XI. Financial Prospects of ITV 2

37.

Given the assumption of a complementary service of ITV 2, it is not expected that its introduction will lead to any dramatic increase in advertising revenue above that earned by a single service.

38.

Advertisers will expect to pay for the audience delivered to them by the two services. It is, therefore, necessary to make some assumptions about how the total audience will divide between ITV 1 and 2 and BBC 1 and BBC 2. It must be remembered that BBC 2 has been broadcasting for more than seven years and that it will have a lead of nearer ten years, or more, by the time the first ITV 2 transmissions begin. It is likely, therefore, that ITV 2 will start with a smaller audience than BBC 2. It has been suggested that some more than proportionate increase in revenue might result from two special factors: that some smaller advertisers who find the present cost of a television campaign too high may be more ready to advertise on ITV 2, and that certain specialised advertisers may be attracted to the particular audiences of ITV 2.

National advertiser 'Top Cat'

39.

The ITV 2 Working Party asked the British Bureau of Television Advertising to make the best estimates that it could of the likely revenue of a second ITV service. In summary, the estimate of the net revenue addition resulting from a second service (allowing for loss of revenue in ITV 1 as a result of diversion of audience from the first to the second service) showed, after two years of transmitter development giving a total population coverage of about 80 per cent for ITV 2, a possible figure of around £14m. [£195m in 2019 allowing for inflation], no allowance being made in that figure for inflation or for any Levy deduction.

40.

There are various ways in which advertising might be sold in a second ITV service. One possibility is that it should be sold and inserted into the programme on a centralized and national basis; another that it should be sold “across the board” with that of ITV 1, i.e. that an advertiser would pay for simultaneous insertions in both ITV 1 and ITV 2 programmes; a third is that it should be sold by existing companies, but as an entirely separate commodity from ITV 1 advertising. This is a question on which no conclusions need yet be reached. Indeed it is better, rather than attempting now to forecast the best arrangement, to leave it for resolution in the light of the circumstances prevailing when ITV 2 begins.

Regional advertiser 'Glenville'

41.

The ITV 2 Working Party also asked a small group of specialists from the companies to prepare an estimate of the extra cost of an ITV 2 using existing facilities. The advice given was that the additional direct cost of a specimen programme schedule, based on the concept of a complementary service and limited in the first place to about thirty-five hours a week, would be around £11m. [£153m], and the indirect cost about £4m. [£56m] In addition the companies collectively would probably need to spend between £2m. [£28m] and £2½m. [£35m] on capital account on the provision of additional master control and other facilities.

42.

These figures exclude the costs of the Authority, where capital expenditure on the construction programme envisaged for the first five years would be of the order of £7m. [£97m] The additional rental needed in order that, after tax, the Authority can cover this expenditure and the operating costs of the additional transmitter and link network is likely to be of the order of £5m. [£70m] a year for the initial period. A proportion of the capital costs would have to be incurred before the service became operational. The method of financing this would depend very much on the point in time at which the service was authorized, but the money would be found either from the Authority’s accumulated reserves or by borrowing, as appropriate. It is not the Authority’s intention that the development of ITV 2 should prejudice the planned UHF extension of ITV 1.

43.

The exact interrelation between these two sets of figures of revenue and total ITA and company expenditure will depend upon what is done about the Levy. If the Levy remains, as now, a charge upon advertising revenue, then difficulties will arise for, assuming that the revenue of both ITV 1 and ITV 2 accrues in any area to the same programme company, it will be treated as a single unit for Levy purposes. Over much of the system, this would mean that the additional income earned by ITV 2 would be subject to the higher rates of Levy. Discussions are, however, proceeding with Government about the basis of charging the Levy. If this were altered so as to be related to profits or to revenue after specified heads of programme spending had been deducted, then it would be one which was better adapted to a two-service situation. It will be seen that, with the Levy currently running at an annual rate of £12 m. [£167m], and with the possibility of an eventual net increase of revenue of £14m. [£195m] or so, there is reason to suppose that ITV could support a second service even if the estimate of cost given in the preceding paragraphs proves, in the event, to have been too conservative.

National advertiser Spillers 'Homepride'

44.

It is not a precondition for ITV 2 that it should necessarily be self-supporting from its own income. Just as the total income of ITV 1 is at present available for financing programmes as a whole, and the advertising associated with a particular item does not have to be sufficient to pay for the item’s production, so, in a dual-service situation, there could be, if necessary, a transfer of revenue from the more profitable ITV 1 to ITV 2. The use of a single pool of revenue to finance more than one service is the position in the BBC where there is no predetermined allocation of the global licence fee to the various services: it would not be possible if ITV 2 were run competitively with ITV 1 by different contractors, nor would it be possible if the fourth channel were given to an entirely new body.

45.

If ITV 2 were authorized, there would undoubtedly be a complex financial situation at the beginning. The full audience potential would not be realized immediately, nor is it certain that a second service could be opened on a nation-wide basis from the start. The smaller regional companies have expressed fears about the effect on their revenue if ITV 2 starts in the larger areas in advance of its start in the remoter parts of the country. The larger companies have also suggested that, if this is to be the initial position, they also will suffer in the early years since the financial burden of the additional production will fall upon them and not be immediately shared by other ITV 2 companies. In the early years it may be necessary for the Levy in whole or in part to be returned to the system, with benefit to the larger companies, unless the Levy burden is alleviated in a dual-service system as a result of the introduction of a different basis of charging. If the larger companies are benefited in such a way, it would be more possible for them to bear the additional costs, and, if the fears of the regional companies about a diversion of revenue to the centre were realized, to pay such additional rental to the Authority as would be necessary if the Authority found it desirable further to reduce its rental demands upon the smaller companies. An equitable sharing of profitability across the system as a whole could also be secured by appropriate changes in the financial arrangements for the supply of programmes between companies.

46.

There are some in the ITV system who assert that it would be desirable with the arrival of ITV 2 to create larger units. The argument is that this would give all companies a worthwhile possibility of providing programmes to the network, whereas, if contract areas remain as now, the smaller companies will be able to make only minor contributions, if any. Existing studio centres would not be closed when the larger units were created but the smaller ones would concentrate on purely local production as part of the larger unit. The Authority would hope that, if ITV 2 were introduced before 1976, some useful lessons could be learnt before the award of contracts for the period after 1976, when all the relevant considerations and not only the ITV 2 position could be taken into account in deciding whether any change in the contractual shape of the system was desirable.

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1971 // TRANSDIFFUSION BROADCASTING SYSTEM