What is the outlook for ITV?

By Torin Douglas
Media correspondent, BBC News

Even before it announced its annual results, no-one was in any doubt how bad things were for the UK's leading advertising-funded broadcaster.

Production on long-running drama Heartbeat has been suspended

The days when an ITV franchise was deemed "a licence to print money" and a single regional company - Granada - could splash out millions on high-quality dramas such as Brideshead Revisited and The Jewel in the Crown are long gone.

ITV's commercial director Rupert Howell admitted this month that it was "scrapping for its life", as he pleaded with the government to let it make money from "product placement".

It is one of a series of regulatory changes it is seeking, as advertising revenue dives and audiences fragment.

You might expect ITV to play up its problems as it tries to bounce the government into changing the rules.

Channel 4 has dominated the debate over the future of public service broadcasting, with Ofcom and ministers floating ways to safeguard the smaller channel's future.

A merger with BBC Worldwide or Five has been mooted, which is expected to announce big job cuts.

'Enormous poison pill'

But things must be dire for ITV to suggest a merger with the two other ad-funded terrestrial broadcasters, Channel 4 and Five.

It says this is "blue sky thinking", as requested by the government, in response to Lord Carter's interim report on Digital Britain - but such a merger really is thinking the unthinkable.

The government would need to scrap the competition rules, as it did with the Lloyds Bank takeover of HBOS - hardly an encouraging precedent.

If the worst should happen, and ITV were dismantled or taken over by an overseas company, it would leave a huge hole

Other broadcasters and production companies simply will not wear such a merger.

Channel 4's chairman Luke Johnson says he regards ITV's pension hole as an "enormous poison pill" and sees no great value in equity in ITV.

Tim Hincks, chief executive of Endemol UK, which sells shows including Big Brother to ITV, Channel 4, Five and the BBC - thinks it is a non-starter. BSkyB and Virgin - no strangers to the law courts - seem certain to object.

And advertisers - already resisting ITV's plea for a relaxation of the advertising sales rules - are hardly likely to accept a merger that would give it a 70% share of ad sales.

The fact that ITV has even raised the idea shows just how bad things are in commercial television, where huge structural changes have collided not just with an existing downturn in advertising but the global financial crash.

ITV made the "wrong" investment in Friends Reunited

ITV's plight is particularly desperate, with advertising down more than 15% so far this year and hopes of an Easter boost fading.

The internet has broken the traditional TV advertising model and in, trying to get a slice of the action, ITV bought the wrong internet company - Friends Reunited - at too high a price.

With Sky still holding an 18% stake in ITV and challenging a regulator's ruling to reduce it, no investors want to buy even at its current lowly share price. And, perhaps worst of all, it has a huge pension hole.

So what can ITV do? It has already cancelled expensive dramas such as A Passage to India, reduced episodes of The Bill, and halted production of Heartbeat and The Royal.

Recent reports - unconfirmed, though seemingly well-sourced - suggest it may now do one, or all, of the following:

• Cut at least 500 jobs (on top of 1,000 last year), many at its Leeds studios where Heartbeat and The Royal are made

• Sell website Friends Reunited for a loss

• Sell SDN, a company with a stake in Freeview

• Release the handcuff deals with its biggest stars such as Ant & Dec and Simon Cowell

• Cut its programme budget, which it has so far tried to avoid

The Leeds proposal has been condemned by broadcasting union Bectu, which said ITV had the "most demoralised workforce in British television".

Commanding heights

It would represent almost the final withdrawal from ITV's once proud regional heritage - when it had major production centres across the UK.

Yet there's a paradox here.

Despite this undoubted decline and the loss of reputation, ITV remains one of the commanding heights of the UK media, delivering far bigger audiences - and a much bigger share of advertising - than any of its commercial rivals.

This explains why advertisers are still resisting any relaxation of the sales rules.

Coronation Street remains a popular ITV stalwart

It has invested up to £1bn a year in UK production, creating highly popular British shows for ITV1 including Coronation Street, Britain's Got Talent, Emmerdale, Dancing on Ice, and Saturday Night Takeaway, as well as dramas such as Whitechapel and Doc Martin.

This is at a time when US imports - both drama and factual - are finding a ready and growing market here on digital channels, including ITV2. Ofcom has acknowledged this as an important contribution to public service broadcasting.

It has been suggested that if ITV did not exist as a broadcaster, its production arm could still make such shows for other commercial channels, such as Five or Sky1.

But that ignores the broadcasting ecology - the huge advantage of being a large channel with an established audience.

When Richard and Judy moved from daytime on Channel 4 to peak time on a new digital channel, their audience virtually disappeared.

If the worst should happen, and ITV were dismantled or taken over by an overseas company with less of an obligation to create British programmes, it would leave a huge hole. That really is thinking the unthinkable.