Investors
Michael Grade Speech to the Institute of Economic Affairs
30 June 2009
Like Google, like Disney and the Hollywood studios, like News Corp, Bertelsmann and the rest of the global media sector, we at ITV believe in the power and value of content.
In our case that power derives from British-made programmes. And never in my 35 years in the business has British content been in greater demand internationally, nor have there ever been more opportunities to monetize that content.
Who wasn’t amazed by the speed and impact of the Susan Boyle phenomenon? Over 200 million hits on YouTube had Eric Schmidt, the computer scientist who founded Google, calling to see if he could possibly come over to get a meeting with me in my office. Thank you, Susan!
ITV is beginning to exploit the creative assets so abundant in the UK. Programmes and formats which start on our screens can be reproduced and become hugely popular in other countries. ‘I’m a celebrity get me out of here’ ended last week on NBC in the US – having added more episodes, following its initial success. President Barack Obama’s speeches in Washington have even name-checked our content.
This content power is at the heart of ITV’s business model for the future - a model based on three simple propositions:
- We make and own great content
- We make it famous on ITV1
- Then we exploit it wherever there is a platform – on digital, online, on-demand, around the world
The advertising recession is making it temporarily tougher to monetise, but the audiences are seeking out our programming in ever increasing numbers on TV andonline. It is only a matter of time before the profits follow.
- So far this year ITV has aired the UK’s highest rated entertainment programme, the highest rated new drama and the highest rated sports event
- ITV’s family of channels is holding its share of the advertising market for the first time in 25 years
- And online, ITV.com’s figures for last month were five times higher than the year before
I know the next session today is on regulatory issues, and I don’t want to steal any of Ed Richard’s thunder. But these matters are vitally important to ITV and to creative Britain. The Government’s Digital Britain Report, published two weeks ago, is the first really coherent government statement about what needs to happen to take Britain from the analogue to the digital age, spanning content, networks, digital literacy and piracy. It recognises formally that the old analogue regulatory framework has to go.
When I started at ITV in 2007, the debate was going to be about what British Public Service Broadcasting might look like after 2014: the end of ITV’s current licences. We knew that timetable was out of touch with the reality of the changes underway.
But all credit to Ofcom and to the Government for accelerating the process and getting into step with the realities.
Lord Carter’s report summed up its vision for the future of ITV as follows: “There is a strong case for the progressive liberalisation of the Channel Three licences so that they can move towards becoming fully commercial networks, servicing the interests of their shareholders whilst continuing to deliver a focused, sustainable public service commitment centred on original production and news”
Today, this is not only the Government’s view; it has the broadest coalition of political support across the Parties and in both Houses of Parliament.
Coupled with the current Competition Commission review of ITV’s airtime sales regime (CRR) this represents the moment when ITV could finally be freed from a legacy of regulation that worked well in the pre-digital age, but is a millstone around the neck of a commercial broadcaster looking to become an international media player through investment in UK production.
During the past year - based upon thorough analysis by Ofcom and the Government - a new consensus has emerged:
- That digital switchover means the old model of commercial public service broadcasting is broken
- That channels like ITV can no longer be expected to provide uneconomic services in return for licence surpluses that were once substantial but are now no longer there
- And that to achieve guaranteed plurality in impartial news supply, where the market can no longer provide, alternative sources of funding have to be found
Perhaps of all the Digital Britain recommendations this last one has provoked the most controversy. Responses to it so far have fallen broadly into two camps:
- those that support the use of existing public funds - and in particular the BBClicence fee - to sustain plurality in news supply
- and those who support the BBC’s continued monopoly on the licence fee and would rather leave plurality to be determined by the market, with no guarantees beyond the public sector
This is an issue of public policy to be determined by Parliament, not ITV. But if Parliament wants an alternative to BBC news in the nations and regions of the UK, guaranteed on mainstream television, then the Ofcom solution, endorsed by the Government, is the most sensible and practical approach.
Having explored all the options, both Ofcom and the Government have concluded that, “…funding therefore needs to come in some form from the existing public investment made through the Television Licence Fee, either directly or indirectly.”
For our part, we await the politicians’ verdict and stand ready to offer our airtime to carry the new publicly funded services. Ofcom, Government and Parliament are clear on one thing: ITV is unable to go on paying for nations and regions news.
But, I repeat, this presents a choice for policy makers. The Conservative Opposition has set out its alternative proposal, which seems to be founded on a preferred cashback option for licence fee payers. This again is an entirely sensible position. Though I am not sure how MPs on either side of the House of Commons would relish the prospect of a BBC news monopoly in their constituencies.
Jeremy Hunt, Shadow Culture Secretary, has some interesting ideas about more local, even city, TVand perhaps that is an idea whose time has come. I know Jeremy must understand full well the market alone won’t guarantee plurality.
The BBC Trust and management have set themselves against Ofcom and the Government’s proposals, even describing them as “ideologically focused”. The Trust and the management seem to have temporarily abandoned their separation, joining together to fight a concerted and, dare one say, ideological campaign to protect the BBC’s monopoly over the licence fee.
The BBC’s alternative proposal, Partnership (designed to head off top-slicing) was a really promising idea that unfortunately evaporated on closer examination, and after months of negotiation. Out of £120 million of value promised by Mark Thompson, approx £20m was talked about for regional news. In the event this translated into a potential £7m, and that not fully available until 2016. By this time, Regional News on ITV would be long gone. Oh, and we would have had to move the regional news out of peak time or pre-record it!
It is disingenuous, to say the least, to hear the BBC still trotting out Partnership as the alternative to guarantee plurality.
Stephen Carter has shown great determination in delivering the Digital Britain Report on time and in addressing many of the key challenges he set out for himself at the beginning. The report’s broadband-for-all objective will offer universal online access – that can only be good news for us content creators. Although he is leaving the Government, it is essential that the momentum now established is maintained.
The Government says that there will be a short Digital Economy Bill in the next Queen’s Speech. No doubt the Government will update Ofcom’s duties in the Bill so the Regulator can implement one of the key findings in the Report, namely that, “Ofcom may need to adjust ITV’s… public service obligations up to and beyond the completion of digital switchover in line with the diminishing value of the licences”.
There is no such explicit obligation for Ofcom to balance the costs and benefits of ITV’s licences in the current Communications Act, drafted - as it was - in the predigital age when those licences were substantially in surplus.
For once, in the dense history of broadcasting regulation, it really does feel like the policy makers are acting in time.
Now all this may seem a long way from Britain’s Got Talent and Susan Boyle. What does it mean for ITV’s future?
I am very optimistic for ITV. The advent of digital is opening up new distribution platforms, all hungry for more and more new content.
In many ways it reminds me of the development of the film industry. That was built simply on funding from ticket sales in cinemas, then TV sales were added, then video, then DVD’s and now online and mobile revenues, not to mention merchandising.
Today, where is the evidence for those who have been proclaiming that linear TV is dead? Television viewing - in terms of hours watched per week - was actually up year on year in 2008.
Just as the industry was starting to think about giving up on high end, mass audience drama, along came Whitechapel, Unforgiven, Above Suspicion, all attracting over 7 million viewers to ITV1 on their debuts.
As well as drawing 19 million people to the final last month, Britain’s Got Talent was the highest rating show outside sport on UK television in five years.
Millions of people watching ITV’s show drove tens of millions to
seek out content online – on ITV.com, on YouTube – which in turn
drove more people to ITV1.
YouTube’s numbers are the headline stealers but they wouldn’t have
a business if it wasn’t for the content creators.
ITV’s is an extraordinary business – bringing together many millions of people at the same time, enabling advertisers to communicate messages to their customers in the most effective and proven way.
ITV creates fame – for our programmes, for the stars that appear in them and for our advertisers’ products and brands. We are the big shop window and in a fragmenting world that is increasingly, not less, valuable.
But this is only part of a very exciting growth story.
Viewing On Demand is without doubt the consumer success of the last twelve months. Over the next three to four years, we believe VOD will grow to around 12-15% of all viewing – whether through TV, PVR or PC. And that presents a real opportunity for ITV. We have recently launched on Virgin’s VOD service and have seen strong growth in each succeeding month.
On ITV.com with the ITV Player we are seeing similar levels of success with May a record breaking month. We delivered over 50m video views which is a five fold increase year on year. There is a massive public appetite for catch up online – which makes up around 90% of all views. And with Digital Britain aiming to roll out broadband right across the country, that will only expand the audience for ITV’s online content. We achieve premium rates for online video advertising.
The next leap forward is currently called Canvas. There is some misunderstanding about this. Glib comparisons with the ill-fated Kangaroo project have been drawn. Let’s be very clear, Canvas is no more nor less than the equivalent of a second generation Freeview box with HD, a return path to your ISP, on demand services and a hard drive memory. It is the final convergence of the computer and the television – bringing together video on demand and DTT though a broadband connection in a set top box.
We believe this really will meet the demands of the next generation. Video catch-up services delivered not just to PCs but also directly to the TV screen. Viewers able to access TV programmes and other web services at the touch of a button on their televisions, without any cost beyond the upgrade to a new box and their broadband connection.
Canvas is simply future proofing the free-to-air platform.
Can we make money out of it? We believe we can, through a wide range of revenue models, some familiar, some very new:
- Selling pre-roll and mid roll adverts
- Direct advertising
- And greater flexibility – enabling advertisers to do more than show a 30 second video. With an internet-connected box, a TV ad can be just the starting point for a deeper brand experience or transaction
We are also at the early stages of exploring new revenue systems such as micro payments where viewers choose to pay a small amount of money to watch a programme rather than see an advert. Micro payments drive mobile and iTunes and the like – why not catch up VOD? 200 million hits on You Tube at 10p a hit delivers £20 million of revenues.
At the same time ITV’s overseas expansion continues.The power of content.
ITV Studios is the largest commercial content producer in the UK, and its content travels. Coronation Street is distributed in 160 territories worldwide. Agatha Christie’s Poirot in 190.
As well as selling finished programmes and formats, we’re now producing – or coproducing - the shows locally ourselves, which brings in a higher margin. Shows like I’m a celebrity, Hell’s Kitchen, Come Dine with Me – all work well overseas. Come Dine With Me has generated close to £60m revenues for ITV since 2005. Last year our external content revenues were up by 25%.
So, I am optimistic.
We’ve had to take some tough decisions in the last year. But ITV’s business model is now streamlined to take full advantage of the opportunities ahead provided by convergence. Through Digital Britain, the regulatory framework now being developed should give ITV the best possible chance in the digital arena. No longer fighting with one hand tied behind our back.
Making great content.
Owning rights and formats that are a rich vein for online and global exploitation.
Winning audiences for our advertisers and offering them brand new and ever more innovative ways to reach their customers.
Aligning the interests of our shareholders with the public interest.
And of course, continuing to deliver the programmes people love - wherever, whenever and however they choose to watch them.