The money ITV gets back on licence payments must be spent reinvigoratin g itself, otherwise it will wither

It turned out to be an unexpectedly stressful summer for many Channel 3 executives up and down the country. Just when they thought they could settle back and enjoy their usual month-long siesta in August the ITC went and spoilt it all by issuing a critically important consultative document on licence renewal. This gives the first insight into how the ITC intends to calculate the annual licence payments for the new franchise period beginning on 1 January 1999. These payments are a combination of a bid price and a levy on advertising revenue. In total Channel 3 pays more than pounds 420m a year to the Treasury.

Ever since that consultative document was issued ITV executives have been wrestling with how to respond to the ITC's suggested approach. To a man they are all trying to make sure the ITC uses a calculation formula that will dramatically reduce annual licence payments. And good luck to them; the licence bids were the daftest way of raising public finance since the window tax.

However, the real issue is not how much Channel 3 gets back from the Government but what the broadcasters are prepared to do with any reductions. There is an enormous temptation for the channel simply to see licence reductions as a way to cut broadcasting costs. This temptation must be resisted in order to protect the longer-term future of the channel. Channel 3, which some in the City believe could save as much as pounds 200m a year in reduced payments must, in my opinion, reinvest at least 50 per cent of that back on screen.

The ITC, if they take their remit seriously, must insist that Channel 3 companies commit to a significantly enhanced service in their new licences. This reinvestment approach benefits Channel 3 and ultimately the requirements of the viewing public. Politically, it's also much more acceptable to government. Investors who believe that licence reductions will go into dividends could be in for a nasty surprise.

At the root of this approach is the fact that the ITC faces an enormous political problem. They simply cannot reduce payments without the Treasury's blessing. Even though the ITC is a public corporation, supposedly independent of government, the reality is that the Treasury will resist fiercely any sizeable reductions. If Channel 3 thinks it can get away with major reductions without the Treasury noticing they'll have to think again - this government needs every penny it can get. There are no votes in giving money back to television companies whose parent companies make record profits. The ITC know this and the only way they can allow big reductions is if the money is reinvested, so the public will benefit.

Channel 3 should not balk at this. It could be the channel's salvation. Reinvested licence payments give ITV and GMTV the opportunity to completely reinvigorate themselves. Channel 4 has increased its programme budget by 16 per cent in 1997, Channel 5 say it will increase by about the same amount, whereas ITV's has only grown by about 3 per cent. With viewing down seven per cent in the past six months, serious investment is necessary. Licence reductions provide that opportunity. If Channel 3 gets between pounds 150m and pounds 200m back then at least pounds 100m a year of it should be spent on screen. This is money to spend on developing writers, money to invest in fresh popular UK drama, to develop comedy, to punch back at the subscription services and secure movie and sports rights, to strengthen poorly funded regional services. This is money to reinforce Channel 3's justified position as the market leader. If Channel 3 takes the short-term approach and sucks the money back into its parent companies' coffers then ITV's decline will be swift.

By investing the lion's share of this money on screen the political case for licence reductions becomes much, much more tenable. Politically it would win support from all the parties involved: the programme makers will be delighted, the advertisers who need bigger and better Channel 3 audiences will be equally happy to see more investment on screen, the viewers will benefit and even the tax man will get the benefit of improved performance and greater tax yield.

Shareholders and company managements should not be horrified. Investing in the future - a difficult concept for Channel 3 companies, driven by the need for cash - is really not so unacceptable. Media investors have in recent years expected quick returns on their investments but a longer- term approach is now much more acceptable - especially amongst the US funds taking an increasing interest in European media.

The greatest threat to the survival of ITV will not come from the plethora of new channels and services but Channel 3's own reluctance to invest seriously on screen. It is also very important that Channel 3 does not allow the City to believe that licence payments will go straight to the bottom line. Such a short-termist approach to the ITC, I predict, will yield minimal returnsn

The writer is former commercial director, HTV

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