Granada crashes to £69m loss as advertising slump bites

Even 'Coronation Street' stars asked to take a pay cut as falling revenues hit TV group

Only a year ago the future for big broadcasting groups ­ spurred on by expectations of never-ending growth from digital convergence ­ looked unremittingly positive. Twelve months on, however, plunging advertising revenue and rising digital investment costs have left TV groups wallowing in red ink.

The latest casualty is Granada, which yesterday reported a loss of £69m for the six months to March, from a pro-forma pre-tax profit of £289m a year ago. For Britain's largest commercial broadcaster, which also produces mass-market soaps like Emmerdale, the reversal took place just 11 months after it was separately floated.

At the time of the float, the investment allure was to own shares in a high-growth, acquisitive, pure media play. But then the dot.com boom imploded, telecoms companies quit spending and the US economic downturn caused makers of cars and consumer goods slash advertising budgets, so trimming their use of ITV airtime.

Charles Allen, the Granada chairman, yesterday offered few clues about when advertising volumes might recover: "The honest answer is that forward visibility is nil. It would be inappropriate to look forward to try to forecast."

For July, however, the broadcaster, which owns six ITV franchises stretching from Meridian along the south coast of England to Yorkshire Tyne Tees Television, has estimated advertising sales at £58m ­ down 18 per cent from £70.7m last year. Advertising revenue for the nine months to June will be off almost 11 per cent at £702m.

With this recession showing no sign of ending, Mr Allen and Steve Morrison, the chief executive, have moved to lower operating expenses by £60m a year within two years. More than 100 Granada middle-ranking managers are to go in a plan to trim the company's £600m annual cost base by 10 per cent.

About half of the savings relate to economies of scale from the buyout of United Media's ITV franchises. The rest will come from reducing duplication between Granada and Carlton Communications and the ITV network centre.

Proof that no stone will remain unturned, the pay of Coronation Street stars ­ including Bill Roache, who plays Ken Barlow, and Barbara Knox, who plays Rita Sullivan ­ is to be cut. The programme's stars, who earn well in excess of £500,000 a year and who are threatening to strike, could lose up to £50,000 each under the new contracts.

"Coronation Street is being restructured to bring in new casts," Mr Allen said. "The old contracts paid actors for episodes in which they didn't appear. We are increasing pay for shows they are doing but have removed payments for shows that they don't do."

In a further aspect of the streamlining, Granada will replace its six operating units with two broader divisions. Granada Content will manage content creation across all distribution platforms, including the internet. As the new division's managing director, Simon Shaps will head programme production and international distribution as well as digital TV joint ventures such as Granada Sky Broadcasting and the Wellbeing TV channel launched with Boots.

Mr Morrison, commenting on the integration, said: "It makes sense for programme content to be integrated with channel and broadband content. It is much more sensible than keeping them separate."

Granada Platforms, the second division, will encompass the company's ITV franchises and broadcasting interests, including ITV2 and the ITV Sport Channel, which will launch in August. A new managing director is being recruited.

Though the details of the reorganisation and of an additional £20m in cost reductions were new, City analysts were left nonplussed. That reaction was mirrored in the market: Granada shares, down more than a third from 52-week highs, closed unchanged at 167p, valuing the company at £4.6bn. Anthony de Larrinaga, analyst with SG Securities, said: "Most of the cost savings had been announced and the numbers were in line. It would be rather more surprising if they weren't trimming some of the costs."

Looking at Granada's results for the half, shows that net advertising revenue fell 5.4 per cent to £486m. Among advertisers, auto-makers and food manufacturers reduced their budgets by a combined £23m.

Better news came from the programme production business, in which sales grew 10 per cent to £260m. Granada's newly established format development team sold the Boot Camp programme to Fox Television in the US, which attracted 23 million viewers to its first episode.

Other than the softer market for advertising sales, Granada's biggest headache remained its digital terrestrial broadcasting platform. The renamed ITV Digital (formerly ONdigital), saw first-half losses, including internet costs, hit £121m.

ITV Digital is expected to absorb a further £250m from both Carlton and Granada before turning profitable in 2004 with 1.7 million subscribers, up from 1.1 million currently. Meanwhile, the August launch of the ITV Sport channel, to be sold on subscription, is expected to incur start-up costs of £140m before reaching break-even in 2003.

The escalating costs of carving out a pay-TV business in the face of multibillion-pound investments by BSkyB and cable rivals Telewest and NTL is probably the main factor undermining investor sentiment for both Carlton and Granada. In an earlier, less complicated media landscape, the ITV companies might have been content to manage long-term decline, all the while milking their spectrum licences for maximum profit.

No longer. The growth of multi-channel TV, now a feature in more than 40 per cent of British homes, has rewritten the rules for ITV. What had been a highly profitable, low-risk business is now anything but.