ITV's Grade seeks digital review as advertising revenue falls

Michael Grade, the ITV chief executive, warned yesterday that the company needs a swift resolution of the public service broadcasting debate in the face of a sharp decline in television advertising.

ITV's half-yearly figures, published yesterday, included a goodwill impairment charge of £1.6bn, a £35m cost-cutting programme likely to include job cuts, and a halving of the dividend – alongside predictions of a 20 per cent drop in ad sales next month.

Revenue was up 3 per cent to £1.03bn. Adjusted profits were down by 28 per cent to £91m – largely due to a £29m rise in ITV1's sports costs thanks to Euro 2008, according to the company. But inclusion of the massive goodwill writedown takes the company to a £1.53bn loss.

The problem is that the TV advertising market is starting to succumb to the wider economic gloom. So far this year, ITV has done reasonably well. Ad revenues for the first eight months were flat, compared with a 1 per cent fall in the market. But the horizon looks dark. The market will drop by 17 per cent next month, according to ITV, and the company itself will see a 20 per cent fall-off compared with last year's particularly successful September, buoyed by the Rugby World Cup.

The result is not just the devaluation of the broadcast business, but also a dividend slashed from 1.35p to 0.675p, revised targets in the high-profile turnaround strategy, and an extra £35m of savings to add to the £81m-worth of schemes already in place. But what ITV really needs is a change in its regulatory status as a public service broadcaster (PSB), says Mr Grade. Under the current arrangements, ITV's PSB obligations cost the group around £300m every year, in return for a free broadcast licence. But with digital switchover looming, the system no longer makes financial sense and Ofcom is reviewing possible alternatives.

Mr Grade denied that he was threatening the regulator but was adamant that a resolution is needed, fast. "We would prefer to retain PSB status but not at any price," he said.

"Ofcom understands our predicament, but does not quite understand the urgency. Never mind next year, we could do with it next month. There is an important connection between the goodwill impairment and the PSB review," Mr Grade added. "It is unarguable now that Ofcom needs to take quick action to redress the imbalance between the value of the licence and that which we are required to provide."

Notwithstanding the stalling ad market, and shares languishing at little more than a third of last autumn's price, ITV is holding its own – delivering 6 per cent more "advertising impacts" and maintaining an overall market share of 41.4 per cent. But while the group's management may say that September's declines cannot be extrapolated out to the fourth quarter, their strategy suggests otherwise.

"If this was a one-month blip, they wouldn't act this quickly to lower the dividend and take a goodwill impairment," Paul Richards, an analyst at Numis, said.

The only upside is the added weight given to discussions with Ofcom, said Mr Richards: "The pace of deterioration and halving the dividend highlight that this is not hot air from Michael Grade and shows how urgently ITV needs the process to go through."

The City remained broadly supportive yesterday, putting the 5.83 per cent share price fall down to rises in the wider market earlier in the week.

Simon Lapthorne, at Blue Oar Securities, said: "ITV is outperforming commercial rivals and ad revenues are flat, which is pretty good given the market's overall decline. Michael Grade is trying to make a silk purse out of a sow's ear."

Digital switchover playing havoc with broadcasters

The 2012 digital switchover, when analogue broadcasting will cease, is playing havoc with the economics of public service television.

Under current arrangements, the regulator gives the BBC, ITV and Channels 4 and Five free access to radio spectrum for terrestrial TV. In return, the public service broadcasters (PSBs) meet quotas for less lucrative programming such as regional news or UK-originated content, and the commercial channels also comply with advertising controls.

But as switchover nears, and viewers abandon analogue, the value of the PSB licence is declining and will, ultimately, be outweighed by the cost of the obligations. The question is both when the tipping point will be – ITV says as early as next year – and also what model is pursued thereafter.

The situation varies between the different organisations. Unlike state-owned Channel 4, publicly-listed ITV is at liberty to walk away from the PSB licence altogether. But even with analogue turned off, ITV will still need a licence for digital terrestrial broadcast. No free licence will mean negotiation with commercial multiplex operators, which is likely to cost in the tens of millions of pounds.

Ofcom's PSB consultation outlines four options. One involves all five PSBs, including ITV, remaining as licence-holders. The other three suggest mixed models with piecemeal competitive funding.