In November 2007 digital switchover in the UK started as the town of Whitehaven turned off its analogue signal. By 2012 the whole of the UK will have switched over to digital.
The transition to digital marks the start of a new era for ITV. For 25 years, ITV1 lost share to new services, for example Channel 4, five and Sky. The UK’s leading commercial channel appeared locked into an inexorable cycle of decline, exacerbated by poor performance.
By the end of 2007, over 85% of UK homes had converted to digital. The multichannel fragmentation effect began to ease and ITV’s performance improved. ITV1’s audience started to stabilise and the channel enjoyed a number of programming successes – from enduring favourites like Coronation Street and I’m A Celebrity…Get Me Out of Here! to new hits, like Britain’s Got Talent, Kingdom and Primeval. A “blue chip” roster of major sports included Champions League football, Formula 1 motor racing and the Rugby World Cup.
Structural changes to the schedule paid off with gains in daytime and over the summer. Over the full course of 2007, ITV1 actually delivered to its advertisers more viewers than it had the previous year, in terms of commercial impacts.
ITV Productions played its part, delivering half of the channel’s original commissions – and more than half of its total impacts – with a slate extending from Emmerdale to Mobile, from Parkinson to Ant and Dec’s Saturday Night Takeaway, from This Morning to Tonight with Trevor McDonald. ITV productions for both ITV1 and other broadcasters continued to win plaudits and prizes, with successes including The Queen, See No Evil, The Street and Longford. 75% of all programmes (excluding sport) on all UK channels delivering audiences over 10 million in 2007 were made by ITV Productions.
However, ITV Productions was not able to deliver revenue growth to match such on-screen successes, with drama for ITV1 and production for other UK channels both down compared to 2006. The new strategy and structure, together with personnel changes made towards the end of the year, are aimed at improving this performance in 2008.
ITV’s digital channels came of age in 2007, generating in excess of £200 million of advertising and sponsorship revenues. itv.com completed its successful relaunch and now offers a state of the art broadband experience. In November, ITV announced a joint venture with BBC Worldwide and Channel 4 to provide a broadband service offering access to thousands of hours of archive programming from the UK’s top broadcasters.
We are determined that ITV’s strong on-screen performance in 2007 should mark the beginning of a revival in the Company’s fortunes. To this end, during the year, we put in place the team and the strategy to deliver future growth.
The ITV Senior Executive team was considerably strengthened in 2007. In Global Content, we recruited Dawn Airey, latterly of Sky and five. Rupert Howell, a major figure from the advertising sector, joined us in the crucial post of Managing Director of ITV Brand and Commercial. Carolyn Fairbairn, formerly of the BBC and McKinsey, leads our strategy and development function. Entering 2008, we have confirmed that Peter Fincham, the controller of BBC1 until October 2007, will join ITV as Director of Television. In this role, Peter will replace Simon Shaps, who has performed a great job for ITV over many years and has been Director of Television since 2005.
ITV’s clarity of purpose is evident in the Turnaround strategy that we set out in September 2007. Our vision is for ITV to be the UK’s favourite source of free entertainment. We set a revenue target for the Company of 3-5% compound annual growth to 2010, rising to 5% to 2012. The Global Content business aims to double its annual revenues by 2012. Our broadcast channels aim to deliver a share of commercial impacts at or above 38.5% in 2012. We also plan to deliver £150 million of Online annual revenues by 2010.
Our plan will be self-funding. We have continued with the programme of disposing of non-core businesses, which has now raised over £600 million since merger. During 2007, we disposed of our stakes in Liverpool FC, Arsenal FC, MUTV and ITFC. Such disposals will fund acquisitions which are consistent with our content-led growth plan. During the year, we took a majority stake in US producer Jaffe/Braunstein Entertainment, a 25% stake in new producer Mammoth and acquired UK independent producer 12 Yard.
Our Turnaround strategy is not founded on any assumptions of regulatory relief. However significant regulatory relaxation is overdue in commercial public service broadcasting (PSB). Ahead of the launch of the Ofcom PSB review, ITV set out its detailed plans for modernising regional news. We recognise that these will have implications in terms of regional staffing, but we believe that it is right to be open about our plans and their rationale. Our plans would ensure that every home in the country retains access to a high-quality ITV regional news service from 2009, whilst maximising investment in original network programming, where the core public interest lies.
It should be remembered that terrestrial television has always faced limitations in delivering at the sub-regional and local levels with multiple unresolved boundary issues stretching back over decades. Broadband delivery faces no such technical limitations and puts regional choice with the viewer, rather than the broadcaster. itvlocal.com was rolled out across all our regions during 2007, supplementing our on-air regional coverage and allowing us to target local classified and display advertising, a new market for ITV.
In other areas, regulatory reform remains imperative. In September 2007, the OFT confirmed its intention to review the Contract Rights Renewal (“CRR”) mechanism which has applied to the sale of ITV1 advertising since 2003.
Our improved on-screen performance in 2007 has mitigated the worst effects of CRR.
But in a rapidly changing market, ITV still remains unduly restricted: ITV now faces competitors who didn’t even exist in 2003. We look forward to participating in the review process over the coming year.
2007 was also a year when trust in broadcasting came to the fore. All the major UK broadcasters faced issues over their operation of premium rate services (PRS) and allegations of misleading viewers. ITV acted swiftly when problems started to emerge, suspending all our PRS activities until systems were independently assessed by Deloitte & Touche LLP (“Deloitte”). We commissioned Deloitte to undertake a review going back over two years. Where problems have been established, we have made full disclosure, offered full recompense to viewers and improved our systems. We have committed to donating in full to charity any viewer refunds that are not claimed.
ITV is also co-operating fully with Ofcom’s inquiry into the PRS incidents on ITV channels and we await the outcome of their adjudication. GMTV, which is 75% owned by ITV, faced serious PRS issues of its own in 2007 relating to the conduct of its on-screen competitions and received a substantial fine from the regulator.
Such incidents for the most part appeared to stem from misguided editorial judgments taken with a view to maximising viewer enjoyment, not from any desire to maximise PRS revenues. Nonetheless we let our viewers down and that is inexcusable. We are determined to restore public trust in ITV
and UK broadcasting as a whole. The Remuneration Committee of the Board has taken account of PRS issues in calculating annual bonuses awarded to the executive team.
I am confident that the business is in better shape going into 2008. The launch of the new ITV1 schedule shows our commitment to innovation. We have launched a succession of ambitious dramas, from Honest to the genre-busting Moving Wallpaper/Echo Beach. We have brought News at Ten back to ITV1. The weekend schedule is underpinned by great entertainment, from Dancing on Ice to Harry Hill’s TV Burp. As the year progresses, football fans will have Euro 2008 and England’s home games to enjoy on ITV, as well as the Champions League.
Our valuable production business needs to grow and deliver programmes for ITV, other UK broadcasters and the international market. We have the considerable advantage of being an integrated producer/broadcaster. Our emphasis needs to shift from producing linear programmes for one-off transmission on a single channel to “360 degree” exploitation of the lifetime value of our content, across multiple platforms and territories. We will also be investing for the future: in monetising itv.com; in building on the success of ITV2; and in rolling out an HD service as part of our Freesat project with the BBC.
BSkyB’s acquisition of a 17.9% stake in ITV plc was subject to a Competition Commission review in 2007. In January 2008, the Secretary of State confirmed that BSkyB would be required to reduce its stake to below 7.5%, although the decision is being appealed. The Board will continue to act in the best interest of all shareholders.
The Board has reviewed the level of the final dividend in light of the performance of the Company over the course of 2007, current trading conditions and the outlook going forward. In 2007, ITV plc NAR fell by 0.3% on the previous year with strong growth in ITV digital channels offsetting a decline in ITV1 revenues. In the first quarter of 2008, ITV plc NAR is expected to be up around 1.9%, growing ahead of the total market.
In the light of this trading context and the Company’s stated policy of building back to 2 to 2.5 times dividend cover in the medium term, the Board proposes that the final dividend for the year should be held at 1.8 pence per share to be paid on 1 July 2008 to shareholders on the register on 18 April 2008.
In February 2007 Sir James Crosby was appointed senior independent director and Chairman of the Nomination Committee. Agnès Touraine and Heather Killen joined the Board in August 2007 and John Ormerod in January 2008. Sir Robert Phillis resigned from the Board in 2007 and John McGrath in early 2008. The Board is grateful to Bob and John for their significant contribution to ITV plc over the last few years.
In February 2008, Dawn Airey and Rupert Howell were appointed directors, providing strengthened executive representation at board level. We confirmed our intention to appoint a dedicated Finance Director, freeing up John Cresswell to focus on his responsibilities as Chief Operating Officer. The Board has also extended my appointment as Executive Chairman to the end of 2010. All of my contractual terms – including the terms and period of the Turnaround Incentive Award – remain unchanged. The decision provides my management team and I with the space to focus on the job to be done over the next crucial years, without distraction.
ITV made measurable progress over the course of 2007. The operational performance in the year was better than it has been for some time. We have also started to lay the foundation for sustainable growth in the future. I would like to thank all of my colleagues at ITV for their considerable effort, dedication and creativity in serving the needs of our viewers, advertisers and shareholders.
Michael Grade
Executive Chairman