News Analysis: Friends at a price

ITV will use Friends Reunited to improve customer relations. At £120m, it's a hefty price to pay, writes Greg Brooks.

ITV's purchase of internet phenomenon Friends Reunited raised more than a few eyebrows in the media. The fact that the broadcaster paid £120m for the business, possibly rising to £175m, was one reason; the other was that nobody could fathom why ITV chose to buy it at all.

According to ITV chief executive Charles Allen, the broadcaster intends to create content and exploit the property through a series of channels - broadcast, broadband and mobile. But his case was not strengthened by suggestions that a Blind Date-style TV show could be spun off from the Friends Reunited site, If so, it would be one of the most expensive programmes ever conceived.

Jeff Henry, head of ITV's recently formed consumer division, argues that the acquisition should be seen in the context of the rapid changes under way in the broadcast industry. 'We needed to move very fast to get a presence online. It was not a big price for a fantastic business,' he says.

Money moving online

Traditional broadcasters are seeing their ad revenues falter. The proliferation of digital channels and the different ways in which consumers can now access content are making it harder to maintain market share, and an increasing amount of advertising is being taken by internet businesses. More than £1bn is estimated to have been spent on online ads this year.

Broadcasters are thus having to broaden their offerings to retain revenue, and it is this which fuelled ITV's decision to pay what many consider an inflated price for Friends Reunited.

'In essence, it is a defensive move,' says Guy Di Piazza, media and entertainment director at Ernst & Young. 'ITV is facing a decline in advertising and a fragmenting audience, and assets in new media are seen as attractive.'

The purchase bears comparison with those made in the early days of the dotcom boom, when traditional companies bought into new-media start-ups to capitalise on the growing phenomenon and reassure investors that they were part of the online gold rush.

For many of the companies that attempted to bolt on a new-media business to their existing offering, the internet turned out to be fool's gold. ITV has behaved differently, developing its own online services, with a varying degree of success.

But it has been largely unable to compete with the BBC, which has enjoyed massive public investment, or with the deep pockets of portals such as Yahoo! and MSN. So ITV has had to turn to a costly acquisition.

In theory, the difference between this deal and acquisitions during the heyday of dotcom fever is that there is now a viable market - the audience is ready for converged TV services, such as programmes delivered via broadband or by mobile phone.

In this changing market, the companies best placed to reap the rewards will be those that have direct relationships with their consumers. For example, Sky has direct relations with 7.8m subscribers and is set to launch on-demand TV, accessed through viewers' PCs.

O2 has 15m customers and is trialling a TV-over-mobile service in Oxford.

Cable company NTL is also involved in the Oxford trial, but has been rebuffed, for the moment, in an attempt to partner Virgin Mobile and offer fixed-line phone, mobile, broadband and TV services to a potential audience of 10m.

Customer data

By comparison, ITV has a loose relationship with its consumers. This could be why it has just bought a service used by 15m people, half of all those online in the UK. Looked at through traditional media eyes, the deal makes little sense as a way of generating programme content. But consider the data to which it gives ITV access and it appears more rational.

What remains unclear is how ITV will leverage its new asset and the relationships that come with it. The broadcaster may have bought a potential new audience, but it will have to work out how to turn registered members of Friends Reunited into subscribers to ITV services.

Sky has worked hard to develop its average revenue per user over a number of years, and ITV has to do the same if it does not want to be left behind.

ITV intends to keep the Friends Reunited brand, while linking the service with ITV.com and new broadband service ITV Local. It will aim to develop areas such as dating, recruitment and classified ads, and will integrate the underlying technology and skills such as database-handling across its entire offering, allowing for integrated billing and subscription services.

Henry says one key advantage will be the opportunity to offer users of the Friends Reunited sites - which include Genes Reunited, Friends Reunited Dating, Friends Reunited Jobs and social networking site Connections - the chance to view programmes linked to their school days. 'It is a fantastic opportunity to monetise our back- catalogue,' he says.

The acquisition has undoubtedly moved ITV a step closer to developing the intimate relationship with consumers that it needs, but the broadcaster has a long way to go to succeed in the modern TV era.

DATA FILE - ONLINE BUSINESS ACQUISITIONS

Daily Mail & General Trust (DMGT): Primelocation.com £48m (pending acceptance), December 2005

News Corporation: Asserta Holdings (Propertyfinder.com), £14.3m, November 2005

Trinity Mirror: Hot Group, £50.5m, October 2005

Emap: Worth Global Style Network, £140m, October 2005

eBay: Skype, £1.4bn, September 2005

Sabre Holdings: (Travelocity) Lastminute.com, £577m, July 2005

Cendant Corporation: eBookers, £190m, March 2005

Associated New Ventures (DMGT): Findaproperty.com, £14m, November 2004.

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