Carlton sounds an upbeat note

Investment: Media group remains confident its ONdigital pay-TV venture will pay off

MICHAEL GREEN, the chairman of Carlton Communications, yesterday sounded an upbeat note about ONdigital as the costs of launching the pay- television joint venture dented the media group's full-year profits.

"The technology is now established and working well. Early indications are of strong demand from the public," Mr Green said of the 30-channel service that was launched two weeks ago.

The set-top boxes required to receive the ONdigital service have been in short demand since the launch. ONdigital claims to have received 300,000 telephone enquiries about the service, but many customers are having to wait to receive their box.

However Philips, the consumer electronics group, is now producing 2,500 boxes a day for ONdigital while Pace Micro Technology, the specialised manufacturer, expects to have supplied 15,000 boxes by Christmas.

Digital television cost Carlton pounds 27.9m in the year to 30 September. This includes its share of ONdigital's launch expenses, the costs of supplying programming to ONdigital, and losses from Carlton Online, the group's embryonic Internet venture.

The costs helped pull Carlton's pre-tax profits down to pounds 312m, compared to pounds 316m in the year to September 1997. This wiped out growth in the company's television, film and video production divisions although profits at Carlton's products unit, which makes film-editing equipment, more than halved as a result of the Asian crisis and confusion about technological standards for television in the United States.

Last year was just the beginning of Carlton's investment in ONdigital. The company expects to sink a total pounds 150m into the venture over a three- year period, with the majority of the costs falling next year and the year after. Given that each set-top box carries a pounds 200 subsidy, those losses will increase if more customers sign up.

However, the worry that Carlton will never see a return on its investment is receding now that the service is up and running. "Digital will have a fairly tough start," said Anthony de Larrinaga, an analyst at WestLB Panmure. "But it has good long-term potential that Carlton should be able to exploit.''

If successful, ONdigital will generate growth for Carlton's television division - by far its largest business. Advertising revenues from its ITV franchises could come under pressure if the economy slows down. Meanwhile, attention has shifted to some of Carlton's other businesses. Mr Green was giving little away yesterday, saying only that the company would "continue to examine the potential for expanding further in media and screen-based entertainment".

But yesterday it confirmed to analysts that it is interested in buying Polygram's film library from Seagram in an attempt to cash in on growing demand from television channels for movies. The deal, which would cost Carlton just under $200m, could be completed in the next few weeks.

Meanwhile, the company is still looking to sign up the television rights to sports, especially football, despite breaking off takeover talks with Arsenal last month.

Analysts said that the solid results would help to support Carlton's shares, which have trailed the FTSE 100 index by 10 per cent over the past 12 months, despite mounting a strong rally in recent weeks. "Even though there's no immediate upside the shares should hold their own from now on," one observer said.