2 New team, new vision
A funding gap?
6. Channel 4 is in a unique position as a publicly
owned, not-for-profit broadcaster funded solely from commercial
revenues but with public service broadcasting (PSB) obligations.
Although it also undertakes other commercial activities, its primary
means of raising revenue is through selling advertising minutage
on its channels. PSB content, on its own, would not bring in sufficient
advertising revenue to sustain the Channel. It operates, therefore,
a cross-subsidy model, whereby it is allowed to broadcast cheaper
and more advertiser-friendly non-PSB content as well as PSB content
in order to generate sufficient advertising revenues to finance
its primary remit. The previous Channel 4 management team argued
before our predecessor Committee, and elsewhere, that this model
was becoming untenable as advertising revenues declined and that,
in the future, Channel 4 would require some form of additional
financial support if it was to continue to deliver the same level
of PSB. [8]
7. The case for additional financial support was
articulated in Channel 4's 2008 strategy document Next on 4,
which warned that "as the 10% decline in viewing experienced
by the core channel between 2006 and 2007 suggests (from 9.8%
to 8.7%), historic levels of Channel 4's advertising revenues
are unlikely to continue in the face of increased competition
brought about by digital switchover."[9]
Next on 4 prayed in aid consultants LEK, whom Ofcom had
tasked in late 2006 to review Channel 4's finances, and whose
final report "confirmed the arguments that Channel 4 had
previously made that it will face a significant funding gap by
the time the digital switchover process is completed by 2012."[10]
Next on 4 drew the conclusion that "[...]with no change
to the current model, it will increasingly face the choice between
moving into losses or having to cut back on public delivery."[11]
8. There was a second strand to Next on 4's case
for additional funding; namely that:
Channel 4 has always had some kind of public
support to enable it to deliver its remit. [...] Throughout its
existence, Channel 4 has benefited from an implicit subsidy in
the form of gifted analogue spectrum which, at its height, is
estimated to have been worth 15-20% of turnover. [...] The residual
value of analogue spectrum will fall away completely once the
digital switchover process is completed in 2012 [...][12]
9. For the previous Channel 4 management team, therefore,
an estimated £100 million funding gap was the consequence
of an irreversible combination of declining advertising revenue
and an associated decline in the value of the gifted analogue
spectrum, which they saw as an implicit public subsidy. They did
not specify a solution in Next on 4, stating that "we
remain open to the best model of support to the organisation—whether
another form of indirect support, to replace the value of gifted
analogue spectrum, or some kind of indirect subsidy."[13]
Next on 4 was, though, very clear on what would occur if
a solution was not found:
[...] much of the public value that Channel 4
delivers will diminish or disappear entirely. It would have to
reduce its overall level of originated programmes, along with
its commitments to loss-making genres such as arts, religion,
comedy, drama and film. Even across its popular output, there
would inevitably be less innovation, risk-taking and diversity.
Off-screen, there would be a significant scaling-back of Channel
4's commitment to development and training, and to the range of
independent companies that we work with.[14]
10. When the previous management team appeared before
our predecessor Committee in May 2009, the then Chairman and Chief
Executive reiterated their concerns about the impending funding
gap. Chairman Luke Johnson asserted that "unquestionably,
the very robust and successful model that has persisted for over
25 years for Channel 4 needs some adaption,"[15]
and said 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 [...] [16]
Mr Duncan drew the Committee's attention to the "unprecedented
level of ad market decline,"[17]
the fear that "with the structural change as well it simply
will not bounce back."[18]
He argued that "it would be a huge mistake just to sit back
for another two or three years, particularly given the speed of
change."[19] He
told the Committee in 2009 that he had a preferred solution, which
was for additional funds to come from a partnership with BBC Worldwide.
He advised us that both Channel 4 and BBC Worldwide were enthusiastic
about the deal, and anticipated that the main negotiations could
be concluded in a few weeks[20].
Although he favoured an indirect solution that he felt went "with
the grain of self-reliance"[21]
he accepted, in response to Committee questioning about the option
of Channel 4 receiving some licence fee funding, that were the
Worldwide deal to fall through then "some sort of contestable
fund around the licence fee is a good idea."[22]
Going it alone
11. Given the evidence given to the Committee in
2009, we were intrigued to read the statement of the incoming
Chairman, Lord Burns, in the 2009 Annual Report that "although
it can be tough at times, I also like the discipline of Channel
4 having to earn its living in the market place rather than being
dependent on Government funding."[23]
This statement, and media stories where he outlined
his vision for a policy of self-reliance,[24]
appeared to us to suggest a significant change of tack from the
previous regime. We asked Lord Burns to explain his position.
He told us that:
[...] seeking to find solutions, certainly through
Government in these circumstances, is not the way forward. I think
that one has to face the position that one is given. The commercial
realities are that we have to make a success of it within the
framework that is set out by Parliament, and that is what we propose
to do.[25]
12. On a more upbeat note, Lord Burns observed that:
what we have seen this year is some pick-up in
advertising, a welcome pick up. I think we are quite well positioned
and my preference and ambition is to make a success of what we
have rather than trying to seek solutions externally to get additional
implicit subsidy into the company.[26]
Lord Burns was clear that, if the Government were
ever to introduce a contestable element into the licence fee,
he would then want to consider applying for it. However, he stressed
that "what I do not want to do is to be out there arguing
that we need Government money in order to survive."[27]
He also confirmed that "there are no discussions taking place
with BBC Worldwide."[28]
13. New Chief Executive David Abraham placed further
stress on the benefits of going it alone, suggesting that the
cross-subsidy revenue model, independent of public funding, encouraged
independent thought and creativity; "from a creative point
of view there is great virtue in the independent funding model
of Channel 4 in that part of our remit is to look at things in
different ways from the BBC, to give a platform for these independent
voices [...]."[29]
14. In light of these statements, we pressed the
new top management team on whether the risk of a £100 million
funding gap had gone away. Mr Abraham responded that:
There has probably been some misunderstanding about
what was meant originally about a gap. A gap is defined by the
point at which you measure it and it is the case that we are spending
considerably less on content now than we were three or four years
ago. Do we think we can still deliver to our remit on that budget?
Absolutely yes. [30]
Lord Burns added:
I do not want to appear critical of predecessors
about this issue because there is a clear sense that historically
there was a much larger implicit subsidy that Channel 4 was receiving
through the terrestrial broadcasting system when there were only
the main terrestrial channels. I think it was right for them to
point out that much, indeed virtually all, of that implicit subsidy
was going to disappear in the digital world, and therefore if
Channel 4 was to continue in the same balance relative to others
there was a gap that was appearing. I am not challenging that
logic. What we are saying is that it seems to us clear now, looking
at the new Act which covers our activities, that we really have
to settle for what is set down there and that our main task is
to get on and deliver that and to live within our means and do
our best to generate the commercial earnings that are necessary
to be able to provide outstanding television.[31]
15. Having listened to the comments of the new
Chairman and Chief Executive, we conclude that the question of
a "funding gap"—a central component of the previous
regime's strategy—has indeed been consigned to history,
replaced by a more robust assessment of future advertising revenues,
albeit still below previous highs, and of the potential for further
efficiencies. This is, in short, a commitment as Mr Abrahams
explained to us, "to operate very much within our means."[32]
16. Although Lord Burns did not want to appear critical
of his predecessors, Lord Puttnam, Deputy Chairman of Channel
4 since February 2006, has not felt the need to be so circumspect.
During an interview on Radio 4's The Media Show in September
2010,[33] he commented
unambiguously that the previous top management had "cried
wolf"[34] and that
they "had hopped up and down too early far too much"[35]
and implied strongly that the Chief Executive had not listened
to the counsel of the non-executives on the Board on this issue.
We conclude that the previous management overplayed its hand
on the funding gap issue, and that Channel 4's need for additional
public funding was not as mission-critical as was claimed. We
recommend that Channel 4 non-executive Board members review whether
they ought to have challenged the previous management more strongly
and whether there are lessons for the future to be learned from
this experience.
The scale of the independent-funding
challenge
17. The 'funding gap' has proved something of a red
herring. Nevertheless, the self-reliant approach of the new team
is not without risk. As the table below shows, total Channel 4
advertising revenue is down year- on-year since 2007, which must
be of concern given that some 85% of Channel 4's revenues is derived
from advertising. Table
1: Channel 4 financial trends
| | C4 core channel
| other channels |
Total |
| | |
| £ million | advertising revenue
| advertising revenue |
advertising revenue | total all revenue
| total operating costs
| total profit |
| 2009 | 535.1
| 170.7 | 705.8
| 830.3 | 826.4
| 0.3 |
| 2008 | 619.7
| 169.6 | 789.3
| 906.1 | 906.6
| 1.8 |
| 2007 | 676.8
| 148.4 | 825.2
| 944.9 | 953.7
| 0.5 |
| 2006 | 664.4
| 112.7 | 777.1
| 936.9 | 922.9
| 14.5 |
Source: Channel 4 Annual Reports and accounts,
various years
18. In 2009 Channel 4 experienced a 10.5% year-on-year
decline in advertising revenue, slightly better than the total
TV advertising market which declined by 12%. It is noteworthy
though that Channel 4's advertising revenue trends are not uniform
across the network. Whilst its core channel advertising revenue
has fallen significantly over the last three years, advertising
revenue on its digital channels and future media (that is, internet
and on-demand services) has risen. One consequence of these trends
is that, whilst the core channel has shown significant and rising
losses in recent years—it last made a profit in 2006—the
digital channels have recorded rising operating profits, as the
table below shows.Channel
4 Financial Performance
| 2007 operating profit/(loss) £m
| 2008 operating profit/(loss) £m
| 2009 operating profit/(loss) £m
|
| Core Channel | (7.8)
| (24.0) | (59.4)
|
| Digital channels | 16.2
| 41.1 | 53.5
|
Source: Channel 4 Annual Report and Accounts,
various years
19. In 2009, the Channel 4 Corporation as a whole
recorded an after tax profit of £300,000. Then Interim Chief
Executive Anne Bulford noted in her foreword to the 2009 Annual
Report that "record profits from our digital TV channels
were the most important factor in helping the Group break even."[36]
The question is whether Channel 4 can continue to expand and exploit
advertising and other revenues throughout its portfolio of services.
In his evidence to us, Chief Executive David Abrahams was positive,
observing that:
[...]without innovation television is likely
to stay at the plateau that it is currently on. [...] But Channel
4 has always innovated. It innovated when it first ceded from
ITV and had a new way of serving audiences, younger, up-market
audiences, packaging it very effectively to ad agencies in creating
a good price position in the marketplace. I believe our task now
is to innovate another time in this area and that is where a lot
of my focus is.[37]
20. Subsequently, on 6 August 2010, Channel 4 made
an announcement[38] that
it had signed agreements with BT and Sainsbury's to sponsor London
2012 Paralympic games programming on channel 4. This adds weight
to Mr Abraham's confidence in Channel 4's ability to generate
more advertising revenue. The accompanying press release commented
that
[...] the two multi-million deals will see BT
and Sainsbury's share sponsorship equally across a variety of
programmes across the Channel 4 network leading up to the London
2012 Paralympic Games as well as the live coverage and highlights
shows broadcast during the Games themselves. This ground-breaking
dual sponsorship also includes sponsorship of Channel 4's new
website dedicated to the Paralympic games, www.channel4.com/paralympics,
programming on PC and TV VOD [view on demand] as well as the joint
creation of Short Form Programming content.[39]
Further evidence that Mr Abraham's plans for future
advertising revenue may be bearing fruit came in October 2010,
when he was reported to be expecting Channel 4's advertising sales
to achieve in excess of £1bn during 2011, benefiting from
its stake in YouView,[40]
and the addition of the UKTV sales contract offer. [41]
21. In supplementary evidence, we also asked Channel
4 how the Contract Rights Renewal (CRR) mechanism affected their
ability to raise advertising revenue. The CRR mechanism is a remedy
imposed by the Competition Commission in 2003 as a condition of
the merger of Carlton and Granada (two of the largest Channel
3 licence holders). The CRR was imposed in recognition of the
concerns of advertisers about the extent of ITV plc's market power
after the merger. As a result, the CRR imposes conditions on
ITV plc which are intended to ensure that advertisers and media
buyers are no worse off after the merger than before. It includes
an automatic "ratchet"—a linkage which reduces
the amount advertisers will have to commit if ITV1's audience
shrinks. During evidence to our predecessors, Michael Grade, then
Executive Chairman of ITV, argued that the CRR was damaging to
all commercial broadcasters.[42]
However, the Competition Commission recently confirmed that the
CRR was still needed to prevent ITV plc from exploiting its position
to the detriment of advertisers and other commercial broadcasters.
22. Channel 4 responded that it agreed with the decision
taken by the Competition Commission because "ITV1 still has
dominant market power so there is a need for a competition remedy
to constrain ITV1 from exploiting its position."[43]
They emphasised that, were the CRR mechanism to be relaxed, then
"gains that ITV might accrue [...] are likely to mean losses
for other commercially-funded broadcasters—with a negative
impact on their ability to invest in UK content."[44]
They also identified the structural shift towards digital television—rather
than any constraints imposed by the CRR mechanism—as the
primary cause of the decline in the TV advertising market.
23. There is a second key variable, namely the extent
to which Channel 4 can compensate for any reduced advertising
revenue by reducing operating costs. As table 1 at paragraph 17
shows, in recent years Channel 4 has made substantial progress
in reducing operating costs—reducing them by 8.8% in 2009,
following a fall of 4.9% the previous year—partly achieved
through a significant headcount reduction. Despite the scale of
the cuts already made, in evidence to this Committee Mr Abrahams
was also positive about the potential for further savings, telling
us that we was looking at "the scale of management and the
volume of management at the top end of the organisation"[45]
and also at "the adjacencies between departments: can we
work more efficiently?".[46]
As with future advertising revenues, he stressed above all the
gains that could be made through innovation, in this case in working
practices:
[...] convergence is about joining up these different
platforms and getting the creative teams to work in a completely
joined-up and holistic way, so any departmentalism, any silos,
is really where our focus has been to date.[47]
However, he did also warn that: "if we were
to cut any deeper I think it would really impinge upon our ability
to deliver the schedules and the high quality content that you
would expect from us."[48]
24. In the current economic climate, Channel 4's
decision to pursue self-reliance through exploiting existing and
new revenue sources and further reducing operating costs is the
right one. However, given the extent to which Channel 4 has already
made efficiencies, and uncertainties over future advertising revenue
trends, it will be a considerable challenge for Channel 4 to innovate
to the extent required to make available sufficient funds to maintain
current levels of public service content. We do not under-estimate
the size of the task and, for this reason, we will continue to
monitor Channel 4's progress closely. We would not rule out re-examining
Channel 4's funding regime in the medium term if, despite its
best efforts, advertising revenue were to drop significantly.
8 Culture, Media and Sport Committee, Third Report
of Session 2009-10, Channel 4 Annual Report, HC 415, Ev
1 Back
9
Channel 4, Next on 4, March 2008, p 101 Back
10
Ibid. Back
11
Ibid. Back
12
Next on 4, Executive Summary, p 9 Back
13
Next on 4, Executive Summary, p 9 Back
14
Ibid. Back
15
Culture, Media and Sport Committee, Third Report of Session 2009-10,
Channel 4 Annual Report, HC 415, Q 1 Back
16
Ibid, Q 33 Back
17
Ibid, Q 35 Back
18
Ibid. Back
19
Ibid. Back
20
Ibid, Q 10 Back
21
Ibid. Back
22
Ibid, Q 14 Back
23
Channel 4 Television Corporation, Report and Financial Statements
2009, p 4 Back
24
See e.g. "Lord Burns: Channel 4 does not need public subsidy",
The Guardian, 23 June 2010 Back
25
Q 3 Back
26
Ibid. Back
27
Q 4 Back
28
Q 5 Back
29
Q 4 Back
30
Q 6 Back
31
Ibid. Back
32
Q 2 Back
33
Radio 4, The Media Show, 22 September 2010 Back
34
Ibid. Back
35
Ibid. Back
36
Channel 4 2009 Annual Report, p 5 Back
37
Q 20 Back
38
Channel 4 press release, BT and Sainsbury's to sponsor London
2012 Paralympic Games Programming on Channel 4, 9 August 2010 Back
39
Ibid. Back
40
Previously Project Canvas - Channel 4 is a partner in this joint
consortium aiming to offer free-to-air, internet-connected TV
Back
41
Reported in Media Week, Channel 4 to take £1 bnin TV ad
revenue in 2011, says boss, 10 October 2010 Back
42
Culture, Media and Sport Committee, First Report of Session 2007-08,
Public service content, HC 36-I, para 169 Back
43
Ev 22 Back
44
Ibid. Back
45
Q 69 Back
46
Ibid. Back
47
Ibid. Back
48
Ibid. Back
|
