News Analysis: Licence deal gives ITV firms pounds 90m a year

Double bonanza for television companies as franchise payments are cut and incentives offered to attract digital viewers

SIR ROBIN BIGGAM, chairman of the Independent Television Commission (ITC), yesterday did something that few watchdogs ever do: he handed a cheque worth more than pounds 90m a year to a handful of the ITV companies he regulates. At the same time, he gave digital television a major boost by giving the companies an incentive to attract as many viewers to their digital services as possible.

The decision has a major impact on the finances of some of Britain's largest television companies. The hotel and television group Granada expects the decision to save it an average of pounds 43m a year until 2008. Lord Hollick's United News & Media will save pounds 23m a year. Carlton Communications, the television group run by Michael Green, will be pounds 22m better off next year.

Meanwhile, GMTV, the struggling breakfast television operator which is owned by a consortium of companies, was handed a lifeline that will probably stave off its closure.

The bonanza is the result of the opaque process under which ITV companies were allowed to renew their regional licences in the hope of reducing the amount they had agreed to pay when they won the licences in 1992.

In a complex process that has kept hundreds of bankers, analysts and media executives occupied for months, the ITC worked out what the different licences would fetch if they were auctioned again today. All in all, eight of the 11 franchises were handed reductions in their annual payments.

In this case, the ITV companies cannot lose. If the ITC chose not to award them a lower amount, they could reject the decision. Nevertheless, there were a few disappointed faces yesterday. United News & Media griped that the savings were "at the low end of expectations" and turned down the ruling on its Anglia franchise. It is still weighing up whether to accept the new terms for Meridian.

But Carlton was upbeat. Nigel Walmsley, the company's director in charge of broadcasting, said: "With a lower tax burden we can compete more effectively in the expanding television market place."

Border Television rejected a ruling which would have increased its payments while Carlton dismissed the new terms for its Central franchise.

Analysts complained that the ITC's calculations were opaque: "It's pretty inconsistent. There is a whopping great reduction for GMTV while Anglia gets nothing," one said.

The ruling also changes the way in which ITV companies will pay for their licences in future. Rather than hand over large lump sums every year, their payments will be more closely linked to advertising revenues.

Under the current terms, two-thirds of the payment comes from the lump sum with the remainder coming from a measure of sales known as percentage of qualifying revenue (PQR) - basically, advertising. The new regime reduces the cash element to 25 per cent with the bulk based on PQR.

"The terms are derived from a realistic assessment of the value of these licences in an increasingly competitive market," Sir Robin said: "If revenues fall below our expectations, the tender payments will fall accordingly."

More importantly, however, the new structure offers a major fillip to digital television because the new medium, which was launched in Britain in the past few months, will not be taxed in the way that ITV currently is. Under the new regime, viewers who watch ITV's digital broadcast will not be included in the PQR calculation. This means that, as digital penetration oincreases, licence costs will fall.

This "digital dividend" could be substantial. The ITC forecasts were based on the assumption that 50 per cent of ITV viewers will be watching the digital service by 2008. But many media analysts think this figure will be much higher - reducing the costs of analogue licences even further. Sir Robin said yesterday he expected payments to go "way, way down".

However, the ITC's apparent generosity will be short-lived. The ITV companies who renewed their licences this year did so because they had bid too much at the time of the auction. The reverse is true of the other franchises: they will be able to wait until 2001 before they have to renew their licences, but at that point their payments are likely to rise dramatically. In the case of Central, the West Midlands franchise owned by Carlton, the rise will probably wipe out the benefits received from the reductions announced yesterday for the Carlton and Westcountry franchises.

What is more, even the more fortunate ITV companies will not be that much better off. They are preparing to lose some pounds 95m a year from the Channel 4 levy - the bizarre system under which Channel 4 handed a proportion of its profits to the ITV companies to compensate them for lost advertising revenues. This will be completely phased out by 2000, and will make Channel 4 a stronger competitor.

At the same time, ITV is currently boosting its spending in an attempt to rebuild its slipping ratings. Once the sums have been balanced, most ITV operators are likely to come out more or less even.

That seemed to be the view in the City yesterday, where shares in Carlton hardly responded to the news while even United News - on the receiving end of the most disappointing ruling - only dipped 22p to 643p. Shares in Granada soared, helped by its upbeat set of full-year results.

In the long run, however, the ITV companies should benefit, especially if they can encourage the United Kingdom population to take up digital television in greater numbers than are now envisaged. This would suit the Government, which wants to switch off the analogue signal and auction off the parts of the radio spectrum it currently uses.