1 ITV plc Report and accounts 2006 Stories for our time.
2 Contents Message from the Executive Chairman 01 ITV at a glance 14 Business Review Our market environment 17 Our strategy 21 Resources and relationships 24 Key performance indicators 29 Risks and uncertainties 30 Operating review 31 Financial review 37 Forward look 42 Glossary of terms 43 Governance Board of directors 44 Directors report 46 Statement of directors responsibilities 49 Independent auditor s report to 50 the members of ITV plc Corporate governance 89 Remuneration report 93 Shareholder information 102 Financial record 104 Financial Statements Consolidated income statement 51 Consolidated balance sheet 52 Consolidated cash flow statement 53 Consolidated statement of recognised 54 income and expense Notes to the accounts 55 ITV plc Company Financial Statements 84 ITV s Business Review The Business Review explains in detail how we have performed this year and sets out a fair review of the business, balanced and comprehensive analysis of our performance, the use of financial and non-financial key performance indicators to explain how much progress we have made, a description of the principal risks and uncertainties facing the Company, and an indication of likely future developments. The Business Review is prepared in line with the relevant provisions of the Companies Act 1985 and in accordance with the guidance issued by the Accounting Standards Board in its Reporting Statement on narrative reporting. It is intended that the Business Review will provide shareholders with a greater understanding of the Company, of its position in the markets within which it operates, and of its prospects. In setting out the Company s main risks and uncertainties, an indication of likely future developments, and in other content, this Annual Report contains statements which, by their nature, cannot be considered indications of likelihood or certainty. The statements are based on the knowledge and information available at the date of preparation of this Business Review, and what are believed to be reasonable judgments. A wide range of factors may cause the actual outcomes and results to differ materially from those contained within, or implied by, these various forward-looking statements. Nor should any of these statements be construed as a profit forecast. Financial highlights Revenue 2,181m 05 2,196m (restated) Operating Profit 264m m Profit before tax 288m m Cash generated from operations 342m m Earnings per share 5.5 pence pence Dividend per share 3.15 pence pence Cover image Helen Mirren in the Oscar winning ITV Production, The Queen, go to page 32 for more details.
3 01_ITV plc Report and accounts 2006 Message from the Executive Chairman Michael Grade Together I believe we can raise our game to create more innovative content for our viewers and more valuable airtime for our advertisers. On Monday, 8 January, 2007 I returned to work for ITV. From the moment I was approached by the Board last year, I had no doubt that I would accept this most stimulating and challenging position in British broadcasting. ITV has not had an easy time in recent history, operating in the highly competitive and technology driven media sector. It faced a challenging advertising market and speculation over both its leadership and its ownership. My brief is to restore the fortunes of the Group and thus return the business to growth. Having been in post for two months it is too soon to conclude definitive plans for the business, but generally I have developed more positive impressions than negative ones, and the latter are mostly within our control to remedy. On the positive side: There are talented and dedicated people across all areas of the Company; ITV Productions is a superb business of real scale with the ability to deliver outstanding content, from the Oscar winning film The Queen starring Dame Helen Mirren, to Coronation Street and Emmerdale, to Dancing on Ice; ITV remains a much-loved brand and ITV1 is still the UK s most popular television channel in peak-time with the England v Sweden game during the football World Cup achieving the highest audience (18.5 million) on any channel in 2006; Our strong regional presence is a greater asset than is recognised and the growth in regional advertising has been particularly buoyant against a depressed national TV advertising market. We need to find ways to sustain and even enhance this valuable public service. It is part of what binds ITV to its audiences throughout the UK and distinguishes us from our competitors. Our digital channels are the most successful free to air commercial family of digital channels in the UK, each with distinctive branding and programming. We must ensure that they have the investment they need to grow their leading market position as we approach digital switchover; The Consumer businesses represent an area of proven growth which we will seek to accelerate; and The Board s strategy which I inherit is essentially sound. The businesses that have been recently acquired and developed are all natural extensions of the core operations. On the negative side: Whilst the strategy is sound, we are playing catch up in many areas, no doubt due to the efforts required to bed in the successful Carlton/Granada merger. We have a valuable multichannel offering and exciting web opportunities but still a long way to grow; There is a lack of innovation in our programming, partly resulting from a fear of ratings failure and the punitive consequences that follow under the Contract Rights Renewal (CRR) remedy (described below); The Company has developed a tendency towards bureaucracy. The cure for this lies with the example set by the leadership team within the businesses. I will improve delegation, and place emphasis on the need to make the ITV values (described on page 25) a reality in our actions; We need to continue strengthening the relationship between our commissioning teams and both internal and external producers. This is critical to ensure that the commissioning pipeline is filled with the high-quality programmes that deliver the audiences which in turn our commissioning team need to fulfil our advertisers and viewers aspirations; and Our regulatory environment needs to reflect the reality of our 21st century structure and the developing market in which we operate these days. ITV may have consolidated, but it is a long way from the advertising monopoly of yesteryear. The regulatory burden has yet fully to reflect this.
4 02_ITV plc Report and accounts 2006 Message from the Executive Chairman Michael Grade The value chain for content is getting longer and more lucrative thanks to the digital present and future. My task, after the recent distractions, together with ITV s senior management team is to build a sense of confidence in our people and the wider creative community to ensure that together we deliver more consistently for our viewers, our customers and our shareholders. There is a section on ITV strategy later in this report on pages 21 to 22. My immediate priorities are developing the strength of our programming and new media businesses, and working to reduce overly onerous regulatory constraints. Raising our creative sights On the programming side we must raise our creative ambition. We must be more innovative and take more risks. We must be more relevant and we must be ahead of audience tastes. In particular we must regain our pre-eminence in drama series on ITV1 at 9.00 pm. I am definitely encouraged by what I have heard and seen so far from the new commissioning team headed by Simon Shaps. They have already started to cull some of the older programmes which were past their sell by date, and we are introducing a range of new programmes in I am now working with them on the plans that are being formulated for 2008 and beyond. Content creation is at the core of our future High quality, home produced, popular content attracts the mass audiences which only ITV can offer advertisers, thus generating value. Content creation is today, and will remain, at the heart of ITV. I am committed to the continuing development of ITV Productions. It is already one of Europe s most successful commercial production companies supplying programmes in many different genres both for ITV and other UK broadcasters. Our licensing, distribution and international production businesses which are also important to our content development strategy, are growing and moving into new markets and territories, providing important additional revenue streams. The value chain for content is getting longer and more lucrative thanks to the digital present and future. New media platforms Increasingly our viewers are demonstrating a desire to move beyond a simple passive viewing experience and expect to interact with, and participate in, our programming. People are also accessing our content from a much wider range of media platforms. Our Consumer team has responded, developing ways of enabling viewers to do this. Technology creates new opportunities for content consumption, and we must ensure that we exploit the opportunities that this brings, delivering new services that viewers can access whenever, wherever, and however they want. The launch of our new broadband proposition this Spring will significantly enhance our online offering. I will be promoting the acceleration of our new media businesses. With our high-quality content and services for viewers, I believe that 2007 will be the year that ITV comes of age as a deliverer of online entertainment with real commercial opportunities. Appropriate regulation for the digital age ITV is subject to a high degree of regulation, some of it the legacy of an age of analogue broadcasting and an oligopolistic commercial broadcasting structure. This regulatory burden is not entirely compatible with the increase in competition driven by digital technology and new media, and by the public s appetite to access new distribution platforms as they appear. A section on regulation appears later in this Business Review, and one of our priorities is to seek some alternative to the Contracts Rights Renewal remedy (CRR). The CRR undertakings were given in 2003 as a pre-condition to the merger of Carlton and Granada to create ITV, and the effect is to link ITV1 s advertising share (Share of Broadcast) directly to its commercial viewing share measured by Share of Commercial Impacts (SOCI). It has become apparent that this not only prevents ITV from receiving fair value for the mass audiences it delivers, and which are so sought after by advertisers, but it is also damaging to the overall UK television advertising market. A number of well respected figures in media and advertising now accept that CRR needs urgent review, and we are lobbying hard for that process to begin. We continue to look for operating efficiencies across the business. We announced in June 2006 an operational review with plans to save 40 million over three years. We are on track to deliver these efficiency savings.
5 03_ITV plc Report and accounts 2006 Conclusion During 2006, ITV was the subject of much bid speculation, with potential offerors being forced on two occasions to make public statements about their intentions. In neither case was a formal offer tabled, and in both cases the Board carefully considered firstly the limited information provided by the potential offerors, and secondly detailed internal and external valuation work. On both occasions the Board concluded that it was in all ITV shareholders interests that such proposals should be rejected. On 17 November 2006, British Sky Broadcasting (BSkyB) acquired a 17.9% holding in ITV at a price of 135 pence per share. At the present time, BSkyB s holding is subject to regulatory reviews by Ofcom, the OFT and the DTI in relation to both competition and broader public interest issues; Ofcom is also separately reviewing change of control under the Broadcasting Act. ITV has made submissions in response to the authorities, at their request, and has noted the concern that BSkyB (as a competitor) may be able, with the size of its holding and given historic voting patterns, to block a shareholder resolution requiring a 75% majority and that this may not be in the interest of ITV s shareholders as a whole. The authorities will consider whether there should be any form of restriction on BSkyB in respect of their holding in the Company. The Board will continue to act in the interests of all shareholders. In reviewing the level of the final dividend to propose at the forthcoming AGM your Board has considered a number of factors. The UK television advertising market deteriorated over the late Summer and Autumn of 2006, resulting in a near 5% fall for the calendar year. It was in part as a result of this that the Board of ITV plc decided to halt the share buy-back programme at 251 million. Market estimates for 2007 were that the UK television advertising market would be either flat or decline a little further, with the first half of 2007 likely to be more adversely affected as a result of comparative 2006 monthly revenue patterns. Over the first quarter of 2007 we believe that the UK television market will be approximately 0.5% higher than 2006, and ITV s total advertising revenue will be down by approximately 4.5% as the effect of CRR and SOCI decline on ITV1 reduce the channel s share of advertising. Whilst we expect this decline to slow and stabilise as multichannel digital television fully replaces analogue, it is probable that ITV1 revenues will decline in 2007, and may not be wholly made up by the growing advertising revenue from our successful digital channels. Having regard to this, your Board has decided to propose that the final dividend for the year ended 31 December 2006 should be held at the same rate as for 2005 of 1.8 pence, to be paid on 2 July 2007 to shareholders on the register on 20 April My Board colleagues and I would formally like to record our thanks to Sir Peter Burt and Charles Allen for their contributions to ITV. The creation of one ITV from 11 separate regional ITV companies owes much to Charles vision and determination. Under Sir Peter s steady stewardship through an unsettling period, Charles directed the integration of Granada and Carlton ahead of schedule and produced greater synergies than originally forecast. I would like to thank all of my new colleagues within ITV for their warm welcome, and to express my belief that together we can lift our game and create new and valuable content for our viewers and uniquely effective airtime for our advertisers. Michael Grade Executive Chairman
6 04_ITV plc Report and accounts 2006 Stories that deliver. ITV delivers the largest commercial audiences in the UK and was watched by around 80% of the population every week in ITV1 has dominated the top shows of the year, broadcasting the most popular programme of 2006 ITV1 s coverage of the World Cup match between England and Sweden, and the highest rating shows across major genres including drama and sport. ITV1 remains the most popular channel in the UK across peak hours. ITV s portfolio of digital channels continues to deliver. Measured by share of commercial impacts in 2006, ITV2 is the biggest non-terrestrial channel in the UK, with ITV3 the second biggest and ITV4, which was only launched in late 2005, the 11th and increasing its audience. The top programme of the year in the UK was ITV1 s coverage of the World Cup match between England and Sweden on 20 June 2006 with 18.5 million and 67.8% of the available audience tuning in.
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9 07_ITV plc Report and accounts 2006 Stories of passion. ITV is about great programmes and high quality content. We invest around 1 billion each year in programming, more than any other European commercial broadcaster, and support production centres around the UK. Built on a heritage of 50 years of programme making, ITV Productions make programmes and content across a wide range of genres, from drama to arts, to factual, entertainment and sport, to daytime and lifestyle programming both for ITV and most other major UK broadcasters. Billie Piper stars in Mansfield Park, part of ITV s Jane Austen season airing in Spring 2007.
10 08_ITV plc Report and accounts 2006 Stories of change. ITV is changing. ITV is now available on broadcast TV, online and on mobile, giving viewers access to ITV s quality content on every major platform. In 2006 ITV1 became the first terrestrial TV channel to stream on 3G phones. Online, we will be launching a new broadband portal, ITV.com, in Spring Viewers will be able to watch ITV s channels online, get 30 day catch up TV, and access exclusive preview content and programmes from ITV s extensive archive. Primeval is ITV s new family drama for Saturday nights, starring Douglas Henshall and Hannah Spearritt.
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12 10_ITV plc Report and accounts 2006 Stories of realism. ITV News continues to set the agenda with award-winning journalism and world exclusive stories, at home and abroad, including special reports on climate change and a series of live transmissions presented by Mark Austin from Antarctica. In 2006 ITV News enhanced its international coverage opening a news bureau in Beijing, and continued to invest in cutting-edge technology in UK local newsrooms to deliver outstanding regional news services. In addition, Tonight with Trevor McDonald is the UK s most popular commercial current affairs series, providing popular, relevant and hard-hitting stories covering a wide range of issues across the year. In March 2006, ITV News launched the highly acclaimed Three Degrees from Disaster series investigating the evidence of climate change around the world. This was followed earlier this year with a week-long special anchored live from Antarctica by Mark Austin.
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15 13_ITV plc Report and accounts 2006 Stories of success. ITV has successful merchandising, licensing, DVD, distribution and international production businesses. We have production centres in America, Germany and Australia. We sell thousands of hours of programming to over 200 countries worldwide and licence more than 1,000 products across a wealth of major programme brands. We successfully exploit programme brands beyond broadcast from both ITV Productions and major hits acquired from other leading producers including Pocoyo, Thunderbirds, Prime Suspect, Coronation Street, Dancing on Ice, I m A Celebrity Get Me Out of Here, Little Britain and The Catherine Tate Show. Granada International sold the format of ITV s hit show Dancing on Ice around the world in 2006, with international versions in Russia, Australia, Germany, Spain, Belgium and the Netherlands.
16 14_ITV plc Report and accounts 2006 ITV at a glance Introduction For more than 50 years ITV1 has been the UK s largest and most popular commercial channel. Today ITV is a multichannel, multiplatform, content-driven business, firmly focused on the needs of viewers and advertisers. PANTONE REF PROCESS COATED DE C C 35 M 0 Y 100 K10 BLACK K 100 Our heritage ITV sells advertising on behalf of all 15 Channel 3 regional licences. ITV also produces much of the programming broadcast on ITV channels. ITV has played an important part in the growth of multichannel television, with the launch of ITV2 in 1998, ITV3 in 2004 and ITV4 in In 2006 ITV launched more channels: including the children s channel, Citv; and two catch up channels, ITV2+1 and ITV3+1. ITV began broadcasting in the London area in 1955, following the Television Act of 1954 which made commercial television in the UK possible. By 1973 there were 15 separate Channel 3 regional companies, each with its own licence. A period of consolidation between these companies began in 1993 and, in 2004, Carlton Communications Plc and Granada plc merged to form ITV plc, which today owns 11 of the 15 regional licences. Our people ITV employs almost 6,000 people worldwide. The majority work in production centres around the UK, with large centres in London, Manchester and Leeds. Outside the UK we have offices in Los Angeles, New York, Sydney and Cologne with smaller representation in Rio de Janeiro and Hong Kong. We also employ a large body of freelance writers, performers and technical staff who contribute to our programme production.
17 15_ITV plc Report and accounts 2006 Our businesses: At an operational level, the Company is based around three major businesses: Broadcasting, Content and Consumer. p p p p Listen to what viewers and advertisers want We gain valuable insight into what our audiences want through in-depth viewer research and working closely with our advertisers to ensure we deliver the highest quality programmes and content. Develop great content We invest in original UK content across a wide range of profitable genres and formats. Deliver through our family of digital channels We broadcast the most successful commercial family of channels in the UK, with each targeted to appeal to distinct demographics. We operate complementary scheduling to ensure that we attract the widest possible range of viewers to our channels. Capitalise on other opportunities We exploit content on an increasing number of media platforms, such as online and mobile, and our Worldwide team create new opportunities through merchandising, licensing, distribution and international production. Broadcasting ITV has the most successful commercial family of channels in the UK. Within Broadcasting the Channels team are responsible for commissioning and scheduling programmes on all the ITV channels. This fully integrated television team ensures that ITV is strongly positioned for growth in the digital age and continues to deliver attractive programming to viewers and advertisers. ITV also owns 75% of GMTV, the holder of the Channel 3 breakfast time licence. The other key part of the Broadcasting business is the Commercial team which markets and sells our advertising airtime and is also responsible for programme publicity. In 2006 ITV created a new Integrated Planning team to build stronger relationships with strategic planning agencies, working alongside the Trading team, who negotiate directly with media buying agencies selling airtime and sponsorship on ITV s portfolio of programming and digital channels. The two teams work closely with our advertisers to offer them bespoke multimedia solutions for both mass audiences with ITV1 and targeted audiences across our digital channels and new media platforms such as mobile and online. Content Our Content team comprises ITV Productions in the UK and the businesses in ITV Worldwide. ITV Productions is one of Europe s leading commercial production companies producing more than 3,000 hours of original programming each year. It is responsible for some of the most popular brands on UK television including Coronation Street, Emmerdale, I m a Celebrity Get Me Out of Here!, Dancing on Ice and Prime Suspect. It also produces highly-rated work for other channels such as The Street and The Royle Family for the BBC, Brainiac for Sky and Countdown and Longford for Channel 4. ITV Productions also made the successful, critically-acclaimed and Oscar winning feature film of 2006, The Queen. ITV Worldwide is made up of Granada International, Granada Ventures and international production centres in America, Germany and Australia. Granada International sells thousands of hours of programming from ITV Productions, and many other independent producers, to more than 200 countries worldwide. Granada Ventures is a major distributor of DVD entertainment in the UK and exploits merchandising and licensing in the UK and worldwide from both ITV Productions bank of television programmes and other independent rights owners. Consumer ITV s Consumer team was established in The team works with the Broadcasting and Content teams to capitalise on opportunities to deliver ITV content to consumers through new platforms. It consists of four main areas: platforms, broadband, transactional and mobile. Platforms manages our wholly-owned digital terrestrial multiplex SDN and ITV s relationship with Freeview, Sky and the cable operators. Broadband includes ITV Local, itv.com and the community website Friends Reunited. ITV Local was tested in the Meridian region and is now being launched in London and Central. It will be rolled out across the rest of ITV during itv.com will relaunch in the Spring of 2007 with extensive broadband video capabilities. Transactional includes our participation TV brand, ITV Play, alongside our interactive and premium rate telephony businesses. Mobile manages ITV s mobile portal and arranges distribution of ITV s channels and content on mobile networks such as 3, Virgin, O2 and Vodafone. Other businesses We own 100% of Carlton Screen Advertising based in the UK and the Republic of Ireland. In the UK, Carlton Screen Advertising has exclusive rights to sell advertising on more than 2,200 cinema screens, accounting for 75% of UK cinema admissions. We have a 50% interest in both Screenvision Europe and Screenvision US, joint ventures with Thomson S.A., which operate leading cinema screen advertising businesses in continental Europe and the United States respectively. We own a 16.78% interest in SMG plc, which operates the two regional Channel 3 licences in Scotland. We hold a 40% stake in ITN the national news provider for ITV and Channel 4. We also have a stake of 9.99% in Arsenal Holdings plc and a; 50% share of Arsenal Broadband Limited and 50% of Liverpool FC.tv Limited.
18 16_ITV plc Report and accounts 2006 Business Review Business Review by John Cresswell ITV is a vibrant company with many unique assets operating in a challenging business environment. We are executing a clear strategy to manage ITV into the digital age, ensuring we deliver for all our viewers, customers, employees and shareholders. John Cresswell Chief Operating Officer and Finance Director
19 17_ITV plc Report and accounts 2006 Our market environment Advertising trends ITV is a vibrant company with many unique assets operating in a challenging and highly regulated commercial environment. As the UK s leading commercial free-to-air broadcaster we generate the majority of our revenues from television advertising, which remains the largest display advertising medium in the UK. However, many traditional display advertising media have continued to decline in 2006, with the only major exception being online advertising. Although not immune to this decline, television has proved more resilient than some other traditional areas, such as radio. Television remains the major brand building display advertising medium. Over the five years to 2006, television s share of the UK display market has remained relatively stable at around 40%. The rapid growth in internet advertising is largely in search, which is brand searching in a similar fashion to direct marketing. Internet display advertising has also grown in 2006, though it represents less than a quarter of internet advertising growth. Freeview to overtake Sky in 2007 Digital penetration at 80% million homes Dsat Source: Ofcom DTV Platform growth DTT/Freeview Dcable The growth of the Freeview platform has ensured that three out of four households now have access to at least 30 television channels. As Freeview is the digital platform on which ITV s family of channels has the highest viewing share, that digital take up of Freeview is to the benefit of ITV. In addition, nearly half of all UK households have broadband internet access and mobile phone penetration is at more than 100%, with 3G penetration rising more slowly. These new platforms have resulted in shifts in viewing patterns and methods of consumption. The challenge for all media companies is to work within the context of these changes and prepare their businesses for the future. With the success of ITV s digital channels, and the development of our broadband and mobile businesses, ITV is well positioned to take advantage of the digital environment. Share of Commercial Impacts Our advertising revenues are based primarily on our share of commercial impacts (SOCI), with an impact measured as one person watching one thirty second advertisement (defined as spot advertising). In 2006, ITV s total share of adult commercial impacts on UK television was 42.2% (2005: 44.6%). The reduction in 2006 was principally on ITV1 where a combination of factors was operating: The rapid take-up of digital multichannel television; An increasing number of channels available to viewers in multichannel homes; Some weakness in ITV1 s programming line-up including lower audiences for some long-running series; and Strong competition from digital channels. Whilst the development of the ITV family of channels has mitigated some of the loss of market share from ITV1, it is also clear that we must seek to improve the quality of programming on ITV1 itself. Revenues outside of traditional ITV1 net advertising revenue are becoming increasingly important to the Company, and in 2006 these grew to over 41% of our total revenue vs 32% in ITV strength on Freeview % SOCI from DTT adults (peak time) ITV1 Ch4 Five ITV3 ITV2 E4 UKTV History ITV4 More4 Sky Three Film4 FTN E4+1 TMF The Hits Source: Barb/Infosys, DTT Adults Jan Dec 06.
20 18_ITV plc Report and accounts 2006 Business Review Our market environment ITV Productions is one of Europe s leading commercial production companies, and makes programmes in the UK for both ITV and other broadcasters.
21 19_ITV plc Report and accounts 2006 Spectrum usage in UK media TV GSM 3G WiFi Long wave Radio Medium wave Radio FM Radio Satellite Broadcasting B B B B B VLF LF MF HF VHF UHF SHF EHF M khz MHz GHz C Increasing Range Decreasing Range Decreasing Bandwidth Increasing Bandwidth Source: Ofcom BBB Content creation As platforms and channels have multiplied, so has the demand for and the value of content. ITV Productions is one of Europe s leading commercial production companies, and makes programmes in the UK for both ITV and other broadcasters. Within ITV Worldwide, our international production operations make programmes for broadcasters in the US, Germany and Australia. As new distribution channels such as broadband and mobile develop, creators of content like ITV will be able to access viewers directly. Regulation UK commercial television broadcasting is regulated under the Communications Act 2003 (the Act) by the communications industry regulator, Ofcom. Ofcom has authority to impose fines, and revoke or vary licences in pursuit of its consumer protection responsibilities relating to impartiality and accuracy of news programming, taste and decency, the use of sponsorship and the quantity and content of advertisements. Advertising is also regulated by the Advertising Standards Authority. In addition, Channel 3 licencees have to meet significant positive requirements covering, for example, original productions/commissions, independent productions, news, regional production, networking, equal opportunities, training, provision for the deaf or hearing impaired and blind or partially sighted, national television archiving, and party political broadcasts. Channel 3 licensees are required to fulfil their public service broadcasting (PSB) remit, requiring them to provide a range of high quality and diverse programming. For ITV1, a significant share of its programme schedule airtime is filled with PSB programming, including: childrens, religion, current affairs, national and local news, and regional non-news programmes. Whilst news is a core and fundamental part of ITV output, much of this other PSB airtime delivers low audiences. Under the Act, 25% of the time allocated to qualifying programmes (i.e. all programmes except acquired material, news, repeats and party political broadcasts) must be commissioned from independent producers who are not more than 25% owned by a broadcaster. This condition is included in all regional Channel 3 licences (as well as the arrangements for Channels 4 and 5, GMTV and the BBC). The Act also requires every public service broadcaster to have in place a code of practice for commissioning programmes from independent producers, and for these codes to be approved by Ofcom. In addition, ITV1 seeks to commission at least 50% of qualifying programmes (in terms of hours and investment) from outside the London area. ITV Channel 3 licences run to the end of 2014 and may be renewed at ITV s option for a further 10 year period from that point. These licences include the obligation to broadcast simultaneously in analogue in each region until that region is converted fully to digital transmission, with the final ITV regional licence owned by the Company expected to convert fully by ITV pays a licence fee for its Channel 3 licences. This fee was 51 million in 2006 and is expected to reduce to approximately 4 million in constant prices when all regions have fully switched over to digital. In July 2006 Ofcom consulted on proposals for the introduction of spectrum pricing for all users of spectrum including public service broadcasters from ITV does not support the introduction of spectrum pricing although, unlike most other public service broadcasters, ITV already pays for the spectrum it uses for its television channels (via cash payments as well as the delivery of substantial public service obligations). Ofcom has not yet issued a final position paper following its consultation.