The UK system governing how television airtime changes hands between clients and broadcasters is as old as the TV industry itself. But television is a very different beast to what it was 30 years ago and there is general agreement that the trading system is now somewhat at odds with a marketplace of 300-plus channels, instead of the three on which it was initially based.
Some within both broadcasters and agencies, while reluctant to vilify contract rights renewal and how it works, point out that the industry might be better served by trading in a different way. But it is worth looking at the old before we talk about the new.
The latest TV negotiation round has just ended and, according to agency insiders, ITV fared much better this time around than last year, when it lost out to its closest rival, Channel 4.
CRR, which links agency deals with ITV1's performance, means the channel's share of revenue declines in line with its viewing figures. But agencies say that ITV managed to hold on to between 40% and 50% of the money coming out of its flagship channel this time around, redirecting £65m of the £126m it was expected to lose back into its digital portfolio. Last year things were very different.
That said, most agency buyers claim that none of the broadcasters came to the table this year with anything special to steal the show.
The CRR mechanism has generally been acknowledged as doing its job in the current market, which is based around agency deals and bulk buying. "There are some benefits," says Chris Hayward, head of investment at ZenithOptimedia.
"At the basic level, it links ITV1's potential revenue performance to its audience performance. I can't really see that a broadcaster should have too much complaint about that - it was designed as an encouragement for the broadcaster to maintain the quality of its schedule."
There is no denying that CRR keeps ITV1 in check, but the fact that most TV negotiations these days are based on price, rather than quality or creative media planning and buying, means it's a commodity market. As one sales insider points out, media agencies aren't getting paid for their creativity or their smart planning, but on how good a price they can get on their bulk deals for clients
There are those who would argue that, although CRR has tamed ITV, it has created another beast in the form of C4, which, last year at least, absorbed most of the money coming out of ITV.
The mechanism's critics also claim it is driving money out of television altogether, at a time when the industry has to fight for every penny against increasingly strong competition such as online.
Whether the money leaking out of television is due to the strength of other media rather than CRR is impossible to prove, but there is a theory that if clients can buy TV cheaper, they might not put the money taken out of ITV1 back into other TV channels.
Many in the industry think along these lines, but few are prepared to go on the record to say so. Both Sky and TV marketing body Thinkbox refused to comment for this feature, due to the political nature of the issue, and Isba also gave a definite "no comment".
Others were more bold, and the seeds of reform are certainly there.
Nick Bampton, managing director of Viacom Brand Solutions, which sells MTV, VH1, Nickelodeon, Paramount and E!, has long been outspoken on the subject.
"The agency deal and market trading dynamics do not encourage competitive behaviour," he contends. "It very much favours the status quo, which does nothing for the long-term growth of television.
"There needs to be intervention by the regulator - in this case the Office of Fair Trading - to call for a review of the TV marketplace and how it operates. New business is incredibly difficult to attract and nurture, due to rigidity in the way TV is traded. There are so many ways TV could and (with technological advances around the corner) will be used. We need to ensure a fair and open market for all."
Bampton does, admittedly, have good reason for wanting to see change in the system - the stable of channels he represents is small and will be severely hit by new restrictions on junk food advertising. But his is not the only voice of dissent. Viacom canvassed the top buyers in the UK's media agencies, and 70% said they would prefer to trade differently.
James Wildman, managing director of Flextech's sales house IDS, also backs reform - in theory. "We would absolutely welcome it and play a proactive part in any review," he pledges.
And, perhaps unsurprisingly in the light of CRR, ITV Sales managing director Gary Digby could also see some benefits in changing the status quo. "We would sit down and talk to our customers about the way they thought they could trade," he says.
So if reform were to happen, what process would need to take place? The move would have to go through the OFT, through lobbying from the industry on the part of either the broadcasters, clients, agencies or, ideally, a collective of all three parties. It is the OFT's job to oversee CRR and, hypothetically, implement its abolition, should it ever come to that.
The OFT would then work hand in hand with Ofcom on coming up with alternatives, although the OFT is unable to say exactly what these alternatives might be. It would be a case, it says, of exploring the possibilities should that process be set in motion. The one certainty is that change would be dramatic and probably expensive.
Andy Barnes, sales director at C4, says: "If you were to change (the way TV is traded) you would have to change every single parameter. You would have to say 'OK, this and that is now not allowed'. It would need to be a massive change. You can't be half pregnant - either you are or you aren't. You change it or you don't."
From a broad survey across the industry, those in favour of a new system would most like to see the abolition of the agency bulk deals that currently characterise the market and make it so price-driven.
Paul Rowlinson, investment director of audio and visual media at MindShare, says: "The whole set-up of share deals and restricting yourself that way becomes more debatable about whether that is the right thing to do."
Meanwhile, ITV's Digby says there are hundreds of possible ways the system could be altered - too many to choose from, in fact. Agency deals could, hypothetically, be replaced by line-by-line deals or client agreements, which would involve negotiating airtime for individual clients, rather than through huge buying points such as Group M or OPera. Or they could be replaced by campaign deals - which are exactly what they sound like. However, both would be time consuming and heavy on agency manpower.
In fact, such an alteration in the way TV is bought and sold would require a seismic shift in the way the industry, and particularly the media agencies, are structured. The agencies would need to take on and train more staff and handle multiple negotiations, and would also need to restructure their businesses to focus on getting more value out of strategy than bulk buying. Ultimately, that cost would have to be incurred by clients - a price hike they might not be willing to pay.
Channel 4's Barnes points out: "Just think about the cost implications. Agencies currently do year-round deals with contractors, by and large. What if they have to do it on a campaign by campaign basis? Clients have reduced the amount they're willing to pay for the buying function - who would pay for it?"
Some of the smaller broadcasters are paying lip-service to reform, but the reality is it is still some way off, mainly due to the politics within the television industry. Neither IDS or Viacom - the most outspoken campaigners for change - possess the necessary weight or influence to prompt the OFT to launch a review of the system.
They are David compared to the Goliath that is ITV and, increasingly, C4. Neither of these two broadcasters is showing any signs of prompting the process and Five is silent on the issue, although it is believed Sky, now the major shareholder in ITV, is moving towards supporting reform of CRR.
"There needs to be a political will to review anything and Ofcom may not see this as a priority," says IDS's Wildman. "If the advertisers have an issue and feel they're getting a poor return, then they will cry foul as they did over the ITV merger."
True enough, but the will within the advertiser community simply isn't there yet - as Isba's silence on this issue suggests. The agencies are also reticent and non-committal. Most importantly, no one - clients and agencies alike - wants to annoy ITV.
"The truth is the current system is probably here for at least one more negotiation round," says Hayward at ZenithOptimedia. "We should be open to review because it's worthwhile just giving consideration to a better system - but that's not to say I support changing the system."
So, is reform coming? Probably. Will it be here by this time next year? Highly unlikely. But the seed for reform has been planted and no doubt will grow. Into what is anybody's guess.
CONTRACT RIGHTS RENEWAL
Introduced when Carlton and Granada merged back in 2003, the CRR mechanism was designed to prevent the commercial broadcasting behemoth abusing its dominance in the marketplace.
But three years in, the system has attracted criticism from some surprising quarters. Shackling ITV to the extent where one of the few remaining mass-audience channels suffers could be at the expense of the TV industry in general, they argue.
James Wildman, managing director of Flextech's sales house IDS, explains: "CRR only applies to ITV1 because of its monopoly position and works to prevent ITV1 compensating for loss of audience by putting up price. As ITV1 loses share, so money can move away from ITV into cheaper channels, which could arguably deliver a deflationary effect in the UK TV market."
AN IDIOT'S GUIDE TO TV TRADING
The TV commodity market works on supply and demand dynamics. However, in a reversal of economics logic, advertisers can end up paying more for less, if ratings fall and demand remains constant.
- The TV market is governed by deals whereby advertisers negotiate the share of their annual TV advertising budget with each broadcaster. The contract rights renewal mechanism allows advertisers to reduce their share commitment to ITV1 in line with the previous year's viewing decline, while retaining the price discounts on ITV1 in place prior to the ITV merger.
It does not allow advertisers to reduce their budgets to account for under-performance in current months. So advertisers' deals in 2007 were negotiated using the viewing decline ITV1 experienced in 2006.
- Over-trading occurs when a channel fails to deliver the forecast audience scale and/or profile that deals have been set against. If in a particular month the advertiser demand is heavily skewed to ABC1 audiences, but the programming delivers C2DE audiences (whether young or old), then the broadcaster will be unable to match the profile of its programming to advertiser demand. Broadcasters then have to make up the deficit to advertisers in future months.
- Other channels do not operate their pricing structure in the same way as ITV1. For example, they can calculate prices by discounting versus the ITV1 price or by offering a "fixed" price that is not adjusted for changes to either supply or demand. Channels that operate fixed costs can be very susceptible to over-trading if they fail to deliver the required number of viewers in order to match their demand. CRR does not apply to channels other than ITV1.
This article was first published on Media Week