Speeches
Merrill Lynch Speech
06/06/2007 Good morning ladies and gentlemen, [for those of you who don’t know me, my name is Michael Grade]. I took over as Executive Chairman of ITV plc at the beginning of this year.
As I have been around the investment community, the question that recurs is why I took the job. Easy to answer. ITV is still a great business, a national and much loved and recognised brand and a business that can establish a market leading position in the digital world.
So…when I was offered the chance to run this business for a few years, I didn’t hesitate. It was a business in need of a broadcaster to lead its recovery and prepare it for the post analogue world, also experience has taught me that three years is the limit of my tolerance in the public sector.
The problem at ITV has been that a succession of consolidation moves, regulatory and parliamentary battles and putative bids have meant it has taken its eye off the ball.
ITV1 is the biggest brand builder in the UK with un-matchable reach for our advertisers. In short, ITV is the most powerful marketing vehicle in the UK. In addition, in a world where content creation and ownership is the gold standard, ITV is the biggest commercial creator and owner of intellectual properties in the UK, if not Europe. I will explain in a moment why this asset is such an extremely valuable prospect.
We are currently engaged in a wide ranging analysis of the allocation of resources within the Company. We will update the market by the autumn. I will talk as frankly as I can bearing in mind we have yet to complete our work.
We need to do two things. We must urgently stabilise the existing core ITV 1 business, and at the same time we must put in place a credible, achievable growth strategy for the medium term.
Broadly, ITV plc’s tasks are to:
- Fix ITV1
- Keep growing our non ITV 1 spot ad revenues
- Start to grow our content and exploitation business
- Develop our consumer facing new media businesses
- Deal with the most onerous regulatory constraints
Those of you who attended our final results will know that I think the overall strategy inherited is right. The business is generally in good shape, by which I mean we are in the right businesses, we are focussed on our two core skills, making and broadcasting programmes and selling the airtime in between to advertisers. We do not intend to stray from that focus.
We have continued with our non-core assets disposals programme and already this year we have realised £71m.
If the strategy isn’t wrong then what is the problem with ITV and what can I do to improve the company’s performance?
The answer to that is heck of a lot, of course it will take time.
I have spent a good deal of my time over the past six months, meeting advertisers and agencies to discuss CRR. Many have privately expressed concerns over CRR and the deflationary effect it is having on the industry as a whole and the potential side effects of diminishing the most powerful brand builder in Britain. At its worst, ITV’s inability fairly to price its own airtime restricts our ability to optimise our investment in the premium content that creates ITV’s unique mass appeal and delivers audience reach. ITV is currently the biggest commercial investor in content in Europe. CRR jeopardises our current level of programme investment. This is NOT good news for advertisers.
The most watched video on U-tube has chalked up about fifty million hits globally which is an important milestone (although we’re not told how many individuals have watched it twice or more). Less impressive:- that fifty million took ten months to achieve. ITV1 reaches that many individuals every single week. You need impact to build big brands - that is ITV’s unrivalled strength.
I would like to take this opportunity to explain why CRR is so punitive. It has frequently been reported that CRR allows advertisers to cut their spending if ITV1's audiences fall. Whilst this is true, it's not the whole story. The brutal reality of CRR is much more punitive: for in practice CRR allows advertisers to reduce spend on ITV1 UNLESS AUDIENCES RISE SIGNIFICANTLY year on year. The volume of commercial impacts (that is the total number of occasions on which commercials are viewed on all advertiser-funded channels each year) has risen by 4.1% per year over the past four years. Total commercial impacts have risen from 654 billion impacts in 2003 to 708 billion in 2006. This is due to the BBC losing viewing share to new commercial channel and an increasing number of digital channels which have a higher mintage allowance - nine advertising minutes in the hour rather than the seven on the analogue terrestrial channels.
To maintain or improve ITV1's share of total commercial impacts during that period, viewing to ITV1 commercial breaks would also have had to rise by 4.1% or more: an almost impossible task for any large free-to-air channel at a time of rapid fragmentation until the free switch from analogue to digital delivery is completed in 2012.
Another unforeseen and damaging side effect of CRR is that it deters innovation in programmes; it attacks the very heart of creativity. Changing this mechanism would in my opinion significantly improve the innovation and flexibility of the ITV1 schedule and would be a benefit to viewers with a greater variety of programmes, a benefit to advertisers to improve their ability to reach mass and specific, desirable audiences and of course for shareholders. It is to everybody’s benefit - not just ITV’s - to have a review of CRR.
Our CRR discussions are getting some traction around the sector and we have made strong representations to the OFT for a review. We await their decision.
No conference speech would be complete without some reference to the current trading. ITV total net advertising revenue for the first half is down 5.7%, ITV channels up 34% and ITV1 down 9.6% affected, of course by CRR.
On the general regulatory front the origins of the ITV monopoly are still clearly discernable in the regulatory regime for ITV1. Yet the monopoly was broken in 1982 with the emergence of Sky and multichannel television and has become a distant memory as technology has raced ahead and competition has grown substantially including now via the web. However, this legacy regulation has serious cost implications for us and limits our ability to deliver what audiences, advertisers and shareholders want in a way that is anachronistic.
I note that we can look forward to another Ofcom review of Public Service Broadcasting later this year and this is the sort of issue which that review will have to address.
So far we have seen creeping incremental regulatory change but what we need is a big bang to bring the UK media industries into the 21st century and regulation lift to meet the changing market.
Pause
Our problem will not all be solved by regulatory relief. There is, a lot we can do to help ourselves to improve the ITV1 programme schedule and so stem the decline in share of commercial impacts. 78% of all individuals are now digital viewers, and some fragmentation driven decline is still inevitable until the phased digital switch over is completed by the end of 2012.
I have been working with the commissioning and scheduling team on changes to ITV1 and the family of channels for 2008. The cycle of commissioning programmes can be as long as two years for something like drama - from green light to on-screen, much of the 2007 schedule was already fixed. I am encouraged by the performance so far. Adult SOCI is down 5.7% year to date, we are slowing the decline and this is important for future top line performance. There are potentially some easy wins - I can only speak about schedule architecture in these general terms as the changes we are planning are VERY commercially sensitive.
I am able to announce today that we have brought back from the US market three terrific shows:
"Pushing Daisys" - new 1 hour drama starring Anna Friel - for ITV1
"Swing Town" 70’ Chicago suburban swingers drama - with Jack Davenport - (This Life)
"Cane" Dallas meets the Sopranos - set in the Cuban centre of Miami with Jimmy Shine.
ITV was late to the digital channels but has caught up with great success. We continue to grow impacts and revenue on our digital channels and I want to use them as a nursery slope for content for ITV1. We have ambitious plans to increase the scale and reach of ITV2, through a combination of original and acquired material. It is encouraging that the family of channels combined viewing is flat year on year in multichannel homes.
We have reduced the numbers of children’s hours on ITV1 from eight to five hours and this has allowed us significantly to improve the daytime schedule. We continue to serve the children’s audience but in a much more effective way on our children’s channel, CITV.
I have also identified some areas of weakness that we are working to repair.
Firstly on arrival I identified a serious disconnect between our production division and broadcasting. ITV Productions isn’t always developing what the network needs. For example ITV1 has been looking for a replacement programme for the afternoon slot at 5 o’clock since Paul O’Grady left almost 18 months ago. This shoulder peak slot is a prime piece of television that our productions division should have been focusing on to fill. I’m pleased to tell you that we are now at last piloting new shows for 5 pm. For example in the coming weeks we are piloting a 5 pm entertainment show with Anthony Cotton from Coronation St. We also have two or three quizzes and some narrative ideas in advanced development for this slot. Better late than never.
Secondly because of CRR, we do pay a punitive price for programming failure - and this makes the commissioners very risk averse. It prevents us from doing the very thing that advertisers and viewers want from ITV: exciting, new and varied entertainment. It has stifled innovation and in my opinion led to too many formulaic and derivative shows - and a tired, predictable schedule. A large part of my job is to bring confidence and experience to the new team so that we take more calculated risks to produce and broadcast fresh, exciting and enduring ideas. This is the engine of ITV’s business model. How do you pick "the right shows"? What commissioners are paid to spot is the ideas that have absolutely no chance of succeeding. After that, it is the audience who decide what is a hit. What I am encouraging is a sense that when assessing new ideas, we reach up to audience tastes, not reach down. That creatively bankrupt approach has been tried, and it clearly didn’t work!
If the idea is new, innovative and different and we are reaching up, but the audience isn’t ready or don’t get it yet and the ratings aren’t there, that is acceptable failure. But if we have copied a tired old format or patronised our audience - reaching down - then we will have failed, for the worst reasons. Unacceptable
Another symptom of the disconnect: ITV1 used to be the champion of drama series but in the last few years this leadership has been lost.
We still maintain very high shares for a number of key drama series, particularly at the weekends and on Monday night, but ITV1 was once the king and queen of 9 o’clock drama across the week, a crown that has been usurped by BBC-1 with new original drama series like Life on Mars, Spooks, and New Tricks. The new ITV commissioning team is working very hard, both with in-house production and other independent production houses to restore our supremacy in this key battle ground, it is an urgent matter for us.
And finally some of these changes need to be brought about by changes in structure and leadership. I have been impressed by the new commissioning team that has been together for just a year, a few of its new commissions have already aired. So far as 2008 is concerned, judgement is about delivery. Our development is already in much better shape.
We are making changes within the all important production division. I have hired Dawn Airey to be the Director of Global Content. In this role she will be responsible for developing and growing ITV's UK and international production, distribution and content exploitation businesses. We have also added more new talent to our production division. ITVP has recruited Kate Bartlett from the BBC to run Drama. Attracting key on and off screen talent is critical for our long-term. I am lending my weight where needed to bring back the best talent.
While these changes will in the short term improve ITV1’s on-screen performance, they are also part of our longer term plans.
The value chain for content is extending.
What does this mean? And what will it mean for ITV?
Once upon a time the audience had two ways to access moving picture content - via the cinema and latterly via analogue terrestrial television. You couldn’t store it and you had to access it at the same time as everyone else. Improving quality and ubiquity of broadband will change all that. The value chain for content will only increase and a larger and larger proportion of our revenue will come from sources outside the traditional model of television display advertising.
As a result, new metrics, including the lifetime value of a specific piece of content, will become more important to us over time than year-on-year SOCI. The lifetime value of live events - sports, news, current affairs, awards shows and reality series - will be shorter than the lifetime value of returnable long-running drama series, formatted entertainment and comedy series.
ITV plc is one of the few commercial broadcasters in Europe to own a content business of scale. ITV productions, including its commissions for ITV, are as large as either Endemol or Freemantle. We make on average 3,000 hours of television a year. In the old world this would be made and viewed at one point in time (and possibly repeated!) on terrestrial television. Now our viewers will be able to catch up on a show they missed via our broadband site itv.com, which launches later this summer.
The revenue from one piece of content will come from a mixture of traditional TV display advertising, sponsorship, international distribution, download to own, pre roll advertising on the broadband stream, banner ads and potentially product placement. These widening revenue targets offer a huge opportunity for ITV and place content at the heart of ITV’s plans for the future. And we won’t just be making content for TV, at ITV we have already started to make bespoke content for mobile and broadband.
That is why I have ruled out splitting broadcast and production.
As well as the 3,000 hours we will make this year, we have a library of over 100,000 hours of classic dramas, comedy, films, sports and news to exploit and monetise. And much of this archive will be made available to view on the relaunched itv.com.
We have been late to the full internet model but I believe we have, what you might call, second mover advantage. It has taken time but Broadband has now reached critical mass, over ten million homes have a Broadband connection and with improvement in speed of data delivery, the technology is ready and at last the audience is there - we are launching at the optimum time.
The speed of growth of our new digital channels shows just how powerful ITV’s cross promotional force is. And using cross-promotion we can significantly enhance and extend viewers enjoyment of itv content on itv.com. ITV.com is an example of a new business we can create from our existing businesses and increase our top-line growth.
The relaunched ITV.com will continue to be a predominantly free site. Our ‘click and watch’ streaming technology means it is easy to use, with none of the "click and wait" problems many consumers have faced with other video sites.
Our Emmerdale website last year showed how we can build strong communities around content with more than 110,000 users signing up to follow Tom King’s murder investigation. This was significantly more than some of our pay experiments. There is also good evidence from the US where ABC’s online demand for Desperate Housewives increased by 16 times when it went from pay to free.
We believe that free ad-funded content is the most popular, and will be more profitable than pay on ITV.com. That doesn’t mean we rule out pay altogether, but the vast majority of the site will be free at the point of consumption. It’s attractive for consumers and a really exciting proposition for our advertisers and our online sales team is already working with our major advertisers to take online advertising to another level, without in any way undermining the consumer experience. The greater regulatory freedom afforded by advertising on the web is likely to strengthen the on-line ad market. The on-line display ad market was worth £386m last year - almost as big as radio - and is set to grow strongly. This is a market made for ITV. We will be a substantial presence in this market going forward.
What may hinder the development of this market is being able to measure the impact.
Twenty-five years ago we helped establish BARB as the industry gold standard for broadcast audience measurement. Today we are working with BARB to develop the audience measurement tools for the 21st Century. Our guiding principle will be that if it looks like TV, we should measure it. And if we can measure it, we can monetise it.
ITV.com is only going to be successful if our viewers feel they can really be a part of it. We are making user generated content an integral part of our news service. ITV News has led the way in using viewer content to break big news stories. Now the Uploaded section of itv.com will mean anyone can become a citizen correspondent, commenting and loading their clips onto the website with the best clips being shown on the ITV News bulletins that day.
As well as broadcasting great TV content, we are showing exclusive made-for-broadband content, starting with a daily soap ‘Web Lives’, a collaboration with award-winning filmmaker, Roger Graef. And we will have more original commissions and additional content from our on-screen portfolio.
We are committed to making 360 degree commissioning a reality. The BBC has proved that audiences now expect a richer web experience to accompany the big programme brand. The ITV.com team is already working closely with the channels commissioning team and productions to develop some great original ideas that can be applied onscreen and online.
We applied 360 degree commissioning to our FA Cup deal. We made sure we had the content we wanted for ITV1 and the digital channels as well as live rights for simulcast and broadband and mobile clip rights for all the FA cup and England games.
As the site develops we will be testing out different formats and genres to see what works best for our online viewers. Broadband is still an evolving technology but ITV is ready to participate in shaping and monetising future change on the web. The advantage we have is the content we own.
But let us be clear, the success of our future business depends on investing and producing great content to continue the strength of ITV1 and our other digital channels, and to grow our new businesses, develop new brands and drive revenue. Just like we do for our clients - the advertisers.
So as investors I expect you are wondering how much this new vision of ITV is going to cost?
The analysis of the allocation of resources within the business is looking at all the ideas and themes I have spoken about today. I intend to come back to the market by the autumn to brief you on my proposals in detail.