Jeremy Warner's Outlook: ITV rediscovers its licence to print money

Aviva acquires RAC - Hampton review
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ITV was once famously described as a licence to print money. Few would have recognised it as such during the disaster years of ITV Digital and mayhem in the advertising market, when it became more of a licence to burn the stuff, yet all of a sudden ITV seems once again to have rediscovered the printing presses. Pre-tax profits for last year leapt 57 per cent as advertising came surging back and the deep cost cuts associated with the merger into a single ITV company worked their magic on the bottom line. The big question; can it remain the cash cow it has become?

ITV was once famously described as a licence to print money. Few would have recognised it as such during the disaster years of ITV Digital and mayhem in the advertising market, when it became more of a licence to burn the stuff, yet all of a sudden ITV seems once again to have rediscovered the printing presses. Pre-tax profits for last year leapt 57 per cent as advertising came surging back and the deep cost cuts associated with the merger into a single ITV company worked their magic on the bottom line. The big question; can it remain the cash cow it has become?

Charles Allen, the chief executive, is confident it can, not withstanding the worrying new loss of market share the core ITV1 channel chalked up in the first two months of the year. In his own eyes, he's stabilised the main analogue channel and he's created some exciting new growth businesses in ITV2 and 3, interactive and ITV.com, the latter of which taps into the potential for subscription TV delivered via broadband.

As for the core channel, Mr Allen believes it perfectly capable of holding its own at or above 20 per cent market share. On top of that he hopes to achieve further considerable cuts in the channel's bandwidth, regulatory and infrastructure costs, currently standing at £450m a year. A further significant boost might be achieved by raising the amount of advertising allowed from seven minutes airtime per hour to the nine minutes that rules in digital TV and in America.

These are regulatory concessions that are plainly worth working for, yet they don't of themselves provide any kind of long-term answer to the strategic bind ITV finds itself in - which is the damage that progressive fragmentation of the broadcast landscape will do to the mass-market attributes of the core channel. You cannot indefinitely shrink your way to success. Further cost reduction is only a short-term palliative. The new digital channels plainly mitigate the situation to some degree, but there will soon be a lot more competition from where they came from. In this market place, ITV is just one of many, the legacy of the duopoly it once enjoyed with the BBC just a distant memory.

However, there is at least some cause for optimism. As a condition for renewal of the licence fee, the BBC is being asked to concentrate on public service broadcasting and forgo the ratings war. As I've argued before, this is unsustainable in the long term, for without mass-market appeal, the justification for a BBC supported by a universally imposed tax disappears. For ITV, on the other hand, it's just what the doctor ordered.

The London sophisticates who dismiss ITV as a creative desert seem to have forgotten the roots of commercial TV's success in Britain as a popularist mix of game shows, soaps and bought in American pap. For the licence to print money days of ITV you need to go back to the time of Michael Grade's uncle, Lew, and his Associated Television. There was little creative or high brow about what he did back then, just an instinctive sense of what the average council house dweller really wanted.

Lew Grade's early programming finds its mirror image today in I'm a Celebrity, Get Me Out of Here and Footballers' Wives. Mr Allen is plainly going to have to invest more heavily in programming to defend his position, but he won't succeed on the diet of "creative" public service programming that Lew Grade's nephew, Michael, is being forced into as chairman of the BBC.

Aviva acquires RAC

Aviva, owner of the Norwich Union insurance brand, was rumoured to be one of the bidders for the AA when the roadside assistance service was put up for sale by Centrica last year. In the end, it got outbid by private equity. In the very full price Aviva yesterday agreed to pay for the AA's main rival, RAC, it seems determined not to make the same mistake again.

The attractions of the RAC to Aviva obvious while the £80m of cost savings it achieves by crunching together a large part of RAC's back office functions with its own and outsourcing the rest seems to more than justify the premium. It seems unlikely private equity could match the price given the synergies Aviva can achieve.

For Aviva, RAC may in any case be a better acquisition than the AA. RAC is still relatively underdeveloped in financial services, whereas at the AA insurance sales to members is already half the business. The opportunity for Norwich Union to cross sell is therefore that much higher. For an insurance company, roadside assistance provides a ready made distribution channel.

Yet though the logic is compelling, it doesn't always work as planned. Centrica hoped for the same cross-selling opportunities when it bought the AA. A few years later, it was forced to recognise that there was virtually no cross selling going on at all. The strength of the underlying business enabled Centrica to exit at an impressive profit, but the deal's raison d'être was never fulfiled.

Given the success of the AA in financial services, there's every reason to believe Aviva will fare better. Even so, the customer is much more savvy than he used to be and Norwich Union will only succeed in selling more insurance to members of the RAC if it can offer genuinely better value for money than is available elsewhere.

When he's not running Aviva, Richard Harvey, the chief executive, doubles as chairman of the Association of British Insurers. It was a busy day for him yesterday. On top of the annual results and the RAC takeover, he was also delivering the keynote speech to the ABI's biennial conference in which he detailed a five point action plan for restoring public trust in the savings industry. I don't want to knock Mr Harvey, is one of the industry's good guys, but this really was a load of platitudinous nonsense.

The savings industry will never win back the hearts and minds of the British public on a platform of best practice codes and enthusiastic support for a new "Financial Services Forum", whatever that may be. The solution lies rather with vibrant competition and value for money products that put the interests of the customer first. If the purpose of the RAC takeover is to stuff the poor members with inappropriate savings plans, then it will fail.

Hampton review

There is no issue more guaranteed to make the average businessman foam at the mouth in rage than the supposed growth in regulation. This is not a phenomenon confined to these shores; it is truly global in nature and indeed much of the increase in the regulatory burden that British industry suffers from comes from Brussels. Yet we do seem to have a particular penchant for it right now. We gold plate European regulation that other member states manage either to dilute or wholly ignore, and we impose vast swathes of our very own home growth regulation on top.

For instance what is the purpose of the soon to become active Gangmaster Licensing Authority, with its annual budget of £22m, that cannot adequately be dealt with by the existing Health and Safety Executive? Every new crisis, seemingly, spawns its own new quango, in the case of the gangmasters, the Morecambe Bay tragedy. Presumably it was something similar which in the dim and distant past was responsible for the Bee Health Authority (why bees and not ants?), and the Security Industry Authority, which regulates bouncers. Do we really need a Wine Standards Board or an Agricultural Wages Committee?

The Centre for Policy Studies, a right wing think-tank, recently detailed an astonishing 111 new quangos and regulators that had come into existence since Labour gained power, many of them with big budgets and overlapping functions. Even the ministers responsible for these job creation schemes have become embarrassed by their proliferation. Whether they are prepared to do anything about it remains to be seen.

The Philip Hampton review on government red tape, due to be published with next week's Budget, recommends a substantial cull. On past form the Chancellor will welcome the findings, order another review and then quietly forget about them. One quango that might actually be worth creating would be the Labour Review monitoring committee, for hardly ever does anything become of these "initiatives". We can only hope the Hampton recommendations aren't left to gather dust along with all the rest.

jeremy.warner@independent.co.uk

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