Memorandum submitted by Channel 4
1. Channel 4 welcomes the opportunity to
submit written evidence to the Committee's inquiry into the commercial
operations of the BBC. Channel 4 has not addressed each of the
Committee's terms of reference directly, but would like to make
a number of broad points to help inform the work of the Committee:
— commercial revenues have underpinned
the provision of public service content;
— the BBC's commercial activities are
key to funding public service content;
— public ownership has helped the BBC's
commercial activities to make a strong contribution to the PSB
system;
— given the economic climate, the BBC's
commercial activities should be pushed harder, especially overseas,
to contribute more to the PSB system; and
— clearer governance arrangements would
free the BBC's commercial activities to maximise their returns
to the PSB system.
2. The remainder of this submission sets
out in more detail Channel 4's views in relation to each of these
points.
THE UK HAS
DECIDED TO
INTERVENE IN
THE BROADCASTING
MARKET
3. In common with most other Member States
and Commonwealth countries, the UK has a long history of intervening
in the broadcasting market in order to secure public service outcomes.
This intervention has been based on a continued belief that the
market left to itself would not provide all of the content that
we, as a society, want to be widely available. From the creation
of the BBC in the 1920s, to the establishment of ITV in 1955,
Channel 4 and S4C in 1982 and Five in 1997, the UK Government
has made a number of clear policy decisions that have underpinned
the plural provision of public service content. There is a broad
consensus that plurality should continue to be a key feature of
the UK's broadcasting market in future.
4. Thanks to these interventions, UK audiences
benefit from a broadcasting system that provides a huge amount
of diverse, highquality and innovative content, across a
range of genres. The system has also secured high levels of UKproduced
content, and has contributed to cultural, social and democratic
outcomes.
COMMERCIAL REVENUES
CROSS-SUBSIDISE
PUBLIC SERVICE
CONTENT
5. Historically, the plural provision of
public service content has been supported by a cross-subsidy model.
Under this model, the commercially-funded PSBs (Channel 4, ITV
and Five) enjoyed privileged access to scarce analogue spectrum.
This enabled the commercially-funded PSBs to provide universal,
free-to-air access to their content and deliver large audiences,
which allowed ITV and Channel 4 in particular to generate significant
advertising revenue.
6. For Channel 4, the significant revenues
delivered by profitable programmes (for example, Deal or No
Deal or Ugly Betty) subsidise loss-making public service
content such as news and current affairs. This is not to say that
all public service content is loss-making or that all commercially-focused
programming is devoid of public value. However, the fact remains
that a substantial amount of public service content is loss-making.
THE BBC'S
COMMERCIAL ACTIVITIES
ARE KEY
TO FUNDING
PUBLIC SERVICE
CONTENT
7. While the UK has a long history of providing
public funding for the BBC, there has also been an expectation
that the burden on the public of providing that funding should
be minimised. The BBC has therefore been required to use its commercial
activities to help fund public service content, thus minimising
the level of public funding required.
8. In some cases, the BBC's commercial activities
generate profits that can then be used to supplement the BBC's
guaranteed licence fee income of over £3.2 billion per annum.
In 2007-08, for example, BBC Worldwide made a profit of £118
million. Ofcom reports that BBC Worldwide's net contribution to
the BBC in 2007-08 amounted to £75 million in programme investment
plus a £50 million general dividend.[24]
The BBC estimates that BBC Worldwide will generate profits of
£200 million by 2012-13.
PUBLIC OWNERSHIP
HAS HELPED
THE BBC'S
COMMERCIAL ACTIVITIES
TO MAKE
A STRONG
CONTRIBUTION
9. Thanks to its public ownership, BBC Worldwide
has been able to make a strong contribution to the PSB system.
Like Channel 4, which is also free from external shareholders,
BBC Worldwide has been able to return its profits to the BBC to
invest in public service content. This is in clear contrast to
private companies such as ITV, which have to pay dividends to
shareholders and are therefore under pressure to move away from
public service objectives. In any future funding model, the overriding
objective of publicly-owned commercial activities should be to
generate revenue to support public service content provision.
THE NEED
FOR SELF-HELP
IS INCREASING
10. There is now a consensus that the historic
model for supporting the plural provision of public service content
is under severe pressure and will not be sustainable after the
completion of digital switchover.
11. As the Select Committee concluded in
its November 2007 report on Public Service Content, "the
value of the indirect subsidy of analogue spectrum for ITV, Channel
4 and Five, which granted exclusive access to mass audiences,
will diminish as the UK approaches digital switchover, and we
note the concerns that ITV, Channel 4 and Five might therefore
reduce their current provision of public service content".
The Select Committee also noted that a smaller subsidy will continue
to exist and that this could sustain some public service content
in future.[25]
12. More recently, Ofcom, in its Second
Public Service Broadcasting Review, stated that "commercial
public service broadcasting under the current system will not
survive the transition to an all-digital world"[26]
and that "the existing model for public service broadcasting
beyond the BBC is capable neither of exploiting the new opportunities
that are emerging on interactive platforms, nor of addressing
the risks to linear public service broadcasting that lie ahead".[27]
Ofcom identified that there could be a potential shortfall in
the provision of public service content in the order of £145
million to £235 million by 2012.[28]
13. The advertising downturn of at least
5% this year is forcing Channel 4, for example, to take £50
million out of its cost base in 2008; and a forecast 5-10% decline
next year is expected to require a further £75 million of
cuts in 2009. If the UK is to continue to enjoy the same levels
of plurality in public service content provision and high levels
of investment in UKoriginated content, a new funding settlement
needs to be found.
THE BBC'S
COMMERCIAL ACTIVITIES
NEED TO
MAXIMISE THEIR
CONTRIBUTION TO
THE PSB SYSTEM
IN FUTURE
14. Ofcom has identified a range of potential
funding options for supporting the wider PSB system in future.
Channel 4 is working hard to examine all of the options and is
actively engaging with Ofcom and the Government's processes to
urgently find a sustainable funding solution. However, at this
stage, and given the current economic climate, it seems unlikely
that additional public funding will be available to support investment
in public service content.
15. It is therefore crucial to ensure that
the existing resources, both commercial and public, used to support
public service content are maximising their contribution to the
system. This is particularly relevant in relation to the BBC:
Channel 4 believes that the BBC should maximise the contribution
of its commercial activities to the PSB system. For example, the
BBC should seek to generate greater returns in overseas markets,
which have the potential to contribute substantial revenues without
raising concerns from UK competitors.
EFFECTIVE GOVERNANCE
FRAMEWORKS FOR
COMMERCIAL ACTIVITIES
ARE CRUCIAL
16. As is the case with any public organisation
that operates in a commercial environment, including Channel 4,
a clear governance and accountability framework is needed to prevent
market distortion and ensure that public funds are not used to
subsidise commercial activities. Where there are concerns, the
broader market needs to have confidence that there is a clear
and transparent framework governing commercial activities.
17. Clearer and more transparent arrangements
would also help the BBC to maximise the return of its commercial
activities to the PSB system. The close, some might say opaque,
relationship between the BBC's public service and commercial arms
may constrain the BBC's ability to maximise public value: clearer
boundaries between public and commercial activities would not
only provide greater confidence in the system and leave the BBC
less open to criticism, but they could also enable greater returns
to the PSB system as a whole.
18. However, the need for clear, transparent
governance arrangements should not be confused with calls for
increased bureaucracy. Governance arrangements need to strike
a balance between protecting competition, and enabling commercial
activities to generate returns for reinvestment in public service
content. As such, the arrangements need to be proportionate to
the size of the potential problem which policy-makers are seeking
to address.
October 2008
24 Ofcom, Second Public Service Broadcasting Review,
Phase Two: Preparing for the digital future, p 110. Back
25
Culture, Media and Sport Committee, First Report of Session 2007-08,
Public service content, HC 36-I, paragraph 53. Back
26
Ofcom, Second Public Service Broadcasting Review, Phase Two: Preparing
for the digital future, p 2. Back
27
Ofcom, Second Public Service Broadcasting Review, Phase One: The
digital opportunity, p 9. Back
28
Ofcom, Second Public Service Broadcasting Review, Phase Two: Preparing
for the digital future, p 90. Back
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