TV merger that breaks all the competition rules gets go-ahead

Advertisers dismayed by creation of company that will command more than 50% of national television advertising

The competition Commission verdict was the best possible outcome for ITV. But had the decision, to impose a behavioural remedy on the Carlton-Granada merger, not been apparently leaked over the weekend, it would have come as a real shock to many competition experts.

The leak, the unexpectedly favourable outcome and the closeness of the commission's views with those of the Government, set tongues wagging yesterday. Behavioural remedies are much less likely to be advocated by regulators than structural solutions. Add to that a dissenting voice at the commission and what seemed like deep unease at the outcome at the Office of Fair Trading, and conspiracy theorists were having a field day. One experienced competition lawyer said: "It doesn't pass my smell test."

What seemed beyond doubt was that the regulatory outcome was a triumph for Carlton and Granada, creating a single ITV for the first time. The decision will allow ITV to rid itself of its unwieldy federal structure and take on the BBC and BSkyB on more equal terms. The outcome also makes the combined company an attractive takeover target, though the share prices of the two companies place a toppy value on the combined business. Potential predators, from the US in particular, have been put off by ITV's previously complex structure.

The commission recommended a "contract rights renewal" (CRR) or "roll-over" remedy, that would see advertising contracts now in place with ITV extended for another three years on the same terms. In the view of the majority of the commission, this would tackle the increased power a single ITV would have over advertisers. The Department of Trade and Industry yesterday accepted the commission's recommendation.

To reach its conclusion, the commission significantly altered its view from its last examination of the television market, in 2000, and said that it considered this sector a special case. The Government has already made known its desire to see a single ITV and cleared the way for this to happen by removing legal barriers in this year's Communications Act. The regulator also took a distinctly broad view of the ecology of British television and saw it as its duty to make sure there was a strong third force to balance the power of the state-funded BBC and its pay television rival Sky.

Although ITV's share of viewers and advertisers remains high, the commission set much importance on the speed at which its dominant position has been eroded. The report said: "We also accepted that the technological and regulatory developments that had taken place over the last 15 years ­ and grown considerably in scale and importance over the last five years ­ had changed the broadcasting landscape in a number of significant ways. As the number of platforms and channels continued to grow, the position of ITV, with its specific regional and other public service obligations, was becoming increasingly difficult to maintain."

According to the regulator, whatever competition may exist now between the ITV licence holders was soon going to be superseded by competition between ITV and the other commercial channels for advertising money. Competition lawyers had said that, going on precedents, a structural remedy was more likely than a behavioural one and that, given a 50 per cent market share for the merged Carlton and Granada, an outright ban had also been a real possibility.

The commission's report makes clear that it never seriously considered a ban. It took the view that it had two effective remedies that would allow the merger of Carlton and Granada to go ahead. One involved the divestment of both sales houses of the merged company and the other was the behavioural solution it went for. "The conclusion of all of us... was that as effective remedies had been identified, the prohibition of the merger would be disproportionate," the report said.

Sarah Brown, a former head of company law at the DTI, was concerned about the effectiveness of the roll-over solution and its complexity.

The report said: "Although it might, in her [Mrs Brown's] view, reduce the adverse effect of the merger in the short term, she was concerned that its effectiveness would diminish over time as advertisers' needs changed and the original contract became less relevant."

Mrs Brown wanted the merger to go ahead but, unlike the four other members of the commission investigating the deal, she was most convinced by the more draconian, structural remedy that would have seen both the sales houses of the merged company divested. She believed that while ITV's market power was diminishing, this was not happening fast enough for the roll-over remedy to be appropriate.

Her views seem much closer to those of the Office of Fair Trading, which published its own assessment of the deal yesterday and of the commission's preferred remedy. The OFT said advertisers' opposition to the CRR solution raised "substantial concerns" and that these should be "carefully considered". It raised doubts over the intricacy and workability of this solution and suggested that the DTI "may wish to consider alternative remedies".

The OFT said: "Most media buyers, advertisers and other commercial channels saw the [CRR] remedy as introducing an unwelcome degree of rigidity into the market as customers would be reluctant to move away from the protected deal for fear of losing their benefits."

Even at this stage, the OFT went on to suggest that "prohibition would be an effective remedy". The OFT does not, as a rule, like to have to police behavioural solutions. Its views have clearly been ignored by Patricia Hewitt, the Secretary of State at the DTI, in her decision to go along with the Competition Commission. However, the OFT remains relevant. Carlton and Granada must agree terms with the OFT for the operation of the CRR solution by 7 November.

The majority of the commission did not dismiss "double divestment" as a possible remedy but they thought it came with more disadvantages than the "roll-over" solution. In particular, the majority of the commission was concerned, as were Carlton and Granada, about the merged company being separated from its source of income and that this structural remedy would add to the historical problems of ITV's lack of unity.

"Our [the commission's majority] greatest concern was ensuring that the merged company, which would be the ultimate owner of the airtime being sold, would not be able to exert excessive influence or a degree of control over the independent sales houses.

"We also shared some of the parties' [Carlton and Granada] concerns about divorcing the broadcasting company from its principal source of income, and agreed that this could result in dysfunctionality, due to the differing commercial objectives of the broadcaster and the two sales houses."

The commission was clearly much taken by the "dysfunctionality" argument put forward by Carlton and Granada, that ITV is hamstrung by its federal structure.

With sales house separation, the report said: "These [problems] might manifest themselves in continuing arguments about scheduling of particular programmes, and by ITV lacking confidence in advice from the sales houses about programming investment."

Mrs Brown was convinced that these drawbacks could be tackled, producing an element of competition while aligning the interests of the merged company and the separate sales houses.

"She [Mrs Brown] believed that contracts could be drawn up which prevented the merged company from having undue influence over the sales houses while protecting its legitimate interests. Accordingly, she concluded that the two sales houses remedy would be both effective and, in the absence of an alternative effective remedy, proportionate," the report said.

Double divestment was the solution preferred by most advertisers and the minimum demanded by ITV's rivals ­ with the exception of the BBC, which has been a supporter of the deal.

The commission acknowledged it was stepping outside historical precedent. "We [the majority] believed that some of the usual disadvantages of behavioural remedies did not apply in this case. Whilst we saw some attractions to the two sales houses remedy, we concluded that, although it could be made to work, there were significant issues associated with it."