How to make money from being wrong

Christmas hasn’t just come early for the ITV companies – it’s come twice. It first arrived when the Independent Television Commission (ITC), despite a consultation exercise which showed public opinion running at four to one against, allowed the companies to axe News at Ten so that they could run “adult blockbusters” from 9pm onwards, and thus maximise viewers and advertising revenue. The companies received their second present last week when the ITC announced cuts in their annual payments to the Treasury – payments which had formed the basis of their successful bids for the franchises in the first place.

A complicated funding formula is involved but it’s predicted that the loss to the Treasury over the next ten years will be of the order of £500 million. The money is going back to the ITV companies whose profits last year were around £420 million – which they clearly regard as a rather measly 25 per cent return on capital.

It’s very tempting to blame the ITC, the ITV companies or even the government for allowing this to happen. But the culprit is Margaret Thatcher. In handing out the cash bonuses to the ITV companies, the ITC was doing no more than working through the ludicrous requirements of the Broadcasting Act 1990 – known in the trade as “Mrs T’s poisoned chalice”.

That act instructed the ITC to award the new ITV franchises to companies that promised to make the highest annual payments. But, in a little-noticed clause, the successful bidders, if they found they had made a mistake in their financial projections (in other words, had over-bid), could have their licences renewed on terms that are, in effect, more favourable. It’s a bit like placing a bet with a bookmaker and, when the horse trails in last, still getting your money back, plus some winnings to compensate for your horse turning out to be unfit. The ITC’s actions last week were explained to me by one industry insider as “simply correcting a market failure”.

Before 1991 franchises were awarded according to the past performance of the bidders plus the quality of their proposed staff and programme plans. When the franchises came up for grabs that year, the 1990 act came into force and the criterion was simply how much money a company was prepared to stump up to the Treasury.

The results were mixed. Two companies were eliminated because the ITC deemed their very high bids “uncommercial”. Thames Television lost its licence to Carlton TV. TV-AM, whose chairman, Bruce Gyngell, was said to be Thatcher’s favourite TV executive, also lost out, having been outbid by GMTV, which offered to pay the Treasury £50 million a year. Yorkshire TV retained its franchise by bidding £52 million a year. These, and the other ITV companies, based their bids on two considerations: first, on expected profits from the franchise, but second (and this was crucial), on how much they expected their rivals to bid.

The franchises were originally granted for ten years from 1993 to 2003. However, the act allows companies to apply for a ten-year extension of their franchises at any time from the beginning of 1999. At that stage the ITC has to work out how much more (or less) they should pay. The companies then decide whether or not they want to renew on those terms. If they don’t, they can have another go every year until 2003, in the hope that the ITC comes up with a better deal.

So last week the ITC offered eight companies renewals until 2009 (without further public or private consultation) plus, immediately, lower payments to the Treasury. The biggest winners are GMTV (whose bid in 1991 was seen as ludicrously excessive) with annual payments cut from £50.5 million to £20 million; Yorkshire TV, down from £52 million to £35 million; and Carlton, which will pay £72 million instead of £81.5 million. Lower down the ITV food-chain, HTV, which covers Wales and the west, is having its payments reduced from £25.5 million to £9 million, and Tyne Tees from £18.5 million to £11 million. True, three companies are being asked to pay more – Central, Border and Ulster – but the beauty of the system is that they can put two fingers up to the ITC for now and say “make us a better offer next year, please”.

Why are the companies entitled to these reductions? Apparently, they underestimated the impact that cable, satellite and now digital (which many of them also own) would have on their revenues. But whose fault was that? Not the taxpayer’s, that’s for sure. Many critics feel that the ITC members – mostly great and good stalwarts such as the Earl of Dalkeith and the Queen’s former press secretary – don’t have enough understanding of commercial realities.

The critical point is that these ITV companies are not fledgeling enterprises, struggling to survive. They are all part of larger, stronger groups. GMTV is usually described as “loss-making”, but it’s owned by such profitable media giants as the Disney Corporation and Granada, which also owns the other major beneficiary of the ITC announcement – Yorkshire TV. The announcement came on the day Granada revealed that its annual profits had leapt to almost £1 billion.

It’s hardly surprising that some of the losers last time round feel aggrieved. Bruce Gyngell said of GMTV: “Their business plan was abysmally wrong. I said they would go broke and they couldn’t sustain it. This confirms that the legislation was flawed and that the ITC was incompetent in interpreting it. It is small consolation to be found right seven years later.”