The highest bidder wins. Or maybe not

The Channel 5 auction has produced an odd line-up. Maggie Brown explains what could happen next

Rupert Murdoch has lost none of his power to surprise. Just as everyone was lining up to comment on the allegedly enormous and damaging consequences of his empire's extension into Channel 5, the amazing details of the four competing bids were revealed yesterday.

Contrary to all expectations, Murdoch's BSkyB/Granada consortium, New Century Television, was not the highest but by far the lowest bid, offering to pay the Government £2m a year to run the new terrestrial TV channel, compared with £36m bid by an obscure Canadian company, CanWest UK TV. Equally astonishingly, the other two bidders - Virgin TV and Channel 5 Broadcasting (Pearson) - tied at £22,002,000 each.

For the Government, the outcome of yesterday's blind bidding process seems on the face of it to offer a perfect win-win solution. First, it appears to take the political heat off the Heritage Secretary, Stephen Dorrell. His failure to publish a credible set of modernised cross-media ownership rules attracted huge criticism in the run up to yesterday's deadline (under the current set there is nothing to prevent Murdoch's limited expansion from satellite into terrestrial television).

And the Treasury will rake in anything from £220m to £360m over the 10-year life of the franchise, from what was judged only three years ago to be a worthless channel.

But the Government should not breathe easy too soon. There is still a nightmare scenario: that all the higher bidders are excluded on the grounds of over-optimistic business plans, leaving Murdoch a clear passage. The result will be known later this year.

So did Murdoch get it wrong, or very, very right? Or did he submit an unrealistic bid in order to make his excuses and defuse the bitter political row that a victory would produce? "If there's one thing Rupert Murdoch can do, it is add up," quipped Michael Grade, chief executive of Channel 4 and vociferous critic of Murdoch.

Assessing the bids is the immediate task awaiting the Independent Television Commission, the commercial television regulator. There are plenty of precedents for not accepting the highest bid. In the 1991-92 ITV franchise auction carried out under the same rules, the ITC disqualified some of the highest bidders, such as Polygram's £32m bid for the London weekend franchise, which was rejected in favour of LWT's £7m.

But the regulator is also painfully aware that once again it is being forced to administer a bizarre auction system that does little for its reputation. This pits the quality of programming and services against the amount of cash any bidder is prepared to offer.

The critical factors the ITC has to consider are: how much it costs to retune the home videos of people living in the extensive Channel 5 area; the cost of offering a reasonably popular service which will be tempting enough to get viewers linked up; and the buoyancy of the advertising market.

On all of these questions the BSkyB/Granada bid is the most cautious. It says it is putting aside £120m for video retuning, a "Rolls Royce service" carried out before the channel goes on air. This compares with £60m to £100m anticipated by the higher bidding rivals. (CanWest won't reveal its estimate.)

It has also, perhaps deliberately, included a relatively high programme budget, though it is not giving precise details. Some say this budget reflects the hard lessons it has garnered from Sky 1's lacklustre performance.

If any of the three relatively high bids succeeds then there is either £36m or £22m less money a year to spend on making programmes than might be the case. ITV and BBC competitors are justified in their quiet jubilation that the burden of a high bid could well prevent Channel 5 really succeeding.

For there is scant sign that the public wants the new general entertainment service. There have been no genuine public lobbies, no letters to the press demanding more choice or more repeated films in peak time. Nor is there any sign that people are prepared, or have the spare time, to watch more television.

True, the decline in viewing of recent years has stabilised in the past few months. But the new satellite and cable channels have battled hard for their current relatively meagre share of viewing, by cannibalisation. BSkyB has won Premiership football and rugby league, but not people's affections: the most successful of the low-budget satellite stations is UK Gold, playing BBC and ITV repeats.

The imperative to launch the service has come from business, originating 10 years ago as a method of appeasing advertisers disappointed in their attempts to force advertising on to the BBC.

The channel failed to attract a credible bidder three years ago mainly because the recession was hitting advertising hard. But over the past two years advertisers have come to resent the way the cost of reaching viewers on ITV is rising as the network's share of the audience slowly declines. Channel 5 offers advertisers the chance of a near-national audience and competition in key areas such as London and the Midlands on a scale which fragmented, subscription-driven satellite cannot deliver.

The final factor is the "squatter's rights" benefits conferred on the winner of the franchise, who will be in a favourable position to benefit from the forthcoming digital revolution that will engulf terrestrial television. That will require extra investment, and the nagging doubt stalking all the bidders last night was that - just maybe - Rupert Murdoch has got his sums right. Certainly CanWest's launch last night at a 6pm press conference raised questions about its competence.

David Montgomery, chief executive of Mirror Group, which pulled out off the auction last week, said yesterday: "Our bid would have been closer to Murdoch's, which is the more realistic bid. If he bids that low, with all his leverage - production facilities, the link to Granada - then it must be a risky project."