UPDATE 3-ITV moves into pay-TV with new strategy

* H1 net ad revenue up 18 pct

* H1 revenue, earnings in line with forecasts

* To offer some ITV channels through Sky

* Shares down 2 pct

(Adds details, reaction)

By Kate Holton

LONDON, Aug 3 (Reuters) - ITV, Britain’s biggest commercial free-to-air broadcaster, will enter the pay-TV market as part of a wider plan to generate around half of its revenue from sources other than traditional and often volatile advertising.

ITV ITV.L, which saw its share price fall almost 85 percent between June 2007 and April 2009 as ad markets collapsed, said on Tuesday it would also spend more on programming, online and digital content as part of its five-year turnaround plan.

New Chief Executive Adam Crozier, who has been scathing about the company’s previous strategy, announced the new plan as he revealed that first-half ad revenue was up 18 percent due to the World Cup.

Ad revenue is expected to be up 15 percent in the third quarter before comparatives with 2009 toughen, leaving the company more cautious for the end of the year and beyond, ITV said.

Crozier, who restructured Royal Mail in the face of union resistance, said he wanted half of ITV’s revenue to come from non-advertising sources such as pay-TV, sponsorship, content creation, online income and product placement.

“It is pretty obvious to me that being so reliant on one extremely volatile and declining source of income is not a healthy place for us to be in the long run,” Crozier told reporters.

“We need to move away from that and rebalance the business. It will take around five years.”

Crozier, who joined ITV at the end of April, said he wanted to improve the broadcaster’s ability to compete in the era of Internet TV, pay-TV, the globalisation of programming and the proliferation of digital channels.


ITV, home to shows such as Simon Cowell's X Factor and Coronation Street, said it would put the high definition versions of its digital channels on the BSkyB BSY.L pay-TV platform as part of its push to develop new revenue streams

The deal, which would provide a guaranteed revenue stream, is not exclusive and ITV will talk with other pay-TV platforms.

It will also work to improve the quality of its programming, so it can be sold abroad and online, with an investment fund of 75 million pounds to be used over the next three years.

The ITV1 network programme budget will be held below 800 million pounds in 2011 and 2012 -- around 50 million pounds higher than originally expected -- and it will refocus on producing quality drama and light entertainment, even though making good drama can take several years.

ITV has launched two strategic reviews in recent years under previous management, and both times identified that it needed to make and sell more content abroad and online. But analysts said they were encouraged by the initial plans.

Shares in the group were down 2 percent in morning trading, after they gained 3 percent on Monday on speculation about the turnaround plan. In the last year, ITV shares have gained 24 percent, behind the UK media sector, which is up 35 percent.

“ITV is a large, complex business which has undergone a period of drift under previous management,” Credit Suisse said. “It is clear that the new team have a clear mandate to effect change, and the outline of their plan today makes strategic sense.”

The recovery in advertising helped six-month revenue rise 9 percent to 987 million pounds, compared with a Reuters analyst forecast of 992 million pounds.

Adjusted earnings before interest, tax and amortisation was in line with forecasts at 165 million pounds. Cost-cutting helped to reduce net debt to 437 million pounds from 612 million pounds at the year end. (Editing by Paul Sandle, Lin Noueihed and Karen Foster)