ITV is returning to the UK pay-TV market for the first time since the failure of its digital terrestrial television venture, ITV digital. The broadcaster will launch three channels - HD versions of its ITV2, 3 and 4 channels - as part of the BSkyB platform in the last quarter of the year.
The new channels will be available to all BSkyB's HD subscribers - 2.939m at the last count - with the satellite broadcaster paying an undisclosed per subscriber carriage fee. ITV's channels are carried free-to-air on pay platforms and it has not had a subscription revenue stream since ITV Digital switched off in 2002.
The move came as ITV reported improved performance in its core free-to-air business. ITV's advertising revenues in the first half of 2010 were £728m, up 18 per cent on the same period of 2009 and better than the overall UK TV ad market, which grew 15 per cent. The ITV family of channels increased their share of the ad market to 45.8 per cent (44.6 per cent in 2009).
On the back of improved revenues and cost reductions, group EBITA improved to £165m from £46m in first half 2009. Net debt was £437m as of 30 June 2010, compared to £612m at the end of last year.
The performance of ITV's flagship ITV1 channel was boosted by recovery in the UK ad market after one of the worst years in its history and by the FIFA World Cup in June. However, ITV1 overall share of viewing fell to 15.9 per cent, compared to 16.7 per cent in the same period of 2009. ITV1's share of commercial impacts (SOCI) was down four per cent at 27.2 per cent (28.4 per cent in 2009).
Decline in ITV1 was offset by a stronger performance for ITV's family of digital channels, which increased SOCI to 10.5 per cent in the first half from 9.2 per cent in 2009, primarily thanks to improvement in the upmarket-skewed ITV3.
Revenues for the online division were up 20 per cent year-on-year to £12m, excluding the Friends Reunited website business sold in March. The main itv.com website registered a 27 per cent increase in unique viewers but in reach and audience remains 'subscale', according to ITV itself.
Showing the impact of cutbacks in expenditure by broadcasters around the world, production division ITV Studios reported a 25 per cent fall in external revenues at £126m. Internal revenues from commissions from the ITV family were flat at £128m, while international production revenues were down 48 per cent to £39m as US and German programme commissions were not renewed.
ITV said the ITV1 network programme budget would be cut from £820m this year to below £800m in 2011 and 2012. Outlook for the third quarter ad market is good, with ITV ad revenue forecast to grow around 15 per cent. However, the outlook for the fourth quarter and into 2011 remains 'uncertain' with tougher comparatives.
ITV has an almost entirely new management team, with a new chairman and chief executive, new heads for its production and commercial businesses and a new chief technology officer. However the announcement of a turnaround plan designed to address the decline of ITV's core free-air-air broadcasting business carries strong echoes of statements made by the previous management team, which set and abandoned targets for SOCI, online revenues and production revenues. The target to derive half of revenues from non-television advertising sources (the total was 73 per cent in 1H 2010) is not far away from the objectives set by ITV management some years ago.
The return to pay is, however, a new development. ITV has avoided the nuclear option of moving its SD channels behind a pay wall, because the carriage fees BSkyB would have paid would not be enough to compensate the loss of ad revenue.
Assuming ITV is paid a monthly 30p fee per sub for the digital HD channels, Screen Digest estimates the HD channels could deliver £14m in carriage revenue next year and £17m by 2012. After various technical costs (notably transmission) and assuming minimal additional production costs (ITV has already committed to several ambitious targets regarding HD-native content for ITV1 HD) this would translate into roughly £11m gross profit from carriage next year and £13m the year after. BSkyB may, of course, have offered less, although the ITV channels are among the top rated digital services.
Chief executive Adam Crozier - who only joined ITV in April - has had little time to influence the business which he said 'needs to change substantially'. As well as ITV plc being over-dependent on spot advertising, he said, itv.com lags behind competition in terms of 'audience, functionality and revenue' while the content business needs to increase its global scale and its share of ITV1's network spend.
In terms of advertising outlook, ITV management confirmed that Q3 trading is still looking good and forecast to be up around 15 per cent. However tougher comparatives and economic uncertainty led ITV to be 'cautious' for Q4 and for 2011. Screen Digest currently anticipates ITV NAR to grow 13 per cent in Q3 and two per cent in Q4, putting full-year NAR growth to 12.4 per cent - in a market up 10.1 per cent - thus entirely offsetting the 2009 drop. As for 2011, the television advertising market is expected to grow sluggishly (one per cent). ITV will be in line with it or slightly below. Absence of a World Cup boost in Q2 will not be compensated by the Rugby World Cup in the autumn, while Channel Four and Sky Media will be more competitive, having both recently extended their digital portfolios.