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August 24, 2008

Invest in ITV Shares? The Price is Right – I Don't Think So!!!!!


Invest or Advertise on ITV? If the Price is Cheap Enough: But When Will That Be?


I started to look at how ITV was doing elsewhere on this blog (Is ITV Going Down the Tubes?) in the early Spring of this year as Michael Grade tried to pooh-pooh the signs of an economic downturn which is now being considered as more of a recession if some financial commentators are to be believed with worse news to come. At the time of writing the ITV share price was still slipping it is now hovering at the 40 pence level - around a pound a share cheaper than this time last year!

Merryn Webb's article ( Merryn Webb Financial Times 22nd August ) which in the hardcopy version of the Weekend FT is entitled Investors Should Switch on to ITV but Advertisers Should Switch on to ITV in electronic versions shows a supreme over-optimism to my mind. One  thing for certain is my SIPP won't be going for this one and any investment trust my SIPP has an interest in which does will be dumped by me at the earliest opportunity. I did that last year when I noticed that Northern Rock appeared in the top 20 holdings well before the infamous credit crunch. Some investments are obviously bad even to non-professionals.

I  argue that both advertisers and investors should steer clear of ITV at the present moment. Now, there is an argument that the vultures are beginning to circle around ITV with the intention of stripping the carcass. Speculation earlier this week has linked BMG to a possible swap of its Channel 5 holding with the SKY holding in ITV. Sky are currently resisting the forced sale of their shareholding but will need to have some sort of exit strategy. Arguably despite the cost the blocking of NTL now Virgin Media in a planned takeover of ITV has worked to SKY's advantage as they have been able to use the time to establish better non-satellite based srvices.   Of course any deals like that would push the share prices up a bit and for the quick-fire trader rather than investor a small quick profit might emerge but if we are talking about investment, i.e. holding the share on the basis that the performance and prospects of ITV might improve decently then don't hold your breath. Leave it to the recovery funds to judge when the time is right. The shares have further to sink and this one is very difficult to call because of the rapidly changing media environment.


A key problem with Merryn Webb's article is that it relies on anecdotalism as the key element of its analysis rather than serious research. Merryn Webb, like myself, is not of the internet generation and this can make it more difficult to analyse a new cultural phenomenon. Her argument is based upon the fact that she uses the internet a lot and doesn't click on adverts. Instead she prefers the Skoda advert on TV. Merryn needs to make a cultural leap to gain a better insight into what is happening.


Webb ignores the advantages of the internet for advertisers, publishers and also consumers. Increasingly Google - probably the most sophisticated web company who at times seems to be driving the web - has brilliant algorithms which are continuously improving and are delivering and helping to create new markets to new creators - now there is a company to buy shares in! For example one of my AS students last year was earning about £25 per week from his adverts on his web sites. I'm a little envious it earns loads more than this site and neither of us set out to be commercial. He has more experience than me and he is clearly hitting his target market which is his peers. This is how people of that age and younger do things. Rather than analysing the average amount of pocket money that young people are getting getting abetter idea of the incomes of 14-19 year olds is what is needed. Clearly not all of them are working in Tesco, some are developing their own on-line income generators. How will they spend this? Probably on items advertised via the web. The latest iPod / MP3 phone or maybe a faster computer with better screens or ISPs offering better deals for a generation that increasingly turns to the web for a vast range of cultural experiences. People use the web for pleasure and for experiment and this is creating new ways of doing things which is still very young. Merryn I suspect uses the web purely as a working tool and that is the generational difference!

Google matches target audiences and advertisers which is essential in the era of audience fragmentation and on-demand media. Take this blog for example. There are around 500 publicly available pages produced by one person. Google has very successfully matched the page content to relevant advertisers. The better the page content the more closely the adverts seem to relate to potential users and the more popular the page the more the advertiser receives. New media then is intensely competitive. Those who actually make a living out of web publishing for example are amongst the new breed of entrepreneurs for the information age / networked society.

From the perspective of the advertiser once adverts are designed to fit the various Google formats available then they get advertising 24/7 at little or no cost. Only if the advert attracts attention does the advertiser incur costs. Furthermore the adverts can change from country to country so the global reach of the internet can be linked into local audiences. How clever is that? Pretty damned clever I reckon. Furthermore, an individual is attracting advertisers who are huge global companies. BT / Hewlett Packard / Sky for example all have / have had adverts on this blog. This is presumably the case for many thousands of individuals or small groups running small-scale sites. The fact that adverts from high quality companies can be attracted to these sites with no specific effort from the site-owners is truly phenomenal: Unimaginable without Google.

Not only is  publishing to  a global market for all possible but  advertising to all interested parties is possible. Just as the concept of mass media is changing so is mass advertising hoping to attract somebody out of a very general audience. Targeted advertising is where it is at and it will become more and more sophisticated. Publishers are free to focus upon creating the content and tuning their search engine optimisation techniques again with the help of Google.

Now from the perspective of the person clicking on an advert they are probably in most cases sufficiently intersted in the product or service to pay strong attention otherwise why bother clicking in the first place? People surfing the internet aren't going to waste time clicking on adverts to see if they find the advert amusing. By comparison the fact that Merryn finds the Skoda advert in Midsomer Murders memorable might relate to the content of the programme - in an inverse ratio?


Advantages of the Internet for Advertisers

I can think of several good reasons for preferring to place adverts on the internet rather than on TV:

  • Extremely low costs for distribution of the adverts
  • Low administration costs
  • Global reach
  • Local target audiences
  • 24 / 7 availability
  • Potential customers who actually cost the advertiser are self-selecting and clearly very interested in the product / service accessed either generically or specifically


Merryn Webb's Arguments for Investing / Advertising Using ITV

Merryn Webb's arguments come down to several key points:

  1. Anecdotal she doesn't click on ads therefore why should other people?
  2. Ads on the internet are irritants (they aren't on TV?)
  3. You can't block ads on TV out (Try using a Skybox!)
  4. 'The average internet user devotes just 24 minutes a day of his home time to the medium'. Evidence please and who is this "average" person anyway? Average and the concept of target markets are mutually incompatible
  5. Last year, 16-24-year-olds watched only 150 minutes (of TV) a day and also said they media multitasked while watching (they sent texts and fiddled on the internet at the same time). Webb writes of young audiences as having no money to spend on TV advertised products anyway: young reduced pocket money /new graduates weak job market / 20 somethings lack credit status. (Anecdotally my A level students have better iPods, mobiles and cars than me...!)
  6. Old people have more money and lots of it locked away in their homes. But which old people? Bring on the equity release schemes... (problem if your property values dive and forget leaving your money to relatives...!)

Media related arguments:

ITV has a few good things going for it, too. It makes the kind of entertainment and music shows both old and young like.

It still has 23.5 per cent of the UK viewing audience. It could even see advertisers return as they scale back online (Really?) spend and seek refuge in a tried and tested medium in a recession.

ITV is also cutting costs, and a possible change in public service broadcasting requirements may help with this. And, although it seems there won’t be a bid from Endemol, ITV is cheap and another bidder may appear in the future. (My emphasis)

Against Webb's arguments:

  1. The appeal to both old and young alike seems to contradict Webb's earlier arguments which wrote off the young as being irrelevant to advertisers anyway. The reality at my level of anecdotalism is that sixth form students barely watch any ITV at all. It is for "old people" (which I suspect is anybody over about 30). C4 is the popular channel.
  2. 25.3% of the UK viewing audience is something of a disaster when compared with what ITV achieved as part of the media duopoly that existed up until the early 1980s. The next thing is which 24.3% of the viewing audience? Possibly those who can't afford Sky and who find the BBC too elitist? If this is the case this means lowest common denominator viewers for most of the time who are less likely to have a big income (with the exception of footballer's wives of course). Obviously this weak demographic is very attractive to the serious advertisers.
  3. There is no evidence that advertising is migrating back from the internet rather the models of marketing and advertising via the internet are becoming increasingly sophisticated. Check out this Media 2.0 workgroup link for example.
  4. ITV is cutting its costs. Well it needs to because it is losing valuable income as ads migrate to the internet and as economic downturn bites. Given that much of its market comes from those designated as  sub-prime when it comes to credit ratings general mass advertising is likely to be wasted.
  5. Don't hold your breath over immediate changes in public service broadcasting requirements. There is no sign of the Governement relinquishing theses at present. If they don't happen for Michael Grade then ITV will really be struggling.


A more convincing argument about the effectiveness of webvertising


I find the argument below more interesting as what happens after a click through is of course extremely important. However this is a matter of how good the company is at delivering its services / products online. Amazon ad links go straight to the relevant book and now their service provides a good second-hand service as well - brilliant. As a  bookbuyer I use Amazon more and more.  In the end  the argument below doesnt negate wbvertising at a generic level it raises issues about competitiveness  and competence in the  delivery institution.  But this is the same issue  however / wherever a consumer  consumes.  The best companies will out!


...the rhetoric of departure in hypertext theory.
The other end of the ad's hypertext link is the landing page. Most often, these pages are highly disappointing and cause the user to back out immediately. This is why even click-through is a poor measure of the value of Web ads since it measures the alluring quality of your creative and not the ad's ability to deliver business. (Jakob Nielsen on why Advertising Doesn't Work on the Web)


Nielsen makes another important contribution to developing theories of advertising in relation to websites. Regular returning visitors are likely to be the most valued visitors for the development of websites:


If you build a good site, users may come; but if they only visit once, you lose. This is one of the reasons why raw "hit rates" are discredited as a measure of site success: you can build seemingly impressive traffic volume by spiking your pages with search engine bait or by spending liberally on banner ads on other sites. You gain zero value from people who visit one or two pages and turn away in disgust when they discover that your site is not really about the topic they searched for or that you don't fulfill the promise of your ads. Site tourists crank up your hit count but do nothing for the long-term viability of your site. Repeat users are satisfied customers and the way to build a site. (Ibid)


I absolutely agree and these are the principles behind this blog. Developing long-term content which is of educational value. Google Analytics provides me with visitor loyalty analysis and I can quickly see how much a regular user base is developing. Nevertheless there are opportunities for occasional users. there are some educational service pages on the site such as information about the UCAS points system and  listings of undergraduate courses. Whilst users might return there is still useful advertising to be done for one off users. Hit count isn't totally irrelevant as it helps place the site up the search-engine rankings. Appear after page 2 of Google and your site is commercially dead.  This on the other hand is how  the  web  becomes enormously  competitive and  how in the end the best content for specific target audiences should win out.


ITV Media midget in a Global Mediascape

The simple facts are that ITV do not have the weight financially to compete on the increasingly global media market and provide good quality products. At some point the whole will equal less than the sum of its parts in terms of share price. when that happens this is the time to buy because breaking up ITV and splitting the production facilities from the company will make the overall value clearer. As we move closer to 2012 the ominous presence of companies geared up to deliver mobile moving image products is going to be crucial. How well ITV can adapt to this rapidly changing media environment is a mute point. I'd stick your money in Vodaphone / WPP if I were investing in media companies.  The alternative is to short out ITV: I suspect that once the share price comes down into the 25 pence area then some real value can be potentially released:

Companies naturally dislike investors who bet on their share price to go down. But the activity is legal, and helps keep the market efficient. If the shorts are right, and a company is overvalued, its price will come down in time regardless. By publishing their own analysis, they can stop damaging misvaluations from persisting. (John Authers, Strategic Short-Sellers Not the Root of All Evil, FT 23 / 24 August 2008)



This isn't to argue that TV advertising is redundant, however the argument that because TV didn't kill off Radio, doesn't apply to the internet. The point is that the internet potentially allows for on-demand high quality moving image based media content this will depend on high speeed broadband connections becoming generally available. The other key issue is that 2012 sees the digitisation of the airwaves. There will be increased fragmentation of audiences and content which will be paid for by advertising most probably. Look out for groups of students gathered around the latest handheld devices laughing over 15 minute comedy shows whilst they are on the trains to school or college. Sky seems better placed to provide this content than ITVDraw your own conclusions when it comes to investing in pension funds. My Space will have given the Murdoch camp a lot of experience at the sort of content which younger audiences enjoy. (These aren't recommendation for Sky / My Space please note).

Overall investment in ITV for those not savvy with the rapidly changing media world and who don't have access to a lot of figures and some knowledge of developments in on-line advertising models will be taking an extremely risky punt right now. ITV will need to be significantly reconstructed if it is to survive beyond 2012 but how that is to be achieved and by whom is far from clear and the current downturn in the British economy is working strongly against it.





Webliography


Merryn Webb Financial Times 22nd August


Merryn Webb's article as displayed by Yahoo


Ofcom August 2008 Research Report


Ofcom PDF on the changing market context including use of communications by older people and the changing advertising market.


FT Technology Blog on web advertising


How-to films get ahead in web advertising. Guardian June 2007


VUNet comment on growth of European Webvertising

Why Advertising Doesn't Work on the Web

Why Site Tourists are Worthless


Warwick University Student Union Site advertising rates.  (Excellent example of  a very tightly defined target audience). The fact that  this site  came high on the search term "web Advertising"  already tells us something about the effectiveness of the site!


Webvertising


Five Bad Webvertising Techniques


March 05, 2008

Is ITV Going down the Tubes?

Is  ITV Going down the tubes?

ITV Logo


Introduction

Beginning to examine the British TV system in the contemporary Broadcasting / Multicasting environment can be little else but a work in progress which at least gives a notion of forward movement. It is highly debateable whether TV as we know it has got a promising future. Here we examine the long-term decline of ITV which up until the early 1990s had been the companion of the BBC in the British Broadcasting duopoly. What is discussed below is the question of whether the gloabl economic recession will send ITV to the wall or will it force a takeover or set of mergers. Whatever the outcome it is expected that ITV will not survive the next 18 months in its present form. 

One of my alert Sixth Formers alerted me to the fact that a problem had been announced with ITV, this morning. Well it was a very big but expected problem. ITV profits sank by a monstrous 38%.

Commercial broadcaster ITV has seen its annual profits for 2007 fall by 35% to £188m after a difficult year, but says its "turnaround plan is on track" (BBC News online check this page to listen to Michael Grade's rather tetchy protesting too much responses to serious questions. What does that tell you?)

It certainly begs the question about whether current shareholders should run for the exits and get what money they can for the shares despite the presence of the rather abrasive Michael Grade who came in a year ago to try and turn around ITV's lack of fortunes. It is a problem exacerbated by the great phone calls rip off, where loyal but rather naive suckers were phoning in to try and win competitions after the entries had been closed by the institution without telling anybody.

Michael Grade

Michael Grade currently ITV Chief Executive

Former BBC One controller Peter Fincham will join ITV as director of television, replacing Simon Shaps, the commercial broadcaster has said.

Of course I should have guessed these highly significant results were coming out as Monday's Media Guardian was full of upbeat messages about how well TV was doing with viewing hours up. The back page even featured a full page advvert claiming that teenagers were spending more time on line "discussing what they had seen on the TV Yesterday"!!!! 

teenagers online...discussing what they had seen on the TV Yesterday"!!!!

Well I don't think so! Neither did anybody else in the class. A couple said they mentioned a TV programme if they had just seen it and were explaining what they were doing, but to pretend that this is a harkback to the days of mass TV audiences who discussed a significant programme such as Coronation Street the following day...RISIBLE (LOL 2U).

Grade's struggle to turnaround the failing ITV

Below I look at the beginnings of change in the approach of ITV and place it into the contemporary world of rapidly increasing economic crisis in the US and ultimately the UK.  The fact is that the health of the macro-economy is extremly important to the survival and profitability of media companies. I suggest that the emerging economic crisi as well as a changing media environment is going to dramatically effect companies which are effectively medium scale regional players. ITV is one of these and it has had a series of failures and problems in the past few years which now make perhaps the weakest media company in the UK. With the chill wind of recession gathering pace there is little chance of ITV surviving in its present form. Whilst there is no doubt that Grade is probably the best man to get the best out ITV when it gets taken over or merges with another company or is broken up into a production arm and a distribution arm the market view is currently very pesssimistic. 

As far as Sky is concerned they would probably prefer to see the company break-up into a production arm and a distribution arm. With a 17.9% chunk which will need to be sold as a single chunk they are undubtedly engineering deals behind Grade's back. Perhaps with Disney is one suggestion. A likely outcome would then be the production arm being sold off, which might end up with Virgin Media who have no production presence and sorely need some in an era when production for the mobile market after 2012 is going to be highly significant.  It is hard to imagine what Disney would want with the news service and obviously Sky don't need it. Perhaps Virgin would take it on board? another possible is Bertelsmann, certainly speculation is rife, just don't expect ITV to last long in its present form. Grade is increasingly embattled.

Bertelsmann has always been the obvious buyer for BSkyB's stake in ITV. Its subsidiary RTL already owns channel Five. Now that Bertelsmann has shelved plans to spend £710m buying the remaining 10pc of RTL that it does not own, perhaps it will seek new targets to channel those funds. (By Juliette Garside Daily Telegraph Last Updated: 11:48pm GMT29/01/2008)

Regional Cutbacks

One of ITV's original strengths was the fact that it was a network and that it provided strong regional idenitities. Arguably it forced a change in the Public Service Broadcasting (PSB) remit. Nowadays it wants to maximise profits (well minimize losses in thier case). As a result massive cuts are being made in regional programming. Given that one of the remits for PSB in the 2006 white paper was to provide for regional identity this is a little ironic! Let's look at what the Press Gazette has to say about it all:

ITV has already cut its regional budget by almost five per cent ahead of a drastic reorganisation of its news output over the next two years, the broadcaster revealed today.
In its end-of-year results, published this morning, ITV said its regional programming costs were reduced by £5m in 2007, down 4.2 per cent to £114m.
Regional news accounts for about three quarters of this budget, or £85m - a figure which could be cut to £40m if ITV's regional news reorganisation is approved by Ofcom.
Under the proposals, the existing 17 news regions will be merged to form nine bigger regions. Widespread redundancies are expected as part of the cuts.(Press Gazette Paul McNally)

Grade's optimism seems wildly misplaced given that the economy in general is heading into a downturn. However deep that downturn is the advertising industry is always the first to react. Just look at the regional advertising for newspapers from the important Johnstone press group which also announced its results today:  

Johnston Press has ruled out making any "significant acquisitions" this year and has warned it is beginning to feel the impact of a slowdown in advertising.
The regional newspaper group posted a 4.6 per cent decline in profit to £178.1m for 207, with revenue up 0.9 per cent to £607.5m.
In its end-of-year results, published this morning, Johnston said print advertising revenue fell 2.1 per cent in 2007.
Early indications based on the first few weeks of 2008 pointed to a 4.2 per cent decline in ad revenue compared with the same time last year, with motoring and property advertising among the worst-hit. (Paul McNally)

Economic Slowdown / Recession / Stagflation: The Evidence

Grade has tried to brush off the ITV share price as just a bit of a 'panic about a consumer downturn' however Evan Davis the BBC Economics editor makes some salient points about retail sales. Let's take a look at what is actually going on. The state of the US economy is fundamental in what happens because it represent 25% of the total world economy! The BBC economics pages make this clear: 

The US economy, a $15 trillion giant which makes up 25% of the world economy, is in trouble, and could drag down world growth. The US central bank has cut interest rates aggressively and the US Congress is planning an economic stimulus package to prevent a recession.

The chart from the 31st of January 2008 below is a disturbing one.

US Economic Growth Figures

This useful BBC timeline provides links to Bank losses in January and February

US economy in slowdown says Fed 5th March

Confidence level at four-year low (UK)

Housing market slowing in Europe 5th March

One in five 'has mortgage fears' 4th March

French Bank hit by losses sustained in US property market 5th March

Thursday March 6th. Large rise in USA of people losing their homes

United States March 7th Unemployment rises. This will contribute to a rise in home forclosures. A dangerous downward spiral is in danger of occurring.  

By Friday the Seventh March the US Federal Reserve seems to have been panicked yet again

Monday March 10th: BBC reports consumer prices at a 16 year high  

Monday March 10th:  Oil hits record price of over $108 per barrel

Monday March 10th: ITV Targets Youth Audience on BEBO. (Adaptation or desperation) 

Tuesday March 11th: The UK's employment outlook is the weakest for 15 years, as companies continue to cut back on their recruitment plans, a report claims.

Tuesday March 11th: The price of crude oil has set a fresh record at $109.72, its fifth day in a row of historic highs.

Tuesday March 11th: The mortgage market is shrinking under the impact of the continuing problems in the banking system, say lenders.

Tuesday March 11th: The world's largest central banks have launched their latest co-ordinated action to calm jittery credit markets. The question many re asking is whther this is a sign of panic and whether they do anything more than hold up flagging markets for a bit. Many commentators argue that central bank intervention can't deal with the underlying issue of too much spending on credit in the UK and the USA. 

Wednesday March 12th: The price of crude oil has set a fresh record for a sixth consecutive day, hitting $110.20 as a falling dollar encouraged buying.

Thursday 13th March looks unlucky for some

  1. Big fall in retail sales in the USA in February. Is this more than straws in the wind? 
  2. Gold hits $1,000 per ounce for the first time ever. Gold always goes up when investors are looking for 'safe haven'. Bit more than a consumer panic I think Mr Grade
  3. Whilst this news will create a flood of crocodile tears the fact that a hedge fund Carlyle Capital is going under even after the Fed and other central banks have taken action to try and reassure the markets shows how deep the lack of confidence is. Read this article and the associated Peston blog to see why this is important
  4. The fact that AOL has acquired BEBO for what seems to be  something of a bargain price shows just how down the market is on media and advertising at the moment.  A good  buy for AOL - does  this harbinger a good-bye for ITV as the media sector loks to 'consolidate'? AOL itself has suffered recent profit falls and is seeking to reposition itself in the internet marketplace. They can afford to buy ITV cannot!
  5. Oh yes and car depreciation rates are set to increase by %8 more than usual this year. Whilst a glimmer of schadenfreude passes the lips as a Range Rover passes the fact of the matter is that all the signs of recession there. In an era when targeted rather than mass advertising is the thing, particularly finding the premuim markets, what is ITV going to be advertising and too whom. Taking a topslicing if the government offers might be a good idea!
  6. A rather telling quotation from a city economist rather than a  panic stricken consumer: "Looking at the markets there is a complete loss of confidence and that's because the markets are concerned over the US financial sector and ultimately what the Federal Reserve will be forced to do to support that sector."

Friday 14th:

  1. US bank Bear Stearns has got emergency funding, in a move that raises fears that one of Wall Street's biggest names is on the verge of collapsing.
      • ...if Bear Stearns had been allowed to collapse, it could have put the whole financial system at risk.

        Bear Stearns shares dropped as much as 53% on the news before finishing Friday trading down 46%.

          Monday 17th: Well the day Bear Stearns banks is taken over for peanuts. This is a powerful financial institution with shares worth at one point apparently 100 times the selling share price of a mere $2.00 US!!! OK ITV isn't a bank but then its shares were never a few hundred dollars. 

          Still think Grade was right about brushing off the state of the economy? The fact isthe outlook is bleak for the weakest sections of the media in general. Expect 'consolidation' over the next 18months (especially with ITV).

          House Repossessions

          House Repossessions rising significantly. 4th of March

          US manufacturing activity shrinks 3rd March

          Property prices fall in February (for the fourth month in a row) 28th February

          Falling House Price 2008

          FSA sees credit squeeze on banks 27th February

          The Financial Services Authority (FSA) has warned banks that the crisis in the financial markets will force them to change the way they do business.

          All this very recent economic and business data shows had bad it is becoming, it seems that an advertising slowdown is well under way. Grade may get a larger share of a falling market but is that good enough? Well most investors must be examining whether it worth holding onto their shares at the moment.  Obviously Sky TV hold around 17% of these shares which it bought at a much high price in order to block any potential takeover from Virgin Media. If forced to sell Sky would make a large loss but from a strategic perspective it would probably be worth it.

          The fact of the matter is that everyday the business and stock markets come out with worse news about financial expectations. The debate over the preceding months has moved from one of a bit of overexposure to sub-prime mortgages in the US to yesterdays slumping markets as a recognition that the US is inexorably heading into recession comes to the fore. The problem for the rest of the world is that it is still highly dependent upon the US which has been living on credit for a long time. Now people are begining to draw the line.

          The UK is clearly in a very weak economic position with an overvalued pound, a housing market which has become entirely disconnected to economic fundamentals because of the availability of cheap credit which has lulled houseowners into feeling richer than they are because the house prices have nominally trebled in value in recent years.

          This is likely to have an enormous effect upon ITV and other commercial media companies, becuase the advertising spend is going to to start drying up big-time. People are rapidly reigning in their spending at a time when the basic cost of living is suddenly beginning to soar in terms of fuel and transport, heating and food costs. At the same time the cost of products is beginning to rise because of the cost of basic commodities such as metals. Interestingly there has been the return of the term "stagflation" in economic discourse.

          Stagflation is a term which emerged in the 1970s partially as a response to high oil prices which coincided with the end of the post-war economic long-boom.  It described a period when prices were increasing faster than wages and economic growth had halted accompanied by a gradual rise in unemployment.

          Whilst the sort of recession seen in the world in 1929 is very unlikely because financial institutions are far more aware of how to manage things there is likely to be a prolonged downturn in spending in the U.K. This means that advertising budgets will become rapidly reduced and overall economic activity is likely to see the weakest media organisations go bankrupt or be taken over by the strong. however a quick read of the influential 'Lex' column this morning (Saturday 08 / 03 / 08) makes my glomy prognosis by no means the most pessimistic about economic futures :

          Now after a very nasty week in markets, the whispers are that it might be the big one: the worst crisis since the 1930s. Signals of distress abound: Yesterday's non-farm payroll data were awful, the US auction rate market is closed, bank shares are collapsing, interbank rates are back in the dnager zone and debt spreads are ballooning. even sovereign borrowers such as Italy are being hit. Meanwhile credit funds that made silly bets are dying." 

          ITV is in a very weak position. It appeals to audiences who tend to be in the lower income brackets and who will feel the consequenses of any economic downturn the most. In the past this would have meant a reduction in profits but shareholders in a stable media environment would know that this was very much a cyclical business with any economic good news rapidly being translated into increased advertising revenue. 

          Because the nature of employment has changed quite a lot of economic activity can be reduced on the margins of society. People will go out to eat less and jobs for teenage studnets may become lower paid, shorter hours or disappear altogether. This is important because these teenagers usually feed their earnings straight back into the market-place buying cultural goods and services feeding the "cultural industries". 

          Already in the US we can see problems emerging in organisations such as Starbucks which is very much the beneficiary of some spare cash in the system:

          Starbucks has been hit by a combination of rising raw material costs, which has forced it to raise prices and a drop in consumer confidence as a result of the sub-prime mortgage crisis, which has made its expensive coffee a little less alluring. The company increased prices over the summer but pricing pressures are continuing - milk prices, for instance, have increased more than 60% since the start of the year. (Guardian November 2007)

          Now if you read this story at first sight it seems to contradict my argument regarding advertising becuase they are going to try and advertise their way out of trouble.  Prior to this though Starbucks had never advertised and the other thing is they now have much more competition. Given the nature of the crisis it is unlikely that advertising is going to make anything other than a short-term difference. The next step will be special offers and promotions and will provide evidence that Starbucks is no longer a premium brand. By January 8th Starbucks had lost its chief executive:

          Starbucks has sacked its chief executive Jim Donald and handed the reins back to its chairman and former chief executive, Howard Schultz. (BBC Report)

          What we can expect in the UK over the next 18months is a consolidation of the market with brands coming up for auction. Possibly private equity will encourage the merging of a couple of brands. We have Cafe Nero / Costa Coffee / Starbucks in most town and city centres. Expect some to go! 

          The Changed Media Environment

          As if the general outlook for media in genral is pretty bleak there are specific factors which contribute to ITV's position as the investment dog amongst media companies. A lot of things have changed in the British media environment in recent years. The internet is still making a huge difference and models of media are still adapting and creating. Here the audience of ITV will tend to be less computer literate and to have lower numbers of computers in the household.  Many of this lower income audience upon whom ITV relies upon especially in the north of Britain have been largely excluded from the nominal rise in house prices which have fuelled the hidden inflation promoted by the government. They are most exposed to the credit squeeze and they inevitably end up with the most expensive credit which after all is spending one's future earnings / income at a price!

          The vast range of different types of media consumption is also also changing audiences. young people spend a lot of income upon games, mobiles, iPods etc.

          The changing media environment had meant that increasingly commercial TV companies had started to change the basis  of their revenue streams in a mockery of much hyped so-called "interactivity". This was the increasingly popular model of creating TV Premium phone-lines for viewers to "particiapte" in media events that were being staged (so-called "reality-TV" for example). To some extent this was managing to move commercial broadcasting companies away form their dpendence upon advertising revenue as advertisers themselves began to migrate onto the internet taking thier budgets with them.  


          Fragmenting Audiences

          As if the above unfurling economic slowdown isn't enough of a problem there is a problem of fragmenting audiences who are getting their content from elsewhere often via the internet. Young people seem to be gradually migrating away from TV and the TV they watch is clearly more targeted at youth audiences. My sixth form students seem to watch Channel Four the most and experience it as the main TV company which is aimed at 'Youth'. With a range of digital channels and forms of public service broadcasting coming from the BBC such as Asian Network there is also a growth of ethnically based media consumers as well. An OFCOM research report from July 2007 suggests that there will be little incentive for ITV to provide public service broadcasting  for regional news services.

          ITV certainly isn't targeted at today's aspirant consumers it is a channel "for grannies" commented one of my sixth-formers. Perhaps a little ageist but the fundamental point is that advertising itself is fragmenting and chasing 'niche' audiences. These niches themesleves are quite dynamic and multicasters have to be able to respond to changing tastes and fashions very quickly.

          Loss of trust in ITV and to some extent BBC

          As mentioned earlier revenue streams for broadcasting companies  previously dependent upon advertising increasingly promoted a model of cheap TV which provided the opportunity to get audiences to participate using premium phone-lines. Here I argue that to a large extent this led to an increased 'dumbing down' of popular TV and ultimately led to a total ripping off of the audiences. The long-term outcome of this is still unfolding however it is questionable whether ITV can continue in its current form.

          Where is ITV Now?

          There are signs of desparation crreping in at ITV as Michael Grade carries on with attempting what appears tobe structurally impossible. This recent Daily Telegraph comment on the business angle shows a scepticism is is hard to disagree with: 

          Show goes on for Grade as Shaps exits

          By Alistair Osborne, Business Editor
          Last Updated: 1:40am GMT01/03/2008

          ITV has instigated a bold management shake-up that sees the departure of television director Simon Shaps and the extension of Michael Grade's tenure as executive chairman for another year.

          As the Telegraph notes in ITV:  

          The shares, down 37pc in the last 12 months, slipped 2.4 to 68.7p. Mr Grade said: "The share price is all to do with panic over a consumer downturn and the overhang of BSkyB’s 17.9pc stake."

          Below in July an investment advice website This is Money noted the optimistic outlook of Michael Grade who argued in July 2007 that advertising outlook was looking strong. Clearly this argument is obviated by the current economic conditions outlined above.  

          First-half ad revenues at ITV1 were down 9% at £595m, slightly better than Grade had forecast at the group's annual meeting in May. With digital stations ITV2, ITV3 and ITV4 and GMTV together producing a 24% rise in ad revenues to £122m, the overall group decline in the first half was 5%.
          The British television advertising market looks to be recovering strongly and is expected to be up by 10% in July. ITV's own experience shows that demand became increasingly strong through May and June.
          Chief operating officer John Cresswell said: 'Returning stability in the total TV advertising market has been an important feature of the first half, as has the improving schedule performance and the roll-out of itv.com.'

          Below are the latest share prices taken from the BBC Markets page on Saturday 15th March. They make pretty grim reading having dropped by a quater since Xmas.

          ITV share price over three months

          Here is a chart for the ITV share price for the last 12 months, it makes pretty grim reading for Sky who have bought over !7% of the company:

          ITV 12 month share price

          Under the circumstances the ITV News at Ten initiative without adverts seems like a desperate measure to recapture audiences reports the Guardian :


          ITV is running its resurrected News at Ten without any advertising breaks - a move that is set to cost it hundreds of thousands of pounds in lost revenue.
          The broadcaster said today it had no immediate plans to introduce a commercial break into the programme, after the first edition of the new-look programme ran uninterrupted last night, with a commercial break at the end before the regional news.
          ITV traditionally runs commercials halfway through its nightly news bulletin, with 60-second spots some of the most expensive on the network at up to £100,000.
          Industry sources said the move to run the new
          ad-free is a bid to lure more viewers away from BBC1's 10 O'Clock News, which runs uninterrupted.

          The Guardian reports that the return of News at Ten haslargely been a failure leaving ITV an even more unconvincing bet:

          BBC1's Ten O'Clock News has pulled in almost twice as many viewers as News at Ten since the ITV1 bulletin was relaunched a month ago.
          Figures for the revamped News at Ten show that since the bongs returned on January 14, it has pulled in an average of 2.7 million viewers, Monday to Thursday, when the ITV1 bulletin is head to head with its BBC1 rival.
          This compares with the 4.8 million viewers who have been tuning into BBC1's 10pm news on average.  

          The ITV Owned loss making Carlton Screen Advertising 

          As if the above information isn't bad enough one of ITV's subsidiary organisations is managing to make a magnificent loss in the Cinema advertising industry. Hard to make a loss in a part of the economy which has been doing well but is likely to be hit as the recession develops. The Times recounts the sorry story yet another in the story of ITV mismanagement making you feel sorry for Michael Grade (well almost):

          The company behind Australian cinema chain Hoyts is looking to buy loss-making Carlton Screen Advertising from ITV.
          Pacific Equity Partners is one of two parties to have registered interest with Grant Thornton, the broadcaster’s adviser.
          Once worth £80m, analysts now value CSA at nothing, despite healthy cinema attendances. ITV may even have to pay someone to take it off its hands.

          The backdrop to declining audiences for both ITV and BBC in 2007

          The Daily Telegraph noted on the 19th January 2008 that:

          The fall in ratings follows an embarrassing 12 months marred by phone-in scandals, with both channels being forced to apologise to viewers for encouraging them to enter competitions they never stood a chance of winning. BBC1's share's of viewers during the peak 8pm to 11pm slot fell from 24.22 per cent in 2006 to 23.43 per cent in 2007, while ITV fell fromFor the first time in television history, fewer than half of viewers watched either BBC1 or ITV1 during prime-time last year. 26.82 per cent to 25.32. The ratings, published by Broadcast magazine, were based on official figures by the research organisation Barb.

          Grade stands by ITV strategy By Ben Fenton Published: March 5 2008 08:05 | Last updated: March 5 2008 21:18

          This article by Fenton in the Financial Times below sees Grade upbeat despite evidence to the contrary:

          Analysts said that, although the company had reported a good start to 2008, it was vulnerable to a slowdown in consumer spending and would be among the first to suffer the effects of tighter advertising budgets.

          Below is a share chart of the successful advertising agency WPP over the last 12 months which doesn't make pretty reading and clearly shows what he market thinks about the liklehood of a serious downturn in the eonomy in the near future. Inevitably advertising and media are very responsive to change in consumer budgets:

          WPP 12 Month Share Price 2

          WPP was very confidant about a good 2008 as can be seen in this trading statement:

          WPP, the world's second-biggest advertising group, expects 2008 to be a bumper year for the industry. The Beijing Olympics, the US presidential election and the European football championships are expected to boost business, it said.

          Maintaining a Public Service Broadcasting Remit

          Michael Grade is nothing if not dogged. At this Ofcom conference in Cardiff whilst the phone-in scandal was reverberating Grade put the case for how wonderful ITV is at regional broadcasting:ITV's role in the nations and regions

          But I want to start today by emphasising the place that ITV plays in national broadcasting and reflecting all of Britain back to itself.
          This year ITV will broadcast around 2,000 hours of dedicated programming for the nations of Wales, Scotland and Northern Ireland, across news, current affairs and other programming.
          That represents a total investment of tens of millions of pounds every year across SMG, UTV and ITV Wales in programming for the nations.
          Remember none of our main commercial competitors provide a single minute or invest a single penny in such programming. It is just ITV providing a vital alternative to the BBC in this critical genre.
          In addition, producers in the nations continue to win network commissions out of the 50% of the ITV1 budget that goes outside London. That represents a further £30 million over the last couple of years, including programmes as diverse as Rebus and The All Star Poker Challenge.

          Of I fully accept that "All Star Poker Challenge" is a fundamentally crucial piece of regional broadcasting which manages to maintain the identity of a region of gamblers, sharks and small time crooks and presumabaly tax-evaders (are we talking the Isle of Man here?). Certainly the term "diverse" can hide a multitude of sins. Please note that the current government wants to top-slice the licence fee to support this kind of drivel. This is how business media analysts view Public Service Broadcasting as Brand Republic argues:

          Grade has also managed to dump most of its remaining public service obligations (arguably bringing back 'News At Ten' is ITV's attempt at compensation for this) and he may even be able to get rid of the hated Contract Rights Renewal (which allows advertisers to reduce their spend in line with ratings) soon.

          Recent Reports on the Future of ITV

          BBC Business report  2006:  Sky and ITV  

          Independent  07 March 2007

          This Times report from October 2007 on the success of Google advertising probably sounded the death knell of ITV as even the flagship of former year's Coronation Street is shown to be a blast from the past when it comes to creating revenue: 

          Google’s headline advertising revenues surpassed ITV1’s in the third quarter as the search engine demonstrated it could generate more money from sponsored links than 30-second commercials in Coronation Street.

          Grade may find a glimer of hope in this comment from the World Advertising Research Centre: 

          85% of consumers still find TV advertising to have the most impact on their buying habits, although online ads come second best with 65% saying they have the most impact, ahead of magazines at 63%. (World Advertising Research Centre March 8th 2008).

          However the bad news for Grade is that according to WARC the UK at 14% has the highest share of advertising based upon the internet and it's rising. Try out WARC's clickable globe to compare UK and other countries.

          ITV's Broadcasting Portfolio 

          The week ending Friday 21st March brought some interesting aspects of ITV's sports portfolio. sports after all has elements of Public Service Broadcasting embedded within it in terms of national regional and local representation it can also generate a lot of money in advertising. 

          The good news for ITV is that is has retained the broadcasting rights to EUEFA Cahampions League until 2012 as the BBC has reported:

          From August 2009 the channel will broadcast the first pick of Wednesday night games, including the final and Uefa Super Cup Final.

          however Sky has gained part of this competition:

          BSkyB earlier won the right to show coverage of live matches and highlights on a Tuesday, plus matches other than the first choice on Wednesdays.

          The BBC declined to bid for this one.

          Formula One

          Thankfully that ecologically stimulating sport Formula One is back with the BBC who have regained it after 12 years. This is strange as with Hamilton a potential British World Champion giving such a strong naotional interest in the sport it has probably never ben more popular. Was ITV short of the readies to bid up? One must presume either this or else the possibility of splitting up. It seems that Ecclestone is concerned with the future prospects of ITV reading between the lines of his comment on Radio 5 Live:

          Asked why he had decided to split with ITV, Ecclestone told BBC Radio 5 Live: "It's not that we are unhappy with ITV but I think maybe they will have their hands full with other things and maybe the BBC can service us a bit better.

          Ex Formula One presenter Murray Walker who did it for both BBC and ITV has expressed his astonishment and also thinks there is something else going on: 

          Murray Walker, former F1 commentator for both the BBC and ITV, said: "I'm absolutely flabbergasted - I was lying in bed listening to the news this morning and I almost fell out of bed when I heard it.
          "It's an amazing development because I think ITV did and do a superb job, and I think there is more to this than meets the eye." (ibid)

           

           

          Conclusion

          Whilst it is premature to predict the total demise of ITV, in its current format and in the current economic climate it is hard to imagine a viable business model for the future. With Sky having a 17.9% stake and Richard Branson around 11% it is clear that the sharks are circling. Grade's interview with the BBC business programme so viciously cut out any questions about ITV being split into production and distribution arms inevitably points up the weakest point in Grade's armour. As Virgin doesn't need a distribution system a deal with Sky for the 17.9% stake in which Virgin would keep the production arm might be a possibility. The fact that we can sit around and speculate the likely outcomes at all would have been unthinkable only a few years ago. It shows how far ITV has fallen and how it has really failed to keep up with the rapidly changing media environment. Obviously any deal would have to go through regulatory approval, however with the probability of declining revenues and the possibility of a failing company on its hands the regulator would be under considerable pressure from the market. Grade's strategy of producing better quality programming is an expensive risk which might have worked in a different economic environment but would rely upon increasingly risk averse bankers to provide the funding. One can only assume that Grade is trying to rally around other large shareholders and trying to stitch up a deal which allows him him to exit from the post with a semblance of dignity and which outmanoeuvres both Sky and Virgin. Grade could try to enlarge the  group  by merging with other troubled media groups such as Scottish Media Group.  This would provide much needed consolidation in the sector and might act to water down  Sky's holding but it seems a thin hope.

          Postscript

          Coming back to this a couple of months later we can see how bombastic Grade's claims were. There has been aserious financial meltdown and there is little doubt that ITV will suffer from this. Added to this thay have just been fined a large amount of money by Ofcom over the telephone scam of around a year ago.  


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