TV mergers: we ain't seen nothing yet

IF Stephen Byers, the hapless Trade Secretary, should find himself spending more time with his family after the next Cabinet reshuffle, he might consider a new career as a TV game show host. Possible games include Who Wants To Be A Media Billionaire? and Call My Multimedia Bluff. After spending the best part of a month considering the Competition Commission's report on the putative Carlton-Granada- United News and Media mergers, Mr Byers has decided that he's not cut out for the role of King Canute and maybe the market should decide what happens to ITV. Also he got such a mauling over Rover that he's in no mood to antagonise the moguls who control the big television franchises.

The plot unravelled by the Competition Commission and placed before the Trade Secretary would have been rejected by most TV executives as too predictable to be worth screening. Once upon a time there were three players in the ITV game - two smallish companies called Carlton and United News and Media, and a big company called Granada which hails from Manchester. (There was also a Scottish company, but it doesn't count in this story.) The two smaller companies were afraid that they would be eaten by the big one, so they decided to merge. The big company was very annoyed by this and declared that it planned to buy one of them at its leisure. Whereupon referee Byers cried foul and referred all these plans and declarations to the Commission.

THE perm-any-two-out-of three scenario faced by the Commissioners was complicated enough in itself.

But the television business in Britain is enmeshed in an impenetrable tangle of overlapping, obsolete and sometimes conflicting regulations.

The Broadcasting Act, for example, states that no single ITV company can have more than 15 per cent of the total audience. The Office of Fair Trading and the Independent Television Commission, on the other hand, stipulate that no single TV company can have more than 25 per cent of the total advertising revenue. Then there is the rule that no company can own both London TV franchises.

There are also rules about broadcasting companies owning newspapers and vice versa, and about who is allowed to own British broadcasting companies (Americans are banned, but

Europeans are not). And so on and so forth in a regulatory quagmire into which only the most expensive corporate lawyers ever venture.

All of this stems from the classically British idea that broadcasting - even commercial broadcasting - was not really a business but a kind of profitable public service. The regulatory framework in which Carlton, United and Granada operate was shaped in the 1950s when ITV companies had strong regional bases and a monopoly of advertising revenues. The media mogul Lord Thomson (who owned an ITV company) once declared that a franchise was "a licence to print money".

But in return for that licence, ITV companies were expected to behave in a publicly-spirited way - by screening high-quality news, current affairs and children's programmes, for example. The reason many people feel enraged by the decision to drop News at Ten in order to give programme planners greater freedom is because they see it as a betrayal of the public service obligations first laid on the network in the 1950s.

But that was then and this is now. The media landscape has changed beyond recognition. BSkyB has arrived, closely followed by cable and digital television with its plethora of channels. Mergers and acquisitions have shrunk the number of ITV companies from 13 to four.

Commercial logic would suggest that the process of consolidation should continue until there is only one big player left. All the smart money expects that to be Granada.

Last week the company announced that it had a war chest of 2 billion in cash, and there are reports that it has moved its takeover team to offices in the LWT building on the South Bank of the Thames in preparation for a hostile bid for Carlton.

The only fly in the ointment is that the regulatory framework conflicts with the industrial logic. On existing rules, for example, a merger between Carlton and United gets by on the audience-share criterion (less than 15 per cent) but fails on the share of advertising revenue test (the combined company would have something like 36 per cent, way over the 25 per cent limit).

And if Granada (which owns LWT) were to take over Carlton (which owns the Monday-Friday London franchise), it would be compelled under current rules to sell one of the franchises, even though both are highly profitable.

Similarly, if Carlton and United do merge, United may yet have to sell off the Daily Express under the cross-ownership rules governing who can own what in the media world, and Byers has insisted that it should divest itself of Meridien. This is the economics of the madhouse -

which is why some of these contradictions will be ironed out by the forthcoming White Paper on Communications.

The conventional wisdom in the industry today is that big is beautiful.

The problem for Britain is that all its major media organisations are pygmies by comparison with US giants like AOL-Time-Warner, Disney and Viacom-CBS, or with European conglomerates like Bertelsmann. Even if Granada eventually scoops the UK pool, it will still be a small player by world standards.

That's why, in a way, it was always going to be irrelevant what Mr Byers decided in relation to the Carlton-United-Granada triangle.

The British Government can propose what it likes, but ultimately the market disposes.

ALL of which suggests that this month's most significant event is not the Byers announcement, but the news that a massive new TV company known as RTL Group will be floating on the Stock Exchange on 26 July. It's being created by merging the TV interests of Pearson with those of two continental giants - Albert Frere of Belgium and Bertelsmann of Germany. RTL will be worth about 14 billion and is clearly planning to make some acquisitions soon. And it's European, not American. The message for Carlton, United and Granada shareholders is clear: stay tuned - to the stock market.

P John Naughton leads the Open University's Going Digital project and is a Fellow of Wolfson College, Cambridge.

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