Jim Marshall: Channel 4 and Sky Sales to Merge?

Jim Marshall, Starcom Mediavest’s executive director and chairman of the IPA Media Futures Group, questions the uncertainty surrounding the television industry and asks whether mergers are the answer…

“In an uncertain world, you need some insurance – not a great advertising slogan, but true none-the-less. And something that Channel Five would particularly agree with at the moment”

As they say:

“Nothing creates uncertainty quite like . . . well uncertainty.”

And these are currently very uncertain times for commercial television. Significant changes are expected to take place with possible mergers, sales, acquisitions and wholesale management/company restructures involving just about all of the major television companies. Additionally, the Competition Commission review of CRR chugs on, with no clear idea of when a decision will be made or, indeed, what that decision is likely to be. And, in spite of more optimistic economic forecasts, television ad revenues do not appear to be showing any prospect of recovery – this year will be down by at least 15% and next year is unlikely to register growth.

In such circumstances, it is hardly surprising that the industry is subject to conjecture and some pretty negative headlines. In the last week or so, Channel Five has announced that it has reduced its programme budget by 25% and, rather more sensationally, it has been rumoured that Channel 4 and Sky are planning to merge their sales. In the case of Channel Five, life is particularly tough and uncertain. It’s a pity because it is an organisation run by decent people who are doing a pretty effective job in increasingly difficult circumstances.

The problem is that Channel Five was launched at a time when advertising revenue was buoyant and there was genuine demand for the service, from advertisers at least. Since then, with the onset of digital expansion and most recently as revenue has declined, advertisers and even the regulators have increasingly lost interest in the channel. Consequently, Five has become marginalised and is rather desperately looking for future partners, without too much success to date. The fact is, and they have admitted it themselves, they probably can not survive on their own.

The Channel 4 and Sky sales merger is still largely speculation but it hasn’t been denied by either organisation, who both appear to be responding with a ‘dignified silence’, which would suggest that there is a fair degree of truth in the rumour. Why would they want to do it? On the face of it, while there will clearly be cost savings, you have to wonder whether these will justify the other problems a merger will inevitably generate. (Lets be honest, even the most successful mergers are painful and when they go wrong they can be very destructive).

Currently both Channel 4 and Sky operate highly effective sales departments and both have experienced, extremely capable and widely respected leaders (and senior staff). Both would argue, and quite correctly in my view, to have been successful in their own right. There also has to be a question over the synergies, particularly in terms of the cultures of the two organisations. Furthermore, there is the real prospect of Channel 4 combining with BBC Worldwide (and taking on the UKTV channels) and Sky acquiring Virgin. This will not only complicate the process of merging but could also lead to a competition enquiry.

I suspect the answer to why they are considering a merger and whether it will go ahead, depends on the current Competition Commission review of CRR. It is still highly possible that CRR will either be dropped or at least relaxed. That certainly seems to be the recommendation from Ofcom/OFT.

If this is the case, and with digital penetration at a very high level (and therefore the prospect of much reduced further erosion of ITV’s audience) it places ITV in a potentially far more powerful negotiating position. A combining of Channel 4 and Sky, the next biggest sales organisations to ITV, will represent much stronger competition to ITV. Or at least the ability on the part of Channel 4 and Sky, to resist more effectively an unregulated and much more predatory ITV.

So, I suspect that neither Channel 4 nor Sky would necessarily welcome a merger but feel that it would provide potential protection against an ‘unleashed’ ITV. In an uncertain world, you would need some insurance – not a great advertising slogan, but true none the less. And something that Channel Five would particularly agree with at the moment.