debacle, shareholders don't have the stomach for any foreign acquisitions. However, a single ITV becomes a very attractive asset and one of the consequences of the Communications Act is that US companies can now buy the broadcaster.

Expect to see foreign bidders including Viacom emerging at the beginning of next year.

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