ITV mergers are really about controlling advertising

By David Elstein

There are two profound misconceptions about the ITV mergers that were given the green light last Friday by the Competition Commission. The first is that a fully consolidated ITV is just around the corner. In fact, it is at least five years away, if not more. Three key obstacles to an ITV with one owner were incorporated into the Commission's report. No company can own both the London ITV licences - it would simply confer too much power in the advertising market-place.

There are two profound misconceptions about the ITV mergers that were given the green light last Friday by the Competition Commission. The first is that a fully consolidated ITV is just around the corner. In fact, it is at least five years away, if not more. Three key obstacles to an ITV with one owner were incorporated into the Commission's report. No company can own both the London ITV licences - it would simply confer too much power in the advertising market-place.

There is also the pre-existing statutory bar on any commercial company controlling more than 15 per cent of viewing share - and ITV's current 30 per cent is only declining by 2 per cent a year.

And the Commission - whilst releasing ITV as a whole from its undertaking that no combination of licences would control more than 25 per cent of the TV advertising market - created a variation of that theme, by preventing any company from owning more than two of the four licences that generate most revenue. If owning more than two out of Meridian, LWT, Carlton TV and Central is deemed contrary to the public interest, how can owning all of them - plus the rest of ITV - be allowable in the foreseeable future? The second misconception is that the drive for consolidation in ITV is powered by a need to compete on the global stage. There has never been much appetite within ITV for international clout. It is true that United - largely as a result of its previous merger history - has a strong international exhibitions industry: but its television activities abroad have been minimal.

Carlton is currently disposing of its biggest international acquisition, Technicolor, as part of its streamlining in anticipation of merger with United. And Granada Media is in the process of de-merging from Granada Group: giving up the protection from predators such scale confers in exchange for the improved stock market rating that a pure media company enjoys.

None of the proposed mergers would lead to any significantly greater presence abroad by the ITV sector: nor would any of the merged entities be large enough to resist a determined attack by one of the major European media companies. Indeed, if ITV had wanted to be a player on the world stage, it could long ago have merged all its non-broadcast activities: studios, programming, international sales, new media activities.

Only on the programming side might there have been a regulatory inhibition, and Friday's report suggests that even Granada absorbing Carlton's programme division - creating a 70 per cent domination of ITV's programme supply - does not raise insurmountable competition issues. The most obvious "creative" rationalisations have not materialised, even though there is no legal barrier to them, because that is not what drives consolidation.

No, what all three putative mergers are about is control of advertising in the UK. At the moment, the three big sales houses that control over 90 per cent of all ITV airtime co-operate in a mechanism that allows them to deliver an 11 per cent greater share of TV advertising than their combined share of viewing of commercial channels.

They do this by exploiting their collective domination of the airtime market. Their standard trading practice is to offer preferential deals to clients willing to commit proportions of their advertising budgets to ITV's share of the broadcast market, rather than the share of the specific sales house making the deal. That way, three companies each with 20 per cent or less of the total market are jointly able to command the premium that derives from their collective 55-60 per cent of the market.

Indeed, as ITV's audience share has declined, the gap between its share of advertising and its share of viewing has increased. And the reduction from three sales houses to two is assumed within ITV to be likely to lead to the 11per cent premium rising to 16 per cent. This is because a would-be ITV advertiser, who might currently drop one of the three sales houses from his schedule and find lower cost airtime from other broadcasters in order to fulfil his audience targets, will find it virtually impossible to adopt such a policy with just two ITV sales houses: which half of the ITV audience do you do without?

This is the reality that the Competition Commission chose to ignore when it abandoned the 25 per cent rule and turned a blind eye to ITV's trading practices. The actual sorting out of the three-way ITV stretch - for all its entertainment value - will see shareholders in all three major groups with more cake to divvy up, whatever the actual outcome.

Of course, Granada's executive team have most to be pleased about. Just as in 1994, Michael Green's hairline-sensitive judgement as to when to pre-empt regulatory change has actually served to open the door to Gerry Robinson's strategic moves.

Carlton's bid for Central then made possible Granada's for LWT, overcoming LWT's own attempts to wriggle out of the regulatory maze - and Granada' unwelcome embrace - by finding its own merger partners.

This time, Green and United's Clive Hollick pushed down the 25 per cent barrier, only to find that the competition authorities had been seduced by the somewhat spurious issues of a north/south divide and the danger of three of the four most lucrative licences falling into one pair of hands.

Granada corralled dozens of local MPs to help make its case, which bizarrely required ITV's proudest company to down-grade the significance of its own regional licence below that of Meridian, even though the gap in revenues between the two is marginal.

Ten years ago, Meridian - in its previous guise as TVS - could not even secure a seat at the Network Controllers table, which Granada regarded as its droit de seigneur.

All credit to Robinson and the Granada Media teamwith adviser Chris Hopson managing the politics so well, for timing their run on the rails so expertly.

On Thursday, United and Carlton might have bought off Granada by an agreed sale of Meridian. Now Granada have more ambitious targets in their sight (though there is precious little room for more licences whilst staying below the statutory limit of 15 per cent of total viewing). The dynamic of the Carlton/United merger has been partially unravelled by the Competition Commission.

The forced sale of Meridian - if it were not meekly offered to Granada as the price of a tolerated Carlton/United merger - might trigger a hostile bid from Granada. The fluctuations in share prices leave open to doubt which of the two targets Granada might select. And other predators might then join the fray.

But the economic logic of the merger pressure is to drive up the cost of ITV airtime. Allowing new players into the game would fragment the power of two dominant sales houses.

The odds must still favour an agreed carve-up, with Granada much more in control of the situation than it was before Friday. The end-game of a single ITV is too far away to give up the golden opportunity to share an even larger slice of the advertising cake, with full regulatory approval.