Memorandum submitted by Channel 4
EXECUTIVE SUMMARY
1. Channel 4 Television Corporation ("Channel
4") is a publicly owned statutory corporation required to
fulfil a unique public service broadcasting remit and fund this
through commercial activities. Channel 4 welcomes the Select Committee's
investigation of the Government's proposals for achieving analogue
switchover and the opportunity to submit our views. This document
summarises Channel 4's involvement in the switchover process,
our views on the proposals and raises a number of issues of particular
importance to Channel 4.
2. We understand the remit of the Committee
is to investigate the Government's proposals to switch off analogue
terrestrial television broadcasts over the period 2008-2012. In
particular it is interested in the following issues:
— The policy objectives and economic
benefits of digital switchover, and the relative roles of the
different platforms in the delivery of digital television.
— The feasibility of, and the steps
needed towards achieving switchover to the Government's timetable
and with sufficient geographical coverage.
— The costs associated with the digital
switchover process and how these are to be met.
— The protection of vulnerable groups
in terms of financial and practical assistance.
3. Channel 4 is a key stakeholder in digital
broadcasting in the United Kingdom and in the switchover process.
We already broadcast the main Channel 4 service across all the
digital platforms in the United Kingdom (Satellite, Cable, Digital
Terrestrial and DSL) and we also provide a range of digital channels—including
E4 and More 4 (to launch in October) free-to-air—and FilmFour
as a subscription channel.
4. Channel 4 is a shareholder in SwitchCo
which is the body that has been established to communicate and
promote the switchover process in order to meet the Government
timetable of 2008-12. We have also agreed to become an equal shareholder
(with the BBC, Sky, ITV and Crown Castle) in Digital Television
Services Limited, which owns and operates the Freeview
brand in order to support the roll out of Digital Terrestrial
Television ("DTT").
5. Channel 4 was also issued a new broadcasting
licence (its Digital Replacement Licence), which includes specific
obligations for Channel 4 to roll-out the digital terrestrial
network to substantially all of the 1,154 transmitter sites in
the United Kingdom, in order to ensure that the coverage of its
digital services "substantially replicates" the current
coverage of analogue broadcasting.
6. Channel 4 is broadly supportive of the
Government's proposals to complete the conversion of all homes
in the United Kingdom from analogue to digital broadcasting in
order to achieve greater consumer choice; more efficient allocation
of scarce spectrum by the cessation of simulcasting DTT and analogue
services and the release of the 14 frequency channels of analogue
spectrum. We believe that there are a number of clear consumer,
public policy and economic benefits of switchover that justify
such an intervention in the broadcasting market.
7. We believe progress has been made towards
developing a clear and implementable plan for achieving switchover.
We also welcome the fact that the Secretary of State has made
a firm commitment to achieving switchover, and has set out a clear
timetable and proposals for marketing and communication to viewers
and forms of financial and technical support for those who most
need it. After a lengthy period of healthy debate and discussion,
switchover is now a realisable goal. The success of switchover
is now dependent on all parties being allowed to successfully
implement the relevant elements of the switchover plan.
8. However, whilst we support the policy
of switchover we are extremely concerned about its impact on our
ability to continue to fulfil our public remit effectively and
the long-term future of the Channel. Channel 4 is a unique public
service broadcaster with its own unique funding model. Unlike
the BBC we are not insulated from the impact of switchover through
guaranteed licence fee income, and unlike ITV and Five we are
not able to benefit from licence payment reductions to reflect
the declining value of our analogue spectrum. Nor do we wish to
reduce our PSB obligations, as ITV has sought to do. Channel 4
is particularly exposed to the detrimental impact of digital switchover
amongst the main terrestrial broadcasters given its funding model,
and it has the potential to significantly undermine our long-term
ability to deliver our remit.
9. As a broadcaster whose primary purpose
is to maximise its public service ambition but must fulfil this
through commercial means, Channel 4 has traditionally been supported
through the allocation of scarce analogue spectrum at no cost
in order to transmit its services and fulfil its remit. However,
as we approach switchover, the value of this analogue spectrum
will fall to zero. Channel 4 will face increased pressure on its
audience share from additional competition brought about by new
digital channels. Furthermore, we also face the impact of new
technologies (eg PVRs), which have the potential to undermine
the traditional advertising model as well as emergent media, such
as broadband and video-on-demand, which will compete directly
with traditional broadcast television. All these will put greater
pressure on Channel 4's funding model.
10. Channel 4 is unique amongst the commercially
funded PSBs in continuing to want to maximise its public service
impact in the face of these commercial pressures. Whilst ITV will
seek to reduce further its public service commitments and Five's
contribution will at best remain relatively small-scale, Channel
4's aim is to have as great a public service role in a digital
age as it has had in the analogue one. However, we are currently
responding to these pressures without any form of support to replace
the implicit subsidy of analogue spectrum. We also face the additional
challenge of having to fund the one-off capital costs of achieving
switchover, although the BBC's offer in Building Public Value
to fund these costs if provision is made via the Licence Fee settlement
offers a solution to this problem.
11. As well as the short-term cost we believe
that DSO will have a detrimental long-term affect on Channel 4's
financial position, leading to a significant funding gap. It is
critical that Channel 4, as we begin the switchover process, works
with Ofcom and Government to ensure that adequate on-going mechanisms
of support are put in place to allow us to continue to fulfil
our remit effectively in the digital age. Our clear preference
is for indirect mechanisms of support, rather than direct public
funding, although we believe that it is important that the White
Paper ensures that reallocation of the licence fee is left open
for further discussion should it be necessary to investigate further
in the future. We believe this will be essential to ensuring that
the recommendations of both Ofcom's PSB Review and the Government's
Green Paper are fulfilled: that Channel 4 remains a strong PSB
provider and a key competitor to the BBC in the provision of news,
current affairs and other genres of high quality original UK programming.
BACKGROUND TO
DIGITAL SWITCHOVER
12. Digital switchover is the UK Government
policy to convert all remaining analogue television viewers to
digital by 2012. The satellite and cable platforms have already
been converted to digital[1].
The terrestrial platform, however, continues to transmit both
analogue and digital signals. The main public service broadcasters
(the "PSBs": the BBC, ITV, Channel 4 and Five) now carry
obligations under the terms of the Communications Act and their
Ofcom licences or Charter to achieve the conversion from analogue
terrestrial to digital transmission for their PSB services.
13. Switch off of the analogue terrestrial
signal and conversion of all viewers to digital television will
have considerable benefit to the United Kingdom:
— It will offer all viewers a wider
range of channels and services than they currently receive in
analogue, whilst ensuring the continued provision of the five
main public service channels (and a range of new public service
channels including BBC Three, BBC Four and More4).
— It will support the broader government
policy of achieving "Digital Britain" and encouraging
the take-up and use of new digital services.
— It will enable more efficient use
of scarce broadcasting spectrum.
— It will enable the release of 14
channels of spectrum which have a range of potential uses, with
both potential economic value through sale to commercial bidders
and the potential to support public policy through the introduction
of new public service channels and services (eg HDTV).
14. However, the policy of digital switchover
comes at a significant cost. Broadcasters will incur significant
financial cost rebuilding the network and viewers will suffer
from the potential disruption and inconvenience to their reception
equipment. There is also a potential impact on the provision of
public service broadcasting in the United Kingdom. Whilst we are
supportive of the public policy of switchover, Channel 4 firmly
believes that its implementation needs to be well planned and
effectively co-ordinated between all the stakeholders, most notably
the broadcasters. This means that the process and benefits of
switchover must be clearly communicated to viewers and that those
viewers who need help with the process are adequately supported.
Furthermore, it is essential that the impact of switchover on
the long-term provision and funding of public service broadcasting
is properly reflected within the Government's policy towards the
sector.
CHANNEL 4'S
OBLIGATIONS AND
ROLE IN
RELATION TO
DIGITAL SWITCHOVER
15. Analogue terrestrial broadcast services
are provided by the five public service channels: BBC1, BBC2,
ITV, Channel 4 and Five. The provision of these services has been
controlled, via licences issued by the regulator in the case of
the commercial PSBs, and in the case of the BBC via the Royal
Charter.
16. To achieve switchover, those analogue
transmission obligations need to be wound down and replaced by
new digital obligations. For the commercial PSBs, including Channel
4, these obligations have been captured in "Digital Replacement
Licences" which replace the old analogue licences. The Digital
Replacement Licences came into force in December 2004, and amongst
other things require the commercial PSBs to:
— Replace the analogue signal with
a digital service that is "substantially the same as the
coverage area that was achieved by the Analogue Licence"—ie
DTT coverage of the PSB services must substantially replicate
the 98.5% coverage achieved in analogue. This will require the
existing 80 transmitter site network to be enhanced and extended
to almost all the 1,154 sites in the UK.
— Switch off their analogue signals
by 31 December 2012 (this can be changed by the Secretary of State
or by agreement between Ofcom, and the licensee).
17. Channel 4 is a key stakeholder in the
switchover process because we jointly own and operate one of the
six DTT multiplex licences that form part of the terrestrial network
that will need to be extended and upgraded for switchover. Digital
3&4 Limited—the joint-venture company which Channel
4 owns equally with ITV and holds and operates our DTT multiplex—is
currently in negotiations with transmission providers regarding
the financial costs and technical arrangements to extend our multiplex
to meet the requirements of our DRL.
18. Channel 4 is also a shareholder in SwitchCo—alongside
the other PSBs and multiplex operators—which has been established
to coordinate and communicate the switchover process across the
industry. A number of Channel 4 departments are currently working
with SwitchCo: inputting on plans and ensuring that we are fully
lined up with the rest of the industry.
OVERALL PROGRESS
OF SWITCHOVER
19. Following a significant period of discussion
between all the key stakeholders within industry, Ofcom and Government,
Channel 4 welcomes the fact that the Secretary of State has made
a firm commitment to achieving switchover and set out the timetable
at the RTS Convention in September. We now believe there is emerging
consensus amongst the stakeholders as to the best route to achieving
switchover:
— A strong free-to-air DTT platform
available to the vast majority of the country, alongside free
and pay services from the cable and satellite providers.
— An effective communication strategy
to demonstrate the benefits of switchover to viewers and the process
to achieve it, led by SwitchCo and the BBC.
— Targeted help for those people who
will not be able to afford, or easily install, digital equipment.
— A strong presence of the public service
broadcasters on all digital platforms to ensure the Government's
ongoing commitment to public service broadcasting is fulfilled
and viewers continue to receive the range and quality of services
they had been used to in analogue.
20. In light of this, Channel 4 also welcomes
the establishment of SwitchCo and its role in achieving switchover,
and also the BBC's commitment (subject to the Charter renewal
and licence fee settlement) to providing the funding required
to support the platform-neutral communications strategy of SwitchCo
and to provide targeted help to key groups of society who will
need assistance with switchover. Natural market take-up will mean
digital penetration will continue to grow, but as we approach
conversion of the final percentage of homes, a co-ordinated approach
to funding and marketing switchover will be essential. As a shareholder
in SwitchCo, Channel 4 endorses its detailed submission to the
Committee on how best to achieve this objective.
TIMETABLE
21. We welcome the fact that Government,
Ofcom, the Broadcasters and the transmission service providers
(Crown Castle and Arquiva) have now agreed the timetable for switchover
and the order in which regions will convert. The responsibility
to meet this Government policy and timetable falls primarily on
the Broadcasters through their agreements with the transmission
providers to roll-out the network, and through SwitchCo ensuring
that consumers are aware of what they need to do and by when to
receive digital television.
22. We believe that subject to effective
co-ordination amongst the key parties and successful conclusion
of our negotiations with transmission providers, this timetable
should be achievable. However, it is important to note that once
this process has been commenced it will not be possible for Government
to postpone, or even delay, the switchover process. The broadcasters
will have committed to major contracts with the transmission providers
to roll out the new network and these cannot be delayed without
significant financial cost.
COVERAGE
23. Channel 4 welcomes the current plan
that all multiplexes should operate at 64 QAM at switchover, and
be allowed to increase power levels to achieve coverage levels
of approximately 98.5% of the country, equivalent to analogue
coverage today. We believe this is the most effective way of ensuring
digital television services are available to all homes who can
currently receive analogue television, whilst maintaining the
choice of services on the DTT platform and its competitiveness
with other platforms.
24. However, the spectrum plan that is being
developed to achieve this objective has not yet been agreed with
other countries, and will not be so until the Regional Radiocommunications
Conference in mid 2006. We hope that Ofcom will be successful
in these negotiations to enable the implementation of the spectrum
plan currently being developed to provide 98.5% coverage. However,
if for any reason coverage is lost in the international co-ordination
negotiations, we believe the short-fall should be made up by free-to-air
digital satellite services, rather than changes to the mode of
the multiplexes, which would reduce the competitiveness of the
platform through reducing the range of services available.
COSTS OF
SWITCHOVER
25. As we have already discussed above,
digital switchover is a hugely complex and costly exercise. There
are three broad categories of cost associated with switchover
on which Channel 4 would make the following comments:
(i) Network infrastructure
The largest cost of achieving switchover will
be rolling out the DTT network to 1,154 transmitters in order
to offer full coverage. This cost will be primarily met by the
public service broadcasters. It is essential, that there is a
strong and clear regulatory framework in order to ensure negotiations
between broadcasters and transmission providers can be concluded
to ensure these costs are minimised.
(ii) Marketing & Communications
Alongside rolling out the DTT network, the second
key success factor to achieving switchover will be a properly
funded and effective communications strategy. This should be primarily
the responsibility of SwitchCo and the BBC, and it is essential,
therefore, that sufficient funding is provided and ring-fenced
via the licence fee agreement to fulfil this objective so viewers
are clear as to the timing and process of switchover.
Furthermore, we strongly believe that the marketing
budget for SwitchCo should be spent across all relevant media—including
commercial television—in order to achieve its marketing
objectives. We strongly reject the Government suggestion that
promotional air-time on ITV, C4 and Five should be allocated for
free to support switchover when other media will be bought by
SwitchCo on a commercial basis. SwitchCo should be free to use
its marketing budget across all relevant media as it wishes. Government
has already accepted that public funding should be used on commercial
media by SwitchCo to support its marketing campaign, and there
is no reason why television should not form part of this approach.
(iii) Customer equipment and support
Almost two thirds of homes now have digital
television and we believe the low cost of Freeview boxes, the
availability of Sky Digital and cable pay-TV services, and the
emergence of FreeSat will ensure that many consumers will naturally
switch to digital over the coming years. However, there will inevitably
be a significant minority of homes who will need financial and
technical help in converting to digital. We welcome the Secretary
of State's commitment to ensure that targeted help will address
this requirement, particularly for the elderly and for low income
households. Again, it is essential that sufficient financial resources
are ring-fenced to deliver on this proposal.
THE ECONOMIC
BENEFITS OF
SWITCHOVER RELEASED
SPECTRUM
26. A key argument that has been made in
favour of digital switchover is that the economic value of the
released spectrum will out-weigh the financial cost of the process.
We are aware that the DTI has carried out a cost-benefit analysis
to estimate the nature of this surplus (which has been estimated
at between £1.1 billion and £2.2 billion). Whilst we
are sceptical of the detail of the analysis, we recognise that
there is economic benefit in both spectrum efficiency and releasing
14 channels of spectrum.
27. However, we would stress that in considering
the potential use of the released spectrum, it is essential that
Government and Ofcom consider the fulfilment of public policy
objectives as well as simply its financial value. The Government
is committed to maintaining the strength of public service broadcasting
through switchover, and digital terrestrial television (in particular
the BBC and Channel 4) is a key element in delivering this objective.
If the released spectrum were to be allocated—at least in
part—to DTT it would enable a number of policy objectives
to be achieved, for example:
— The provision of new public service
channels from the existing operators (particularly Channel4 which
currently has less DTT capacity than both ITV and the BBC).
— The provision of High Definition
television services.
— New interactive services.
— Regional and local television and
other new media services.
Channel 4 would urge the Government and Ofcom
to properly consider uses of the released spectrum which support
public policy objectives alongside pure commercial exploitation.
THE BROADER
IMPACT OF
SWITCHOVER ON
CHANNEL 4
28. Channel 4 is both supportive of, and
a key stakeholder in, the switchover process. Whilst we welcome
the investigation of the DCMS Select Committee of the Government's
proposals, our own view is that the industry is substantially
embarked on the implementation of the policy and the focus now
should be on ensuring that the implementation of the plan for
switchover is carried out effectively and without any detrimental
impact on viewers and the PSB system.
29. Channel 4 welcomed the conclusions of
Ofcom's Review of Public Service Broadcasting which were published
earlier this year. These provided a strong commitment to the ongoing
importance of competition in public service broadcasting and,
in particular, the unique value of the role fulfilled by Channel
4. We agree that, despite significant changes in the media landscape,
the provision of public service broadcasting will remain as important
in the future as it does today. Furthermore, we share Ofcom's
conclusion that plurality of supply—with a strong Channel
4 alongside the BBC—is crucial to the ongoing provision
of public service broadcasting, particularly given the inevitable
decline in the public service contribution of Five and ITV.
30. However, we also believe that the impact
of the take-up of new digital technologies—and in particular
digital switchover—will put greater pressure on the way
in which public service broadcasting is financed. Ofcom identified
a growing funding gap that will emerge during the next five-to-ten
years that unless addressed through Government policy, will lead
to a decline in PSB provision.
31. The impact of digital switchover on
Channel 4's financial position is two fold:
(i) Loss of viewing share and advertising
revenue
Channel 4's share of viewing is inevitably much
higher in an analogue/five-channel home (c13%) than it is in a
digital TV homes (c10% in DTT or nearer 7% in satellite/cable).
As the number of analogue homes falls to zero this inevitably
means that Channel 4's overall audience share will decline (even
if we mange to maintain our position in each individual platform).
A decline in audience share has a direct impact on our share of
advertising revenue, our main source of income. This trend is
inevitable.
(ii) The cost of digital roll-out and transmission
Channel 4 is currently required to broadcast
its main service both in analogue and digital form, leading to
duplicate costs of transmission. As the switchover process begins,
the costs of digital transmission will increase substantially
as we develop the network infrastructure and roll it out from
80 transmitter sites to 1,154. Furthermore, we will also face
the cost of de-commissioning the old analogue network. Following
the completion of the digital switchover process Channel 4 will
no longer be required to broadcast in analogue resulting in a
reversion to paying for just one transmitter network. However,
our net position post-switchover will not be improved relative
to before the introduction of digital broadcasting, with a significant
period of duplicate costs during dual analogue and digital transmission.
32. The financial impact of switchover on
Channel 4 is, therefore, largely negative. However, unlike the
other public service broadcasters, Channel 4 has not yet been
granted any form of support to address the financial impact of
switchover. In recognition of the challenge we face, the BBC indicated
a willingness in Building Public Value to fund the one-off capital
costs of conversion for Channel 4, assuming sufficient resource
was allocated in the Licence Fee settlement. Ofcom welcomed this
suggestion and in the Green Paper the Government also supported
its examination. The BBC will have its own conversion costs accounted
for in its Licence Fee settlement and ITV and Five have had their
licence payments reduced. Without such a mechanism being put in
place Channel 4 will simply have less money available at this
critical time to invest in the delivery of its public service
remit. Channel 4, therefore, welcomes this proposal. However,
it only assists with the one-off capital costs of conversion and
not the on-going challenge posed by the loss of the analogue spectrum
as a form of implicit subsidy for the Channel.
SECURING CHANNEL
4'S LONG-TERM
FUTURE
33. Channel 4 has set out a clear vision
for ensuring that the impact of its public remit is maintained,
and ideally strengthened, up to and beyond switchover, by providing
our programmes and services to viewers in the UK by whichever
technology or platform they choose:
— Maintaining the strength of the core
channel as the heart of Channel 4's public service role.
— Developing a portfolio of digital
channels to help maintain our creative impact and commercial scale
in multichannel homes.
— Extending our public remit into new
media to respond to the rapid growth of new digital platforms.
34. Both Ofcom's PSB Review and the Government's
Green Paper on the future of the BBC supported the ongoing importance
of Channel 4's role in the public service ecology and stressed
the value of its status as a publicly owned non-profit maximising
organisation, in the face of the declining public service commitment
from the shareholder-owned PSBs. A healthy public service broadcasting
sector requires a strong Channel 4 alongside an independent and
properly funded BBC.
35. Historically, Channel 4's ability to
fulfil its public service remit has been supported by the allocation
of scarce analogue spectrum at no cost to Channel 4. However,
as we approach switchover the value of this spectrum will reduce
to zero. Unless other forms of support are put in place, there
is a risk that Channel 4's public service impact will begin to
decline, which would be contrary to the conclusions of both Ofcom's
PSB Review and the Government's Green Paper.
36. We have, therefore, agreed to work with
Ofcom and Government to identify a range of potential mechanisms
of on-going indirect support for Channel 4, which if implemented
could help to address the funding gap created by the loss of our
analogue spectrum and remove the need for direct public funding.
We will continue to progress these discussions over the coming
months alongside fulfilling our obligations towards achieving
switchover.
3 October 2005
1 There currently remain a small number of analogue
cable viewers (approximately 325,000, or 10% of cable subscribers).
These are likely to be upgraded to digital cable before 2008. Back
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