Business Analysis: ITV's Allen faces test of vision as network stumbles

The shares are down, so are audience ratings and critics complain of a creative desert

Was Etienne de Villiers deserting a sinking ship when he quit as a director of ITV yesterday, ahead of the company's maiden results as a merged company later this week?

ITV's share price has plunged since the merger of Carlton and Granada, that created the company, completed at the end of January. That, together with a horrendous audience performance over the summer, means that the chief executive, Charles Allen, has some awkward questions to answer when he presents the interim figures on Thursday.

Mr de Villiers, a non-executive director, yesterday insisted he had always planned to leave at this time and was going because the "workload is greater than the time I have available". ITV sources denied that the departure was the start of a boardroom cull, though many expect the 72-year-old Sir Brian Pitman to vacate his non-executive position in the not-too-distant future.

Mr Allen will have some goodies to throw to the City on Thursday: a strong set of numbers (pre-tax profit is forecast to be up 11 per cent at £109m) and upbeat news on advertising sales. It is also possible that he will increase the £100m cost-savings target from the merger (adding maybe another £20m).

Mr Allen could also announce non-core asset disposals that may raise more than £500m. He will no doubt talk (again) about the prospect of ITV's regulatory burden being significantly reduced, and he ought to provide more detail on the family of digital channels that the company is developing. The launch of ITV3 is imminent - a station aimed at an older ("Cold Feet-friendly") audience than the youth-orientated ITV2.

If analysts and press allowed Mr Allen the sort of soft treatment he might get as a guest on ITV's new Parkinson talk show, launched with much fanfare on Saturday, he would certainly have achievements to puff.

Mr Allen got a remarkably favourable settlement from regulators last autumn that allowed Carlton and Granada to combine without having to ditch any parts of the merged business. This produced a single ITV company for the first time, with more than 50 per cent of the £3bn television advertising market.

Shortly afterwards he benefited from a spectacular shareholder coup that ditched Michael Green, Carlton's chairman, who was supposed to be chairman of ITV. The overbearing Mr Green would surely have interfered in the day-to-day running of ITV and was quite likely to have fired Mr Allen, a man he is not thought to have rated highly. Mr Allen gets full marks for handling the integration, quickly settling the jostling for jobs at the combined company. He raised the cost-savings target from the merger (originally £55m, now £100m).

To Mr Allen's delight, the media regulator, Ofcom, has been making very sympathetic noises about ITV's regulatory burden - estimated to cost the company up to £475m a year. Ofcom has launched reviews of both elements of ITV's regulatory obligations - licence fee payments for use of the analogue broadcasting spectrum and "public service broadcasting" commitments to make certain kinds of programmes (such as religious shows) which are not necessarily commercially driven.

Mr Allen has pointed out that the boost to ITV profits available from lighter regulation far exceeds anything likely from cost-cutting or even a sharp upturn in advertising revenues.

On the advertising front, ITV has already said that the first half was up by between 4.5 and 5 per cent, stronger than many had suspected. Furthermore, Mr Allen recently said that September ad sales were up 7 per cent, which points to momentum picking up as we get into autumn.

Paul Richards, an analyst at Numis Securities, said: "In most respects, you'd have to say that it has been a very successful merger. But we'll only really be able to tell after we're through the pivotal autumn season."

ITV1 remains Britain's dominant commercial station. However, ITV faces huge challenges. It has been losing audience and advertising share pretty rapidly for 20 years as its position was eroded, first by the launch of Channel 4, and more recently from the appearance of five and hundreds of digital channels.

This structural decline at ITV will accelerate as the whole of Britain converts to digital television in the next seven or eight years. The growing popularity of personal video recorders, which allow viewers to skip advertisements, will be another tricky issue for the future.

There are more immediate difficulties though. ITV has dropped more than 2 percentage points in commercial audience share this year. This ought to mean that ITV loses between £80m and £100m next year in advertising revenues. The viewing figures are ITV's most obvious failing this year. Television analysts said that, rather than genuinely investing in programming, ITV has been guilty of attempting quick fixes to the schedule - for instance with extra episodes of the soaps Coronation Street and Emmerdale and a second series this year of the trashy reality show, I'm A Celebrity Get Me Out Of Here!

ITV was, amazingly, taken by surprise by the success of offerings on other stations over the summer - the Olympic Games on the BBC and Big Brother on Channel 4. ITV points to the strength of its autumn schedule, with the likes of the Parkinson show and a new series of Midsomer Murders.

Marc Bignell, the joint managing director of Opera Media, which brokers deals to buy advertising slots, said: "I'm disappointed that the programming strategy has not been more clear and more competitive. There is some hope that with the autumn things will get better, though last autumn's base is a very strong one to compete against."

England's heroics in the Rugby World Cup last autumn significantly upped non-peak audiences. The programming difficulties go to the very heart of the criticisms levelled against Mr Allen's management, from both outside and inside ITV.

One industry source said: "There is no strategic vision of where ITV is going creatively. At the moment it feels very tactical. The creatives are feeling very frustrated."

Mr Allen has survived at ITV much longer than many predicted. But the performance on the creative side of the business in particular provides ammunition to those who continue to say he should be replaced. However, it does not appear likely that Mr Allen will be ousted any time soon and there is no sign of a bid coming in for ITV, despite the lowly share price. Much of the fall in the company's share price is attributed by analysts to investors simply exiting cyclical shares.

ITV has been painfully slow at creating a multichannel strategy. It was beaten to the game long ago by the BBC and Channel 4. Only with a family of successful channels can ITV begin to convince sceptics it is not just about managing the inevitable decline in its core ITV1 channel. Otherwise, many in the industry, government and regulatory circles worry that in the digital world, ITV is staring at the abyss.