Grade to work on ratings table at ITV

As someone who never criticises artistic talent in public, Michael Grade stopped short of naming the TV turkeys that had raised his ire during his first two months as executive chairman of ITV.

He didn’t need to name and shame at this week’s annual results. ITV’s problems go beyond just a few ratings flops: some of its programming was “creatively bankrupt”, he said. It is an assessment likely to be shared by viewers, whose loyalty to Britain’s flagship commercial channel has been tested by repeated offerings in the mould of Love Island and The Sharon Osbourne Show.

Mr Grade’s immediate answer to ITV’s problems is to introduce a culture of innovation and risk-taking and to tackle evidence of bureaucracy. He wants to restore ITV’s glory days in the 9pm drama slot and get ahead of audience tastes, but any commissioning takes time and the results of Mr Grade’s initiatives will not be seen until next year at the earliest.

And while he admits to finding more positives than negatives in his first 50 days, City analysts worry that there is still no sign of the “silver bullet” that could reverse this week’s slide in profits, revenues and ratings.

Mr Grade must also turn around the business with one hand tied behind his back.

The legacy of the merger of Granada and Carlton was the Contract Rights Renewal (CRR) scheme that regulators introduced to protect advertisers from the dominant market position of ITV1 following the tie-up in 2003. It allows advertisers to cut the percentage of their marketing budgets spent on ITV1 if ratings decline.

Three years on and the the system has become a corporate straitjacket. Mr Grade believes the regime is inappropriate in a world of digital TV and leads to a risk averse attitude amongst programmers and production teams. He is lobbying for change, but it looks like any move will be towards compromise rather than abolition.

The mass audiences offered by ITV mean it is in the interests of advertisers, such as Procter & Gamble, to engage in constructive dialogue, but they can hardly be expected to vote for a solution that will end up costing them more. They are expected to ask for any adjustments to CRR to take into account the growing market power of ITV’s other channels.

Mr Grade took his case to advertisers this week with a speech to the annual conference of ISBA, the trade organisation for Britain’s leading advertisers.

Citigroup analyst Marc Sugarman estimated there would be no change in CRR until the 2009 financial year: “We believe broadcasters are generally in favour of a change, but would like some protection from the power of ITV1 in the market, hence the view that some other remedy may take its place.”

While the current mechanism is in place it is hard to see how Grade can fully harness the innovation and risk-taking that he talks about.

Caught in that vicious circle, the company’s share of commercial impacts - audience share – declined by 10% to 33.1% last year, and is therefore becoming a less attractive platform for advertisers. A poor UK TV advertising market has compounded the problems.

The fledgling digital channels ITV2, 3 and 4 have been the one ray of hope, but Mr Grade will need them to do even better this year while he sorts out ITV1. Even so their contribution remains small in the context of the group.

The former BBC chairman has also pledged to make 2007 the year that ITV comes of age as a provider of online entertainment. A new itv.com website is to be launched in the spring, and in the longer term will offer access to the digitised archive. While only 2,000 hours have been digitised to date, this could reach 20,000 hours by the end of next year.

Friends Reunited will be a key part of the internet strategy after growing under ITV’s ownership with underlying earnings of £8.8m (€12.9m), up 52%.

Analysts question whether ITV has justified the initial £120m (€176m) it spent on Friends Reunited in December 2005, but Mr Grade enthused about the site this week, calling it “one of the great undersung jewels of the crown”.

He added: “It’s one of the most important bits of ITV going forward, a massive presence, and it’s profitable.” Among the benefits, he said it presented itv.com with traffic and infrastructure to leverage a host of commercial opportunities.

In addition, Mr Grade launched ITV Local this week in the London and Central regions as part of nationwide rollout of news and local information content.

Alan Flitcroft, head of media at Ernst & Young, said: “If ITV’s new broadband and local internet services are as successful as ITV hopes then the new management could oversee a renaissance at ITV.”

Like other analysts, Mr Flitcroft remains unsure about the prospects for ITV.

He added: “Investors know that ITV is going through a tough time but the directness of the new management is a positive sign.

“The UK TV advertising market has never had a recession longer than two years previously, so ITV’s belief that the UK TV advertising market is due a slight rebound in the first half of this year is a major boost. However, finding new hits for ITV1 will not be easy.”

Sam Hart, an analyst at Charles Stanley stockbrokers, said ITV’s problems may go deeper than just overhauling schedules and embracing the internet.

He added: “The strategic review has highlighted a number of areas for improvement and development within the group, but at best it will lead to a slowing in the rate of decline in advertising revenues.

“Recent trends of audience fragmentation and the migration of advertising revenues to alternative platforms look set to continue for a good deal longer.”