Grade to set out stall for the future of ITV

Michael Grade appears for his first public role in the ITV plc soap opera today, with the City and the viewing public relying on him to revive the company's on-screen performance.

For the first time in years, investors are viewing ITV's prospects with optimism. Many City analysts recommend the shares as a "buy" with bullish share-price targets. Even the company's problems with programmes that depend on viewers phoning in - ITV suspended all such shows, including Dancing on Ice, on Monday, pending a review - did not dampen City sentiment, with the shares closing up 3.5 per cent yesterday.

Though Mr Grade has been in the job only two months, investors will want some of the "vision thing" from him and an idea of how much he can fix.

One sign of confidence may be that Mr Grade is to subject himself to a press conference for presenting the company's 2006 results, unlike his predecessor Charles Allen who avoided having to confront the massed media pack.

Omar Sheikh, an analyst at Dresdner Kleinwort, says: "Michael Grade's task will be to persuade investors that there is turnaround potential in the core ITV1 channel; that he can build credible plans for realising that potential; and that it can be realised without a significant increase in the investment requirement of the business, particularly the programme budget."

The optimism surrounding ITV is at odds both with the performance for 2006 that it will report and with the forecasts for 2007. Last year was painful for its main ITV1 channel, where advertising revenues dropped 12.5 per cent, with a further decline of 9.5 per cent expected in 2007 as the overall television advertising market contracts for the second consecutive year.

But such are the low expectations that almost any improvement will be seized upon as a sign of a rebound. So far this year, ITV1's share of commercial television viewing is down 5.5 per cent, but Mr Sheikh says this is "encouraging" given expectations it would fall 8 per cent this year.

What seems to be at work is threefold: the appointment of the highly-regarded Mr Grade, a view that the cyclical and structure negative factors are easing, and a general feeling that things cannot get any worse.

The regulatory burden on ITV will ease. In particular, the contract renewal rights (CRR) mechanism that it labours under, which ensures that its loss of audience is matched by an equal loss of advertising revenues, will be lifted. The only question now seems to be whether CRR will be lifted this year or next. Disappointingly, it now looks like it will be 2008.

On top of this recovery story, there remains the possibility of a bid. ITV attracted two takeover offers last year and Virgin Media was only stopped from proceeding with its bid because rival BSkyB bought a 17.9 per cent blocking stake in ITV. That Sky shareholding is the subject of multiple regulatory reviews. If Sky is forced to sell its interest, it is a good bet that ITV will be back in play.

The overriding task facing Mr Grade is to improve the programming on ITV1, which has lost all sparkle and confidence in recent years. He is the only leader of the company to come from a programme-making background for a decade. His fans in the City point to his record at the BBC and Channel 4, where he improved viewing market shares and backed shows that turned out to be huge hits, including EastEnders at the BBC and Friends at Channel 4.

Jim Marshall, the chief executive of MediaVest, a media buying agency, says: "All roads lead to back to the quality of the programming output ... Grade is seen as a programming man who will sort out the product. Previous regimes have been about managing costs."

The scale of the challenge is enormous. ITV1's share of the commercial television audience plunged by 30 per cent between 2002 and this year. Over that period, its share of the television advertising market dropped by 26 per cent.

Although Channel 4 has shown that it is possible to maintain absolute viewing share even in the age of digital television, no-one is expecting miracles from Mr Grade. What they want is for him to significantly stem the rate of decline.

The performance so far this year has been better, with the drama Primeval and the comedy Benidorm among shows that have won plaudits. But given the long lead times involved in making programmes, the Grade effect will not be seen on our screens until 2008.

Partly, the decline of ITV1's market share has been a simple function of the take-up of digital television in this country, which has given households a much greater choice of viewing. That process is coming to an end, with digital penetration now standing at some 80 per cent.

Another plus for ITV is the predicament of its rivals. Both the BBC and Channel 4 are having to slash budgets, while the pay-TV providers Sky and Virgin Media are embroiled in a bitter competitive battle.

Mr Grade has the opportunity to pull off a corporate turnaround that he has likened to the Marks & Spencer recovery. If he succeeds, the UK media industry, as well as the nation's telly addicts, will be very grateful.

Online strategy to focus on regional services

One of the glaring holes in ITV's strategy has been the lack of a convincing internet story. So far, what it has mostly amounts to the puzzling purchase of the Friends Reunited website.

Today Michael Grade will take a step towards remedying this by announcing that the ITV Local broadband service is to be extended to two new regions - London and Central.

The regional service has already been piloted in the Meridian franchise in the South. It provides ITV local news video clips, allows users to upload their own content and, importantly, it moves the company into the market for classified advertising and online directories for the first time.

With the two new regions, ITV Local will cover 45 per cent of the UK population.

Later this spring will come a more substantial element of the broadband offering, with a revamp of the ITV.com website and the launch of the company's own media player. This will permit viewers to see both free and paid-for content, so that they can, for instance, catch up on a show they've missed or see an old favourite.

City analysts have noted that ITV's massive programming library is probably the company's most under-utilised asset.

Saeed Shah