Mathew Horsman on the future for ITV

For Britain's commercial TV broadcasters, the next 18 months are likely to be dominated by an increasingly rancorous debate over licence fees, levies and taxes.

We have all heard, ad nauseam, about Michael Grade's crusade to end the controversial levy paid by Channel 4 to the ITV companies, which Grade says is a penalty on success that keeps him from financing hit films, making good drama series and sponsoring investigative tele-journalism. (He doesn't mention all those US sitcoms, but let it pass).

But we have heard less about the ITV case, which has sufficient merit to rehearse here. When the ITV companies bid for their licences under the market-driven 1990 Act, they calculated how much they would earn from advertising over the 10 years of the franchise. They also knew that if Channel 4 was particularly successful at winning market share and hence a bigger slice of advertising revenues ITV companies would be compensated under the levy.

And so it has proven. Once it hit 14 per cent share of advertising Channel 4 was required to pay half the excess to the ITV companies and a quarter to an insurance fund, now topping pounds 80m, that acts as a cushion against future troubles. ITV has benefited to the tune of pounds 169m - being the amount paid by Channel 4 to the Channel 3 companies so far.

The Government is now minded to give Channel 4 at least part of what it has been seeking, agreeing to freeze payments to the insurance fund. That gives Grade another pounds 17m to play with, so maybe he can help to finance another Four Weddings and a Funeral.

But the revolution is still to come, with the prospect of an end to the levy altogether. How fair on the ITV companies is that?

After all, they did their calculations back in 1991 on the basis of the Channel 4 levy. Surely, they should not now be made to suffer?

I agree it is hard to feel sorry for monopoly TV companies with guaranteed profits. It is the regional monopoly nature of the ITV system that led to the licence fee concept in the first place. The Government quite rightly decided that if private companies were going to make a killing out of a state-granted monopoly, then the returns to shareholders ought to capped in some way - through a combination of taxation, the payment of a Percentage of Qualifying Revenue (PQR), and the cash bid.

My only point is that one should not change the rules suddenly and without due regard to the effects on all the players. Far better would be to look at the TV market as a whole, and decide how to make the change smoothly and fairly. That probably means leaving the levy in place until 1998, when it can be reviewed at the same time as the ITV franchise holders can renegotiate their licence payments. This is the "rebalancing" approach, and it makes a good deal of sense.

The Independent Television Commission will be in talks soon with those companies wishing to renegotiate their payments, as foreseen in the 1990 Broadcasting Act. Obviously, those who bid very high - like Yorkshire- Tyne Tees and HTV, will be lining up to lower their annual payments. Low bidders, like Central, will be happy to wait until 2001, the end of the current licence period. The ITC will be making a careful, no doubt well- researched analysis of the changes in the marketplace - market share, advertising revenue - that are bound to have taken place since the advent of cable and satellite and the pending launch of the new Channel 5.

It will be up to the ITC to decide whether the franchise holders can meet their programme quality requirements on the likely revenues they will receive. That determination will doubtless lead to lower payments for some of the high bidders, and the Treasury will see its total take from commercial television drop, by many millions of pounds a year.

But we are still a long way from resolving the question. Channel 4 will continue to push for an early end to the levy, while the Channel 3 companies will want to put it off for as long as possible. The ITC will take advice, and will be lobbied from every direction. There will be plenty of indignant noise from all quarters. When the dust settles, there will be two outstanding questions for the Government to contemplate. The first is to determine the future status of Channel 4. If it gets to keep all its extra money, it will be an even bigger force in the television market. It will be able to make more expensive programming, thereby winning bigger audiences, thereby receiving more advertising revenue. It becomes hellishily difficult to judge what the effect will be on Channel 3 companies, which already complain that Channel 4 is really just Channel 31/2 - ratings- driven and populist, rather than adventurous and public interest-minded. Shouldn't the fourth channel become a commercial broadcaster like the others? It acts increasingly like one now, so why maintain the tattered fiction?

The second outstanding issue concerns the cable and satellite markets. If the Government is to tax the monopoly profits of commercial broadcasters through PQR, why shouldn't the cable operators and Rupert Murdoch's BSkyB pay extra too?

Mainstream economists will react with horror. After all, satellite was a huge risk for its backers. It was not a "licence to print money" like the ITV franchises. BSkyB and the others should be taxed like any other company.

But will a future Labour government agree? Even City analysts are beginning to wonder whether Sky's huge profits are really safe, as a new report from Hoare Govett, the investment firm, will show tomorrow.

Applying similar taxation (including a levy on advertising revenues) to all broadcasters might prove irresistible to a cash-hungry government safely in power and no longer so worried about angering Mr Murdoch and the editors of his Fleet Street newspapers.

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