MEDIA: SPOTLIGHT ON ITV MERGER - Carlton and Granada's Plan B fails to convince the industry

Can a new pricing scheme allay fears over ITV merger proposals, Jeremy Lee asks.

Things are getting serious over at Carlton and Granada - senior ITV sales people have been forced to cancel their favoured summer pastime of playing golf in favour of finding possible remedies for the Competition Commission that will allow them to have a single ITV sales house.

Not generally known for being the most industrious lot, there is even a rumour going around that some have been forced to work at weekends on coming up with an alternative plan that seems acceptable to the commission.

Given the gravity of the deal and the expense already invested in planning it, it is not surprising that so much work is going into a Plan B.

Carlton and Granada's possible remedy is one of two that has been put before the Competition Commission, and Patricia Hewitt, the trade secretary, has allowed the commission a further two months to study these proposals.

The ITV companies have concocted a remedy based on share for discount deals. Currently the majority of agencies trade their clients' business on the basis of promising a share of total TV spend to a TV station, against a discount off that station's average price.

However, in their remedy proposal the ITV companies are suggesting a new mechanism.

If ITV's share of commercial impacts fall below a specified level, then an agency's share of broadcast commitment to ITV would also fall. However, if ITV's impacts rose above a base level, then the share of commitment to ITV would stay at the current dealt level.

The argument is that this would eliminate the fear that a merged ITV would demand increased shares from advertisers and agencies in order to maintain current levels of discount.

Nick Theakstone, MindShare's investment director, is surprised that the ITV companies have gone ahead and suggested remedies to the Competition Commission without talking to the market first. "It's interesting that they haven't discussed it with us," he says.

But given that the proposal, while stopping short of scrapping station average price, introduces a way of manipulating deals and inventory, this is not surprising.

The effect of capping the agencies' trading arrangements against ITV's impact delivery has dramatic implications.

Some argue this could lead to a situation where ITV would be able to keep its prices artificially low.

They also ask if the ITV companies are determined to push the merger through at any cost in order to benefit from the short-term cost savings in an attempt to deliver shareholder value.

Mark Howe, the managing director of Flextech TV's saleshouse, ids, is baffled by the proposals. "Are they looking to merge to increase ad revenue, keep it the same or decrease it?" he ponders.

While fundamentally opposed to a mechanism that rewards falling audiences, he is sceptical that this is what ITV desires. "The only thing they are looking to do is take ad revenue from other broadcasters," he says.

The station average price system, which evolved from the TV market of the late 70s, when ITV was the only commercial station, is not without its critics. But at least it is transparent, is difficult to manipulate and provides the industry with a common and accepted currency.

The mechanics are relatively simple, although unusually for a pricing mechanism it includes two variables - audience and revenue. Before the beginning of a month and after they have received confirmed bookings for the month, the ITV companies send out price estimates. These are based on the simple equation of dividing the confirmed TV budgets supplied by the agencies by the number of impacts - impacts being a measure of audience levels.

Given that the month has yet to start, these impacts are predictions based on historical viewing patterns of that month and the content of the programme schedule.

For example, if ITV is showing a lot of sport - the World Cup, for example - it is reasonable to assume that the number of impacts for young men will be higher than it was on the previous year.

Prices change throughout the month as the audience data comes through.

Additional revenue is put into the pot if needed, and shortly after the end of the month there is a final price against which deals are reconciled.

Agencies either accrue a debt or a credit on their TV portfolio, which is rolled over and paid back over an agreed period.

Because every TV company discounts off an ITV price and each agency knows the rules of engagement, this is the industry standard. And, given the history of previous attempts to introduce a new way of trading, it is not surprising that there is so much suspicion of a change to this.

In 1993, Media Airtime Sales, a sales outfit that represented Yorkshire and Tyne Tees TV, dropped station average price in favour of selling ratings packages against volume commitments from agencies at fixed prices. It was an unmitigated disaster and MAS found that it could not meet its deals and built up a massive debt, before LWT waded in and took over sales for Yorkshire-Tyne Tees. LWT returned the sales policy to one based on station average price.

"I would be suspicious of any mechanism of any artifice that interferes with the free competition of the buying and selling of TV airtime," Martin Sambrook, the global account director at Media Audits, says.

Theakstone is not optimistic that a change to station average price will work and has vowed to continue to fight an ITV merger. "Fundamentally, there is still a problem with one ITV. If anyone believes that putting a cap on inflation is a viable solution, they are fundamentally wrong," he says.

Until the Competition Commission receives responses to the ITV proposals, we won't know exactly what the industry thinks.

A meeting next Monday with the media buying community will establish this. But the signs are that ITV will be accused of creating a complicated and unworkable fudge of a solution.