'Footballers' Wives', nil – football, one: there's no fantasy in the figures at ITV

Granada and Carlton want to put a disastrous 2002 behind them by getting into bed together, but with the merger on shaky ground, viewers heading to Sky and advertising down, even Jason and Tanya might not stop the rot.

Things couldn't get any worse, could they? This is what Michael Green and Charles Allen must have thought as they saw in the New Year.

After one of the blackest years in ITV's history – with the collapse of ITV Digital, falling viewing figures and declining advertising revenues – 2003 offered a fresh start for the bosses of the channel's owners, Carlton and Granada.

And with an agreed £25m increase in the programming budget, a slew of new shows hitting the screens and the plan to merge the two groups out in the open, they had good reasons for being optimistic.

But less than three weeks later, ITV looks as if it has already run aground. There is evidence that advertisers have reduced their spend with the channel, some programmes are failing to pull in the viewers, and the much-vaunted merger between the ITV companies will not get past the finishing post. This is hardly the happy New Year Mr Green and Mr Allen had dreamt of.

The most pressing concern is advertising revenues. Official figures aren't out for a fortnight, but the unofficial ones paint a very grim picture. Revenues for January are nearly 2 per cent down on last year, according to data being circulated among advertising agencies. Investment bank Bear Stearns predicts that revenue from pre-booked adverts for February could fall by as much as 10 per cent and things could get even worse in March.

As a result, Bear Stearns and Merrill Lynch last week downgraded their revenue estimates for both companies. Carlton shares fell 12.2 per cent last week and Granada was down 11.4 per cent as the City braced itself for bad news.

In the autumn ITV assembled its big guns, including the well-respected head of marketing, Jim Hytner, to make a series of "up-front presentations" to advertisers and media agencies. The idea was to draw a line under all the bad news and prove that ITV was changing. Central to this was the promised £25m increase in programming spend.

The charm offensive came at a critical time as more than half of the channel's leading advertisers were preparing to renegotiate their contracts with ITV. But some advertisers clearly weren't convinced by ITV's soothing words.

David Roth, marketing director at B&Q, which spends around £25m a year on television advertising, says: "We have taken money out of ITV and put it into advertising with Channel 4, Channel 5 and Sky." Mr Roth argues that ITV, with a reduced share of the audience, simply isn't as good value for money as it was a couple of years ago. "We are monitoring the situation and will shortly decide whether to take more money out or put some back in," he says.

It is understood that ITV executives held a series of private meetings with large advertisers earlier this month to offer a preview of forthcoming plans. According to one senior advertising industry source, ITV has promised a further increase in its programme budget.

This couldn't have come at a better time. ITV has just endured one of its worst-ever Christmases. Figures produced by the Broadcasters Audience Research Board reveal that in the Christmas week ITV1 captured just 22.2 per cent of the television audience. For the first time ever, the channel was overtaken by the non-terrestrial channels, dominated by BSkyB.

While this doesn't bode well for ITV, it does appear that the channel's latest set of programmes are starting to find favour with advertisers. "In terms of programming, ITV is doing quite well," says Marc Bignell, head of television at the media buying agency OMD UK. "It has had a relatively strong performance with Hornblower and Midsomer Murders."

Last week, for example, the much-hyped second series of Footballers' Wives attracted 6.5 million viewers, proving enough of a match for David Attenborough's The Life of Mammals, scheduled at the same time on BBC1, which pulled in similar numbers. However, the ultra-trashy drama has so far failed to meet early predictions that its audience could top eight million. Better news was that during the first week of January, ITV saw a 6 per cent increase on last year in the number of people watching its adverts.

Even if ITV notches up a few hits, Mr Bignell points out that there is usually a lag between decent programmes being aired and an increase in advertising revenues. "BSkyB and Channel 5 will be the two big winners this year. They achieved large audience growth last year ... so revenues will come through in 2003."

Tom George, managing partner at media agency Zenith, is also optimistic about ITV's latest programmes, but urges Carlton and Granada to increase their spending. "A £25m budget increase is a substantial sum, but not that much when you look at it against a total budget of £750m. I would like to see much more investment, ASAP."

Competing against the increasingly successful BSkyB – which has capitalised especially on its football coverage – and the now commercially slanted BBC, "ITV has to keep running to stand still", notes Bob Wootton, director of media at the Incorporated Society of British Advertisers (ISBA).

One problem for Carlton and Granada is that any goodwill generated by the latest programming could be cancelled out by their merger plans. Advertisers and media buyers fear that the creation of a single ITV company – which would control around half the commercial television advertising market – would lead to market dominance in ad sales. In a letter to the Office of Fair Trading (OFT), which is currently investigating the merger, the ISBA argues that "a single ITV should not be permitted if the consequent excessive dominance in airtime sales is not addressed".

Carlton and Granada's attempt to allay concerns that a joint sales force would turn the screws on advertisers has so fair failed. Jim Marshall, chief executive of media agency Mediavest, says: "The bullshit Carlton and Granada come out with, saying that combining sales won't lead to dominance, is just that – bullshit. You can quote me on that."

The OFT won't say when it is likely to issue a ruling on the merger. However, a source close to the office says it will be in early February, when it is widely expected that the OFT will refer the proposal to the Competition Commission for further scrutiny. A final decision could come in the summer.

According to the investment bank Dresdner Kleinwort Wasserstein (DKW), the two companies could save £50m if they were allowed to merge, with £20m coming from combining the sales teams.

By the end of the year the Communications Bill will become law, potentially opening up the UK media industry to foreign predators. If the Carlton-Granada merger is blocked, the two companies are likely to be easy prey for a larger continental rival.

The threat of a referral to the Competition Commission is a serious one, but Brandon DiMassa, a media analyst at DKW, believes the City has largely ignored this. "There exists a genuine risk of the merger being derailed. But Carlton and Granada's shares have been priced assuming the deal will go ahead," he says. If Mr DiMassa is right, the two companies could see their share price suffer yet more falls in the coming months.

Falling shares, advertising revenues and viewing figures. This isn't how it was supposed to be for ITV in 2003. There is now a real danger that, despite the considerable upheavals last year brought, it may not have been ITV's nadir.