Is the party over for ITV? Ad spend set to fall as Norman checks out
'ITV just don’t have the same spring in their step these days,” says the chief executive of one of Britain’s top 10 advertising spenders.

“When I’ve seen them in the last few weeks their heads have dropped a bit.

“I can’t blame them. I’m quite bearish about the second half of the year and it’s hard to see why things should improve dramatically in 2017.”

It is the anecdotal view of only one of ITV’s big customers, but it adds to a weight of evidence that is leading more investors and figures on both sides of the TV advertising equation – broadcasters and brands – to wonder if a long boom is coming to an end.

If the answer is “yes”, it won’t be Archie Norman’s problem. ITV’s turnaround specialist chairman has overseen a dramatic reversal of its financial fortunes on the back of years of buoyancy in the advertising market, and will exit on Thursday as the company reveals its first-quarter trading update.

ITV’s shareholders are not feeling particularly optimistic. The shares are down more than 17pc so far this year, compared with a flat performance by the FTSE 100 index.

The full-year results in March were a disappointment for investors, despite a £400m special dividend and profit growth of 18pc.

The gloom was all based on concern over the outlook for the new financial year. Any incoming threats are a matter now for Norman’s successor, former Big Brother producer Sir Peter Bazalgette, as well as the rest of the advertising-funded TV industry, which includes Channel 4, UKTV and Viacom-owned Channel 5.

They have had a good run. According to data from the Advertising Association, since the financial crisis TV advertising has enjoyed an unbroken run of strong and accelerating growth.

While digital advertising has grown faster, TV budgets remain much larger and have benefited as household brands have shifted money away from declining tabloid newspapers.

Advertising grandees such as Sir Martin Sorrell have also voiced growing frustration around the overall effectiveness of online marketing for brands and levels of traffic fraud, whereby digital advertising is “viewed” by computers rather than people.

Total spending on television in 2009, in the depths of the post-financial crisis recession, sank to £3.7bn, from a high in 2005 of £4.2bn. The industry rebounded in 2010 and expanded to hit total revenues of £5.2bn in 2015, a year in which growth topped 7pc.

That expansion came despite moves last year by Britain’s big four supermarkets, top 10 spenders across the advertising industry, to cut their spending.

The trend was sparked by Tesco amid competitive pressure from Aldi and Lidl and its accounting scandal. Chief executive Dave Lewis’s fightback based on cutting prices meant margins had to be protected with cuts elsewhere, and advertising is among the simplest budget lines for any company to trim.

Once Tesco pulled back, Sainsbury’s, Asda and Morrisons also made cuts, as their advertising budgets are heavily reliant on “share of voice”, and as they seek to benchmark their spending according to that of their rivals. Yet despite the supermarkets’ cuts, 2015 was a marquee year for television advertising.

As well as ITV’s growth, it delivered record revenues and profits for UKTV, the broadcaster behind Dave and Gold, and is expected to do the same this week for Channel 4, which will publish its annual report on Tuesday. “I don’t think we’re at the top of the cycle yet,” UKTV chief executive Darren Childs said in a recent interview.

This year started brightly, too, says a senior commercial broadcasting executive, who like most in the industry is nervous of publicly talking down its prospects but testifies to a less buoyant mood. And the picture has darkened rapidly in the past three months.

“At the beginning of the year we carried on as before,” he says. “Things like the Brexit referendum weren’t really on people’s minds. But as time has gone on the number of negatives has gradually stacked up and the mood has definitely shifted.”

That change has been detected by several of the regular surveys that closely follow the advertising industry partly for its own benefit and partly as a canary in the mine for the wider consumer economy.

KPMG’s media tracker last month found that economic uncertainty at the turn of the year caused more tentative advertising spending by brands fearing a rougher year.

“If you’re a UK brand you’re looking at Brexit and thinking 'shall I commit my spending now or shall I wait until after June?’ ” says the head of one of Britain’s biggest advertising companies.

“It’s a bit of a no-brainer for a lot of them.

“For some of the big global brands I think there is a bit of an effect from the general market volatility early this year and around the oil price.

“There’s no doubt there is now a bit of a pause in spending. We are hoping that’s what it is and there is a rebound in the second half.”

Such hopes suffered a blow from Sir Martin Sorrell last month. He indicated alongside WPP’s first quarter update that Brexit fears were not a major feature of tighter budget discussions with “marketing taking a back seat”.

Some City analysts now believe the party may be over for ITV on a longer-term basis. Deutsche Bank last week urged clients to sell the shares ahead of its first quarter update, arguing that hopes of a bounce back in the advertising market after the referendum are misplaced.

Analyst Laurie Davison said checks with media agencies that act as middle men between brands and broadcasters “point to a continuing deterioration in ITV ad revenues” since March.

Deutsche Bank pointed to pressure on advertising spending by consumer brands as a result of the introduction of the living wage as an under-appreciated headwind faced by ITV. Again, facing a squeeze on margins from higher costs, advertising budgets may be the first to face the accountants’ red pens.

Adam Crozier, ITV’s chief executive, sought to cheer up investors in March by pointing to this summer’s European Championships as a highlight in the broadcaster’s schedule that will attract viewers and advertisers alike.

The tournament has the rare draw of four home nations competing. But one big advertiser points out that after the Euros, there are few major events on the horizon to boost advertising spending until the 2018 Olympics. Sectors beyond supermarkets are likely to pull back on spending, he suggested.

Telecoms companies are among the country’s heaviest spenders, for instance, but fierce competition around BT’s launch of its European football coverage last year has calmed.

Roddy Davidson, a media analyst at Shore Capital, believes that “demand created by the Euro 2016 Championships (and not Brexit) will be the key determinant of Q2 performance” and that fears over the resilience of the advertising market are overdone.

Yet Crozier has repeatedly admitted ITV’s declining audiences are a problem, and promised improvements from new programming. Strong performers, such as the current Nordic-style psychological drama Marcella starring Anna Friel, have been matched by flops including Jekyll and Hyde.

Meanwhile in its Saturday night family entertainment heartland, ITV is yet to prove it can create new hits to repeat the success of ageing ratings stalwarts X Factor and I’m a Celebrity… Get Me Out of Here!.

Rivals accuse Crozier of under-investing in programming and expect last year’s overall 3pc decline in audience share across ITV’s portfolio of channels to cost it this year. Audiences in 2015 are crucial to ITV’s share of advertising spending in 2016, and the company is negotiating from a weakened position.

One competitor’s modelling suggests ITV will under-perform in the market this year, although its own guidance says it is on track to beat the pack. If the advertising market does face a downturn ITV should be more resilient than in the financial crisis, when it faced a collapse in its share price and fears over its viability.

Crozier and Norman have spent the past few years attempting to fix the roof while the sun shines.

They have spent on an acquisition spree in the production market, building up revenues from programme-making, which are less exposed to economic winds than advertising.

The strategy is yet to be tested in a storm and while ITV’s revenues are more diverse, its profits remain heavily reliant on advertising, City sources who have sized up the company as a potential transatlantic takeover target say.

Despite the gathering clouds, many believe this will not be the year ITV’s defences are challenged.

The Advertising Association is forecasting a slowdown in TV spending growth to 5.1pc in 2016 and 2017. As he takes the chairman’s seat at Britain’s biggest commercial broadcaster, Bazalgette must hope the trade body is right.