Select Committee on Culture, Media and Sport Minutes of Evidence


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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