Fall from grace of Michael Grade's ITV

A £2.7bn loss, 600 jobs gone, the programming budget slashed: these are desperate times for the nation's second biggest broadcaster – and its boss knows it

'Michael Grade has recommended to the board that the conclusion of the regulatory reviews will be the right time for him to relinquish his executive responsibilities and become non-executive chairman, as planned.' (PA)

When Michael Grade went back to ITV it was hailed as a "Restoration drama". As the red-socked television impresario walked into its headquarters in London's Gray's Inn Road, staff left their desks in the hope of a glimpse of the returning hero and burst into a spontaneous cheer when he appeared.

But just over two years later, Grade has conspicuously failed to restore the fortunes of Britain's biggest commercial broadcaster. Yesterday, the man who left his job as chairman of the BBC board of governors to return to the commercial television powerhouse that his Uncle Lew did so much to create, announced that ITV's profits had plummeted by 41 per cent on the previous year, down from £281m to £167m. Including asset write-offs, the loss was £2.7bn.

The staff who once cheered their new executive chairman to the rafters had to hear from him that 600 jobs – about 13 per cent of the workforce – would be lost.

So much for a Restoration drama. Indeed, the collapse in profits was so bad that Grade was obliged to take the knife to some of ITV's most popular dramatic output, chopping the making of shows such as Heartbeat and The Royal, trimming spending on prime-time hits including Sharpe and Wire in the Blood, and slashing by £135m over three years a total production budget that had supposedly been encased in a protective shield.

You had to feel a little sympathy for the former Channel 4 chief executive who could not, when he determined to return to the commercial sector, have foreseen the economic conditions he would inherit. As he stood up to announce ITV's disastrous set of annual results, he complained that "current conditions in the advertising market are the most challenging I have experienced in over 30 years in UK broadcasting".

The broadcasting union Bectu was appalled at the scale of the job cuts, claiming they were a result of failings by ITV's management. Gerry Morrissey, the union's general secretary, said: "He is trying to put a gloss on the situation, blaming the economic downturn, but that's only part of the picture. Their number one priority has been the shareholders and not the viewers or the staff." He said staff levels at ITV had halved to 4,000 in the five years since Granada merged with Carlton Communications. "I think what today's results show is that Michael Grade at the helm of ITV does not work. We will be taking the matter up with Ofcom, which has suggested the light-touch regulation that has got us in the position we are now in."

The former BBC director-general Greg Dyke said: "ITV have made some crucial tactical mistakes. They bought two big lots of football rights when the rates were still very high, which they now can't afford. That was Michael Grade's mistake: he nicked the FA Cup off the BBC and now he can't afford to pay for it. It's not the first time he's done that, either. It's also no use him saying, 'We'll be in great shape once the recession ends' – that's like saying, 'Everything will be great once the nuclear bomb has dropped'.

"How much responsibility he takes for this is up to the shareholders, but my guess is that they'll be asking questions of the management – after all, they've followed a strategy which has turned out to be completely the wrong one. Having said that, you have to have some sympathy for ITV, because if your revenue falls by 20 per cent and is getting worse, what else is there to do?"

Some of the deepest cuts will be at ITV Yorkshire, where 180 jobs will go from its Leeds studios where the soap opera Emmerdale is made. No more editions of Heartbeat or The Royal will be made for the foreseeable future and Countdown, the long-running quiz show which ITV makes for Channel 4, will switch to studios in Manchester.

Media experts said ITV's problems were due to its inability to compete with the internet for advertising revenue. Martin McNulty, of the online marketing agency Trafficbroker, said: "The shrink in ad revenues at ITV isn't simply the result of a global deterioration in the economy, but reflects a fundamental change in the mindset of advertisers. ITV's biggest competitor these days is Google, and that's a major cause for concern."

As executive chairman, Grade knew he had to find a way to make ITV work in a fragmenting media landscape, competing not just with its traditional rival, the BBC, but with the masses of channels now available on satellite, cable and Freeview, and from the internet. A previous ITV chief executive, Charles Allen, had attempted to diversify by spending £120m on Friends Reunited but Grade said yesterday that the social networking site would be sold – for a loss of about £80m – along with the online directory Scoot.

At the start of his tenure, Grade publicly backed Simon Shaps, ITV's director of television, but then replaced him with Peter Fincham, a former controller of BBC1 who has a strong track record in commissioning. ITV still hopes that Fincham can rejuvenate its schedules, though it said yesterday it would be focusing its attention on maximising the impact of proven shows such as The X Factor, Britain's Got Talent and the jungle-based I'm a Celebrity... Get Me Out of Here, which dates back to Allen's time.

Grade brought in the advertising heavyweight Rupert Howell to head up the sales and marketing operation and the former BSkyB executive and former head of Channel Five Dawn Airey as director of global content. Airey enraged Grade when she quit after eight months to return to Five last May, while Howell has been sounding increasingly desperate of late. "We are scrapping for our lives at the moment," he told Broadcast magazine last month.

Grade, who will be 66 on Sunday, was paid £934,000 last year, but did not receive a bonus. That's hardly surprising when ITV's share price – which stood at 148p when it first listed in 2004 – hit a record low yesterday of barely 22p.