In a research note published this morning, the bank said demand for Freeview had been higher than expected and is having a negative impact on ITV.
The bank said although ITV2 was doing well in Freeview homes, a poor performance by ITV1 meant the impact overall would be negative for the commercial broadcaster.
"Although ITV2 is taking 3.5 percentage points more audience in Freeview homes than it does in cable and satellite homes, ITV1 is only adding one point of audience share. The overall mix effect will still be negative in our view," the note said.
The note hit both companies' share prices. At lunch time, Carlton was down 1.93% to 96.5p and Granada fell 1.69% or 1p to 58p.
Morgan Stanley said that the stronger-than-expected demand for Freeview had caused it to raise its estimates of UK digital penetration, such that it believes the UK could be "fully digital by 2012".
The bank said this would affect its earnings per share estimates for 2004 and 2005 for Carlton and Granada. It cut its price target from 80p to 60p for Granada and slashed Carlton's to 75p from 125p.
The news follows ITV joint managing director Clive Jones' admission earlier this month that ITV's advertising share had been put under pressure from the increased popularity of digital television.
"The market share has slipped but that's an inevitable part of digital penetration." He added, however, that ITV's ratings had started the year well, which had helped in negotiations with advertisers during the new year renewal period.
Morgan Stanley admitted that it had underestimated how well Freeview would be received. "Following the collapse of ITV Digital last year, we had assumed that Freeview would have a less-than-spectacular start to life," the bank said.
Last month, Freeview said that more than 300,000 of its digital terrestrial adapters had been sold in the two months since its launch. Over the same period, almost 2m requests were received for information on the DTT platform.
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