Examination of Witnesses (Questions 1-93)
MR LUKE
JOHNSON, MR
ANDY DUNCAN
AND MS
ANNE BULFORD
12 MAY 2009
Chairman: Good morning. This morning
the Committee is holding its now annual session in which we look
at the Channel 4 Annual Report. I would like to welcome Luke Johnson,
the Chairman, Andy Duncan, the Chief Executive, and Anne Bulford,
the Group Finance Director.
Q1 Mr Sanders: There is conflicting
background to the issue of this report. The question I really
wanted to ask is: is there or is there not a crisis for Channel
4's finances and your ability to fund public service programming
on the core channel?
Mr Johnson: We do not think there
is a crisis but we are under significant pressure. We are hit
by two significant forces, the first of which is the substantial
structural change undergone by free-to-air television, and indeed
most of the traditional media industry, thanks to the digital
revolution and the very severe economic downturn which is impacting
advertising revenues across all forms of media, I would argue
disproportionately. We do not feel there is a crisis. We think
we have challenges and we are under pressure to maintain investment
in public service output while coping with reducing revenues.
Unquestionably, the very robust and successful model that has
persisted for over 25 years for Channel 4 needs some adaptation,
I think, if we are to continue to maintain a relevant impact from
output in the years ahead.
Q2 Mr Sanders: I ask the question
because, Andy, you are on record on saying that 2008 has been
one of the most difficult years in your history and 2009 will
almost certainly be tougher still. Is 2009 turning out to be tougher
than 2008?
Mr Duncan: It is, yes. I think
the contrast, if you like, between the factors that we can influence
and the factors that we cannot is really at the heart of what
is behind your question. Certainly in 2008, and even so far in
2009, we have done extremely well in terms of creative success,
awards and so on. We have had our best ever year. We have grown
our share of public viewing of television, particularly in peak,
to record levels. We have grown our share of the advertising market
to a record level. But the advertising market itself, partly because
of the global economy and partly because of the factors that Luke
mentioned, was down 5% last year but that came more or less all
in the last four months of the year. So far this year we are seeing
an 18% decline in the first half of the year and we are expecting
probably something like a 15% decline for the year as a whole.
What that means in real terms is over £100 million of revenue.
Although we have taken a lot of cost out of overheadsstaff,
marketing, new business and other areasunavoidably it means
over 10% of our programme budgets will be reduced this year, which
is a very significant cut in programming and output. On what we
can do something about, we feel we are doing a good job but obviously
there are wider forces at play here, and that is having a direct
impact on revenue and in particular therefore on programme and
content spend.
Q3 Mr Sanders: In terms of cutting
10%, are you cutting that across the board or is there a bigger
percentage cut from one area of all your operations?
Mr Duncan: It is still an exercise
that we are going through as we speak. We had already budgeted
for a certain level of decline and we have had to increase that
further as the year has gone on because of the downturn being
even deeper. It will affect every area at some level but we have
tried to prioritise peak, for example; so we have taken disproportionately
more out of breakfast, daytime and late night. As far as possible,
we have tried to protect areas like news and current affairs but
obviously what we also need to be careful of is that we do not
cut programming and output spend that in turn will damage our
commercial income. The balancing act we have to pull off is delivering
public value and making sure that the creative and public service
aspects of what we are doing remain as strong as possible but
also enough share of viewing to generate enough advertising for
the next year again. It is a difficult juggling act. I think at
some level almost every area will be affected.
Q4 Helen Southworth: I want to ask
you if you have been able to differentiate between the decline
in advertising which is due to new technologies and the amount
which is due to advertisers taking account of the current economic
circumstances.
Mr Duncan: It is very difficult,
I would say, to give an exact split and say that of the 15%, X%
was one and Y% was another, but clearly a big part of what was
going on both last year and this year was to do with the economy
generally and the downturn in the cycle. Most people, and certainly
we would agree with this, would be of the view that what it is
doing is accelerating structural change that was taking place
anyway. For example, switchover, which is now starting in earnest
this year, is driving even faster growth of multi-channel. For
example, multi-channel has significantly more minutes and ads
per hour than the terrestrial channels, but that in turn drives
extra supply into the market, which is one of the factors driving
the advertising and revenues down. In particular, internet advertising
has now overtaken TV and gone well ahead of TV for the first time.
Unlike other recessions, we would say by 2010 and at the earliest
2011 maybe it will not bounce back; it might stop declining but
it is going to plateau at a new lower level. That is the structural
change that is taking place, so a significant proportion of structural
change combined with cyclical change but it is hard to pull out
those two exactly.
Q5 Chairman: Your projected £150
million funding gap is based on future expenditure projections.
How much of that future expenditure is on new services?
Mr Duncan: Dealing with the gap
we have, relatively little, so the majority of the gap between
what we believe we should be spending to deliver the public remit
and what we will have in terms of revenue projections is to do
with normal traditional television programmes. The exceptions
to that would be three areas, I think: education activities where
historically we ran schools programming on the televisionwe
have now moved very successfully to on-line, which is a much better
way of getting to that target group who otherwise are at school
and that has always been part of what we have done; it is just
that we are delivering it now on line; 4iP, which is our digital
innovation fund, into which we are putting a relatively modest
amount of money, about £4-£5 million; and the third
area which at the moment is on hold is our children's pilot, some
of which will be television and some of which will be on-line.
The majority of that is straightforward television programmes.
Q6 Chairman: You are also intending
or planning on having two new high-definition channels, are you
not?
Mr Duncan: We have been allocated
a slot for Channel 4, which we think is extremely important. We
already have a Channel 4 high definition channel on satellite.
We have four slots being allocated on DTT, which we think is very
much in the public's interest: one will go to the BBC, one will
go to ITV and one will go to Channel 4, and that one has already
been allocated to us, which we think is absolutely essential.
We have also put in a joint bid with S4C for a Film4/S4C joint
HD channel, which again we think is very much in the public interest.
That means you are developing high quality, high-definition programming
available to everyone for free. We are waiting for an Ofcom decision
on that, which I think has been delayed for a few weeks.
Ms Bulford: We have not had the
decision as yet. We expect that shortly.
Mr Duncan: At the moment, as things
stand, we have one spot allocated. We may or may not be allocated
a second.
Q7 Chairman: We understand that ITV
for instance is thinking about whether or not it can afford to
go ahead with high definition. If you are in such dire financial
straits, is it sensible to be planning on two new HD channels?
Mr Duncan: It is very much a live
issue. I would say that, as things stand, we are engaged in conversations
with the BBC, as are ITV, about how the whole thing is going to
be funded because I would absolutely say that there is the problem
for us and ITV in terms of the funding of that going forward,
yes.
Q8 Chairman: The other thing I wanted
to ask you about quickly is this. It is widely expected that there
is going to be a change to the contract rights renewal formula.
How is that going to affect your future revenue?
Mr Johnson: The positive is that
a cap on the market leader's ability to monetise its advertising
has, I think there is an argument to say, constrained the industry
as a whole; ie any business where the market leader is suffering,
which ITV would argue they are because of this regulation, is
not necessarily good for the industry. However, if contract rights
renewal were lifted entirely without any other compensating mechanisms,
then I think we will probably be at a disadvantage.
Q9 Chairman: I would have thought
you would be definitely at a disadvantage, and that does seem
at least a possibility.
Mr Johnson: We will have to try
and cope with it if that is what the regulator says.
Mr Duncan: We have argued against
it as a simple stand-alone move because of the fact it is effectively
a zero sum gain where ITV would benefit at our expense. I think
if it is looked at as part of a wider review of how advertising
is bought and sold, that is more an advertising market consolidation,
just a general recognition now that TV is much more substitutable
with the internet, for example, in terms of advertising. Looked
at in the round, then that may well be something that needs to
happen over the next year or two, particularly given the extraordinary
circumstances. Just as a stand-alone dropping of CRR, that would
create problems, I think.
Q10 Mr Hall: You have dealt with
the financial difficulties that are facing Channel 4. The other
issue that comes out of the Annual Report in other statements
that have been made is the challenge of Digital Britain and the
quest of Channel 4 to find probably a partner with a symbiotic
relationship with both organisations actually to secure the future
of the company and the programme making that you undertake. You
have said that your preferred plan is BBC Worldwide. The Committee
have come to a slightly different conclusion that we think it
might be better if it looked to Channel 5, which you seem to be
dead set against. Could you explain why you think BBC Worldwide
would be an ideal partner for Channel 4?
Mr Duncan: Just to take a step
back, I know that this Committee looked hard at the whole issue
of public service broadcasting over a year ago and I think recommended
possibly the use of the licence fee to achieve plurality in the
case of Channel 4. I was not aware that you had had a major evaluation
of the possibility of partnership between ourselves and Worldwide.
I know you had a separate review of Worldwide and then obviously
the idea of us doing some sort of partnership with them was also
in the ether at that time. To answer your question, I think there
are really three points. First of all, regarding Worldwide, we
have always said we would prefer something of an indirect solution
if possible. Certainly for the last 15 years or so we have been
self-reliant and earning advertising income off free spectrum.
Prior to that we had a cheque from ITV, so we had in sense some
funding from ITV. It goes with the grain of self-reliance and
there is real synergy, we think, between ourselves and Worldwide
as two public assets that can work together to create additional
value on behalf of the public. So it seems to us that is a better
mechanism if you are creating more value rather than simply transferring
value. Secondly, in terms of real business areas where we can
co-operate, people have I think somewhat mis-portrayed the two
businesses as being rather different; they are actually essentially
rather similar. Neither of us makes programming in our own right;
we both secure rightsin their case from the BBC and in
our case from the independent producersand then we both
very effectively earn money off the back of those rights through
channels businesses, consumer products businesses, DVD businesses
and so on. The possibilities of collaborating in existing business
areas, or indeed in new business areas, are very strong. We and
BBC Worldwide, I have to say, I think are enthusiastic about the
possibility of a partnership and we are hoping that may come through
in the next few weeks as part of a Digital Britain process. For
Five, in contrast, I think there are some quite significant creative
issues but at its very heart it is an issue of economics. Five
was a very troubled business. Their advertising revenue, for example,
will be down over 30% we believe in the first half of this year
with a market down 18%; for example, we will only be down 16%.
They also have very significant issues in terms of their share
performance not so much at the headline level but against key
demographics, and we think they face a similar significant share
loss in the advertising market at the end of this year. Although
there could be some synergies with Five, we think they have been
more than offset by the scale of losses and problems they face
as a business economically.
Mr Johnson: We echo that. We looked
in detail at the possibility of a merger with Five and felt that
it was the wrong thing to do, a few years ago, and, if anything,
particularly on the commercial front, the reasons against it have
greatly increased.
Mr Duncan: We did exhaustive work
for almost two months during March and April looking at this very
seriously with stakeholders, with Five, so we have done a lot
of work on it, but the economics are very problematic.
Q11 Mr Hall: Did I hear you correctly
to say that your negotiations with BBC Worldwide might be concluded
within a few weeks?
Mr Duncan: At a headline level,
we hope so, yes. What a headline partnership could look like is
certainly achievable we think within a few weeks. Making sure
that we have enough value being generated and enough value flowing
back to Channel 4 is obviously at the heart of the issue. The
point of the partnership in a way is to generate more value to
flow back into content investment. There might be more detailed
issues that would take much longer to sort out but at an absolute
headline level we think there is a real urgency to resolve whether
we can get the partnerships confirmed.
Q12 Mr Hall: Would you be able to
put a timescale on when we may have some announcements and then
some actual concrete proposals?
Mr Duncan: As things stand, it
is one of the proposals the Government are looking at. I think
technically Government are going through a process of looking
at a number of options; partnership with Worldwide is clearly
one of them; licence fee may be another; and I think Five is technically
still another. They are obviously working to a timetable of wanting
to reach some conclusions in the next few weeks. To some extent,
we are trying to work with the timetable the Government themselves
have with their Digital Britain report.
Q13 Mr Hall: One of the criticisms
that has been made of a partnership between Channel 4 and BBC
Worldwide is that it would actually give BBC Worldwide an even
more dominant position in the market. Does that concern you?
Mr Duncan: I do not think it would.
I think BBC Worldwide competes effectively in the marketplace.
There is always a balance to be struck, and I know your Committee
have looked at this very carefully recently. Our view is that
the areas of synergy and co-operation would not increase dominance
in the market as such but they would be a sensible way in which
public assets can be monetised and the British public themselves
can get full value back for those assets. The end point of both
organisations is to generate as much money as possible to invest
back into British content: in BBC Worldwide's case giving it back
to the BBC, and in our case we do it within the same organisation.
Part of what we are looking at is getting more money back into
Britain from the rest of the world for British content. I think
it is fair to say that if we wear a broader Digital Britain hat,
one of the real concerns at the moment is that, going back five
or 10 years, the TV advertising market peaked at about £3.5
billion; more than half of that money was reinvested back into
British television programmes. If you take the internet advertising
market, it has now gone in the space of 10 years from nothing
to over £3 billion. Hardly any of that gets reinvested back
into British content; most of it goes to the States, to the banks
that own the big American on-line companies. One of the things
that we and Worldwide believe we could do is more effectively
help monetise British content around the world, both in terms
of linear format and on-line, and that money flows back into Britain
and would be reinvested back into British content and in our case
all of it through the independent sector. All of this is very
good for the creative economy as well. In our view there are two
very good attractions from this. One is that you solve the public
service issue; you have more money for public service programming.
Secondly, it is very helpful in terms of the creative economy
agenda and the creative industries being at the hub of an economic
recovery for Britain.
Q14 Mr Hall: You pointed out that
there could be direct funding for Channel 4 from the licence fee.
We have put that forward as a proposal. I assume you welcome the
Committee's recommendation on that.
Mr Duncan: To be very clear, Worldwide
would be our preferred route forward but a contestable licence
fee we think is a perfectly good idea as well and could be a workable
idea. If Worldwide was not possible for any reason, we think some
sort of contestable fund around the licence fee is a good idea.
Already I think for some areas like regional news it is being
pushed quite strongly as probably the best way forward.
Q15 Mr Hall: So you would not be
thinking that both would be a better proposition?
Mr Johnson: It is for Government,
our stakeholders, to decide. A combination might work, yes. Obviously
I guess it depends rather a lot on the BBC, does it not?
Mr Hall: I thought you would have welcomed
it with open arms, personally, but never mind.
Q16 Chairman: From all accounts the
amount that the BBC is willing to give in terms of partnership
with Worldwide falls rather short of your ambitions. Is that still
the case?
Mr Duncan: I think it is one of
the live areas of current debate, exactly how much value could
be generated in total through a series of ventures and how much
of that value would flow to Channel 4 and with what level of certainty.
I do think at the very heart of the debate is the relative funding
gap that has opened up between the BBC and the rest of the market.
The Committee I think will be aware that as recently as two years
ago the BBC licence fee was at parity to the TV advertising market.
Although it is not apples and apples in the sense that some of
TV advertising goes to non-public service broadcasting and some
of the licence fee goes on radio and on-line, as a proxy comparison
for decades and decades they have been roughly the same. In fact,
for most of that time the licence fee was below TV advertising.
Last year a £300 million gap opened up. Certainly by next
year a gap of well over £1 billion will have opened up. I
do think if you contrast that and the £15 billion of guaranteed
income the BBC will have in the next four years, in a deflationary
environmentso when it was set that was set in anticipation
of us and ITV having more money and with cost inflation that is
now not happeningwith the value of the BBC partnerships
in total that they have offered all the industries put together,
it is probably a few tens of millions at most between now and
2012. That would apply certainly to their regional news offer
to ITV for example, where the much vaunted partnership I think
ITV reckon was worth about £1.5 million to them by 2012,
and so it does not really address the issue. I think there is
a very important policy question which is: given the funding imbalance
that has opened up, (a) is that healthy in its own right and (b)
if you really want plurality in general terms with Channel 4,
in specific terms on news and regional news as with ITV, then
looking at that relative funding gap that has never ever been
there in the entire last 50 years has to be part of the equation
and either more money delivered through partnership or looking
at the licence fee, but one of those two. My own view is that
the BBC could go a lot further than they have so far in real money
delivered through partnership.
Q17 Chairman: Obviously amongst the
Worldwide assets there are the UK TV channels which I think you
might find particularly of interest but there is the complicating
factor of Virgin Media. Are you looking at any of the Virgin Media
channels as possible acquisitions?
Mr Duncan: I think obviously it
is commercially sensitive in terms of what we may or may not bid
for that in terms of commercial deals. It is no secret that Virgin
are looking to sell some of their content assets and it is no
secret I think that the other half of UK TV in particular is something
that the BBC for some time has wanted potentially to find either
a better partner for or find a different way of moving that business
forward. Those assets could have a role to play in terms of wider
partnership but the partnership does not depend on securing those
assets from Virgin.
Q18 Chairman: In terms of the Worldwide
partnership or other kinds of public support, there is obviously
a potential question surrounding state aid. I see you have decided
to open an office in Brussels, unlike the other commercial broadcasters.
Mr Duncan: We have made an appointment
to have somebody in Brussels. I think that is a reasonable thing
to do. We have actually found over the last few years we have
had increasing numbers of issues to do with Brussels, most significantly
in the last few years for us in advertising regulation. So we
had quite a long period of time where in the end we were successfully
negotiating to have more advertising on our film channel, for
example. We took the view that it would be helpful for us to have
somebody based there full-time to help us deal with increasing
amounts of EU regulation that are affecting Channel 4 in total.
On the issue of any state aid or otherwise that might come through
from Digital Britain, that is much less an issue for us and much
more an issue for Government. My understanding is that across
a number of things being considered and possibly that would be
proposed as part of Digital Britain, the broadband and telecoms
area probably especially, there are some where Government might
indeed be needing to put the case effectively for state intervention
to justify what they are doing. Obviously they would need to handle
that with Brussels. I think that is less an issue for us and more
an issue for them.
Q19 Chairman: If it is not about
state aid, why is it that you feel it necessary to have an office
in Brussels when the other broadcasters do not?
Mr Duncan: I think the BBC have
always had quite a long relationship with Brussels and quite a
significant amount of resource. In a former life I used to work
for a big global multinational and we had an awful lot of resource
in Brussels. One person to help us deal across the entire Channel
4 portfolio, there is quite a spread of different issues that
touch into Brussels legislation, seems to us more efficient. At
the moment what we are doing is outsourcing it to lobbying/legal/regulatory
specialists. We think it is both cheaper and potentially more
effective to have one person in-house. That was anticipated at
the time of our restructure last year. We reduced our overall
policy and strategy numbers but we built in an additional role
because it is a cheaper and more effective way of dealing with
those issues.
Q20 Chairman: Are you also still
talking to Al-Jazeera?
Mr Duncan: To my knowledge, we
have never talked to Al-Jazeera. They were alleged to have put
themselves forward for a potential partnership but I do not think
they ever contacted us directly.
Q21 Chairman: You have had no direct
contact?
Mr Duncan: We have had no direct
contact.
Q22 Chairman: You have no interest
in contacting them?
Mr Duncan: It is not at the top
of our list at the moment but they have not contacted us.
Q23 Paul Farrelly: I want to try
and be a bit more precise when you say that in the next few weeks
you expect in headline terms to reach an understanding with the
BBC. What exactly does that mean? Usually in a commercial negotiation
you will reach what is called heads of agreement, which would
cover the assets subject to the agreement and any of the major
financial issues, which will then be subject to contract and the
final contractual negotiations. Are you saying you expect to reach
heads of agreement stage with the BBC in the next few weeks?
Mr Duncan: I think effectively
it would be some sort of memorandum of understanding between the
two organisations on how partnership or partnerships could work.
I think the requirement of our own board is probably slightly
different to the requirement for the BBC Trust and then again
in our case we have government stakeholders that we would obviously
need to be talking to about that. In essence, whether you call
it heads of agreement or memorandum of understanding, it would
need a headline understanding of how a partnership would work,
yes.
Q24 Paul Farrelly: It would be analogous
to a heads of agreement?
Mr Johnson: I think so. It all
plays into what we believe is the 16 June publication date for
the Digital Britain report and obviously one assumes some weeks
before that it will be finalised.
Q25 Paul Farrelly: Usually commercial
parties would have the benefit of privacy and secrecy when doing
this.
Mr Johnson: We would but then
neither BBC Worldwide nor us are normal commercial organisations.
Q26 Paul Farrelly: Exactly. Are you
expecting to announce that memorandum of understanding when both
sides have signed it off?
Mr Duncan: I would say at the
moment that obviously there are commercial sensitivities involved
in what we are discussing. As Luke said, we are both public organisations,
so it is a slightly strange situation, on top of which we are
in the middle of a government process around Digital Britain.
The ambition on all sides I think is to try and get to some broad
agreement in time for that report, which has about five weeks
to go (five weeks today I think). That timetable may move. I do
not think it is absolutely set in stone but, based on our current
understanding of the likely timetable, that gives us about a month
or probably less. Discussions have been going well. It is entirely
possible that is exactly where we will reach.
Q27 Paul Farrelly: When you have
reached that point with a memorandum of understanding, would it
be part of that understanding, either formally in black and white
or informally, that you do not then go for the next win, which
is top-slicing on a contestable or non-contestable basis?
Mr Johnson: No is the short answer.
Q28 Paul Farrelly: So that is still
up for grabs afterwards?
Mr Johnson: Yes.
Q29 Mr Evans: Despite the core budget
last year being reduced by £18 million, the original output
went up by £10 million. What sacrifices have you made to
be able to do that?
Mr Duncan: In particular last
year we dropped acquisitions by a very significant amount. This
was partly a reflection of the policy that we announced at the
time of trying to invest in particular in original programming.
I have said programme budgets tend to ebb and flow across the
years anyway in terms of particular shows and ideas that come
through, but we cut back in one or two areas like drama; there
were fewer drama singles for example than we had done previously.
In particular we tried to focus outside of peak and, as I said
earlier, take as much as possible. Anne could probably give more
detail on exact movements,
Ms Bulford: In the programme budget,
as Andy explained earlier, we looked across a range in terms of
balancing the public service content against the more commercial
output in order to try to maintain revenue. The balance was struck
across the whole schedule. Most of the cuts fell outside of peak,
so very significant reductions comparatively in late night programme
and at weekends, Saturdays. In some parts of the schedule you
will see a higher incidence of repeats running through. In terms
of the core originated budget, we have sought to protect news
and current affairs, specialist factual and as much as possible
of the drama. That will prove more difficult in 2009.
Q30 Mr Evans: I see current affairs
fell 14% as the quiz and game shows increased by 6%.
Mr Duncan: I think we are doing
substantially more than we were doing a few years ago on current
affairs. The cornerstone of what we do remains Dispatches,
of which we do 40 episodes a year, one hour in peak (for example,
the BBC only do half an hour of Panorama which they counter-scheduled
against us) and Unreported World, the only significant
international strand of current affairs that anyone does in Britain,
20 episodes a year. They remain the cornerstone of what we do
and that is substantially higher than we were doing three or four
years ago. The reason for the variation in the budget was partly
an allocation issue. We had a big one-off drama single Mark
of Cain based on Army prisoner abuse, which the previous year
got played out and that was categorised as current affairs, as
occasionally those drama singles do. A smaller and rather less
successful show had been The Insider which was dropped
last year in order to focus the budget on Dispatches and
Unreported World. I would say we remain very proud of our
investment in current affairs and in particular the commitment
to air time and we continue to do that. On your quiz shows point,
certainly compared to BBC1 and ITV1, we do really no significant
quiz shows or game shows in peak. That is just not part of what
Channel 4 does. But it does play a commercial role for some day
time. We successfully have shows like Deal or No Deal that
make money for us but help us invest then in other parts of the
schedule. I think there was a new quiz show last year, a day-time
quiz show with Terry Wogan. We obviously have Countdown
where we have cut down the cost, but there is a batch of day-time
shows for a different sort of audience that do a good job for
us and help with money from the advertising market and in other
ways to reinvest back in. The core ambition of what we have been
trying to do is protect the public service programming, particularly
in peak, and I think we did a pretty good job of that last year.
Q31 Mr Evans: The Chairman asked
you the question about Al-Jazeera. If you were shameless enough
to take some money off people from Qatar maybe it would change
the character of Channel 4 which we have all come to know and
love.
Mr Duncan: In any scenario, protecting
the independence of Channel 4 is paramount. That is crucial. Secondly,
and I am sure the Committee have had a chance to look at it, we
introduced for the first time this year the Public Value Report;
it is the first time in 26 years that we have had a very substantial
part of the Annual Report trying to document and quantify more
rigorously the public value we deliver. We think delivering the
particular purposes that we have pulled out at Next on 4 remain
crucial. It is not just about public service plurality; it is
about the type of distinctive contribution Channel 4 makes in
contrast to the BBC or indeed that which will be provided by the
market. I do think the board would be very concerned if any solution
put any of that at threat.
Q32 Mr Evans: As we look to the upcoming
12 months, particularly with the crisis that is hitting all the
TV and radio sector, apart from the BBC which is clearly in a
jacuzzi of cash, what do you see is going to happen over the next
12 months because of the financial crisis? What are we going to
notice most about Channel 4, the changes that will take place?
Mr Johnson: We hope you will not
notice it through clever commissioning and scheduling, but there
is no doubt behind the scenes, particularly as we said earlier
outside of peak, we have less resources available and the schedule
will not feel as rich later on this year and next year. Of course
there is a lag effect and this is why in a way these accounts
are very historic. The rate of fall of advertising revenue is
very material. A lot of the very finest programmes that won BAFTAs
and other awards in recent times were actually commissioned and
at least part paid for some while ago, even two years ago, or
more in some cases. As time goes on and we are faced with declining
revenues, there will be a threat of death by a thousand cuts in
scheduling.
Q33 Mr Evans: Would that not be the
death of Channel 4 by a thousand cuts as well because if you start
to put on rubbish or less good quality television, you are going
to start to drive away the audience that you require, which means
then that the advertiser is going to be less interested in Channel
4? Is there another solution to this?
Mr Johnson: Our solution is that
we believe in trying to be as ingenious as we can with our cross-subsidy
model so that we do produce for example highly commercial quiz
shows that generate surplus to fund public service broadcasting,
but also we would argue that because we are almost deliberately
investing money in things like Channel 4 News that
we know will effectively lose us money, then there is a need,
if society and our stakeholders feel they believe in the plurality
of public service broadcasting, for some form of support, and
that is what we have been asking for for some time. We feel very
passionately that Channel 4 does deliver something very important
to the choice out there and it is very healthy for the broadcasting
industry as a whole; it is very healthy, I believe for the BBC.
Therefore, a solution should be found.
Q34 Mr Evans: What is the threat
then? Is it that if you do not get that support, the documentaries,
Channel 4 News and Dispatches are all for the chop?
Mr Johnson: We will continue whatever
and we will manage as best we can with self-help, but over time
the damage will become material, yes. I do not think, as we said
at the beginning, it is a short-term crisis but I do think, medium
and long-term for what is relatively speaking compared to the
£3.6 billion very small sums of support, we will maintain
what we think is an outstanding service that, as I have said,
has a beneficial effect on those around us.
Q35 Mr Evans: Do not get me wrong,
Luke, I do not disagree with you but what sort of timescale are
we talking about?
Mr Johnson: It does depend a lot
on whether there is any recovery in advertising revenues in 2010-11.
If there is a similar, very severe decline next year in ad revenues,
partly for structural or partly for economic reasons, then that
will present us with some very unpleasant choices. I would argue
that things like Dispatches, Channel 4 News, et
cetera would be the very last things to be hit but important dramas
like Endgame, which was on last week, and Red Riding
and all these sorts of things will come under threat.
Mr Duncan: It is worth saying
that this is an unprecedented level of ad market decline. In previous
recessions there has been nothing remotely on this scale. As we
said earlier on, the worry is that with the structural change
as well it simply will not bounce back. If you look at what has
happened elsewhere in the market, ITV have effectively pulled
out of arts with the demise of the Southbank Show; that
is last on the list with children's programming, religion, science,
history and current affairs. Five I think are able to invest relatively
little in British content this year. I think the policy question
is: if you really want plurality, and the conclusion of the last
several years of debate is that Channel 4 absolutely is the key
to providing that plurality in most of the genres, then over 10%
of our programme budget is down this year and probably more again
this year. That is very damaging at some level. We will do the
best we can to continue to deliver the best public value we can.
We are not in danger of going bust as some people have tried to
portray it but that will have real damage to our creative output,
the public value we can deliver and the plurality we deliver.
We have already seen what has happened in other organisations.
I think it would be a huge mistake just to sit back for another
two or three years, particularly given the speed of change. The
media world is changing dramatically now in terms of timescale.
We cannot afford in another two or three years to have the same
policy debate. Your Committee first identified this nearly 18
months ago. This is to some extent predictable and now is the
moment that we need the action.
Ms Bulford: It is also worth adding
that in terms of the programme budget we are very determined to
get best value for money out of our producers with whom we work
closely. Clearly of course if we have a problem, they have a problem
and there is a knock-on effect into the creative community. Our
interests in getting as much programming as possible and giving
value to viewers on screen are wholly aligned. When we came to
see you in the autumn we explained that we have consistently exceeded
our production efficiency targets through procurement and clever
scheduling. We work to a minimum target of 5% annual efficiency
and we have been achieving between 9% and 11% annually by working
closely with independent producers, trying to get best value for
money out of the way in which we buy and schedule programmes and
making best use of new technology and these sorts of things coming
through. It is a big challenge for Channel 4 because to do with
our remit we have a very high incidence of new programming coming
through in singles. Like any manufacturing model, it is more difficult
when you make it the first time than it is when you make it the
second time, but we work very hard on that as part of our self-help
agenda.
Q36 Mr Evans: May I ask one final
question and I know we always ask the BBC this. I suspect that
you have nobody on £6 million a year like the BBC is reputed
to have. Do you think, and you can tell us factually, this is
having an impact on the sort of remuneration that you are paying
some of your people?
Mr Johnson: Unquestionably. We
are getting more for less, I would argue, potentially across the
board and talent is feeling the pinch. Frankly, that is no bad
thing. I think the sort of sums you were talking about was absolutely
a high water mark. We are going back to renegotiate and we are
in some cases improving terms dramatically. There are some positives
coming out of this downturn but, nevertheless, it is not easy
to cut some of these budgets where some independent producers
would argue in areas like for example current affairs that they
are not really making any money anyhow.
Q37 Mr Evans: Are some of your top
stars threatening to walk if you do that?
Mr Johnson: In some cases, Countdown
for example, they have and we survived.
Q38 Chairman: You have talked about
acquisitions and you said that was an area where you were cutting
back. There has been a huge increase in the amount of hours devoted
to acquisition and the costs over the course of the last five
years. Kevin Lygo I think recently said that you would be spending
nowhere near the levels that you did in the past "and it
is unlikely we will buy a new show this year unless we get a good
deal". What is a good deal of those?
Mr Duncan: First, to put it into
context, our level of acquisitions broadly in the last few years
is lower than it was in the early years of Channel 4 when Jeremy
Isaacs was running it, or for that matter in Michael Grade's time.
The proportion of British-originated programmes on Channel 4 has
generally been at a high level in the last few years. We absolutely
undertook and said around the time of Next on 4 last spring that
our ambition is to do even more of original British content and
less of US acquisitions. The hours thing you have referred to,
John, is a factor of less original programming, particularly in
non-peak hours, so late night, and we are repeating more American
programming late night; we are repeating American programming
in the morning. We do not do any original breakfast show any more,
for example. Also, on the digital channels in some cases we are
not commissioning as much new material as we would like to be.
It is that factor. In terms of cost, Kevin Lygo's comments are
exactly right; we are not in a position to go out and buy a major
show for Channel 4. Where we could find a suitable show that would
be sensibly priced, it could have a role to play, particularly
on the digital channels again. It was very disappointing, going
back to earlier remarks, that E4 for example, which has a very
good tradition of US acquisitions, can make money on those US
acquisitions that allows them then to invest in original programming
or provide money back to the core channel to invest in original
programming. E4 was recently out-bid by the BBC for an acquisition,
which we think was an outrage.
Q39 Chairman: Which was that?
Mr Duncan: BBC3 out-bid E4 for
Harper's Island and BBC3 is entirely licence-fee funded
and meant to be all about innovation and original programmes for
the British public. E4 has a substantially bigger reach than BBC3
and we think more effectively gets to younger audiences but the
fact is that it was out-bid; we got to a rate beyond which we
could not justify going commercially and the BBC paid about one-third
more than that. Provided everyone is playing a fair game, we would
hope we might be able to get one or two shows at a more reasonable
price but it was particularly disappointing to be out-bid by the
BBC. Clearly no-one else was justified in bidding more moneySky,
ITV, Five, et cetera. To be outbid by BBC3 was ridiculous.
Mr Johnson: Clearly on all acquisitions
we are always ruthlessly commercial, so we would never ever acquire
a US import if it did not make us money or we thought it was not
going to make us money.
Q40 Chairman: So the £1 million
an episode you spent on Desperate Housewives was commercially
sensible?
Mr Johnson: We thought it was
the right thing to do at the time. It was a signature show that
is a huge draw to the channel.
Mr Duncan: It is worth saying
that we are paying substantially less than that now. It was absolutely
the key part of an advertising sales position at the time that
was commercially justified. It was the peak of the market and
we have renegotiated that price substantially down.
Q41 Philip Davies: Following on from
that, one of the most interesting pages in your report is your
top tens. On the point about Desperate Housewives, it appears
that despite spending all that money on it, it is the fifth most
criticised individual programme on Channel 4. With that in mind,
do you still think it was worth paying £1 million an episode
for that?
Mr Duncan: I am not sure what
the nature of the complaints was.
Mr Johnson: I think it is criticised
heavily because it is watched heavily. If you have a lot of viewers
for a show, it will almost always end up being heavily criticised
as well as heavily praised.
Mr Duncan: One of the major sources
of complaint about Desperate Housewives last year was that
we broke off the series half-way through and so for budget reasons
we did not play the entire 22 parts of the series out. I think
we played eight or nine.
Mr Johnson: That was to do with
the scriptwriters' strike in Hollywood.
Mr Duncan: Yes, you are right.
So we broke it and we had quite a lot of complaints and when it
came back on people did not know it had re-started.
Q42 Philip Davies: Is this not an
interesting perspective on customer feedbackand I am sure
this does not apply to any of your other businessesthe
concept that the more criticisms you get, the better it is? Is
that a new style of customer service, a new manual that we should
all be following?
Mr Johnson: If you have a very
popular show, inevitably more people watch it, so inevitably you
are more likely to get criticisms. By way of contrast, I would
think that Desperate Housewives probably got an audience
of five to 10 times that of the fourth show on the list, which
was more heavily criticised. Inevitably the likelihood is more
people will criticise it for the reasons possibly Andy was saying.
Q43 Philip Davies: The most interesting
of course in the top tens is the Alternative Christmas Message,
which is the most criticised but also happens to be the second
most complimented as well. That is interesting. Perhaps that backs
up Luke's theory that it must have been particularly well watched
on that basis. With hindsight, what are your views now about the
Alternative Christmas Message?
Mr Duncan: With hindsight, we
think it was an exactly justified thing to do. It was subject
to an Ofcom investigation based on some of the complaints they
had received, and they also totally vindicated it. It is worth
saying that virtually all the complaints that came in did so before
it was aired. There has always been a tradition with the Channel
4 Christmas message of providing an alternative perspective on
things. One of our core purposes is to present different perspectives
on the world around us. Before the event there was some substantial
noise around it and a number of people did complain. We contextualised
it very clearly. There was a set-up video around what was going
on in that particular country and some of the views of the president.
We also deliberately did not counter-schedule it, which we had
normally done, head to head against the Queen to be somewhat sensitive
around that. After the event, we ended up with significantly more
complimentary audience feedback than we did complaints, and there
were very few complaints after it was aired. Quite often we find
this with programmes. Increasingly now when it is easy for people
to contact us on-line, you get complaints before a programme has
gone out that then fall away quite quickly afterwards. In that
case it was looked at by the regulator and given a green light.
Q44 Philip Davies: Do you think there
is a perception amongst the public that Channel 4 perhaps, although
it is well known for trying things out that other people might
not, sometimes potentially becomes gratuitously different; it
aims to shock deliberately and it perhaps goes over the top in
that sometimes?
Mr Johnson: I think Channel 4,
throughout its history, has always been provocative in terms of
the sorts of programmes it shows. It tries to experiment. Sometimes
we get it wrong, and I think we accept that. Coming back to your
point about complaints, if you have a look at this, you can analyse
for yourself that certain groups of viewers and certain subjects
are likely to solicit both complaints and praise. It is rather
an interesting sociological phenomenon that we could analyse.
Q45 Philip Davies: In order to keep
pushing the boundaries back, as Channel 4 seem to want to do,
what can we expect from this year's Alternative Christmas Message?
Are we going to have an al-Qaeda terrorist perhaps or something
similar? Where is Channel 4 going this year with their Alternative
Christmas Message? What can we look forward to?
Mr Duncan: The Alternative
Christmas Message is commissioned by the news and current
affairs department and over the last decade or so there has been
a very interesting range of perspectives and voices, which I say
again is one of our core purposes. First of all, I think it was
entirely justified as a one-off piece of programming. You also
have to look at it in the context of what we do year-round. Yes,
Channel 4 is controversial; yes, we can be provocative. I would
hope that we could always justify that against a public benefit
of it. In the case of our coverage of international issues, our
coverage of issues around the world helping people in Britain
understand what is going on in the world around them, I genuinely
would argue that Channel 4 is second to none, even the BBC. As
for the international coverage within Channel 4 News and
Unreported World, which we talked about earlier, some of the
documentaries and even some of the dramas that deal with issues
taking place abroad, I would say that Channel 4 does a fantastic
job throughout the year of really helping people understand what
is going on in the rest of the world. That Alternative Christmas
Message was a small part of a much bigger set of programming
across the whole year. I think you have to look at it in that
context. Going back to your earlier point, in any case where Channel
4 is doing something controversial and provocative, there should
be some sort of purpose behind it and there should be some sort
of justification, whether that is creative, editorial or otherwise.
Q46 Paul Farrelly: Shipley may have
been Royalist in the Civil War but Newcastle-under-Lyme, sided
with the New Model Army, so I am always willing to appreciate
new perspectives and messages. That is just to give a bit of balance.
Can I move on to your non-core channels? First, of all, I do not
know what Harper's Island is, so I betray my ignorance.
What is expensive? What is Harper's Island?
Mr Duncan: It is a straightforward
American drama acquisition. I think it is one hour and it is doing
reasonably well in the States. It is not the sort of programme
that would justify going on to a main peak slot on Channel 4,
BBC1 or ITV1 but it is ideally suitable for a youth-targeted channel
like E4.
Q47 Paul Farrelly: Is that an isolated
incident of one sudden rush of blood to the head by one particularly
enthusiastic executive in the BBC?
Mr Duncan: My own view on this
is that I do not understand why any of the licence fee now is
spent on US acquisitions, not one penny.
Mr Johnson: Or indeed films.
Mr Duncan: They compete against
the likes of ITV and ourselves and others for feature films; they
compete against us for US series acquisitions, all of which would
appear in some way, shape or form on British television in some
other way. If they did not spend any money on acquisitions, that
money could either be spent by them on British content or in other
ways or used for some other purpose. Meanwhile, it means everyone
else would get those acquisitions somewhat cheaper and less money
would be flowing out of Britain going into Hollywood. It does
seem to me there might have been a day decades ago when everyone
wanted to watch the BBC1 Christmas film but that day has long
since gone. Personally, I think it is a serious question mark
for the BBC going forward as to why they spend any money on US
acquisitions.
Q48 Paul Farrelly: Given that they
do, is this symptomatic across the board or is that just one instance?
Mr Duncan: To be fair, I would
say that there have been a few occasions in my time at Channel
4 when we have been out-bid by the BBC for shows that we would
have liked to have shown and certainly on most occasions they
have gone higher than we could have justified commercially. On
feature films packages, it is the same point really, that they
absolutely spend a lot of money on one big significant feature
film package. I guess you would need to talk to the likes of ITV
and Sky and get their perspective on it but one or two things
the BBC have done, like The Wire for arguments sake, or
Mad Men, they would argue "quite niche, quite cult"
were not necessarily going to be picked up. A lot of the money
they spend would be on shows that would otherwise be bought by
somebody else and shown to the British public anyway.
Q49 Paul Farrelly: Are there instances
where ITV and Five might level similar charges of Channel 4?
Mr Duncan: I have never heard
them make that complaint. It has always been the case since 1982
that Channel 4 operated in the commercial marketplace. That is
the model which we have set up. Acquisitions for the entire existence
for the big part of Channel 4, certainly for the first 20 years
of Channel 4, were the most significant area of commercial profit,
and they were the biggest driver of investment in British programming.
I am sure ITV and Five would prefer it if we were not competing
for US acquisitions but, given that we have to compete in the
commercial marketplace, and I think for advertisers it would be
quite a problem if we did not, and as long as we can make money
out of it, I think it is a legitimate thing to do.
Q50 Paul Farrelly: I want now to
come on to the non-core channels and for clarity, in the notes
to the accounts, when you have four channels, that is E4, More4
and Film4, is it not?
Mr Duncan: Yes.
Q51 Paul Farrelly: We are talking
the same language. They are phenomenally profitable for you.
Mr Duncan: Yes.
Q52 Paul Farrelly: How do you make
them so profitable when stations like Five are struggling so much?
Mr Johnson: To a degree there
are things like cross-promotion from Channel 4, which helps drive
audiences, and to a degree they benefit from being part of a group,
so we will buy and commission shows to be able to use them across
the network. There is no doubt that that is a benefit.
Mr Duncan: It is fair to say that
in simple quantitative terms they are doing very well. All of
our digital channels are effectively out-performing the competition,
whether that is BBC or ITV, relatively speaking. We have driven
very successful share growth over the last few years on digital
channels and that continues again this year. We partly benefit
from their being very clearly positioned and targeted. E4 is now
by some distance the strongest digital channel affecting younger
audiences. It is bigger on most nights of the week than Five,
for example, for 16-34 year olds. Because it is so highly targeted,
advertisers pay a relative premium compared to some of the other
digital channels. Film4 speaks for itself. We have had a glorious
25 or 26 year track record as a quality free-to-air film channel.
For a lot of homes, if you are on Freeview, it is the only significant
film channel you can get. More4 is very distinctive in terms of
factual documentary, true stories, More4 News and so on
and out-performs both ITV4 and BBC4. These have the advantages
that you have mentioned but they have also been very successful.
In terms of advertising, our sales team has done very well in
terms of monetising that success.
Q53 Paul Farrelly: Just for the record,
the channels in the last year more than tripled their operating
profits of £41.1 million on revenue of £175 million.
Ms Bulford: Yes, their revenue
went up from £148 million to just under £170 million.
Mr Johnson: You have to remember
they were only switched free-to-air relatively recently, so their
audiences have been going up pretty dramatically under Freeview.
Mr Duncan: It is pretty much in
line with what we set out to achieve three years ago, with the
strategy of going free-to-air, and in More4's case in particular,
it is fair to say that its profit last year was boosted by the
fact that we did, reluctantly, cut the programme spend a bit so
in the end we did less original programming than we would have
liked on More4 and that also boosted profits.
Q54 Paul Farrelly: You do not split
the three channels out but are those operating profit margins
just below the mid-twenties equivalent across all three?
Ms Bulford: I will be very happy
to provide more information on the channels privately if that
would be helpful because it is comparatively commercially sensitive
at a more detailed level but all of the channels are profitable
and their profits are all growing, so it may be best to just give
you some more data.
Q55 Paul Farrelly: That would be
appreciated, I am sure. In terms of the balance sheets of the
three channels, last year the liabilities were £92.2 million.
What does that reflect? The assets were just £23 million.
What do the liabilities reflect?
Ms Bulford: They are predominantly
monies owed back to Channel 4 in relation to their share of principally
transmission costs and any other allocated costs out to those
channels so they are inter-company transactions effectively.
Q56 Paul Farrelly: Are they reflective
of start-up costs as well?
Ms Bulford: To some extent, yes,
but in terms of the funding of those channels and their commercial
basis, as the Committee will know, we have our Schedule 9 arrangements
where we need to ensure that, firstly, the way in which costs
are allocated and secondly, the way in which the profitability
of commercial ventures grow, meets the criteria set out in the
Broadcasting Act and that audit is undertaken each year and Deloitte's
is looking to ensure there is no inappropriate cost subsidy through
either costing or allocation of capital to support those businesses.
Q57 Paul Farrelly: Given the phenomenal
profitability this year, would you say that the three channels
have now more than recouped their start-up costs?
Ms Bulford: In terms of their
development from when they went free to air, they are on track.
They have some way to go in terms of turning the full corner in
terms of recouping all the start-up costs. Some are further ahead
than others.
Q58 Paul Farrelly: When would you
expect them to fully?
Ms Bulford: It will be about another
18 months before all three come through against the free-to-air
plans.[1]
Q59 Philip Davies: First of all,
can I thank you for removing that meaningless phrase from your
report last year, which we had a discussion about, wanting to
have a workforce that reflects the country at large. I am very
grateful that you have removed that meaningless sentence. My next
hope is that you will reduce the number of times you put "diversity"
in your report. That is my hope for next year but I suspect I
might be struggling on that one. In terms of headcount, you have
reduced the number of people from 2007-08 from 965 to 905. You
announced in September that you were cutting a further 200 people.
Does that show that you were grossly over-staffed beforehand?
Mr Duncan: No, I do not think
it does. The figures you refer to were before the full-year impact
of the restructuring. We went through a very painful restructuring
process last autumn. We did it very quickly, I have to say, but
the net result is that we are now down to just over 700 full-time
employees at Channel 4. That is nearly a 25% reduction. I think
it is fair to say that that has been very tough. In part it reflects
reduced activity. In some areas, like new business development,
for example, we are simply not doing anything, and in other areas,
some of our marketing activity, some of our commissioning activity,
we have actually cut back. So part of it is a reflection of a
real reduction in activity. In virtually every area I would say
that we are now expecting people to do more, and I would say in
some areas that is proving very difficult. For an organisation
of our size and scale, in terms of what we deliver, to only do
that with 700 people is pretty tough. Compared to our key competitors,
we have quite limited resources, I would say, in virtually all
our key departments. It is early days; we are only a few months
into the post-restructuring situation but I would say that the
staff are doing a very good job and in some cases are probably
too thinly stretched. That is one of the things we need to watch
quite carefully, that it does not either drift into affecting
commercial performance, so it does not affect, for example, on
the advertising sales side, our ability to get enough money back,
or our creative performance in terms of commissioning or marketing
and so on. I think it has been very tough. I think we were right
to get on with it early, and we have gone a lot farther and a
lot faster than most other organisations that I can see.
Q60 Philip Davies: Inevitably, the
core Channel 4 business takes the brunt of it because that is
where the biggest amount of employees are. I understand that you
shave off a few here in corporate affairs and human resources
and that kind of thing. I understand how that happens but there
has been, it seems to me, as a layman, an astonishing reduction
from 87 to 36 in transmission and engineering.
Ms Bulford: There are two things
that have happened in transmission and engineering. The first
is that we closed a studio in the period, which reduced the number
of people, and the second thing is that in August we outsourced
transmission and distribution to Red Bee Media, which transferred
out over 100 staff, and that flows through to those average numbers
in the accounts. One of the reasons that the headcount goes down
is the restructuring programme, which resulted in a loss of posts,
and the outsource of that major operation from Horseferry Road
out to Red Bee at White City, which took out more heads there.
Q61 Philip Davies: So you have not
actually lost all these people; in effect, all you have done is
you have transferred their employment from Channel 4 to an outside
body.
Ms Bulford: In terms of the outsource
of transmission, the staff have absolutely been transferred across,
and that saved us between 10 and 15% on the cost of that operation
through the new contractual arrangement. In terms of the restructuring
programme, more than 200 posts were closed.
Q62 Chairman: Can I turn to remuneration?
Can you tell me roughly what proportion of your staff are paid
over £100,000 a year?
Mr Duncan: Yes. I think this was
in the public domain a few months ago following the Freedom of
Information request. I think the number is around about 80 staff
in total post the restructuring.
Q63 Chairman: So it is about 10%.
Mr Duncan: It would be something
like that, yes. We can double-check and give you an exact figure.
Q64 Chairman: Do you think that compares
favourably or less favourably with other broadcasters?
Mr Duncan: In terms of absolute
numbers, I think it compares favourably, given the fact that we
are a lean organisation in terms of absolute number of employees.
Clearly, the profile of Channel 4, on the basis that we do not
have any production base as such, so we do not have a significant
number of relatively low paid production staff but we have a significant
number of quite senior people who have to do major things like
commissioning decisions and some of the other key functions that
we operate in. It reflects the kind of profile of the organisation
but in absolute numbers, I think favourably; in terms of percentage,
it may be slightly different.
Q65 Chairman: Many people would say
that having 80 people all being paid over £100,000 a year
is grossly excessive.
Mr Duncan: I think that would
be an unfair view. First of all, all of the remuneration issues
are obviously looked at very carefully and benchmarked very carefully
in terms of other people. We obviously operate in a commercial
marketplace. We are competing, for example, in the advertising
sales area with organisations like Sky and ITV. We have a very
good team who have managed to grow the share of the ad market
every year for the last five years. You need very good people
to do that sort of job and compete commercially with some very
big, tough competitors, for example. If you look at it area by
area, those are the sorts of things we are dealing with and we
have had, I think, a very strong creative and commercial period.
Having said that, reflecting the difficulties of the economic
environment we are in and reflecting the tough impact of the recession
on Channel 4 itself, certainly all of our better paid people did
not take any sort of bonus for last year, and in fact, on top
of the restructuring, we have implemented a pay freeze for the
whole of this year. It is fair to say that senior people were
not protected in that sense in the restructuring and a very significant
number of our more senior people were also affected by the restructuring
recently; we had a corresponding reduction at senior levels as
well as junior levels. So I think it is fair and proportionate
and I think it reflects the tough and, in some cases, significantly
bigger nature of most of our competitors, both creatively and
commercially.
Q66 Chairman: Both you and Kevin
Lygo have volunteered a pay reduction but nevertheless, both of
you are left earning rather more than the Director General of
the BBC. Yours is an organisation of 800 employees and his is
an organisation of 20,000. How do you justify that?
Mr Johnson: We have benchmarked
the pay. We are part of the private sector in the sense that we
have to generate all our revenues in the marketplace, and we fight
to keep the best talent with the likes of Sky, ITV and others,
who pay very significantly more than we do. I do not think there
are many organisations where the two top people have volunteered
big pay cuts like that. It is a well-rewarded industry that has
traditionally been a very profitable industry. It is going through
a substantial restructuring and no doubt in the years to come,
as when talking about talent, average levels of pay will go nowhere
or possibly even fall.
Q67 Chairman: You say that in the
commercial sector it is comparable but, actually, you are now
in a position where you are coming to the Government, asking for
finance, financial help, from the public purse. Can you understand
why a number of commentators have been very critical of the level
of senior management pay of an organisation that is asking for
a taxpayer bailout?
Mr Johnson: I can, although I
do not think they are necessarily right. I think things are changing
and will change in the future probably on that front, yes. It
is one of the possible consequences of accepting more direct subsidy.
Mr Duncan: It is worth saying
that, after the pay cuts that I and Kevin volunteered, I believe
we will be substantially below the Director General of the BBC.
I also think it is worth saying that you have to look at the much
more generous pension scheme in place for the BBC, for example.
Just to be factually accurate, I think we move to a level substantially
below that.
Q68 Chairman: Just on the pension
scheme, one narrow question: looking at the figures in the report
for the value of pension pots, Andy Barnes comes in at £2.2
million, which is four or five times the size of anybody else.
Why is that?
Mr Johnson: Longevity of service.
He has been with Channel 4 for 12 years and, to my understanding,
he brought with him something of his previous pension. So it was
not all accrued while he was at Channel 4.
Q69 Helen Southworth: Can I take
you on to the issue of children's programming? We have spoken
in previous years about the gap that you had highlighted in teenage
programmes, or older children, certainly. You told us last year
that you had commissioned the programmes for the pilot children's
programming project, that they were in process of being produced
but there was a delay on the broadcast. Have they been broadcast
yet? If not, what is happening to them? What do you intend to
do?
Mr Duncan: Effectively, they are
on hold because of the budget situation that we are in, both last
and this year. I believe, on the three projects, one of them got
through script development stage and was ready to go but was put
on hold at that stage. Another one, similarly, the development
work had taken place. I think that we went into production in
the end on just one. I would have to double-check exactly where
that has got to but we are not in a position to play that out
at the moment in terms of the transmission costs, because it affects
the P&L at the time we transmit it. I have to say, it is one
of the areas whereback to the earlier pointalongside
some of the new initiatives online, for example, where it is obviously
subject to the funding situation in digital and what comes through
in the next few weeks. At the moment we are having to cut back
anyway on existing activity and it is very hard to justify doing
something completely new like that at that time. We remain of
the view that Channel 4 will be a very effective organisation
at targeting particularly the 10-16 year old group. If anything,
our relationship with that audience has strengthened over time
and in particular we are seeing some early evidence of a very
good online relationship with that age group as well. We remain
of the view that we have a very important role to play with that
group but clearly the funding will need to be resolved first.
Q70 Helen Southworth: Yet with Channel
4's profile and its wider target audience, the people who find
Channel 4 attractive, households with children and younger people
in, must be a very large percentage of your audience.
Mr Duncan: Yes, we have a lot
of people of that age group watching Channel 4 programmes and
E4 programmes generally anyway, but to do very specific targeted
activity for that age group is very difficult to justify commercially.
One of the reasons ITV have pulled out and the market itself does
not provide anything for that age group really is that it is very
difficult to monetise and, of course, some of the, in my view,
valid restrictions around product placement and some of the limits
around advertising to children have made it even more difficult
commercially to justify. It would very much be something we would
like to do but it would fall into the category of loss-making
programming and therefore in terms of resolving the funding, it
can only be afforded if there is some sort of funding solution.
Q71 Helen Southworth: It is very
disappointing though, is it not? When you actually think of the
potential there is, the growing audiences around really good quality
children'sask J K Rowling. It is not that this is something
which is a niche market for a small number of people. If you do
this well, like Doctor Who, you make huge profits and you
drive the market internationally. As a creative body, is it not
something that you really want to look at?
Mr Duncan: As I said, it is something
that we are keen to do but we think we would lose money, and in
our case bear in mind that, over and above the fact that it is
very difficult monetise in advertising, in our case we keep very
little of the proceeds of any international sales, for example.
So in terms of the situation there, it would lose us money. It
is as simple as that. So we would like to do it but it has to
be part of a package where the overall funding issues are resolved.
Just at a time where we are cutting deep in every other area,
it is very difficult to justify funding something that would actually
further increase that funding gap.
Q72 Helen Southworth: Can I explore
a bit the education: you have a core public service ethos, yet
one of the things that perhaps Channel 4 promotes itself on is
the fact that you are good at popularising education. Can you
just explore a little your thinking behind that? Some people,
for example, have been critical about some of the programmes that
you have put out, in that they are really popular programmes rather
than education programmes. How do you see the relationship between
the two?
Mr Johnson: I think one of the
things that Channel 4 does very cleverly is to deliver a whole
lot of accessible programmes that are not pitched overtly as education
but actually do educate. For example, there was a brilliant series
on earlier this year called The Hospital, a three-part
documentary about the stresses on the NHS to do with younger people.
One was about teenage pregnancies, one was about violence and
alcohol, and one was about obesity. They were not actually classified
as educational but I would argue that they fulfilled both categories:
they would have been informative for teenagers to watch and they
would have been educational to anyone who was interested in the
stresses and strains faced by the NHS. I think Channel 4, in the
various ways it delivers communication, is ingenious at reaching
and being appealing to groups who, if programmes are packaged
as very worthy, will not watch, and it is important to make programmes
accessible. This is one of the successes and the importance of
Channel 4, that it delivers these substantial audiences because
it is seen as a good place to go to watch interesting programmes.
It is partly about making the packages appetising to audiences
who would not turn to programmes that they would see as dull.
Mr Duncan: It is worth saying
that the way education programmes are categorised is slightly
odd. As Luke said, a lot of programmes that you would absolutely
see as educational would not necessarily be called education.
The same would apply to a lot of arts, science, religion and history
output. So David Starkey or the Christianity series or the two-hour
documentary on the Qur'an that we ran at peak, are all in my view
highly educational but would not be classified as that. It is
worth talking also about what we have done in terms of our schools
education programming, because we have a particular quota commitment
around that, and we continue to play out schools programming in
the morning, but we very successfully shifted our originated content
spend on line in education, and had some real success. For example,
Battlefront, which was all about young people campaigning
for different ideas and different initiatives, ranging from green
issues and better rubbish collection through to anti-street crime.
One person had a friend who had been killed and he was now on
a mission to teach other young people about not carrying knives
and so on. Those sorts of things we continue to be very effective
on as well, with relatively modest resources. Back to your earlier
point, we have a very good connection with that kind of teenage
age group. So I think that the breadth of the different ways Channel
4 tackles education, from the formal schools programming commitments
and the on-line activity to the sort of programming that Luke
was talking about through to the much more serious specialist
factual type programming, it is a very big part of what we do
and our factual, documentary and education output, I think, remains
very strong indeed.
Q73 Helen Southworth: Can I move
on to the nations and regions issues, something that many members
of this Committee are extremely concerned about. We have very
extensive discussions about this with all broadcasters. We want
to see the boat consistently being pushed out to make sure that
the nations and regions do get the opportunities for people to
develop creativity and also make commercial success. Can you just
explore with us a little bit what you think your successes have
been over the past 12 months but also what you want to see done
better?
Mr Duncan: Certainly. I would
say for Channel 4 we have a very strong track record in the English
regions. I will come back to the nations in a moment. A substantial
amount of our output comes from all around England. In particular,
quite a lot of our programming comes from the South-West, from
the Midlands, from the North-East. We have had some award-winning
programmes, Embarrassing Bodies, Embarrassing Illnesses,
from the Midlands and in the North-West we have had a real run
of success in terms of drama, things like Hollyoaks and
Shameless but also some of the one-offs. The English regions
story I think remains a very good one, although it has actually
been affected by the downturn; in the sense that all our programming
budgets are coming under pressure, that has been affected. I would
say in terms of the nations it is a much bigger challenge for
us. We have an aspiration to do substantially more programming
sourced from in particular Scotland and Northern Ireland. I will
not leave out Wales but there is a slightly different relationship
there. I would say the story of the last year is a mixed one actually.
In terms of positive developments, we have put in place a nations
pilot fund. One of the problems is that we do quite a lot of one-off
programmes but we do not have enough returning series coming from
some of the nations. The nations pilot fund is in particular designed
to try and come up with ideas around drama and comedy that could
lead to a returning series. So far most of that money has been
committed and we are yet to see what comes through in terms of
the ideas but that is encouraging. We have been pleased with 4iP,
our digital innovation fund. The first base was in Birmingham.
We have others being set up in Yorkshire and the South West and
the Midlands, as I have already mentioned. We are in particular
hoping to get to the point where one of those bases will be in
Scotland, one will be in Northern Ireland and one will be in Wales.
I think that digital innovation opportunity in the nations is
very exciting. We have also announced a series of measures, including
putting some commissioning presence in Scotland for the first
time. Kevin Lygo announced in a speech a few months ago that we
have an ambition to have more of our output coming through from
the nations. The very clear tension against that at the moment
is twofold. One is, when you are cutting overall budget levels,
it is quite difficult to be putting more money into the nations.
It is a bit like the children's issue. Secondly, we are finding
a bit of a problem with the independent production sector. To
give you an example, we have made a commitment that a certain
number of our current affairs programmes, Dispatches and
so on, would be made outside England, ie in one of the nations.
Similarly, a certain amount of our cutting-edge documentary strand
will be made. We are struggling to find indies who can cope with
that, who can get enough business to then make a profit from it.
In isolation, it is difficult for us to change the whole industry.
It has to be part of a properly joined up approach where, for
example, the BBC are also spending a lot more in the indie sector.
At the moment they are spending a lot more in the nations but
a lot of it is being spent in-house in the BBC, and the trick
might be they and we together spending more outside of the BBC
to develop the indie sector. I think it remains a very clear policy
objective because the diversity in our supplyI am sorry
to mention that word, Philipis a key strength of Channel
4. We had over 300 producers last year and that is a big part
of our output. If we could get more of the output coming from
the nations, we would like to see that. I hope over the next two
or three years we can make real progress in that area but there
are some problems along the lines that I mentioned.
Q74 Helen Southworth: How important
do you see that as being in terms of your public service responsibilities?
Mr Duncan: I think Channel 4 has
always been about anyone in Britain coming up with a great idea,
and we can take that idea and take it to the British public. Therefore,
the greater the range and breadth and diversity of where those
ideas are coming from, the better, creatively, I would say. We
want to be nurturing new talent, finding new ideas, helping new
indies develop and grow, and the more that can happen in the nations
as well as in England, the better.
Mr Johnson: I think there is always
a risk that any media organisation becomes so London-centric that
it overwhelms other output. The idea that creativity and innovation
can only come from London is ludicrous. It is about nurturing
independent production companies to develop sufficient critical
mass outside of London to be viable. It is not easy. Channel 4
has been at it for decades, trying to cultivate these organisations,
but it does not happen quickly or easily.
Q75 Helen Southworth: In terms of
the skill base, what are you currently doing in terms of relationships
with the universities, for example, or in training and development
opportunities or in skills sharing and those sorts of things?
What do you think should be done across the nation to make it
work?
Mr Johnson: A lot of it is, bluntly,
about confidence and ambition, because once people reach a certain
degree of success, they tend to leave the nations and regions
and come to London. This does not just apply across the media
industry; it applies across many walks of life. It has an economic
impact and it is not all good. One needs to try and develop centres
of excellence across many spheres outside of London that encourage
people to stay.
Mr Duncan: It is worth saying
that we invest a lot of money and talent in training. We obviously
support big organisations like Skillset and the National Film
School. We also have a whole series of 10 creative cities actually
outside of London, where we try and invest in local companies,
local schemes, to help nurture new talent. The 4iP digital innovation
fund is an important new way of doing that, in some cases in conjunction
with the screen agencies. Although we have been under very severe
budget pressure, and we have had to cut back that spend, we have
only cut it back to the tune of around 20%, so in line with spending
cuts we have had to make elsewhere. Many other organisations have
cut their spending altogether in those areas. So I think we have
tried to retain that investment but it is obviously difficult
at a time when budgets are so tight. A lot of it comes down to
giving new talent a chance and actually we are disproportionately
good at backing new companies, giving new people a chance, whether
it is actors on the screen or behind the screen, and I think that
remains very important but it is a challenge at the moment. There
is no doubt about it.
Q76 Paul Farrelly: In terms of taking
risk, can I just prod the entrails, for want of a better word,
of Kangaroo? You had a third stake in Kangaroo. Was that both
the initial equity investment and all three contributed the same
amount in terms of revenue funding? Is that correct? Did you all
lose the same amount?
Mr Duncan: We were all equal partners
in that sense, yes.
Q77 Paul Farrelly: Your write-off
was, what, nearly £6.5 million?
Mr Duncan: Yes. In that sense,
it is commercially sensitive.
Q78 Paul Farrelly: It is in the back.
Yes, it is £6.4 million.
Mr Duncan: It was costly. I think
our perspective on it was that it was a very good thing to try
and be part of. Bearing in mind that ITV are substantially bigger
than us in content production terms and BBC are even bigger again,
to be a one-third stakeholder/shareholder in that was a very good
deal from our point of view and it partly reflected the fact that
we were the first to launch 4 On Demand and get in there early.
I think it was a valid investment. It was very disappointing.
It was blocked. I think it would have been very strongly in the
public interest and we still have strong ambitions in the video
on demand area with Channel4.com and various syndication deals
and so on that we are looking to do. I think it was disappointing
that Kangaroo was not allowed to happen.
Q79 Paul Farrelly: Did the OFT reference
come out of the blue? Were you shocked by it?
Mr Duncan: I think it was a surprise
to most people, yes. Although one or two competitors had clearly
complained, I think the general view within the industry was that
it would be a good thing. It was clearly in the public interest.
I think the body language until quite late in the day seemed to
be that, given some of the remedies that the three parties were
prepared to make, we certainly all felt that wholly answered some
of the concerns that had been raised by the process, so when the
final block came out, that was a surprisenot just to us
but to many commentatorsand it was a disappointment. There
is no doubt about it.
Q80 Paul Farrelly: With the project,
you were not just exposed to the risk of the competition authorities
pulling the plug but there was also the issue of the BBC Trust
not having given its own formal approval. How did you mitigate
against that risk?
Mr Johnson: We took assurances,
I think, from the BBC Executive that they would succeed in convincing
the Trust that it was a good thing to do and I think, as Andy
said, in terms of offering consumers a great place to come for
a batch of programming, it did represent a good service, and I
believe it is a great shame that it was blocked. I think Channel
4 does compete in the marketplace in an enterprising sense and
we are trying to reinvent the organisation in terms of new media.
So Kangaroo was a valid attempt. Sometimes these things fail and
that is the nature of commerce.
Q81 Paul Farrelly: Given that there
was the risk of the BBC Trust not finally approving it because
it was a new venture, how did you seek assurances? Did you get
written comfort from the BBC Executive?
Mr Duncan: We had very substantial
ongoing discussions with the BBC, as did ITV, of course, and it
was our very clear expectation that, on the basis it was allowed
by the Competition Commission, that the path was also clear for
the BBC Trust to agree it. So I think the risk was not a substantial
risk around the BBC not blocking it. I think they themselves saw
significant public interest, and one of the ironies is that money
that would have effectively been retained by the BBC, ITV and
Channel 4 and been invested back into British content has now
opened up the way for probably foreign-owned platforms to come
in and any money that might be made is going to disappear out
of Britain. So from a British plc point of view, it was disappointing.
Q82 Paul Farrelly: But in terms of
the assurances from the BBC Executive, in what form did they come?
Were they written assurances?
Mr Johnson: They did not at any
stage say, "It is certain to be approved by the Trust."
There was nothing like that.
Q83 Paul Farrelly: "We will
use our best endeavours"?
Mr Johnson: Of that sort of nature,
absolutely.
Q84 Paul Farrelly: "We are sure
we can convince them"?
Mr Johnson: They were committing
time and money to it, so you had to believe that they would not
have done so unless they felt highly confident that the Trust
would approve it, yes.
Q85 Paul Farrelly: And you have that
in writing?
Mr Duncan: You have to bear in
mind the deal we did was with BBC Worldwide and it was clearly
backed by the BBC Worldwide Board and it was also backed by the
BBC Executive Board. So we knew that effectively John Smith in
Worldwide and Mark Thompson in the BBC fully supported it and
our understandingI do not know exactly what we had in writing
or not but our very clear understanding was they had a series
of sessions with the BBC Trust along the way and it was very clearly
understood that if the Competition Commission gave it the green
light, it was also expected that the BBC Trust would give it the
green light.
Q86 Paul Farrelly: Is anything out
of your investment in Kangaroo recoverable? Is it all wasted?
Mr Duncan: No. There are confidential
discussions going on at the moment about a possible sale of parts
of the investment that we made. It is still possible that we will
recoup some money from that. Secondly, clearly, a substantial
amount of what we invested and what we learned along the way we
are still exploiting successfully in video on demand. So we are
having a record year actually so far in video on demand on Channel4.com
and we are talking to potential third-party partners that we may
also provide programming to, and we still have a very strong position
in the video on demand world, and given how quickly that is likely
to grow, you would not say it was all wasted. Clearly, some money
was lost and that was disappointing.
Q87 Paul Farrelly: So in terms of
any transfer of what has already been invested, is that on a tripartite
basis?
Mr Duncan: Yes. Any money recouped
would be divided equally between the three parties.
Q88 Paul Farrelly: So there is potential
for a resurrection of Kangaroo by hiving it out to someone else?
Mr Duncan: No. The original idea
of Kangaroo itself is officially dead. That was blocked by the
Competition Commission. Some aspects of the technology, for example,
might be of value to other parties and that is what we are currently
exploring.
Q89 Paul Farrelly: So there is no
Kangaroo 2?
Mr Duncan: Not as a consumer proposition
as put forward to the Competition Commission.
Q90 Chairman: Luke, your term comes
to an end in January next year. Has the process begun? Have you
had thought as to your successor?
Mr Johnson: I am not necessarily
involved in it. It is for Ofcom to decide. If it happens in the
same way as I was appointed, I think it starts cranking into motion
in the late summer, and early September, and I think they officially
announce it towards the end of the year, as far as I know.
Q91 Chairman: You will also be aware
that there have been widespread press reports about tensions within
the boardroom, particularly between you, Andy, and Kevin Lygo,
and indeed between the two of you. What truth is there in this?
Mr Johnson: Well, I would refute
it all. I think there is healthy debate within the Board of Channel
4. I think the non-executives do hold the executive to account.
We take our role of stewardship very seriously. We are custodians
of taxpayer assets. Speaking for the others, I think we care,
as I said before, passionately about the future success of Channel
4 and, as I say, we have robust discussions about decisions, and
so we are no pushover. I do not think there is any truth in those
rumours. I do not know if you want to comment, Andy?
Mr Duncan: I totally echo what
Luke says. It is a load of nonsense. We have had a succession
of tittle-tattle, gossip and rumour certainly for the last five
years, all the time I have been at Channel 4. I guess it will
carry on. Some of it clearly comes from our competitors and is
designed to cause mischief, presumably, at a key time for Channel
4's future but it is just not true. It is as simple as that. We
have had a very good creative and commercial track record over
the last five years and have been very aligned on what we want
Channel 4 to continue to be able to do going forward. We are all
of the same view, which is that we want as much money as possible
to invest in programming to do that job properly. I would say
the whole Channel 4 Board is aligned, there is good debate, as
Luke said, and certainly the executive team I think get on very
well and are very aligned in what we are trying to do and have
worked very successfully together for several years now. It is
a load of nonsense.
Q92 Chairman: You would hope and
intend to be in post this time next year?
Mr Duncan: Absolutely! In my interview
with Luke and whoever else interviewed me several years ago, my
ambition in coming to Channel 4 was to really help Channel 4 fully
transition successfully into the digital world. I think we have
made very good progress over the last few years. I think there
is still some way to go and I would like to finish off that job.
There are some very key issues coming up in the next 12 months
that I would like to see through, for sure.
Q93 Chairman: Do you hope that Kevin
Lygo will continue as Director of Programmes?
Mr Duncan: I think Kevin Lygo
is a first-class director of television content. He has done a
fantastic job and I would very much like Kevin to continue in
that role for the foreseeable future as well, yes.
Chairman: Thank you. In that case, that
is all we have. Thank you.
1 Note by witness: Channel 4's digital channels
fully recouped their costs since moving free to air in 2008; in
2012 the digital channels are expected to fully recoup their start-up
costs since inception. Back
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