Message to Sky; don't write off ITV Digital yet

Trotting into ICI; Railway confusion
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The Independent Online

The Government is consulting the City over what to do about ITV Digital. A number of media analysts have been approached and asked for their views. ITV is bleeding cash, and there is growing concern over whether it will survive. In any normal business, the market would decide on its fate and as likely as not it would be either closed or sold. But broadcasting is no ordinary business and, in any case, there's a key public policy objective involved.

Ministers want ITV Digital to succeed so that they can switch off the analogue signal and sell the air space to the highest bidder. Not everyone can get cable, and a sizeable proportion of the rest either can't or won't take Rupert Murdoch's Sky. If the Government wants to switch off analogue, the default platform of ITV Digital must therefore be made to work, at least in some shape or form.

For ITV Digital's two owners, Carlton and Granada, the problem is easily described. They are spending much more than they can afford, given the present depressed advertising market, on trying to make ITV Digital succeed. But they are determined not to be bamboozled by the City, Sky and the cable companies into closing or selling out of a business they believe will eventually be worth a lot of money. Things seem terrible for ITV Digital right now, but they could soon look better.

The Government's "Digital Action Plan", designed to make an unreliable signal more robust and generally improve coverage, should help reduce churn and increase customer take-up. New subscriber figures out this week will confirm that churn is already coming down and that subscribers numbers are growing fast. ITV Digital's costs are being cut aggressively too, bringing the breakeven point down from 2 million to 1.7 million subscribers, a level which should be achievable by the end of next year.

Then finally there is the Office of Fair Trading's investigation of the rates charged by Sky to ITV Digital and cable for its premium movie and sports channels. A ruling is imminent and if, as expected, Sky is forced to reduce its prices, the margin ITV Digital earns on the channels will be that much higher.

ITV Digital's rivals, Sky and cable, have a big interest in seeing the venture roll over and die. The service would also neatly complement their own. Not everyone wants Sky's Rolls-Royce service. If a "Sky-lite" could be offered alongside, it would make an outstanding business proposition. Sky would like ITV Digital to close, but it would like to own the platform even better. Well, you never know with this Government, but even Mr Blair might encounter resistance in getting that one through his back benchers.

Then finally there is the free-to-air model. Under this approach, ITV Digital's subscribers would be either sold or cancelled but the digital signal would continue for the free-to-air channels – the BBC, ITV and others. This would seem even more of a no-hoper than ITV Digital, since you would still have to persuade the public to buy a set-top box or integrated digital TV to receive the service. Why would they do that for channels they can largely get free already?

In short, ITV Digital may be around for longer than both the City and rivals assume. If, on the other hand, ITV does decide to throw in the towel, then the Government has a hell of a problem on its hands. Solutions are hard to see.

Trotting into ICI

How times have changed. Poor old Charles Miller Smith is giving up his role as chairman of ICI without even the customary gong that once went as a matter of course with the top job at this one-time "bellwether of British industry". That description was never a particularly apt one and with the passage of time it has become even less so.

The labour intensive bulk chemical interests are now largely gone, and the group's world leading pharmaceuticals business was demerged in the mid 1990s. Today, some 40 per cent of ICI's revenues and a third of its shareholders are in the US. Now its new chairman, Lord Trotman, originally from these shores but for many years a US resident, is going to run the show from the US as well.

Mr Miller Smith's rule, first as chief executive of ICI and then chairman, has been a pretty dismal one from a shareholder-value perspective. It was all meant to be so different. When he joined the company in 1995, he was the first outsider ever to become chief executive of ICI and the City had high hopes for him. Then, in a transforming £5bn deal, he bought the business he used to run, Unilever's speciality chemicals interests. The idea was that the acquisition would be funded by selling out of bulk chemicals. In theory, ICI would end up a far less cyclical, speciality chemicals company – starch, flavourings and paints.

But it didn't work out that way. The market collapsed before Mr Miller Smith could make the necessary disposals leaving the group with a massive debt problem, the remnants of which is still around today. Speciality chemicals also proved a good deal more cyclical than thought. It has become an unfortunate truism about ICI that just as one problem gets resolved, another comes along to upset the recovery story. The latest pole axing is thanks to the now severe downturn in the US. The result is that Mr Miller Smith finds himself on the way out with the shares at close to their all time low.

Alex Trotman was once a highly successful chairman of Ford. Shareholders will hope he's retained some of that magic, for it's about time the company's luck changed.

Railway confusion

Just when you thought Stephen Byers could not possibly make a bigger botch job of Railtrack, along comes another train load of trouble for the Secretary of State for Transport to deal with as he wantonly runs the network into the ground. If there is one constituency which Mr Byers might have expected to back him, it is the train operating companies who have been engaged in hand to hand combat with Railtrack almost since the day it was born.

Not so, as the comments of National Express's Phil White amply demonstrate. Perhaps Mr Byers would have got a more sympathetic hearing had he bothered to talk to the train operators first. National Express runs one in every five of our trains and will presumably therefore feature prominently both on the board of Mr Byers not-for-profit Newtrack and in his plans for the "wheel and track interface". But Mr White has not heard a dickie bird from the minister.

Mr Byers is a minister who is making it up as he goes along. While the Secretary of State plays to prejudice by denying Railtrack shareholders a penny in compensation, he is planning to endow Newtrack with £1bn of taxpayers' money for when things start to go wrong.

At the same time, his civil servants are dispatched to tell the transport select committee that black is white and that a not-for-profit trust will have more not less incentive to perform efficiently now that it has been stripped of its shareholders. This is the polar opposite of the argument employed to justify the Tube PPP. On every level, Mr Byers seems to be sinking into a hopeless mire of confused thinking. The railway we end up with will certainly be different, but it scarcely looks likely to be any better.

j.warner@independent.co.uk

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