Learning from Channel 5

LIKELY BIDDERS

FOR CHANNEL 5

Company Shareholding

%

Virgin Group 20

Associated-White Rose 20

HTV 20

Philips Electronics 15

Electra 5

BSkyB 20

Granada 5-20

TCI 20

Goldman Sachs 15

PolyGram 20

Kinnevik 20

(Shareholdings not confirmed)

Pearson 5-20

MAI 20

CLT -

(Fourth unnamed bidder) -

(Shareholdings not confirmed)

BY MATHEW HORSMAN

The scramble to win Channel 5, in its final stages ahead of Tuesday's deadline for bids, has revealed important lessons about commercial television, UK regulations and the heavy costs associated with making the new channel work.

Cynics have long argued that a fifth terrestrial channel would not fly: with the advent of cable and satellite, and the declining audience shares experienced by most terrestrial channels, a fifth commercial service would be difficult to justify.

The illustrious line-up of interested bidders has put paid to that. Although the three serious contenders for the service do not expect to see the national advertising pie grow with the introduction of Channel 5, all expect to break even within three to five years of going on air.

That will mean charging competitive rates to draw advertisers away from ITV and Channel 4, a prospect that will delight big corporate spenders, who have seen commercial television rates climb ahead of the inflation rate for the past two years.

As well, there remains a large national audience for terrestrial TV in the UK, despite the trend. No other medium can offer up to 10 million viewers for a single programme; satellite and cable reach a combined total audience of only 3.5 million.

The potential size of audiences for the new channel has dictated its likely character. By all accounts, Channel 5 will be an "ITV2", dominated by films, drama, light entertainment and a smattering of rather light- hearted current affairs.

The battle for Channel 5 has also revealed the contentiousness of current regulations, as policed by the Independent Television Commission. One leading contender, grouping media and information giant Pearson, media and financial services company MAI and European broadcaster CLT, faces difficulties arranging the group's shareholding to abide by strict cross- ownership rules that limit Pearson's participation. The group is considering options that might pass ITC scrutiny.

Similarly, a competing consortium led by Virgin, is looking at ways of giving partner Associated Newspapers greater control than the 5 per cent voting interest allowed. While it is understood that Associated will initially abide by the 5 per cent limit, it is nonetheless structuring its Channel 5 participation through a separate vehicle, White Rose, in which it can raise its stake once regulations allow.

Both contenders are privately furious that the third likely bidder, a group led by satellite and cable broadcaster BSkyB, does not face the same restrictions. BSkyB's 40 per cent-owner Rupert Murdoch owns five national newspaper titles but no commercial television contractors: as a result, BSkyB can take up to 20 per cent of Channel 5. By contrast, its partner, Granada, the subject this week of rumours that it would leave the consortium, is limited to only 5 per cent, because it already owns two ITV licences, Granada and LWT.

Finally, the bidding process has revealed the extensive costs of getting the channel up and running. Due to licensing limits and signal interference, only 70 per cent of UK homes are likely to receive the new service - about 16 million television sets.

Many UK households have VCRs that use the frequency set aside for Channel 5 as their playback signal. One industry source estimates suggests that more than 6 million VCRs will have to be adjusted, and the ITC has insisted the retuning must not inconvenience viewers or cost them money.

Conservative estimates suggest that £70m might have to be spent to send technicians into homes to do the retuning. The huge retuning costs were one reason Mirror Group's consortium decided not to proceed.

Those costs are a measure of the risk. But the number of serious contenders still in the running is testimony to the attractions of commercial TV.