Digital is the future, but there are still mints to be made from terrestrial TV

The latest wave of consolidation in the ITV sector, launched in earnest last week with Lord Hollick's purchase of Scottish Television's 20 per cent stake in HTV, is the last act of the old television order - more defensive than offensive; linked to the past and not to the future; old fashioned, not innovative. Oh yeah, and it also marks yet another corporate failure on the part of Michael Green's Carlton Communications.

The future of broadcasting in the UK is all about digital TV and radio. Eventually, those companies that make the right sorts of bets about multichannel television will be the winners. So why are the big ITV companies so determined to grow even bigger in the traditional analogue environment? Shouldn't they be concentrating on digital cable and satellite, programme making, programme acquisition and new media? The answer is simple. Digital is the future but the future is not now. There is still plenty of money to be made in terrestrial television, which remains the only medium that can reach the multi-million viewers that very big advertisers seek.

The advertising market for television is set to grow by 6.2 per cent this year, according to forecasts by the media team at Salomon Brothers, and by 6.9 per cent in 1997. Good money, then, for the traditional broadcasters.

At the same time, there may well be some relief for those ITV companies that overbid hellishly in the blind auction for licences in 1993. Some kind of rebalancing of the bid and taxation systems is likely to occur in the next few years, giving the ITV sector some welcome relief. So no wonder the likes of Granada, Carlton and Lord Hollick's United News & Media want to buy more television assets.

The new freedom provided by reformed ownership rules in the Broadcasting Act, which come into force this week, is the proximate cause of renewed merger activity in the sector. More to the point, the business case for expansion is obvious: the more viewers you have, the more advertising revenues you can generate. At the same time, if you buy an ITV company with a good production capability - say Yorkshire-Tyne Tees - then you strengthen the other key source of profits, namely the sale of programmes.

But if that's the case, then why aren't all the big ITV companies moving swiftly to buy up their smaller rivals? Why, for instance, did United only buy 20 per cent of HTV, rather than make an offer for the whole company?

The problem, of course, is the price. Because the market knows that merger activity is likely, it has bid up the stock prices of the obvious target companies. These include HTV, YTT, even small players such as Grampian, Border and Ulster. Michael Green, who tried to buy the HTV stake being sold by Scottish, has told everyone who will listen that the shares of the "bid-able" ITV companies are overvalued.

He's right, but then it doesn't help him much to be right and to be wrong- footed. By bidding for Scottish Television's HTV stake, and not getting it, he adds yet another failed deal to his growing list of missed opportunities.

Now, he hopes to be able to get his hands on a consolation prize, in the form of Westcountry, the tiny Devon and Cornwall licence holder. The company has been put up for sale by its owners, the Daily Mail & General Trust, Southwest Water and Brittany Ferries, and has attracted bids from at least four companies - United, Carlton, HTV and Canwest, the Canadian broadcaster. The problem for Michael Green will be to outbid his nemesis, Lord Hollick, without frightening the City with an unconscionably high offer for such a tiny player.

It is also undeniably the case that the owner of HTV is the most logical owner for Westcountry. Advertising time for both companies is sold through TSMS, United's sales house, while HTV supplies transmission services for its contiguous, smaller neighbour. That gives United more reason than Carlton to bid over the odds for Westcountry.

In the end, the City expects HTV to be sold to either Carlton or United. Lord Hollick's chances of prevailing look better now that he has secured a 20 per cent foothold. Westcountry will go to the highest bidder, but clearly United has more reason now to want to win than does Michael Green.

Thereafter, expect bids from Granada for Yorkshire-Tyne Tees and from Scottish for Grampian - but not, perhaps, for a while, as the bidders bide their time in expectation of lower share prices.

When the dust clears, there will be two or three big ITV companies left. Then, the much harder strategic work begins: trying to figure out how the digital revolution will unfold. Following ITV's consolidation, we will at last witness the first act of a new media order. Who wins then is still anybody's guess.

A final thought. Don't rule out some surprising moves from Channel 5, the last terrestrial TV service. It is owned by Pearson Television, United, European broadcaster CLT and Warburg Pincus. Why can't Channel 5 be used as a vehicle to expand further in television - particularly in programming and digital broadcasting? The risks would be shared, and there are obvious attractions to the channel's backers in creating their own source of fresh programmes. Indeed, if it is true that Pearson may sell its television production arm (Thames Television, Grundy, SelecTV), then Channel 5 could be a logical buyer. Pearson would get to keep an indirect interest, but get some of its cash back. And it might be fun seeing BSkyB, the other possible buyer of Pearson TV, and Channel 5, now run by former BSkyB head of programming David Elstein, battle it out. Far-fetched? I wonder.