Carburton Street, London -- The Government wants to maintain "plurality in television services" and also intends to ensure that there are at least four separately controlled broadcasters providing free-to-air analogue television services. This might prevent either Carlton Communications (LSE: CCM) or Granada (LSE: GAA) from merging with Channel 5 but a union of Carlton and Granada is certainly not out of the question.
There was a time when a licence to operate an ITV franchise would have been synonymous with a licence to print money. But competition has ensured that today's advertising revenue is divided up and fought over between the various players within the industry, both terrestrial and non-terrestrial. And when those advertising budgets get stretched, then something has to give. Today we found that it was Granada's profit that snapped first. The commercial television broadcaster posted a drop in sales, down from £1.59b to £1.49b and pre-tax profit before digital media and exceptional items fell 35% to £175m. Granada also revealed net advertising revenues were down by 12% as a result of a difficult global media market. The deficit for the full year to September was made much worse by continuing losses at ITV Digital, the pay-television service that it jointly owns with Carlton.
It would be easy to prescribe consolidation as a remedy for the ills of the industry. But current rules prevent this and the situation is not expected to change until a new Broadcasting Act is brought in late next year. For now, Granada can only attack the problem from one direction, namely to cut costs and reduce cash burn. It has done this by employing fewer people, freezing pay, lowering capital expenditure and reducing investment. It will need to try and maintain this lower cost base until it can legitimately walk down the aisle with Carlton or at least until another suitor turns up.
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