To jump off a cliff or to fly: ITV sees a happy ending but the City hasn't read the script

Michael Grade says content will be king and so will his company. Tony Glover asks his audience
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The Independent Online

ITV has been struggling to adjust its set. Lam- basted for the poor performance of its shows, poleaxed by a poor advertising market and battered by a resurgent BBC, the broadcaster has found the past few years particularly hard going.

But last week Michael Grade, ITV's new boss and formerly chairman of the BBC, unveiled a strategy for doubling revenues from the company's content. The City's response has been a resounding chorus of "let's wait and see".

ITV, which began broadcasting at the start of the television era in 1955, plans to reinvent itself an internet-age multimedia player, while simultaneously turning out world-beating drama series to rival US hits such as Desperate Housewives and 24.

But despite Grade's best efforts to convince investors and analysts that his vision for ITV marks a turning point in the company's fortunes, analysts are not convinced.

UBS Investment Research says the strategy is "not new" and ABN Amro points out that the core element of the strategy, content exploitation, was outlined four years ago.

But there is a consensus that ITV is standing on the edge of a precipice and must decide whether it is going to jump or try to fly. With all data and entertainment being pumped down the same pipe or transmitted over the same wireless networks, the worlds of TV and the internet are colliding and old-fashioned broadcasters need to discover new revenue channels fast. The division between a website and a TV channel is starting to become blurred as broadband connections enable viewers to surf the internet to find whatever programmes they want.

ITV is no longer just up against old sparring partners like the BBC, but also internet players such as Google, Hollywood film studios like Fox, US TV channels turned content producers such as ABC, and home-grown internet TV players like BT Vision.

"We will be focusing on mass consumer content with a long tail," Grade told The Independent on Sunday, revealingly using a hip dot-com term that refers to the web's ability to distribute a product to a wide range of consumers across different media and locations.

His financial objective is to double all content revenues, including internal production, to around £1.2bn by 2012. ITV expects to achieve half this growth organically and half via acquisition. It intends to assemble a £200m war chest via the disposal of non-core assets such as the cinema-advertising businesses CSA and Screenvision, and unutilised property.

"The old ITV competed in a £6bn market – the UK television advertising and production market. The new ITV will be operating in a market worth double that – including new types of advertising, new and diverse revenue streams," says Grade.

But he believes that whatever technology is used as a delivery system to the viewer, content will be king in the digital age. So he aims to focus ITV's resources on what he sees as the network's core competence.

"At the end of the day, whatever pipes and frequencies are used, the key question is: 'Who has got the content?' And the answer is the BBC and ourselves. By 2012, I want ITV to be widely acknowledged as the UK's favourite source of free, original entertainment across all popular platforms and devices, not just on television," he adds.

With more of ITV's production being brought in-house. Grade wants home-grown productions to represent three-quarters of ITV1's schedule, up from today's 54 per cent. He is looking across the Atlantic for inspiration, where channels such as ABC have had worldwide hits with TV series like Lost. ITV hopes to define its entertainment brand with home-grown blockbuster drama series.

This year, ITV is investing around £1bn across its channels in line with its existing programme budget. To contain costs, it will be using new talent and suppliers, commissioning longer runs and seeking commissions where ITV does not fully fund the programme, which was its traditional business model. It also aims to win a greater share of advertising budgets by increasing opportunities for advertisers to fund content.

According to a source at ITV, the company is extremely interested in using product placement, allowing advertisers to display branded goods in drama productions. In the early days of commercial TV, this resulted in incongruously long and lingering close-up shots of products such as coffee jars or washing-up powder. But in recent years, techniques have become far more subtle. Action heroes check expensive watches, witty soap characters exchange repartee over branded drinks, and the best-looking actors wear easily identifiable fashion lines.

No less a technology pundit than Microsoft founder Bill Gates has predicted that internet TV viewers watching a hit series such as Sex in the City will soon be able to use the TV remote to click on one of the character's shoes and be taken straight to the manufacturer's website where they can order a pair online. Blinkx, a UK firm spun out of technology group Autonomy, already offers the technology to make this a reality.

Although the media regulator still bans product placement for TV shows in the UK, there are no such restrictions on the internet. In any case, broadcasters believe the restriction will soon be lifted as the line between internet and television broadcasting becomes increasingly blurred and difficult to police.

Grade intends to leverage ITV's website to provide a growing choice of archived programmes in the form of video downloads. He also aims to start offering consumers online gaming, and plans to increase cyberspace revenues from £34m to at least £150m by 2010.

But UBS believes that broadcasters round the world have yet to find a proven model for making money out of online video content. Challenges include the availability of free programmes from the BBC, which come without advertising. There are also the threats of user-generated and pirated content. And another problem, reckons UBS, is the potential cannibalisation of existing TV ad revenues by the company's internet arm. The broker forecasts online growth of around 25 per cent as opposed to ITV's target of 37 per cent.

UBS adds that it is likely to be at least a year and a half before there is any firm evidence of ITV's planned content and online growth.

ABN Amro analyst Justin Diddams agrees that the jury is still out on whether Grade's new strategy can turn ITV around.

"I don't think people should get excited yet. In 2003, the company outlined its plans for content exploitation, so that is nothing new. I am glad ITV is going to exploit the online entertainment market but it is still a small part of the picture."

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