The City's love affair with Carlton is showing signs of cooling off, and only a bold move from the media group, say industry watchers, will counter the criticisms of cautiousness and complacency.
'How long have you got?' Michael Green wants to know. What he is really saying is that he hasn't got all day to talk to journalists. Thirty minutes and several swigs of mineral water later - he drinks straight from the bottle - Green makes it clear that the meeting is over. If only the chairman of Carlton Communications could deal with City sceptics as easily as he dismisses reporters from his office.
Opinions on Green the man tend to gravitate around two distinct poles: outright loathing or genuine affection. But ask Carlton watchers for their view of the company's present performance and on one point they all agree: Carlton is at a crossroads and everyone is anxious to discover where Green, who has made his name thanks to shrewd acquisitions, will strike next.
As media moguls go, Green is famous for his low profile, but even by his own standards of discretion, 1995 was a quiet year. While rivals such as Granada and Pearson surged ahead in pursuit of potentially lucrative but risky international ambitions, Carlton more than lived up to its reputation for caution. An impressive set of results announced in December, which showed profits up by 30%, failed to silence the critics and their demands for new revenue streams. 'I accept that Carlton's become a bit boring,' Green admits. 'There may be no fireworks but don't mistake that for a lack of vision if the right proposition did come along.' It is easy, as Green implies, to take Carlton's success for granted. His achievement in building up the group from scratch to its present powerful position as one of Britain's biggest television and video companies is sometimes underplayed. Rarely a week passes without a Murdoch or a Disney making the headlines. As the dash for market share intensifies, and with media mergers as commonplace as backbench rebellions, Carlton's place at the hub of the entertainment business can be overlooked.
In 1983 Carlton only existed as a media empire in Green's imagination. Today the group turns over in excess of £1.6 billion. Sooner or later anyone exposed to television, video or film in Britain and the US will come into direct contact with Carlton via one of its products or programmes. The great leaps forward in Carlton's recent corporate development came with the acquisition of Technicolor, the US film and video duplicator and processor, in 1988, (in North America one in two pre-recorded video cassettes are now manufactured by Technicolor) and the company's arrival as a major player in British broadcasting in 1993, the year in which Carlton became the UK's biggest commercial television operator. Green bought the hugely profitable Central Television in November 1993, less than a week after the Government relaxed media ownership regulations; he had held a 20% stake in the company (the maximum allowed under government restrictions) since 1987. The move followed Carlton TV's success in the 1991 ITV franchise round, when Green outbid Thames for the London Monday-to-Friday ITV licence. Carlton also has stakes in GMTV, the loss-making breakfast station, Meridian, the regional south coast ITV licence-holder, and ITN. Not since Lew Grade's stranglehold on independent television in the '70s has any one figure held so much power in British commercial TV.
Carlton's expansion into broadcasting gave it the biggest bite of network revenue in UK television, amounting to around a third of total ITV airtime sales. The double whammy of owning the London weekday and Midlands franchises was particularly gratifying for Green. Until 1991 the bulk of Carlton's business involved providing post-production facilities to broadcasters, advertising agencies and independent producers, as well as making digital electronics equipment for facilities houses like itself and duplicating pre-recorded video cassettes for the consumer market. In other words, the company's job was to provide the hardware for the creative wheels of Soho and Hollywood once the script-writers, actors, directors and producers had done their bit.
As someone with no background in programming, and who had left school with four O levels to work as a compositor in the print trade, Michael Green was seen by Britain's then paternalistic broadcasting industry as someone who should at all costs be barred from joining the club. In the mid-'80s Green had won the sympathy of Margaret Thatcher when the television establishment, which she detested, blocked his attempted takeover of Thames. But the 1990 Broadcasting Act was tailor-made to enable men like Green to get into TV by auctioning licences previously awarded on merit.
Broadcasting is a relatively new area for Carlton but it now accounts for half the company's profits, compared with 7% two years ago. In the year to September 1995, the company's television division, with a full year's contribution from Central, increased turnover from £496.7 million to £670.1 million, making it the largest division.
Other activities are performing well. Technicolor's video-duplication and film-processing businesses are thriving thanks to the increasing number of 2,000-print cinema releases in the US; Technicolor has lucrative three-to-five-year contracts with most of Hollywood (including Disney). Elsewhere, profits at Carlton's video and sound products division are sharply up.
Nevertheless, broadcasting is 'the lifeblood of our business', Green says. 'If we don't concentrate on programmes we won't have a business.' Why, then, is the City showing signs of cooling off its love affair with Carlton? As Green likes to tell analysts: 'To have a media company capitalised at over £2 billion and net cash is unusual.' Carlton already has a £90.6 million cash pile and is pulling in cash at a rate of about £100 million a year. Overall profits have doubled since 1993.
The simple answer is size. With the media business becoming increasingly competitive and dominated by international players like Time-Warner, Disney and Murdoch, Carlton is small fry; and there is genuine concern regarding growth prospects for ITV revenue given the onward march of satellite and cable and the launch of Channel 5 next year. Green dismisses such fears with a wave of a well-manicured hand. 'I believe that satellite and, more importantly cable, are going to be very exciting, sexy businesses,' he says,'but that is not to say that advertisers don't need the mass reach of one major channel - and that channel is ITV.' June de Moller, Carlton's managing director, thinks too much stress is placed on the fact that other European media giants including Bertelsmann, Fininvest and Polygram are much bigger than Carlton. 'Size for size's sake is not important,' she says. 'Our focus is on television, and on making programmes for our own network and for sale at home and overseas.' On the outlook for television, the City is not so sure. Some observers see ITV caught in an inexorable downward spiral; a recent report by Goldman Sachs forecasts that out of all the ITV companies, Carlton will be hit hardest by Channel 5 and suffer a 'negative profit impact' of £16.1 million in 1997. Meanwhile ITV's audience share will fall from its current 42.9% to 37.2% by 2002. 'The slow decline in ITV advertising share is the main reason why Granada and Carlton are looking at opportunities in the pay-TV market,' a media analyst says.
There is also new competition from more far-fetched technology like video-on-demand and the impact of new digital services. A likely cut in the size of the Channel 5 rebate in the not too distant future will also hit Carlton's long-term profitability. Last year it added £19.9 million of pure profit to Carlton's coffers.
Developments in technology raise further question marks against the other pillar of Carlton's business: video duplication and film processing. Some see Technicolor's earnings as under threat on two fronts: from the digital delivery of film to cinemas and the gradual eclipse of the video cassette by digital formats, in much the same way that the CD has largely superseded vinyl. Green dismisses such a scenario. 'Every figure I've seen suggests that business is going up. The digital video disc will come but I think that will add to the pot.' As the price of the domestic VCR continues to fall and potential opportunities for duplication in the huge Asian market grow, Technicolor's business looks assured for the foreseeable future.
There are, however, other more fundamental doubts relating to Green's personal style and his business philosophy. First, there is the charge that Carlton has simply bought growth by acquiring relatively mature firms and squeezing good results from them, rather than concentrating on organic growth. 'Carlton has never had a strong start-up culture,' says an observer. Second, there are questions as to the balance of power at the top. Green insists that de Moller, who took over as managing director in 1993, actually runs Carlton. This may be, but few seem to doubt where the real power lies. 'Michael likes to make much of the fact that Carlton is the only FTSE-100 company with a female md,' says a former employee, 'but she's a cipher and has no serious executive role whatsoever.' Roedean-educated de Moller looks after the day-to-day running of the group's non-broadcasting activities. She has the manners and appearance of a public school headmistress. Her profile is even lower than Green's. She would make a perfect head of MI5. Asked to define Carlton's attitude to management she says: 'Our companies are well managed by people who feel in control of what they are doing.' Within the television industry there is speculation over who might succeed de Moller should she retire next year on reaching 50. One obvious candidate is Nigel Walmsley, chairman of Carlton Broadcasting, who, along with finance director Bernard Cragg, completes Green's inner circle. Walmsley, a chain-smoking workaholic with an eye for detail, came to Carlton after a successful stint running Capital Radio. His fans say he has thrived at Carlton because he is always one step ahead of Green. His detractors attribute his success under Green to a mix of humility and sycophancy. They also complain of his 'nitpicking'. Says one: 'He gets so far into the fine detail that he loses the plot.' What seems beyond doubt is that all the big decisions are left to Green.
Despite the famous modern art collection, exquisite tailoring and Lew Grade-style cigars, Green has a cautious side to his character which borders on the timid. Carlton's substantial cash pile is a testament to this caution. Murdoch risked his entire empire on building up Sky; Green would never take so big a risk. His approach, rather, involves keeping the City sweet in the knowledge that a buoyant share price gives him maximum room for manoeuvre in any acquisition. But cautious though Green may be, some media experts say there is a danger he will be forced into a new deal simply to keep the City happy. Analysts who attended a recent Carlton briefing came away with the view that it was long on detail but low on strategy. Had Green not been beaten by Richard Branson for the acquisition of the UK MGM cinema chain last year, some of the doubters might have been silenced. However, Carlton's recent investments - a 24% stake in France Tele Films, a French satellite channel, and a minority holding in Channel KTV, a Singapore station specialising in karaoke - have not impressed the City. 'It hardly amounts to a diversified international strategy,' says one analyst.
Green admits that he may have played it too cautiously on the Continent. 'You have to be careful in Europe and look at a lot of propositions,' he says. 'We've missed some opportunities that, with hindsight, we should have taken.' He particularly rues not investing in M6 in France. And he adds: 'We could have purchased Vox in Germany, but Murdoch bought it. Maybe that was the right thing.'
But further expansion there must be, with Carlton's broadcasting interests acting as the springboard for growth both overseas and in the UK. Like Granada, Carlton is determined to boost its production business and make programmes for virtually any outlet that will commission them. Last July, Carlton announced that it will supply programming to France Tele Films.
Meanwhile, Carlton is gradually building up its programme library; the takeover of Central brought with it a prestigious programme collection including Inspector Morse and Soldier, Soldier. Carlton also owns rights to the Romulus catalogue of British films (the titles include The African Queen and Richard III), controls distribution for the hit Australian soap Heartbreak High and 100 American made-for-TV movies. Yet Carlton's 4,000 hours of programming is still half the size of Granada's library.
Granada, ever Carlton's rival on broadcasting, is planning to launch a package of new domestic satellite channels in collaboration with BSkyB later this year which will take it into the subscription TV market. It is a field that Green is also keen to move into, though he says only that there are 'a lot of opportunities in screen-based entertainment'. He is sensitive to claims that he will sooner or later find himself in direct competition with BSkyB; Carlton, however, does not rule out partnerships with the Murdoch-backed satellite station, though it is unclear how these could work given Granada's links with BSkyB.
Until now media ownership restrictions have barred terrestrial broadcasters from owning cable and satellite channels, but new rules - likely to take effect from January 1997 - will enable a single company to broadcast to up to 15% of the total audience. As well as giving Carlton the opportunity to compete in non-terrestrial markets, this further deregulation allows Green to add at least one other smaller ITV company to his empire - he may attempt to seize HTV, Scottish Television or Westcountry.
A more likely target is Clive Hollicks' MAI group, owner of Meridian and Anglia. Carlton is familiar with the lucrative south-coast region covered by Meridian; it bid for the south of England ITV franchise in 1991 and currently holds a minority stake in the station. A successful takeover of MAI would give Green unprecedented power within ITV, but make Carlton even more dependent on the vagaries of the advertising market. Given Meridian's negligible network output, it could also expose what many experienced broadcasters regard as the company's Achilles' heel: its largely undistinguished record in programme making.
There seems little doubt that Green took it personally when, during Carlton's first year on air, its output was universally derided by TV critics and television professionals alike. In 1994 the Independent Television Commission, which chose Carlton in preference to Thames, praised its programming after publicly deriding its productions the year before. However, as recently as last April, Paul Jackson, founding director of programmes at Carlton, admitted that the station still 'lacks the defining hit'.
By then Walmsley had merged Carlton and Central's production departments under one corporate roof, Carlton UK Productions. This enabled Carlton's short-comings as a programme-maker to benefit from Central's achievements, which have ranged from Spitting Image to Inspector Morse. Doubts linger as to whether Central's creativity will rub off on Carlton. Walmsley denies that Carlton is uncomfortable with the creative process. 'That is absolute nonsense,' he says. 'We are inundated with proposals from the best talent in the country. They feel this is an environment that cultivates and nurtures talent.' But what does Green think? 'There is always more to be done to improve programmes but our commitment cannot be questioned. I think if you produce a quality product you will always find a market.' One area where Carlton has undoubtedly scored is children's programmes. A £6 million, two-part, animated version of Wind in the Willows, shown over Christmas, is the latest in a string of successes; Green is only too well aware of the merchandising opportunities attached to programming of this kind.
Privately, executives know that when it comes to output, Carlton still suffers from an image problem. 'Green hates Carlton Television's tacky image, but he's not prepared to do something about it by investing in development,' says a broadcasting source. What is certain is that compared with Granada, which continues to please audiences and critics, Carlton has a long way to go. Similarly, in any direct comparison between Granada and Carlton's senior television management teams, Granada comes off better. 'You only have to look at the way Granada integrated LWT and then examine what is happening to Central under Carlton,' a former Carlton staffer says. 'Carlton is a robust, intelligently managed company, but the Granada people are more dynamic,' an industry watcher adds.
But Green's achievement in launching Carlton TV and winning a regular stream of commissions from ITV's network centre cannot be overlooked; Carlton can boast that it was responsible for seven of the 10 most popular TV dramas on ITV last year. And talk of Carlton's timidity belies the stunning growth that has taken what was a tiny concern a dozen years ago to today's FTSE-100 company.
So where next? A sideways move into print is not to be ruled out. Green looked at the Daily Express. But purchasing an ailing newspaper group would not have silenced those who think Carlton is in danger of treading water. If Carlton is to restore its reputation in the City, Green will have to do something genuinely bold. Adding another ITV company to his stable is one thing; making a successful bid for a major UK media group like Pearson would prove beyond doubt that Carlton deserves to be taken as seriously as Granada. 'There are signs of complacency at Carlton. I think they've got one or two years at most to pull off something big,' a media analyst observes. 'Otherwise they'll lose their glamour stock status.'
CARLTON COMMUNICATIONS: Financial Facts
Broadcast television 670.1 122.8
Video production & distrib. 474.2 60.7
Film & television services 251.8 41.6
Video & sound products 169.1 32.5
Other 14.4 (9.1)
Total 1,579.6 248.5
UK 823.1 138.5
Europe 135.5 10.7
North America 570.1 92.7
Japan 17.3 1.0
Other 33.6 5.6
Total 1,579.6 248.5
* for year to 30 September 1995.