Nature of the beast

As Carlton and Granada celebrate being given the go-ahead for their merger, advertisers and agencies have been left reeling. Many fear that a monster has been created which, with such a dominant position in UK TV advertising, is sure to wreak

The rules of television trading are about to change for advertisers and their media buyers. Carlton Communications and Granada Enterprises have been given the all-clear to merge and form a broadcasting powerhouse. But for many media agencies and commercial broadcasters, their worst fears have been realised.

Trade and industry secretary Patricia Hewitt’s decision (MW last week) to allow the Carlton and Granada merger has given the green light to create one ITV sales house with a 51 per cent share of TV advertising revenue, restrained only by a behavioural roll-over contract mechanism. A measure that had not even been thought of a year ago, when Carlton and Granada announced their plans to combine forces as ITV plc. To alleviate fears that ITV could exploit its dominant position, media agencies and advertisers will for the first time be given the opportunity to turn to an adjudicator if negotiations with the ITV sales house turn sour.

But the road to sales consolidation may not stop there. Carlton and Granada’s major sales house rivals – BSkyB, Channel 4, Five and IDS – have entered talks about joining forces, to preserve their positions in a market dominated by an ITV behemoth.

And further upheaval may be on the way. The Competition Commission has expressed “disquiet” over various aspects of airtime sales and has called for a far-reaching investigation into the market structure and trading mechanisms.

But for the time being, advertisers, TV buyers and commercial broadcasters have their work cut out trying to get to grips with the ramifications of the decision. The merger is subject to a package of behavioural remedies being put in place to offset any adverse effects.

Among them is the roll-over or contracts rights renewal (CRR) remedy – designed to protect advertisers and media agencies from the risk of ITV abusing its leading position in contract negotiations. CRR is to be implemented through undertakings to be given to the Office of Fair Trading by Carlton and Granada by November 7, so that agencies can consider the remedy in their forthcoming contract negotiations.

But Billetts Media Consulting chief executive Andy Pearch warns: “I am very concerned that we are rushing to change the rules of the game. The implications could be quite major for advertisers, their agencies and media owners.”

The CRR remedy gives all organisations with advertising contracts with Carlton or Granada – including media agencies and advertisers – the option of renewing their contracts without change for the duration of the remedy, expected to be at least three years. But where a contract specified a share of broadcast, this would vary in direct proportion to ITV’s share of commercial impacts, subject to a cap at the initial share. The remedy also provides for an adjudicator, to be appointed by the Independent Television Commission (ITC) and Ofcom, to rule on contractual disputes between the parties, and the advertisers and media agencies.

Rescue remedy

Most media agencies had been hoping for a structural solution – the divestment of Carlton and Granada sales houses – and have labelled the CRR remedy as “unworkable” and “impractical”, while the Institute of Practitioners in Advertising expressed disappointment with the decision. In contrast, the Incorporated Society of British Advertisers’ reaction was conciliatory, welcoming Hewitt’s decision not to allow the merger to go ahead “unchecked”.

But the scene has changed and now both the IPA and ISBA are lobbying the ITC and Ofcom about the details of the CRR remedy.

An ISBA spokesman says: “ISBA has taken a very deliberate stance to try to work with the decision to make it as effective as possible at ensuring protection for our members’ interests.

“One key area we are focusing on is the role and extent of the powers of the adjudicator, and who this will be. As we see it, the adjudicator is absolutely central to how effective CRR is likely to be.”

But Initiative Media chief executive Jerry Hill warns that it is essential the CRR remedy itself should be crystal clear, so that the arbitrator is not inundated with referrals and is free to turn around decisions quickly. The adjudicator – with access to all of the merged Carlton-Granada contracts, as well as information on its trading position – will in theory be a powerful person.

MindShare head of investment Nick Theakstone says: “It has been suggested that the adjudicator would be employed on a part-time basis, but the job is too important for that. Whoever gets it needs to be someone who has spent a large amount of his or her working life in this industry and who understands the trading environment.”

Names such as David Connolly, Starcom Motive executive operations director, who is due to leave his position this week, and David Cuff, former executive vice-president at Flextech TV, are being bandied around the industry. But the question remains whether the adjudicator, to be funded by Carlton-Granada, will be effective. ISBA is encouraged by an ITC and Ofcom briefing which says that the adjudicator’s decision will be binding on Carlton-Granada, and that advertisers and media buyers will have the right of appeal to Ofcom under defined circumstances; and thereafter to the courts. But nowhere does it talk about compensation for advertisers if their complaint proves justified.

But some buyers are sceptical about whether the adjudicator will be used. Carat broadcast planning director David Peters says: “The reality is that we have never had someone who can arbitrate in disputes. I don’t think they will be that busy; we have always used negotiation to resolve our disputes.”

However, compromise is not always reached and agencies can display their disaffection in the form of direct action. In the past, Carat, with clients’ approval, did not spend any money with Five for a year before reaching an agreement with the channel.

Theakstone believes that the CRR remedy needs to be tightened to ensure that it only applies to contracts for ITV1, not ITV2, and does not give ITV “a get out of jail free” clause by allowing it to argue over-trading and an inability to deliver on its obligations.

With many details of the CRR remedy yet to be clarified, the TV advertising industry is doubtful whether Granada and Carlton will have agreed their undertakings by the November deadline.

However, the two ITV companies will not be allowed to sell airtime jointly until the CRR remedy is in place, the Communications Act 2003 is in force and sufficient safeguards have been introduced to protect the other ITV regional licensees – Ulster TV, Scottish TV, Grampian and Channel Islands broadcaster Channel. All conditions which are likely to be met by December 29.

Nevertheless, the CRR remedy will have a significant bearing on this autumn’s contract negotiations. Some commercial broadcasters believe the CRR remedy unfairly protects ITV. They claim that media agencies will be reluctant to reduce their share of broadcast commitment to ITV beyond that automatically catered for under the remedy, for fear of jeopardising their discounts on station-average price. There are concerns that this in turn could limit advertisers’ ability to modify their requirements as product strategy changes.

Mark Howe, chief executive at sales house IDS, also warns advertisers that the CRR remedy only serves to protect the discount on station-average price, not the absolute cost of advertising. And if ITV’s impacts and audiences fall, as is expected in the long term, advertisers could find themselves paying more on a cost-per-thousand basis for advertising on the channel.

He adds that the CRR remedy wrongly assumes that current contracts have been negotiated in a fair and equitable manner, and that the ITV companies have not abused their dominance of the market. “This is the autumn, where agencies and clients should level up their books to where they want them to be,” he says.

Rival forces

Moving forward, one of the main ways that commercial rivals can take share of broadcast from ITV is through competing on viewing figures and commercial impacts. That, claims one industry insider, is likely to lead to a ratings war next year, with BSkyB, Channel 4 and Five all potentially colluding to schedule competitively against ITV.

Alternatively, BSkyB, which has 11 per cent of the TV advertising market, Channel 4 (20 per cent) and Five (eight per cent), could team up in a bid to protect their positions against ITV and feed off smaller rivals. Industry observers claim that it is unlikely that all three would join forces, saying that a pairing is more probable. Five, with a demographic closest to ITV, is said to have the most to lose. But the fortunes of the TV sales houses are tied up with the long-term corporate aspirations of broadcasters.

One industry insider says: “BSkyB is basically in control in my view. If it wants to take over Five in the long term, it will team up with Channel 4 to drive down its price. If that’s not the ambition, then it could go with Five.”

However, the ITC’s rules regarding advertising sales arrangements currently prevent the major TV broadcasters from selling their airtime jointly. But the decision to allow one ITV sales house necessitates a review of the rules, which is being undertaken by the ITC and Ofcom. Issues under consideration include whether the other TV sales houses should be allowed to sell their airtime jointly and make conditional sales.

An ISBA spokesman says: “We remain very concerned at the prospect of UK airtime being available from two sales houses.”

In general, media buyers are opposed to further consolidation, but Carat’s Peters says it is unlikely that a duopoly would emerge, pointing out that many smaller players in the TV ad sales market have been free to join forces but have not chosen to do so.

Further investigation

Yet, despite all these potential changes to the TV market, the Competition Commission has called upon the OFT, the ITC and Ofcom to launch an investigation into TV trading practices, as features for selling airtime (share-for-discount deals coupled with the station-average-price mechanism) caused it “disquiet”. Due to the Carlton and Granada merger, the Competition Commission says it could not examine these issues in full.

The commission says in its report: “agreements reached during the annual deal round are less than transparent; …it is far from clear that advertisers always get the full benefits of the deals struck between sales houses and their media buyers; and it is quite clear that some media buyers and advertisers get better deals than others”.

Mike Moran, worldwide marketing and strategy director at Thames Water, says: “Of course there is a lack of transparency; it’s a very opaque market. But it is hard to say that a bigger review ought to take place. What would you replace the trading system with?”

Media Planning Group head of broadcast Andrew Canter agrees that no one has yet come up with an alternative system that would work as an industry benchmark. But he makes the point that there are alternative ways to plan and evaluate campaigns, such as cost-per-rating points and fixed prices.

Media Audits account director Tony Emment claims the industry is more transparent than it has ever been, with between 70 and 80 per cent of UK business now audited. He queries why the Competition Commission went ahead in making a recommendation for the merger to Hewitt, based on a system that it had doubts about and is now calling into question.

With plenty of change in trading practices expected as a result of the ITV merger, few in the industry have the stomach for a further inquiry. And it is thought that Ofcom will wait to see how the CRR remedy affects the market before taking any further steps to change it.

A NEW-LOOK ITV

The &£4.5bn merger of Carlton Communications and Granada will create ITV plc – a monster player in control of 51 per cent of the UK’s TV advertising revenue. Carlton chairman Michael Green and Granada chief executive Charles Allen will become chairman and chief executive respectively of the merged entity, which will comprise three divisions: news, content and broadcasting.

The latter division, to be headed by Mick Desmond, will include marketing, scheduling and advertising sales. Graham Duff, chief executive of Granada Enterprises, and Martin Bowley, chief executive of Carlton Media Sales, are both vying to head the operation, with Duff expected to be chosen to take the helm.

Green and Allen have already unveiled plans for new digital channels – ITV Gold and a children’s proposition – in an effort to offset the long-term decline in ITV1’s share of UK audiences, which has fallen from 38.4 per cent in 1990 to 22.5 per cent in 2002, mainly to the benefit of the multi-channel broadcasters.

Share of TV advertising revenue has also fallen over the same period, from a high of 60 per cent in 1999. Part of the rationale for the merger is to build a strong ITV1 that will continue to offer mass audiences for advertisers.

Carlton and Granada expect to make &£55m in cost savings from the merger and have indicated an intention to negotiate a hefty discount on the &£300m tax that the ITV companies have to pay for their analogue licences.

Advertisers hope that most of the savings will be invested in programming. However, ITV Network announced this week that its ITV1 programme budget for the year to September 2004 is to be increased to &£841m from &£792m.

Many believe that it will only be a matter of time before a merged Carlton and Granada becomes prey to the likes of US media giant Viacom, owner of MTV, or Haim Saban’s Saban Capital Group. In the meantime it will have to deal with friction from remaining ITV franchise holders, in particular SMG which is known to be concerned that Carlton and Granada together control about 50 per cent of GMTV (owner of the ITV breakfast licence until 2009), while SMG and Walt Disney each have 25 per cent.

GLOSSARY

SHARE OF BROADCAST – the proportion by value, of an advertiser’s or media buyer’s television advertising, received by or committed to a particular channel.

IMPACT – one viewing of an advertisement by a member of the target market, measured in thousands.

STATION AVERAGE PRICE – calculated by dividing the revenue a channel receives in a month by the target audience it delivers in the same period. ITV’s station average price is the benchmark against which all prices are judged.

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