Business Analysis: ITV's Allen wins more concessions from the regulator

With regional obligations eased, ITV sets its sights on reductions in licence payments
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Happy Birthday ITV, the media regulator seemed to be singing yesterday as it slashed ITV's expensive regional broadcasting obligations.

Happy Birthday ITV, the media regulator seemed to be singing yesterday as it slashed ITV's expensive regional broadcasting obligations.

While ITV's chief executive, Charles Allen, has sometimes struggled to get his message across to investors, he appears to have no such trouble with regulators. As ITV celebrated its first anniversary as a single company last week, after the merger of Carlton and Granada, the City has increasingly been won over too. Certainly the Square Mile embraced the news yesterday on regional programming, with the company's shares closing up nearly 3 per cent.

Ofcom announced that ITV's obligation to broadcast three hours a week of regional shows - excluding regional news programmes - would be halved to one-and-a-half hours. After switch-over to solely digital broadcasting, Ofcom said the non-news regional requirement in the English regions would be reduced to just half an hour a week.

Stuart Prebble, a former chief executive of ITV - before it became a single company - said: "Ofcom has fallen for ITV's line, hook, line and sinker. It's a tragedy, because it [regional programmes] will never come back."

Although the amount of financial gain directly involved in the announcement yesterday from Ofcom was relatively small (up to £10m a year), the regional move did signal that the regulator is prepared to see ITV jettison its public service broadcasting (PSB) commitments.

Those PSB obligations cost the broadcaster an estimated £250m a year. Furthermore, the announcement demonstrated the sympathies of Ofcom to ITV's case and thus pointed to a favourable settlement likely later this year when the regulator decides how much to cut the broadcaster's £200m a year it pays in fees for the use of its analogue spectrum.

The regulatory environment is the key to ITV's financial health, as the gains available here, in terms of eating into that £450m-a-year regulatory burden, are much greater than anything it can achieve at the operational level. While ITV's actual performance still seems to divide opinion - critics point, for instance, to its poor audience figures outside peak-time - on the regulatory front Mr Allen has achieved more than many expected.

Integration of the merged Carlton and Granada has also been remarkably smooth - Mr Allen cannot resist pointing to Morrisons, the supermarket chain struggling to swallow Safeway, as an example of the difficulties other merging businesses have experienced.

According to Mr Allen's detractors, yesterday's move marked the end of ITV's 50-year history of being a regional network. Sharon Elliott, an official at the broadcasting union Bectu, calculated it would mean the loss of up to 300 jobs.

She said: "The regulator's decision to give the go-ahead to ITV to cut its non-news output in the English regions by half is a death blow to regional programming across the country."

This gloomy assessment was resolutely rejected by Mr Allen as "absolute nonsense". He insisted ITV would be spending more in the regions from now on, not less. While programmes about the regions will be cut, programmes made for the ITV network in the regions will increase.

"Ofcom has done a lot of its own research on this. It is not taking an ITV line. Viewers have told Ofcom what they want to see," Mr Allen said.

ITV will invest £40m on upgrading the regional infrastructure and increase the amount it spends on making programmes in the regions from £200m a year to £250m a year.

While Mr Allen likes to emphasise ITV's continuing commitment to the regions and public service broadcasting, this is of little interest to the City, which is just glad of regulatory gains.

Dermot Nolan, the director of TBS, a media consultancy, said: "ITV is now behaving more like a private commercial broadcaster, along European lines, rather than a UK public service broadcaster."

The regional issue is only a small part of ITV's PSB commitments. The broadcaster is now in discussion with Ofcom about being allowed to ditch large swaths of other obligations, particularly its religious, children's and arts programming.

The regulator says the easing of the burden on ITV is simply a function of the digital television era. ITV was forced in the past to broadcast programmes that did not make commercial sense as a condition of holding an analogue broadcasting licence - a payment in kind. Analogue spectrum is scarce, so it was also obliged to pay a fee for holding the licence.

All that is swept away in the digital era, where spectrum is pretty much unlimited. Already well over half the country has digital TV. By 2012, if we meet government targets, we will all be watching digitally.

Ed Richards, the senior partner at Ofcom in charge of its PSB review, said: "We've got to be realistic about the position as we move towards switch-over. The value of the licence is reduced. We can't impose obligations in excess of the value of the licence."

The news on ITV came out of the final report from Ofcom's PSB review, published yesterday. Mr Richards said Ofcom's approach was "routed in audience research, not just what the chattering classes think". He believed that if there were areas of broadcasting that ITV vacates, the gap would be filled by others in the market.

That rather cold analysis does not go down well with programming-makers, steeped in the traditions of this country's television. Mr Prebble said: "I'm depressed that Ed Richards and Stephen Carter [Ofcom's chief executive] have no commitment to public service broadcasting, of any kind. I just can't see that they do."

ITV's management does have rather a lot to feel good about, though. Their multi-channel strategy has finally come together. ITV2, a youth-orientated channel, is now the biggest non-terrestrial station. ITV3, a more recently launched offering aimed at an older audience, is already a top 10 channel.

ITV's terrestrial rivals are in turmoil. The BBC is in the process of sacking thousands of its staff and moving many of the remainder to Manchester. Channel 5 lacks a multi-channel strategy and badly needs to add scale to its business. Channel 4 does not appear to have a strategy at all. Yesterday Ofcom said Channel 4 could not have the £100m in public subsidy it was after.

"You've only just glimpsed what we can deliver as a single ITV," Mr Allen boasted.