A merger reshapes U.K. TV; stage set for foreign investors

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Imagine that the U.S. government funded an independent broadcaster through a compulsory TV tax. That it exploited cross-media ownership loopholes to the advantage of a powerful, government-friendly satellite-TV competitor of the once dominant terrestrial commercial TV network. That it then approved the merger of that commercial TV network's two major companies-after rejecting an advertiser-backed suggestion that the ad-sales unit of the new merged company be divested to protect competition.

This unlikely scenario has actually happened in the United Kingdom, where the Tony Blair government last week sanctioned a merger between Carlton and Granada, the two major players in ITV, the leading U.K. commercial broadcast network.

The merger, meant to make ITV a stronger competitor in the U.K. TV market , is expected to spark takeover interest among international media companies. Viacom's Mel Karmazin and media investor Haim "Power Rangers" Saban head a list of media moguls reported by the British press to be looking at ITV.

The peculiar nature of the British broadcasting industry results from the 40%-plus audience share controlled by the ad-free British Broadcasting Corp. BBC income is derived from the license fee, a $196-a-year tax on anyone owning a TV. This, plus commercial income through BBC Worldwide, brings in $4.5 billion in annual revenue.

Satellite-TV giant BSkyB, part owned by Rupert Murdoch's News Corp. (despite News Corp. ownership of the Times and Sun newspapers) offers subscriber packages from $500 to $830 a year, which bring in $5.2 billion in revenue.

Revenue climbed at BBC and for pay-TV (including Sky) last year, but TV ad sales (on which ITV and ad-supported rivals Channel 4 and Channel 5 depend) fell 7%. ITV's share of TV advertising fell to a "lowest ever" 51%.

U.K. TV advertisers expressed concern at rivals Granada and Carlton merging previously competing ad sales units. Channel 4 will now likely look to merge its ad sales operation with Sky or Channel 5, or both. Other critics condemned the approval of the merger as "a reward for failure." ITV suffered big losses in digital TV last year and its share of ad revenues and viewers has been in decline.

But in an increasingly global TV marketplace, there seems no alternative but for the U.K.'s ITV companies to merge. And it must ultimately be in advertisers' interests for the old terrestrial TV channels to at least retain their audience reach.

In theory, $90 million in projected cost savings from the merger will be plowed into programming to help ITV compete for viewers. ITV commits around $1.4 billion a year to network programming, the BBC slightly more. Sky spends a fraction of those amounts on original British productions.

The issue of the BBC's license fee is for another column. Nothing will change until the BBC's 2006 charter renewal-if then. ITV needed to do something. The merger is the beginning of the change, not the change itself. As a result, the U.K. market has opened up its TV companies to potential overseas investors. We will all hear much more of this story.

Stefano Hatfield is contributing editor to Advertising Age and Creativity

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