Channel 4 Annual Report and Financial Statements 2010


House of commons



Culture, Media and Sport Committee

Channel 4 Annual Report and Finance Statements 2010 

Tuesday 14 June 2011

Lord Burns, Mr David Abraham and Ms Anne Bulford

Evidence heard in  Public Questions  1 - 82



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Oral Evidence

Taken before the  Culture, Media and Sport Committee

on  Tuesday 14 June 2011

Members present:

 John Wittingdale (Chair)

Dr Thérèse Coffey

Damian Collins

Paul Farrelly

Mrs Louise Mensch

Mr Adrian Sanders


 Examination of Witnesses

Witnesses:  Lord Burns, Chairman, Channel 4, David Abraham, Chief Executive, Channel 4, and Anne Bulford, Chief Operating Officer, Channel 4.

Q1 Chair: This is the Committee’s annual session in which we take evidence on the Channel 4 Annual Report, and I would like to welcome the Chairman of Channel 4 Lord Burns, Chief Executive David Abraham and Anne Bulford. Damian Collins is going to start.

Damian Collins: Thank you. Firstly to Mr Abraham, in the Annual Report, you have characterised 2010 as a transition year for Channel 4. How far are you on that journey?

David Abraham: We are up and running with a new management team. Having settled our revenues down in 2010, the market recovered quite sharply, but on a monthly basis, so we were having to adjust our spend figures as we went. Certainly, it has left us in a strong position to invest in our schedule under the umbrella of creative renewal, which really has two aspects to it. One is the replacement of Big Brother as a very big franchise on our schedule. I like to compare it to imagining the BBC without sport or ITV without Simon Cowell. We are going through a very big change on our schedules

We feel that what this will do is really add to the sense of diversity on our schedules and we are already starting to see that, with that money going into comedy, drama, and the news and current affairs area, to give a more diverse experience for our viewers. So Jay Hunt arrived, the excontroller of BBC 1 in January. She is up and running; she is working fast and furiously to bring new shows to our channel, but we clearly have some way to go to realise our ambitions in terms of bringing new shows to air. The cycle tends to be 12 to 18 months to bring ideas to air. So we are a few months in and we are pleased with progress so far, but we have a lot of work ahead of us, too.

Q2 Damian Collins: I noticed that in your foreword to the Annual Report, you said that, with regard to revenues and commercially, you had a very successful year. I think probably more successful than you anticipated when we met last summer.

David Abraham: Certainly.

Q3 Damian Collins: You said that "due to a late upturn in the market, we were not able to invest this wholly in new content"-"this" being the uplifted income. Do you feel that there were missed opportunities last year; decisions you might have taken in terms of content investment that you did not make because of uncertainty about market conditions?

David Abraham: I suppose there are fast ways of spending money to acquire programmes that are finished and ready. The American market is one example of that. Then there are ways of putting money into the schedule that take 12 to 18 months to come to fruition. We think we have it about right. We did manage to put, versus our original plans, £50 million extra into our schedule, which certainly helped us to maintain our portfolio share and our core channel share in 2010, which was a satisfactory out-turn, but as you see from our accounts, we also managed to preserve cash above the norm at about £250 million. We do see around £50 million being a transitionary surplus that we are going to put to work in rebuilding our schedule and keeping up with the developments in television. It is a very competitive and dynamic time in our marketplace at the moment. Connected TV is coming. The internet is joining up with the linear services and that is requiring us to invest ahead to prepare ourselves for new forms of distribution. So we see this surplus as being beneficial and, had we spent it all, we would not be in such an advantageous position.

Q4 Damian Collins: Last year, Channel 4 cut the amount of money it spent on originated programme, but increased the amount it spent on acquired programming. Why was that?

David Abraham: That is right. It was partly the function of the increases coming in on a monthly basis, where no one in the ad market could quite call how long the upturn would last. What we were able to do is to say, okay, let’s pull forward some of our acquired spending, so Desperate Housewives moved back into the year, for example. We have stock we can move around in the financial year. So we made pragmatic decisions to use programmes that were available to us. It was a tactical move that was specific to the year. Our commitment to original programme is clearly fundamental, and I would expect you to see those metrics altering for 2011.

Q5 Damian Collins: So next year would you expect to see that there will be a greater increase in the amount you are spending on originating content than acquiring it?

David Abraham: We certainly are not going in a direction of spending more on acquisitions than originations; it was specific to the year in which we, for example, were able to acquire certain shows, movie packages for example that could support our schedule in the short term. This is really a function of the development lifecycles of programming.

Q6 Damian Collins: So in cash terms, you would expect next year’s accounts to show that you spent more cash on originating programmes.

David Abraham: Certainly, we would not be expecting acquisitions to continue growing. That is right.

Q7 Damian Collins: Yes, but the money you are spending on originating programmes, will that grow?

David Abraham: We obviously will have to look at the out-turn at the end of the year but our commitment to original programming across the pieces is fundamental and our commitment to working with a wider range of production companies and working in the nations and regions is very, very clear. So you would expect to see that developing in our accounts for 2011.

Q8 Damian Collins: So just to be clear, do you think in cash terms you will be spending more on originating programmes next year than you spent this year, in the last accounting year?

David Abraham: That would certainly be our ambition. Overall, our programming budgets for 2011 are relatively static. As we will probably come on to, the ad market for this year is turning out to be a fairly static ad market. The good news is that the gains of last year have held, so we are very committed to continuing at the same levels overall. So you should see originations within that context of a flat overall content budget proportionately increasing versus acquisitions.

Q9 Damian Collins: Right, okay, so in cash terms, might it be that the origination budget is static or even slightly lower than last year?

David Abraham: The total programming budget is likely to remain quite static. The proportions between acquisitions and originations could alter marginally.

Q10 Damian Collins: Right, okay, so about the same probably. So we certainly would not see the reversal in the cut-in, the investment in originated programming in the next year. I think that was about £20 million.

David Abraham: You ought not to. Remember that a year ago, we were working with a budget where everyone thought the ad market was going to be far lower than it turned out to be, so plans were set. Then, if the ad market starts to come back, the speed with which you can spend that money on original programming that can hit the air that year is constrained because of the amount of production time required. So if you start making decisions in May/June/July, it is quite tough, almost impossible, for example to get a drama on air in the same calendar year.

Q11 Damian Collins: But then presumably you are sitting on all this extra cash you did not expect to get in because of the big increase in the ad market. I mean, you made hundreds of millions of pounds more in ad revenues last year.

David Abraham: Yes, absolutely and we effectively spent half of it on content, on marketing new shows that were coming to air, and also on increasing distribution costs because we put up a Freeview HD service; we have investments in YouView. As I say, the next era of digital distribution requires an increased investment. So we see this figure of about £200 million to £250 million not staying static as we go through the next couple of years. It is a transitionary surplus. Obviously, we do not raise debt on the equity market, so we need, in our view, around £100 million as security and another £100 million to fulfil our codes of practice with production companies to pay up-front and to cashflow hundreds of projects around the country. So the sort of stable figure of our cash reserves is around the £200 million mark and the figure of £50 million that you are looking at there is probably a transitionary surplus.

Q12 Damian Collins: I think, having read the chapter in your report in creative ambitions, the amount of money you are spending seems to sit a bit oddly with that because you are setting up very ambitious creative targets. I do not think anyone would criticise the creativity of a lot of your programming. I think your channel research bears that out, but the amount of money you are investing in it is at best going to be static, despite the fact you have had growing advertising revenues.

David Abraham: There are two ways in which we are looking at our schedules. One is obviously the money that we were spending on Big Brother going into other genres, so in effect, within the schedule, that is an uplift. Secondly, we have a new team. A good idea is a good idea and we’re looking at a much greater diversity of ideas coming into our development pipelines now than probably in the past decade. So I think it is a mixture of the two things working together. Overall, our view is that Channel 4 can have proper impact in the marketplace, operating with a portfolio share above 11% as we do, and that the programme expenditure figures that we are working to allow us to continue to do that.

Q13 Damian Collins: You mentioned in the report that there is an uplift in £15 million for Film 4. If that is origination money, is that coming out of the TV budget to go into the film budget?

David Abraham: No, effectively, it is an allocation of the ad market recovery to film at a time when we felt it was very important to do that, obviously with the transition of UKFC to BFI. Our role is one of the three pillars in the movie industry and it allows us to do more projects working with new writers and new producers. So we felt it was right to make that commitment at the time, and I think it was welcomed by the DCMS that we did so.

Q14 Damian Collins: Are you making a decision to put new money into film-making but not into originating content for television?

David Abraham: It is a move from about £8 million or £9 million to £15 million, so it is a relatively small increase versus the programming budget overall. Just to be very clear, our programming expenditure did go up by £50 million versus our original budget for 2010. So by any measure, to spend £50 million extra within a calendar year is quite a fast run rate.

Q15 Damian Collins: Just finally, how much did Channel 4 spend in 2010 on first-run originations in your key public service content genres? I know the report says in terms of the percentage of airtime that you allocate to those that you still hit and exceeded your targets, but are you able to give a breakdown of how much of your origination budget for programming is spent on your core public services?

David Abraham: We can certainly provide you with much more detail, but what we have done in this report, and I hope it is recognised by the Committee, is that we have broken the accountability down by genre. We have gone through each of our genres and said, "How do we feel we are delivering to overall public service delivery?" because the range of measures in the Digital Economy Act 2010 are obviously far wider and more specific. So this, for me, is a very innovative step forward in our ability to make ourselves accountable to the broader philosophy of the Digital Economy Act in terms of innovation, working in areas of greater diversity and all of the other things that we are expected to do.

Q16 Damian Collins: I think if something could be sent after today, it would be interesting for us to see, of your origination budget, how much of it is going on first- run programmes against your main criteria.

David Abraham: Yes.

Q17 Chair: You previously gave us the figure for the amount of money you were putting into specifically public service content and this year you have not supplied that. I am not sure that is a step forward. I think that is a step back.

Anne Bulford: John, there is no difficulty with it at all. The number last year was £145 million and the number in 2010 was £143 million, so it is very similar. Within those genres, there are a number of quite significant build programmes, long film scripture drama, long film documentary, so the fall of one or two titles from year to year would make quite a difference.

Q18 Mr Sanders: Mr Abraham, you have been quoted as urging Channel 4 to take more risks. How would you assess Channel 4’s record of risk-taking under your leadership?

David Abraham: A year in, I think we are very, very proud of many of the new shows that are starting to come on air, whether it is, for example, looking at the huge Fish Fight season around the beginning of the year that was a very strong piece of public service broadcasting that has prompted a review at the EU level around fishing policy. Jamie’s Dream School, I think, has been discussed in this House. It is, I think, a very influential piece of programming on the topic of education.

Q19 Mr Sanders: Why would criticising the EU be risk-taking?

David Abraham: The risk, I think, is to do with interpreting our public service remit for our public and I think there are many different ways in which that engagement can occur; the format of the programming, the way it is presented.

Q20 Mr Sanders: It is an excellent series, but I do not understand why you would judge that as being risk-taking.

David Abraham: Let me give you another example in the drama area. This is England ’86, is an interesting example. Shane Meadows was a young filmmaker seven years ago making short films in the Midlands for our film unit. His career developed. He became a moviemaker and, subsequently, he started to make dramas for Channel 4. Now, there is a unique creative British voice who has never done drama before. He had never and probably would not get a mainstream commission as a dramatist but, because of our relationship with him, we were able to encourage him to make that creative transition.

There are quite a few examples of where we nurture people from, I suppose, kind of outside the mainstream and bring them to the public’s attention. In news and current affairs, we will tackle issues more boldly than others might. This evening, we have a very important documentary presented by Jon Snow on the killing fields in Sri Lanka, which we know contains material that people will find very, very challenging. We are expected to test boundaries and to draw attention to the matters of the day that we feel are important, and those are examples of creative risk-taking.

Lord Burns: A low-risk approach is to put on the programmes that you know have succeeded in the past and to put on a new series of them or to fill a large part of your schedule, as was happening with Big Brother, which you knew had worked year after year, whereas we are now moving to a position where much more of the money is being spent on shows that are having their first run. Some of them will work, and some will not work. I think it is that sense in which one is also talking about more risk-taking because, as with all things in life, you never know beforehand what is going to succeed and what is not, whereas if you are putting on long-established things that have had several runs and have shown themselves to be a success, I would characterise that as a low-risk approach.

Q21 Mr Sanders: So is it proving difficult to replace Big Brother?

David Abraham: We see it as an opportunity because you are taking a lot of money spent in one genre and one kind of programming and dispersing it among many others, as the report shows. So the interesting background is that Big Brother was a small daytime experiment a decade ago and it grew. So the way I see this is that you place a lot of creative bets in different parts of the schedule; it is about the people. Jay Hunt is a wonderful creative leader. She has galvanised her team. She is encouraging them to work with new creative partners. There’s a new sense of energy around the building at Horseferry Road and, from that, there will be a sense of trying new things.

In the comedy area, we’re working consistently with new talent: PhoneShop was a successful new show; Friday Night Dinner. Often from unique voices, many of whom will tell you that if it were not for Channel 4, they would not even have careers, let alone work. Joe Cornish has just made his first movie, Attack the Block. It is doing very well in the cinemas. When he launched that movie, he said that Channel 4’s appetite for working with non-mainstream creative talent is "second to none".

Q22 Mr Sanders: Going back to risk-taking, you have mentioned news and current affairs; you have mentioned drama; you have mentioned comedy, but the bulk of your output is documentaries. If you look at the website, you have 58 news and current affairs, 184 drama, 191 entertainment, 208 comedy and then 669 documentaries.

David Abraham: Yes, and there is a lot of innovation in documentaries too.

Q23 Mr Sanders: Where is the risk-taking in that?

David Abraham: There is a lot of innovation in documentaries. For example, we have invented a new genre of filmmaking using these very intensive rigs. I do not know if you are watching 24 Hours in A&E, which I think is a wonderful series. It shows the NHS at such a level of intimacy-

Chair: One Born Every Minute.

David Abraham: -which is incredibly powerful. This is a different kind of innovation. It is technical innovation, it is editing innovation and being able to tell stories in very, very new ways. As the Chairman says, One Born Every Minute has been a great success. These are new genres. The Sheffield Documentary Festival just happened last week.We experimented with an idea that did not work, Seven Days, but that was using a lot of social media in terms of a live documentary setting, so we are constantly pressing at the boundaries of that genre as well as the others that you mentioned.

Q24 Chair: Can I ask you: is Made in Chelsea a drama, a documentary or a comedy?

David Abraham: It is a hybrid.

Q25 Paul Farrelly: I thought John was going on to The Only Way Is Essex, but that is probably a different channel.

Chair: That one is ITV.

David Abraham: I am glad you are watching.

Paul Farrelly: That is uppermost in his mind, actually. I do not want to harp on the same theme, but when you break down the statistics, could we have them also for the digital channels as well, E4, More4 and Film4 in your estimation?

I think the figures in the report show that across the other channels, first-run origination fell over the last year. Lord Burns, as the relatively new Chairman, do you think that excluding Big Brother-excluding the elephant in the room-that 30 minutes of first-run originations on the digital channels per day is adequately fulfilling the public service content remit of Channel 4?

Lord Burns: When one is looking at the schedules for 2010 or indeed 2009, I think we have to appreciate that this was coming after what had been the most ferocious downturn in income from advertising revenues. A lot of things had to be adjusted during that period. Obviously, the number of staff fell. Expenditure on programming was obviously affected. It is bound to have, to some degree, an impact upon the schedules.

Our ambition, of course, is to do as much first-run origination as possible, but as we have explained many times in front of this Committee, Channel 4 has to make its living in a commercial market. It inevitably involves a certain amount of cross-subsidisation between different types of programme. We need bought-in programmes. We need some things that are going to make good revenues in order that we can spend them on things like Channel 4 News and some of the original programming, which does not necessarily-and some of the documentaries do not necessarily-in a sense make a return.

The challenge, as I see it, is to get the balance. Our ambition is to do as much of what you would describe as public service programming as possible. Our aim would be to have as few repeats as possible, to have as much of it that is new, but this all has to take place within the constraints of the fact that we also have to earn our living and that we have to have programming that is cost-effective and can be adjusted, depending upon how the marketplace is going, but programming that is cost-effective and that we regard as worthwhile.

We judge ourselves still very much, as you can see from the Annual Report, in terms of the impact that we are making, of what we are doing in the public service broadcasting area. The distinguishing feature of Channel 4 is that its aim is to be a public service broadcaster to produce high-quality content that is fit to have that label but which, nevertheless, can earn its living in the marketplace.

With the digital channels, we do some original content, but it is in the nature-and of course we now have a wider objective in the sense of some of that programming. It is counted towards the measure of our public service output. We are engaged in quite an elaborate amount of cross-subsidisation between different things. Subject to that and subject to being able to break even, we share your ambition. We see success as being able to increase the amount that is being spent that way.

David Abraham: If I could add to that, while the volume may be small, the impact of each of the shows on the digital channels is huge. The Inbetweeners is one of the most popular shows for young people and it is about to be made into what I hope will be a successful movie. Misfits has been a BAFTA award-winning drama on E4. Skins has obviously been very successful for some time. So there has been a very, I think, smart set of creative decisions. Okay, all digital channels do not commission as much as terrestrial channels but, where we do spend the money, we want it have real impact, real quality, and that was reflected in the fact that E4 was voted by Broadcast Magazine, our trade newspaper, as the Channel of the Year in comparison with terrestrial channels as well in 2010, which was a huge achievement and I think the first time that has happened.

Q26 Paul Farrelly: Just one supplementary, Lord Burns, again on the digital channels, clearly David has already explained that he does not expect the balance to alter more than marginally between acquisitions and first-run stuff. Clearly, you have to have a business plan. You have to make money. You cannot necessarily predict good news about advertising; it just happens.

Given all that, can you just give the Committee a feel as to how the board goes about approaching the subjects and targets for first-run programming on the digital channels? Have you started to think about setting more demanding targets or do you just go with the flow?

Lord Burns: No, the role of the board is to challenge the executive. It is to probe them. It is to ask questions and to see whether, in a sense, what is being proposed is the only outcome. Inevitably, this is built around a planning process; it is built around a strategy process as well as an annual budget and we look at the expectations of what our income is going to be. We have to make decisions too about, as David has already mentioned, the money we are going to spend on various channels-high-definition channels, for example, and things like YouView.

We then have quite a detailed examination of the proposals that are being made about programming by genre and what it is that we hope to achieve. We have started a process of looking at many of the things that are set out in the Annual Report ahead of time and we are trying to come to a view about where we want to spend the money to make sure that it is balanced between the different parts of our remit. Those plans are brought to the board and then the board looks at them in detail and, after two or three goes at this, signs it off. We hope that we then end up with something that meets our remit and we can afford to put on, and that will also maintain our competitive position in the marketplace, which we have to do in terms of the kinds of platforms on which we want to offer our material.

All budgeting, all planning, all strategic processes are, in the end, hugely constrained by just the marketplace, the competition, what it is you are capable of doing, but we certainly look at the categories of programming that we are engaged in and the extent to which we believe we are meeting our remit. What we have started to do this year is to set out in the report the way in which we, in a sense, wish to judge ourselves for last year. We are taking that forward as well in terms of making plans so that we can then see, at the end of the year, how far we have met them in terms of these various headings-investing, creativity and so on.

David Abraham: Hopefully, the chart on page 8 will give you some insight into the strategic background to how we presented this to our board in terms of ensuring that we were allocating money in a balanced way across the different parts of the schedule. So what you see here is our aim to always be, as it were, in the top right of that chart on page 8, with a high public impact and a commercial return, which many of our primetime hosts do deliver. Obviously, we also have other kinds of programming sources to deliver; the kinds of services that can then subsidise those things in the top left that are uncommercial but important to our public service delivery.

Q27 Dr Coffey: Channel 4 has increased its amount of spending on originated digital media by about 50%. I think it was up from 8% to 12%. It seems to be heavily focused on the 14 to 19-year-olds, where that is educational and schools-related. What criteria are you using to measure the extent to which digital media are fulfilling that remit, and is there a risk that it all seems to be online as opposed to a wider strategy by engaging with that age range?

David Abraham: Obviously, Channel 4 engages with younger people across the breadth of its schedule through Hollyoaks and many of our health education programmes-

Dr Coffey: And T4.

David Abraham: -and T4, as you say. So that is the backdrop of how we are a relevant brand to young people, but as you rightly say, we also are tasked with having ambitions that are more directed at engagement and a decision was made, as I think we discussed in the last Committee, to take some of the daytime programming that was not cutting through with that group and spend that money online. We are doing so to support the national curriculum in areas of personal and social education, and citizenship and community engagement. The report does show that we are growing our impact through the different initiatives that we have in that area. This year, we have a new round of initiatives that are being tested and developed.

So this is a work in progress, but certainly with the awards that we have won for projects like Battlefront and the new projects we have like Cover Girl, we feel that we have found a very creative way to engage with the audience. Social media are so profoundly and pervasively defining of this younger generation, so we feel that by making our projects relevant in that space, which increasingly they are, we are going to be able to offer the public service benefits that are central to our ambitions.

Q28 Dr Coffey: Okay, I will pop that on digital media. A slightly different digital thing coming up is YouView. You mentioned that earlier; you are one of the partners. When will YouView launch?

David Abraham: YouView will launch next year. As with many very ambitious and game-changing technology projects, it has been subject to marginal delay, but the product will be in test market this year. It is a game-changing platform that combines all of the familiarity and stability of the Freeview platform with the possibilities of broadband and IPTV connectivity. On a global scale, it is a big innovation. It is a big grouping of industries that are coming together to make it happen. We have a new Chairman, Lord Sugar, who is helping to lead it and it is very, very exciting. I have seen the user interface. It is very powerful, and I think it is going to bring a new wave of creative opportunities to broadcasters in the free-to-air public service phase.

Q29 Dr Coffey: Will it be ready by the Olympics?

David Abraham: Yes.

Q30 Dr Coffey: I agree with you that it could be very exciting. I saw an early thing and I am trying to get them to come and do a bit of a demonstration in Parliament. It is proving quite difficult. I see this YouView as a potential platform for local TV. Personally, I think it is probably the only way it will happen. Will YouView be opening itself up to allow other people to come in and share apart from the original partners?

David Abraham: YouView is an open platform, so absolutely. In the debate that we are all having around local, where everyone recognises that IPTV is the long-term solution for those ambitions, I think YouView is an important vehicle for that. Yes, it is an open platform and many other content providers are engaging with the platform. That is one of the ways in which it is going to grow and engage with audiences. Essentially, this is, from our point of view, about reinforcing free television in this country. We want to remain competitive both creatively and technically, and we think it is important that the platforms that we are distributed on have that strong element to them, although YouView will also have the capability to offer on-demand services for those players that wish to participate with it and provide those services, but our interest obviously is primarily in the free TV space.

Q31 Dr Coffey: Yes. I will not go on because I could obsess about YouView all day. There was a previous joint venture project, Kangaroo, which seemed to fall at the hurdle, as it were, for other reasons. We are fairly certain, are we, that there is nothing standing in its way?

David Abraham: From a regulatory aspect, the YouView proposition has been cleared, and it remains open and so we do not see any hurdles of that nature ahead of us. The challenge is technical; it is co-ordinating the different technologies in a way that is accessible and immediate, and we are working very, very hard to make it happen. It will happen next year.

Q32 Dr Coffey: Thank you, that is very encouraging. I will just move on to film now and then that is my batch of three. Under the Digital Economy Act, Channel 4 now has film production explicitly within your remit. What criteria are you using to measure your success of investment in British film?

David Abraham: Tessa Ross, who very ably runs our film team, would describe her primary ambition as to provide opportunities for new talent. That might be short films with new writers or new artists who have never made films before, so some of the money is allocated to completely fresh talent. Some of the money would be allocated to those unique artists who would otherwise not be able to get the funding for their film. The recent Mike Leigh film, for example, was supported by Film4. Then there is a third area that we are cautious about, but which we think is important, which is to co-finance those slightly more mainstream projects where we think that the financial return will be justified.

We have a mix of all three. I would put, for example, the forthcoming The Inbetweeners movie at the commercial end. Perhaps even hopefully the forthcoming film The Iron Lady starring Meryl Streep about the life of Margaret Thatcher, that would probably be at the mainstream end. At the other end, you have movies like The Arbor that won a whole slew of awards, which are coming really from the artistic community, working really at the boundaries of innovation in terms of style and form of content.

Q33 Dr Coffey: So if you are looking at your metrics of success, will it be about awards? Is it return on investment? How many are commercial?

David Abraham: I think, as with so many things in Channel 4, it is balance. If we just went super-commercial-there was a period when there was that ambition-I do not think that we would be providing as many opportunities for the new artists. At the same time, it has also been said that from a commercial point of view, why shouldn’t we, where appropriate, seek ambitious returns for our investments? Effectively, our whole film activity is a subsidy. It is not a for-profit activity, given the risk element in the movie business.

Dr Coffey: Sure, not 100%.

David Abraham: So if you go back to our core, it is to some degree a loss leader and that is fine because we provide opportunities for people who can go on to do more commercial things in the future.

Q34 Dr Coffey: Could you give me an example of some of your metrics because I kind of hear what you say, but what are say the three key metrics you are looking for from the films’ team?

David Abraham: From a commercial aspect it would be, what is the long-term payback of a movie? From a creative aspect, how many new writers would we have brought in in a period of a year and given opportunities to?

Anne Bulford: There is also something quite soft about the quality of the relationship with the project, which is very, very important because we are not a simple finance house. I do not think we see our role as saying, "We think this will potentially make money. Let’s put a number of hundreds of thousands into that".

Dr Coffey: No, of course.

Anne Bulford: It is the extent to which it is branded Film4, the extent to which our very talented development team who work with Tessa are involved in it in terms of exec producing it. David is absolutely correct that there is a set of financial criteria, which largely are about affordability and "will this cover its costs; might it make some return?" Then there are measures around new talent, people we have worked with before, established talent working in new areas that we talked about with some of the examples. Then British box office and its subsequent success when it is transmitted on Channel 4 or one of our portfolio of digital tranches is also a very important measure. Then that follows through to longevity, so we have some films in the Film4 stable with very, very long lives that we are very proud to have.

David Abraham: I think the absolute sweet spot over the last 12 months may be-a good example-Four Lions. Chris Morris, obviously a satirist for many years on Channel 4 on our TV schedules, went away and spent several years developing the Four Lions script. I do not think that was a movie that would have been financed by anyone other than Channel 4 and it was wonderful to see him picking up a BAFTA at the film awards for a first-time film. That is a really good example of the cross-pollination that we really enjoy seeing, with people coming from maybe artistic backgrounds, working in film and seeing that cultural exchange between different parts of the creative industry.

Q35 Chair: Thérèse mentioned local TV. How serious is your expression of interest in local TV?

David Abraham: We recognise that this is an important initiative for the Government and would not argue that localisation of media services is good for democracy, so we have been engaged in conversations and are exploring a variety of ways in which we could be of assistance. Obviously, the ideas are still forming and we would, in the process of discussing those ideas, want to understand the balance between those ambitions and the ones we have been given through the Digital Economy Act. So it is still early days but we are in active conversations and we are seeking to see how we can be of assistance where we can.

Q36 Chair: I understand you are potentially going to take on the task of airtime sales for a provider, but would you still be interested in providing the national spine yourselves?

David Abraham: We believe that the conversation has moved on, or is moving on, from that concept from the latest briefings that we have, so that is no longer a priority in our thinking. Had there been, I suppose, a tender for a new terrestrial slot, that would clearly have been something that we would have looked at, but we do not believe-

Lord Burns: We did work on a version of this that included a national spine, which would have been a prominent channel, but the latest statement from Government is not to pursue that course of action and to go down a different route. So, as David said, we are looking now at the extent to which we can help in the proposal that is being made, but which is still only sketchy and where we are still very short of information about how it is that it is going to work and what the product is and whether we can be of any help in terms of selling airtime.

Q37 Chair: I understood that the national spine is not ruled out. It may be that other alternative ways of delivering this prove rather difficult. If the national spine were still an option, is that something you would still go for?

Lord Burns: The national spine, with a prominent slot and subject to being able to make it work commercially on the same kind of basis is-as I described earlier, we need to do things-is something we would certainly continue to look at. In terms of the work we did, there were some attractive features of it, but it was going to be a bit of a stretch to be able to make it work. We were prepared to have discussions about how we might be able to cover cost. For the moment, the position we are in is that we have been told that that is not the agenda that is being followed and it is a different one. We continue to engage on that. We do see it as part of our role as a public service broadcaster, not to shut the door immediately on these types of proposals, but to be prepared to have a look at them.

Q38 Chair: Can I come back to something else Thérèse mentioned, which is the new remit you have been given under the Digital Economy Act for older children and young adults? A lot of the things you have talked about, you were already providing before the remit was given in some of the programming examples. What specifically are you doing in programming as a result of having been given the new remit?

David Abraham: Programming now, if you mean by that digital and linear, then obviously our focus has been in a digital space because that is where the younger people are congregating. There are examples on page 64 of the report of projects such as Cover Girl, Battlefront and Super Me. They are detailed there. Some of them have been award-winning projects, which we are very, very proud of.

Again, the key themes are citizenship; the transition period between schools is a big editorial theme. So supporting children as they go from a familiar environment to an unfamiliar one in their teens is one that a lot of the projects are dealing with; also, obviously health and sex education, which has always been a strong theme for Channel 4 both on our schedules and online. It continues to be a big focus. Across the board, those are the key themes and we continue and remain committed to innovate. It is certainly something that we are talking a lot to producers and digital production companies around the country about. We are talking about our priorities, and lots of good ideas are continuing to come in. Progress is being made and there is a lot more to come.

Q39 Chair: Now that you have a specific statutory requirement in this area, are you going to have a dedicated budget or a dedicated commissioner for this particular audience?

David Abraham: We have brought together, under Stuart Cosgrove, a creative diversity team, which includes a group of people who focus on education. Obviously, this is part of the development and evolution that we went through in 4iP. We were doing quite a lot of digital projects that were, in my view, quite separate from our remit. We brought them all of those resources in, so we have a very talented team and yes, we’ve a dedicated group of people.

Q40 Chair: You had a remit for education already. This is a new remit on top of education specifically about age range, so do you have a team?

David Abraham: Indeed, yes, we have.

Q41 Chair: Are they not just looking at education?

David Abraham: No, we have people who specifically look at education and we have also an education remit across all of the genres as well in the commissioning team, so it comes together on both sides. You will see educative content on our linear programming schedule as well as obviously very team-specific content on digital space.

Anne Bulford: There are two online titles coming up quite shortly and one is Who Am I? and one is Nightmare High. They both address that transition between schools that David was referring to, which will give you an example of the sort of flow of work that’s coming through from that team.

David Abraham: I would say Niall Ferguson’s Civilisation series that starts in a classroom is a very powerful piece of educative programming; Inside Nature’s Giants; Jamie’s Dream School, which I think created a fantastic debate between young people and teachers and parents about the dynamics in schools. I think our commitment is varied, innovative and groundbreaking in many areas. So I am very proud of the work that we are doing in this area. It is not the traditional schools programming of old that we would remember but where we are doing these projects, I think they have real impact and are working in very fresh ways.

Q42 Chair: Can I move on to audience? You say that defending the audience share of the core channel would be your principal focus. The audience share has now fallen to 7%. Do you regard that as about as low as you can go?

David Abraham: Let me put the figure of 7% in context. All the terrestrial channels over the last five to 10 years have experienced significant reductions because of the rollout of digital, so the proportionate decline of our main channel versus our terrestrial competitors over the 10-year period compares extremely well. It is absolutely the case that in the last quarter, we have been under some pressure as we get into this period of the comparisons of the Big Brother schedule to the non-Big Brother schedule, but I see this as cyclical. Certainly, it is my ambition to see Channel 4 main channel operating at 7%. We are fighting very hard to deliver that this year.

Time will tell how the new shows accumulate and when we get that stability back in the schedule, but the good news is that our digital channels are powering away at the moment, with fantastic growth over last year and this year. So from a portfolio point of view, the impact-and remember so much of the programming is moving from the main channel to the digital channels and being shared-our overall impact is being maintained. That is a strong message that I take to the advertising agencies where I, in fact, was this morning-to say that this development of digital is continuing and what we are focusing on now is ensuring that the very deep engagement we have on our programming is demonstrated in new and innovative ways to advertisers. I think Channel 4 is in a very strong position to demonstrate its value to advertisers in terms of the level of engagement that our viewers have because they are younger, more tech-savvy, more interested in engaging with our content. The growth of the 4oD platform, for example, has been market-setting and that is another example of how digital technologies allow us to maintain our reach, despite the fact that there is this structural decline in channel share, which all of the terrestrial broadcasters have experienced. Clearly, we want to arrest that erosion, but it should be put in the context of how Channel 4 has fared over a five- to 10-year period, which has been very, very good.

Lord Burns: There is still quite a lot of pressure to come in this area because, as digital switchover finally completes its journey, it means that more and more homes are multichannel, and the opportunity to watch other programmes increases, but we believe that the main channel is a very important part of what we do. I think it is important that we set ourselves an objective for that; that we do not simply say, "Well, as people are watching a greater variety of channels, it will simply decline and decline". We have to do our best both from a public service broadcasting point of view and what it is that we are given in our remit, but also from a commercial point of view because it remains a very good income-earner.

Q43 Chair: In terms of measuring audience, particularly audience reach, you use 15 minutes, but it is 15 minutes each month. The BBC uses 15 minutes each week. Yours is a rather less challenging target. Do you have weekly reach figures?

David Abraham: We can certainly provide those to you. We have them here and it shows that our weekly reach is holding up, as is our monthly reach. I think various broadcasters have altered their metrics at different times, but we are very happy to provide you with our data.

Lord Burns: Obviously, if you are measuring on a monthly reach, you get a higher percentage figure than you do on weekly reach, but it does not change to the extent that we have been able to look at this. It does not change very much the rankings of this except that, obviously, for the digital channels, in terms of their maximum audience, it is lower than it is for the terrestrial channels.

Q44 Chair: Finally, in your Annual Report, you have the opinion survey, which produces phenomenal results, saying that Channel 4 is miles ahead of any other channel on television on almost every measure. When you carry out that survey, are you talking to Channel 4 viewers or is it a general survey of all viewers?

David Abraham: It is an extremely sophisticated and deep survey that has happened for three years. We have a team of people both internally and externally working on it. It is externally validated. I think it is a 40-page document that you can study to look at our methodology. I hope that we wouldn’t be blamed for seeking and working hard to demonstrate the connection between the remit that we have been given and the data that our auditors are feeding back to us, because essentially that is the digital economy that I have inherited. There has been a big step forward this year in the level of transparency that is in this report by genre and a level of transparency, including those measures where we demonstrably are not going up, which we are sharing with you and with the public. I hope we will not be blamed for that.

Q45 Chair: It is not blame; it is just a question. Do you ask the question, "Are you a regular Channel 4 viewer?" before you ask all these questions?

David Abraham: Both, it is a statistically representative sample of our viewers and viewers in general.

Q46 Chair: But when you report these huge leads over other channels, is that from the regular Channel 4 viewers or is that from all viewers?

David Abraham: It is for all, because Channel 4 is for all of the people some of the time and people have a very strong set of opinions about what Channel 4 does. One of the things that attracted me to Channel 4, and frankly that gets me up in the morning, is the fact that it has such a distinctive brand. It is very clearly set in people’s minds, far more than any other television channel I have seen probably in the world. People do associate it with content that wakes you up and can be provocative. You do not agree with Channel 4 all of the time, but it certainly gets you to think. It is in an environment that is, to some degree, consolidating.

We think that that distinctiveness becomes more important and it appears to be becoming, in many of the measures, more important in the minds of the viewers. There is an awful lot of choice out there, but what is the quality of the choice? What is the point of view coming through? Channel 4 News still reaches around a million people every night. It is doing something very, very different in the area of news provision. That is recognised by people, and that is coming through in this data, and I think we should be very proud of that.

Lord Burns: It is very important that we do this qualitative research and look at qualitative measures. I can tell, only having been there 18 months, it is very easy for the attention to be on the audience figures. You know, night by night, you are looking to see how you have done. It is very easy to be very pleased when you see a programme that is getting a large audience, but we must also be asking, "Is that audience also satisfying the other aspects of our remit?", in that we have to balance the commercial figures and the audience figures with the extent to which we are meeting the remit in terms of these characteristics. I do not know of any other way of doing it other than trying to sample opinion. I have not gone into the deep-

Anne Bulford: We are not sampling opinion from the subset of dedicated Channel 4 fans. It is statistically valid across viewers as a whole. The questions, of course, are very much about the areas that are central to our remit and, therefore, the areas where you would expect us to be ahead, so that is the difference.

Lord Burns: About remit, yes indeed. I am sure there are questions that we would not-

Anne Bulford: If you asked the question, "Which is the channel that you most come together to watch for national events?", it would be unlikely to be Channel 4. You would see that sort of lead for BBC 1 or ITV.

Lord Burns: Indeed, the questions that we are focusing on are tailored towards our remit.

Q47 Chair : I understand. I do not criticise you for carrying out the research. I just wanted to test exactly what kind of research.

Lord Burns: Okay.

Anne Bulford: It is entirely valid, yes.

David Abraham: I would encourage you to look at the methodology because it is an extraordinary piece of work and we get state broadcasters from around the world coming to Horseferry Road to learn about how we are holding ourselves to account to our remit. It is globally an innovative way of making ourselves accountable and we do force ourselves to be very objective including, as you see, those areas where things might dip.

Q48 Damian Collins: David Abraham, you said last year that you thought you would never see advertising revenue for the core channel go back to its 2007 levels. In light of the quite dramatic improvement in ad revenues last year, do you think that is right or do you think you will expect, in future years, advertising revenue for the core broadcasting channel to exceed previous peaks?

David Abraham: The predictability of the TV ad market is low. My view is that there was definitely an overcorrection away from television. Advertisers became overcorrected towards the internet and they have come back. They are using the internet and television in very creative ways together now, which I think is as it should be. In the first half of this year, the market was building on the growth of last year. In actual fact, all the predictions now, from here on in to the year-end, are flat and in some months negative, as I think you have probably seen from some of the things coming out of ITV. This is another reason why we were cautious around the level of reserves that we felt we needed, because we wanted to keep our investment up.

Certainly, sentiment around this year’s ad market has gone from being marginally positive to plus five in this report, and that is now marginally coming down. I think there is a level of unpredictability, although looking further to the horizon-2012 and Olympic year, and the Paralympics-London is going to be the centre of so many big marketing campaigns, so we are hopeful that TV will continue to perform well in 2012.

Q49 Damian Collins: Looking at your total advertising revenue for this year, would you expect it to be around about the £800 million mark, based on the £794 million total revenue for 2010; around about that level this year and maybe a bit better next year because of the Olympics?

David Abraham: There is the market definition and there is also our performance within it. As we have been discussing, there has been some pressure on our core channel share, and that will necessarily be reflected in the share of advertising take and the margins you are going on to take in the following year. So there are performance dynamics as well as the market dynamics to take into account.

We also successfully negotiated a representation deal with UKTV last year, so our ambition is to transact around £1 billion worth of media value on behalf of ourselves and our third-party customers, which also include our joint venture with Box Television. So in a sales market that is consolidating, Channel 4’s position remains strong. As you probably know, our Sales Director of 20 years is stepping down this summer and we are in the process of finding a new leader for our sales team, so lots of change is going on there as well as in the creative part of the business.

Lord Burns: I think where you are right is that what happened in 2010 was a very good outcome compared to some of the gloom at the end of 2008/2009. Channel 4’s advertising revenue was just a bit above £800 million in 2007 and it went down to virtually £700 million in 2009. It has come back to touching £800 million last year. As David says, it is extraordinarily difficult to predict, as we saw last year, when the consensus of views at the beginning of the year was not much better than flat or, in fact, it may have been a further slight fall if I recall when I first joined Channel 4. So we have to be quite cautious about it.

David Abraham: Our focus is on innovation. Our focus is on looking at the advertising product we provide to the market and continuing to innovate with it. So whether it is the on-demand services, whether it is the growing area of being able to share deeper and richer levels of data about what viewers are interacting with, I see the future of our business model being tied very closely to us, continuing to invest and innovate in the core revenue streams. So while the market will define to some degree the shape of that, what will also define it is our ability to remain very competitive.

Q50 Damian Collins: Are you trying to develop and sell a deeper understanding of a more distinct market, which is intrinsically more interesting, more profitable to advertisers than other audiences are?

David Abraham: Certainly, I mean, we would say that the value of a spot on Channel 4 is significantly higher than one on our competitor channels.

Damian Collins: I am sure you would.

David Abraham: In fact, we can demonstrate that through a lot of statistics and research. So yes, we provide a premium product. It is a quality product. The British audience wants to come to, as you rightly have been discussing, British-originated content first. It still constitutes, even in pay platforms, well over 75% of the viewing that people want to come to. So yes, we want to continue to seek ways of demonstrating that value and, with the deeper forms of engagement that will come with YouView, we think we are in a position to travel down that path.

Q51 Damian Collins: Do you welcome Ofcom’s decision to review the sale of TV airtime? Do you think that is a welcome review? Some people have said they think it is an irrelevance. What is your view? Lord Burns is clearly tickled by the question.

Lord Burns: I think it is fair to say I have learnt over the many years of dealing with Government and with regulators that you accept the questions that you are asked in these reviews. It is not for us to say, "We would rather you were not doing that". They are doing it, we will participate in it and we will respond to it. My personal view-we do not have a company view of this at all-is that it is time to have a look at this. Whether anything significant will emerge from it, I have no idea at this stage, but when you are a regulated business you accept the fact that if your regulator says, "We want to have a look at this particular area" then you have a look at it without complaint.

Q52 Damian Collins: Do the potential outcomes of that review give you any cause for concern about your business model?

David Abraham: It is still too early days. I think we received a 70-page document on Friday which you could interpret many different ways, so I do not think we can really call it. As I say, our focus is on remaining competitive as a media provider in the commercial space, and that is linked to our model to remain independent and we believe we have a developing set of plans to do that, but we obviously will be engaging in those issues that are of concern to Ofcom, whether they are the dynamics of consolidated media buying or how technology will affect our ability long term to deliver our remit. I suppose that is the way in which we should engage with it.

Q53 Damian Collins: Just finally from me on this, when we discussed this with Ofcom a few weeks ago, there was a sense given from Colette Bowe that maybe it was time to consider relaxing some of the regulation of the market in terms of the minutage per hour for advertising, I suppose in the case of ITV the question around contract rights renewal. Do you think a liberalisation of the advertising market would be good for Channel 4 or do you think minutage should be standardised across all platforms, particularly as we move to a YouView model where the distinction between one type of broadcaster and another becomes much more blurred?

David Abraham: Sure, on our minutage, certainly we feel that the rules were set at a time when the conditions were very different in terms of multi-channel versus terrestrial. With the switchover, that becomes defunct. Certainly, we remain quite interested in looking at whether or not ways of harmonising down could be beneficial to the viewer and also potentially beneficial for the delivery of our services.

On the issue of CRR, I think our position has been that it remains the case that ITV is a very dominant player but, by any comparison, any marketplace, a 48% share is big. While we do not look to regulation to protect us per se, we would want to and are engaging in debates around what the evolution of that remedy might be in the future.

Damian Collins: Thank you.

Q54 Paul Farrelly: Just a quick supplementary on this amazing turnaround in television advertising. Michael Grade can be forgiven that he has been unlucky with his timing at ITV. What explains it? Why after all the years of gloom is the sun starting to shine again?

Lord Burns: I spent a lot of my life forecasting, particularly trying to forecast things over the business cycle.

Paul Farrelly: The economy is flatlining at the moment.

Lord Burns: It is, but when you get these very sharp cyclical movements as we had in the latter part of the last decade, it is very difficult to tell what is trend and what is cyclical. There is an underlying belief that there was some kind of downward trend in real terms of the share of television advertising in the economy because of the competition from other kinds of media. You then look at the period during the early stages of the recession when it was falling rapidly and it is not surprising that people feared that maybe this was the trend rather than the cycle. I think what last year shows is that possibly that view was overdone and that more of it was cyclical.

Although there is still, I think, a slight downward shift in the share of total television advertising in GDP because there are now other competitors, television audiences remain very strong. It is one of the things that has been most striking to me. Getting deeper into this, people worry about the music industry. They worry about the book market and the threats that they have had from digital media. Television, and linear television, has performed remarkably well during this period. I do not know to what extent it is just the innate value of the product, to what extent it has been all of the technical developments that have taken place, you know, big flat screens, high definition, multi-channel, a lot more live sport. The audiences remain strong, and linear television, despite the growth of on-demand watching, continues to do very well compared to many other media in the face of the challenge from the digital world.

David Abraham: We have a very creative and competitive environment here in the UK, where we are constantly innovating the ideas that draw the viewer back to the media.

Q55 Paul Farrelly: Do you have any feel-just very quickly, John-that advertisers are reassessing the effectiveness of their spending on digital media?

David Abraham: As I said earlier, I think what they certainly are doing is not excluding television in the marketing mix in the way that some were arguing that they might. Thinkbox, which is a very good trade body that we support, has growing evidence for the efficacy of television working in concert with digital media for the maximum effect. It is not an accident that sees spikes in their business model when they put a TV advert on. So it is about these models working together, and we think that provides lots of opportunities.

We think that the efficacy of television advertising may have been somewhat undersold at the back end of the last decade and at the same time there have been some great hits across the industry, which have brought people’s attention back. We are in a very dynamic environment now, where tablets are rolling out fast, where the relationship between the main screen and social media during the course of a broadcast are developing very rapidly. We can now see in real time what people are saying about our shows as they are going out, and that provides a very fast feedback loop in terms of recommendation and creative feedback. What is meant by convergence is a whole set of new opportunities, but they are also demonstrating in granular terms to advertisers how engaged the audience is with the content.

Lord Burns: The big areas of advertising that have moved-housing, real estate, job search-are not things that were significant in terms of television. Even nowadays-I know this from one of my other activities-people buy a lot of their financial products online. Yet, as you will know, there is an enormous amount of advertising of the consolidation sites on advertising. So television still, in a sense, has its role in terms of people who wish to drive people to their site in the first place.

David Abraham: Simples!

Q56 Chair: While we are on potential sources of revenue for you, may I ask a question. Your predecessors suggested that there might be a case for revisiting the terms of trade, particularly since the original intention to help small companies grow. We are now rather further beyond that. Do you think that we ought to look at this again?

Lord Burns: This is a very difficult area. One of the features that I notice about so much of the regulation in the television world is that it rapidly becomes out of date because very often the days pass of the things that the regulators have put in place. So we have seen the growth of the very large independent producers, when once upon a time it was felt that all of the power was with the television companies. We saw the same, in a sense, with control of ad minutage and so on; the feeling that power was with the broadcasters against the advertising agencies. There has been quite a lot of consolidation there and things change.

I have a general view that one should relook at much of regulation fairly frequently in fast-changing markets to make sure that it does not rapidly become out of date. Our main aim, you know, we want to have a good relationship with the independent sector. We commission all of our television programmes. We are terribly important to them. Some of them are very large, but some of them are also very small and we do not want to get ourselves in a position where it looks as if we are wanting to make their lives more difficult.

On the other hand, I do think that we have to continue to examine the way in which this market is working, how the rights thing is working, the extent to which the competition from all of the various broadcasters is changing that landscape. The Government or regulators need to say, "Are these regulations still as appropriate now as they were when they were introduced?" So that is a general point, without saying that we at all want to go to war with the independent producers. They matter to us as much as we matter to them.

Q57 Chair: So you are not lobbying for it, but there might be a case for it.

Lord Burns: Yes, well, I am saying that these regulations that we see in the television industry should never be thought of as being for all time because the structure of the market has changed at such a speed that some of the regulations put in place do go out of date. You need a process for recognising this. As it happens, there are all sorts of work-arounds that take place in this area, and people have to live together. They have to negotiate; they have to come to deals as to how things are going to be played out. I think it would be a big mistake to think that you can just put in regulations at one point and never look at them again and think that they will be right for ever more, because we have all seen in the last 15 years a dramatic change in the structure of the broadcasting industry.

David Abraham: Our own behaviour can, to a degree, define our own future in that we have made a very big commitment to make every effort possible to engage with small and new companies. We see that as part of our creative mission as well as a way in which our model works. Jay Hunt has already met with over 100 companies outside London in her first few months. We have followed through on last year’s committee. We have consolidated our team in Glasgow and we are hiring representatives in Wales as well. We are putting big projects out in the nations. 4thought TV, for example, is made in Northern Ireland, that is a show straight after the news five nights a week. So there are also behavioural issues around how we commission shows, encouraging our commissioners and incentivising them in terms of their own performance expectations to demonstrate an appetite to work with new companies and to deliver that part of our mission that is about developing new talent. That is terribly important to us, and we are going to continue to do that.

Chair: Thank you.

Q58 Mrs Mensch: If I could just conclude with a few questions on pay and I will start with the last one first since you have just mentioned Jay Hunt. You said that she is very key to your organisation. She has been brought in from BBC1. What is her remuneration package?

David Abraham: Jay’s basic salary is £390,000. She is performing a role which, in effect, is a restructure of the creative group. Effectively, she is doing the job of nearly three people who were doing it before. So Kevin Lygo left; Julian Bellamy’s role did not continue in the new structure; and Jon Gisby, who was doing all the online commissioning, also left the organisation. She has an army of creative people working for her and the role has been benchmarked and we think it is a competitive salary for the job.

Q59 Mrs Mensch: If it is £390,000 as a basic package, what is the total remuneration package with bonuses and pension contributions?

David Abraham: Yes, Anne. Is she eligible for the executive bonus scheme?

Anne Bulford: She is eligible for the executive bonus scheme, which operates up to a maximum of 30%, and she is eligible to join the defined contribution pension scheme. It is potential, sorry.

Q60 Mrs Mensch: Let us talk about bonuses and pensions. Mr Abraham, you got a bonus of £123,000 in 2010 for eight months’ work. Would you say you deserved it and why? As a corollary, during 2010 you received £81,000 as a contribution to your personal pension plan. That was 25% of your salary, which seems on the face of it pretty generous. What would your comments be on that?

David Abraham: If I may-

Lord Burns: I do not think it is for David to speak about his own remuneration. I think that is something for me. When we recruited David, we negotiated a package that was considerably less than that of his predecessor at Channel 4. It was more than he was earning in his previous job, but it was considerably less than his predecessor earned. The pension contribution, as I say, was part of that negotiation. Compared to the cost of defined benefit schemes, this is not at all out of line with what is normally given. Then there is a bonus potential.

The bonus is for everyone at Channel 4. It was structured last year so that there were a number of metrics that were set out at the beginning of the year, and 80% of the bonus potential was judged on how we performed against those metrics. That was the audience share for Channel 4, the audience share for the portfolio of channels, our share of the advertising market and that we met our licence obligations. Then the final 20% of it was determined by an assessment of personal performance. It was on that basis that I think David’s comes out at about 70% of what his potential was.

Q61 Mrs Mensch: Thank you. Ms Bulford, your total remuneration is £811,000 in the report and your former commercial director Andy Barnes received £606,000, these do seem to be very large packages indeed. Can you give us assurances that packages of this size are vestiges of the previous regime rather than a continuum? You did mention, Lord Burns, that Mr Abraham’s pay, as I clearly see, is very much down on his predecessor’s.

Lord Burns: Yes, and I should also say that Jay Hunt’s pay is very much down on her predecessor’s pay as well, despite the fact that she is now doing the jobs that were previously done by others. When you look at Anne Bulford’s remuneration, you have to take into account that there was quite a large sum involved in that that was the result of a three-year LTIP that happened to pay out in that year. That was something that was arranged obviously three years or more ago and we no longer have LTIPs.

Q62 Mrs Mensch: Can we expect to see a gradual diminution of packages of this size?

Lord Burns: As far as individuals are concerned, Anne’s basic has gone up because she has changed jobs from being Finance Director to being Chief Operating Officer, having done a period as acting CEO. So her base is up. The bonus will depend upon how we perform against the criteria that we set out, but there are no longer going to be LTIPs.

Q63 Mrs Mensch: The Hutton Report, which came out in the spring, recommends that from next year public bodies should publish the ratio of the Chief Executive’s pay to the median work force pay. What is the ratio of Mr Abraham’s pay relative to median work force pay?

Lord Burns: The ratio, depending whether you include bonus or whatever, is somewhere between 10 and 12.

Q64 Mrs Mensch: How do you feel that compares to other public service broadcasters?

Lord Burns: I do not have the other figures, clearly. I suspect that it is-I would be very surprised if it very far out of line.

David Abraham: Could I put this in context in that, obviously, we are a public service broadcaster, but we are tasked with generating our revenues independently. So our overall approach is to attempt to benchmark ourselves between our commercial competitors that we are competing with every day and obviously the public service broadcasters, where we have information available to us. Certainly, the direction of travel in the last 12 months-I am glad it has been recognised-is significantly reduced and we are very committed to running a lean organisation where we keep a tight control on costs. We believe that if you were to benchmark Channel 4, as an organisation that is currently in the business of transacting £1 billion worth of revenue, that the ratio is very competitive.

Lord Burns: I do not think that you will find, though, that ratio is out of line.

David Abraham: One gets into the realm of having to compare these metrics to schemes which include share options and other significant elements that we obviously do not have at Channel 4. Everyone works at Channel 4 because they are proud to work there and want to work there, but obviously we need to aggregate sufficient concentration of skills that can compete in the marketplace to deliver what we are tasked to deliver. We would aim always to be in that midpoint between the market and our public sector competitors, and that is where we believe we now are.

Lord Burns: If I take the top six people who were on the executive team two years ago, all those roles are now being done by five people and the total cost, run rate, of what people are now being paid and can expect to pay is a substantial reduction on what it was in 2008.

Mrs Mensch: Thank you very much.

Q65 Chair: Can we finally turn to Tramadol Nights?

Lord Burns: What is that?

Chair: You defended Frankie Boyle pretty vigorously to Ofcom, but Ofcom nevertheless found that the programme was in breach of the broadcasting code. Why did you not issue an apology after the Ofcom ruling?

David Abraham: Just to be specific, there were nine complaints about the programme, eight of which were not upheld and one of which was found against us. Obviously, we recognise in that particular case that a piece of humour that was contextualised in the programme late at night was then passed on in the media and, out of context, caused a reaction that we had not intended. For that reason, I corresponded with Katie Price and made it very clear that we only ever had a satirical intent and we did not intend in any way to focus the humour on a disabled child in this instance.

So we would like to move on from this. It happened in a context of making creative decisions, where the remit is to push boundaries, back talent and try new things, at the same time recognising our responsibility to all groups in society. Our commitment to disability issues has been shown across the board. Just last week, we launched a new series called Born to Be Different, which is doing really well and which we are very proud of, and we are very excited about the Paralympics. So certainly there are some lessons to be learnt for us on this case and maybe we will not get it right every single time. We are making hundreds of creative decisions a week. Certainly, we will learn from this experience.

Q66 Chair: When you responded to Ofcom, you said that the programme went through the most rigorous editorial vetting process, right up to the very highest level. Did you personally approve that particular broadcast?

David Abraham: In a project of this kind, the commissioning editor will obviously go through a compliance process. Where there is humour that is close to the line, it will be referred up. The series, and many of the jokes in the series, were referred up to me and there was a series of debates around many of the jokes in the series. We were trying to find the right line. The decision on this was a very finely balanced one and it was taken in the context of the intent to satirise the culture of celebrity. That was the framework for the approval, and I do still believe that the programme, in context, worked in that way, although I do recognise that the joke out of context did not work in that way.

Q67 Chair: Did you personally approve the broadcast of the Katie Price joke?

David Abraham: The referral process did come up to my level, among many jokes in this series that were pushing the boundaries and, as I say, out of the nine complaints to Ofcom, eight were not upheld, so I do believe on balance we got the decisions right. There were many other complaints and other issues that people now are no longer discussing. This was the one where our procedures were not found at fault but it was an issue of judgment. It is very difficult, I think, to deconstruct a decision about something as subjective as humour. Most people would say that there should be nothing that is out of bounds in humour as long as it is funny. Clearly, Frankie Boyle has his followers and people appreciate his humour. He clearly works at the edge of taste, but that is also the place where Channel 4 needs to be, but to be so in a responsible way.

Q68 Chair: Is Channel 4 still committed to Frankie Boyle?

David Abraham: Frankie Boyle has a big following and we are always open for business for new and innovative ideas. This is the first time he had ever done a sketch show on British television, so that was the innovation. We have a bias against censoring artists and we want to support freedom of expression. His humour is very much in this area of challenging political correctness, but we do recognise that the reaction out of context here was not what was intended.

Q69 Mrs Mensch: I have to say, Mr Abraham, I have been impressed by your evidence throughout the session. I was not aware of the specifics until I saw the evidence in front of me. The second joke, I do not know if I can repeat it. Can I repeat it in this context? Is it unparliamentary language?

Chair: I think most people are already aware of it.

David Abraham: I do not think there is any need to.

Mrs Mensch: I think there is, actually, because the second joke is, "I have a theory that Jordan married a cage fighter because she needed someone strong enough to stop Harvey from fucking her". This is a disabled little boy that we are talking about. I am bewildered that you can sit here and say that it is challenging political correctness and that you will not apologise to the little boy for having put him on a television programme in this context. Surely, no cultural remit could ever possibly justify such a joke. While Katie Price and her ex-husband may be absolutely fair game and I would be the first person to accept that, we are talking about a disabled child, and a joke about a disabled child raping his mother. Do you not wish to take this opportunity to apologise to the child, Mr Abraham?

David Abraham: As we have said, we absolutely regret the joke being distributed out of context and out of the-

Q70 Mrs Mensch: In what context, sir, could it possibly have been justified? What context would justify a joke about a little disabled boy "fucking his mother"? You say that it is out of context and that is the regrettable issue. I put it to you that there is no possible context that could ever have justified that joke and I would urge you-as I did with the BBC in the Fogel massacre-not just to reflexively defend, because you stick up for your channel, a clearly appalling decision. Will you not take this opportunity to apologise to the little boy?

David Abraham: As I say, we do regret and will learn from the experience of this satire being taken out of context.

Q71 Mrs Mensch: You are not answering my question, sir. What context would have justified it?

David Abraham: I am trying to argue in the context of the balance between delivering our remit and the context for this satire, which was against the context of Katie Price in her own television show in which her family was portrayed in certain ways that Frankie Boyle was seeking to satirise. I was convinced by the arguments of the commissioning team that the intention was to reflect on a media construct that had its own context, because there had been media discussions around Katie Price and how the family had been portrayed in the TV series that she appeared in over many years. There is no doubt about the fact that this was only ever intended to be humour in that context and satire in that context. I have made that very clear in my open letter to Katie Price.

Q72 Mrs Mensch: Your argument then is that in the context of satirising celebrity culture, had it been delivered within context, the joke would have been passable-a disabled little boy raping his mother. By name, he is named in this joke. He is named Harvey. A disabled boy raping his mother, you believe that context would have justified that joke then.

David Abraham: The evidence that was shared with me by the commissioning team went into a whole story in the media that had preceded and surrounded that joke, which I could certainly take you through after the session; I could share with you the context for it. The context was to satirise a certain story around Katie Price and her celebrity status and how the family had been debated in the media; the followers of Frank Boyle understood that context.

Mrs Mensch: I find that completely appalling.

Chair: I think we are clearly not going to agree on that particular matter.

Q73 Paul Farrelly: David has taken the brunt of the questioning here. Lord Burns, you are the Chairman of the company and stuff happens. You do not get everything right. You cannot get everything right all the time, but when something is needlessly offensive or sick, is it not the easiest thing in the world to put your hands up and say, "If we have caused offence, we are sorry"?

Lord Burns: Obviously, my role in this is to look at the whole process that was followed and the decisions that were made and to look at the Ofcom judgment. As David has said, we accept the Ofcom judgment. We will learn from this and we will, while not wanting in a sense to remove humour from the channel, we will endeavour to learn the lesson from it. I am content that it was never intended to offend or cause distress to the son; that it was humour directed at his mother, but personally if it has caused distress to the son then obviously I am very sorry. I would not like to think that that was the outcome. It certainly was not the intention. That is the key thing.

I am not disputing at all the conclusion that Ofcom reached about this particular thing. We got on the wrong side of the line and we will do our best to learn from that, but every now and again we get on the wrong side, I am afraid. It is one of those things, when you are pushing away at things. We have to put our hands up and say that we will learn lessons from this.

The Ofcom judgment, which I have read in detail, takes us through it and it found no problems with the way in which the commissioning took place, the processes that were followed, or the way the decision was made. It said it was about context and it said that the context was too obscure in this case and it was not quite clear.

Q74 Paul Farrelly: The BBC got it wrong with Russell Brand. They apologised. You have also said sorry and I think it is a good place to leave it.

Lord Burns: I am very sorry if it has caused any distress to the son because that was never the intention.

Chair: Finally, while we are on the subject of child protection, Damian Collins.

Q75 Damian Collins: I was going to ask about the Bailey review and your response to that as a channel. Firstly, you talk about the number of complaints you had on the previous programme we were discussing. You had 280 complaints about The Joy of Teen Sex programme, which I must admit, as a Member of Parliament, is one of the very few programmes I have ever had constituents writing to me to complain about. Do you think you need to review your programming to young adults and also the access of programming like that through 4 on Demand and on Trust Your Television to younger audiences?

David Abraham: We have a very strong commitment to engage obviously with young audiences and we would agree that we always should do so in an informative and responsible manner. We are aware, obviously, of the direction of the Bailey review and in actual fact very recently we broadcast a campaigning piece in primetime called Stop Pimping our Kids about how certain parts of the retail trade are selling and marketing inappropriately to very young people. I think we are in the same place here.

At the same time, obviously when engaging on public health issues such as sexual education, there are always going to be a range of issues about what is deemed to be appropriate. We have been commended over the years for engaging in these topics in a responsible way, but we do not expect everyone necessarily to be comfortable all of the time with the way that we do it. What we do know is that we are engaging with audiences and the intent is to be informative and educative, and that we are doing in a demonstrable way.

In general, we obviously recognise the watershed. We recognise our responsibilities as a public service broadcaster, and we pay close attention to our responsibilities in this area.

Q76 Damian Collins: Do you think you need to review any of your practices at the channel in light of the Bailey review’s recommendation?

David Abraham: We constantly review. The process of compliance is a dynamic one. We are constantly debating the material that is going on air. It filters through many levels, and great care is taken to ensure that what goes on air is responsible, particularly in these areas. So of course we are constantly asking ourselves that question, but at the same time we must cut through. We must be innovative. We must find new ways of dealing with challenging topics. Shows like Embarrassing Bodies may not be for everyone, but they have a strong aspect of public service to them. People are engaging with them and finding out about health issues through them and our programming for young people works in a similar way.

Q77 Damian Collins: Given what seems to be a relatively large number of complaints about a single programme, The Joy of Teen Sex, do you feel you should review whether that programme was appropriately pitched and may have crossed the line?

David Abraham: You say it was 280 complaints. What always I do in these instances is also look at the data we get back in terms of viewer response, which we get directly, often online or sometimes through the telephone, which is supportive of what we do. One of my challenges is quite often-and I think Frankie Boyle was a good example; 10 O’Clock Live, I hope some of you are enjoying that satire show-it gets as many people complaining as it does people supporting. You could argue that Channel 4 is doing its job well when it is stimulating debate and stimulating attention in that way. I would always want to be evidenced-based, if I came in and said that because we had complaints on one side, we had to change the editorial direction of what we are doing. Of course, this is an important issue, we do listen and review the complaints very seriously and we always operate within compliance procedures.

Q78 Damian Collins: Finally, do you feel that you need to look at how easy it is to access post-watershed programming through 4 on Demand? I do not think this is a criticism aimed particularly at Channel 4. I think in some ways the protection measures you have already are probably at least as good, if not better, than those that some other TV channels have. But do you think that is something that has to be looked at; that there needs to be greater security protection that parents can put in place to restrict access to post-watershed programming?

Anne Bulford: Obviously, the watershed is a function of parental control and the way in which we operate 4 on Demand is that, if you land on the site, you are immediately prompted to introduce parental control through a pin number mechanic. Then if you reach particularly challenging or controversial or difficult programming, you will be prompted again at that point. We look at it all the time and share with other broadcasters best practice and look at ways to deal with it and with how we publicise and from time to time promote the existence of the parental control mechanic when we are encouraging people to come to the on-demand service. So that pin number mechanic is the one that we use and is most widely adopted, but it is something that we constantly look at and share best practice on.

The other thing is through the programmes themselves, just as when you are watching a programme that is difficult or challenging either post-watershed or sometimes pre-watershed, the warnings are there. Those warnings are similarly repeated as you go through the on-demand experience.

Damian Collins: Although if you are an underage person, the warnings are properly not necessarily going to deter you.

Anne Bulford: Of course, but similarly if you are underage person watching a programme at 10.00 at night what you are doing is circumventing your parental control. So there is balance to be struck between censoring it because kids can get to it versus relying on the parental control mechanic.

Q79 Damian Collins: I think they are very different, relatively. Policing watershed when you are talking live programming and therefore restricting people to watch it at a certain time, I think, is different from a programme some of them watch through a computer at any time during the day.

Anne Bulford: It is different, but of course we have to consider the incidence of young people having televisions in their bedroom and all these sorts of things. No one disputes that this is a challenge, but the basic approach of enabling a parental control over the landing home page site to the programmes and trailing warnings is the best solution that has come up, as opposed to not making adult programming available at all in case young people stumble into it. It is a difficult challenge.

Q80 Damian Collins: I must say, based on the answers so far-and I do not dispute the seriousness with which you take these issues-the impression I get is that for you the Bailey review is a total irrelevance; that there is nothing you are doing as a channel that you will do differently as a result of the report of this document.

Anne Bulford: No, I do not think that is right. I think the issues that the Bailey report raises around sexualisation of children are issues we consider very seriously. As David has explained, it is actually a topic that we had a programme on, looking at the way in which images of children are used across the media and raising quite interesting questions around that and how that needs to be developed.

David Abraham: I will send you a copy of the show. It is a very, very strong show. It did very well. It deals directly with this issue. So we do take it seriously and we are paying attention to the Bailey review. At the same time, we have to judge on a daily basis how to engage our audiences in ways that older generations may question. I think this is a dynamic area, where taste and techniques do change.

Q81 Damian Collins: I think your response to this would be not whether you have broadcast a counter point of view to balance against other programming the report might be critical of, but whether as a consequence of it being produced you feel you need to do anything differently from the way you do it at the moment. On top of the processes you already have in place, from what you are saying, it does not particularly sound to me like you feel that you need to change your day-to-day activities as a consequence of the report.

David Abraham: Could you be specific about the day-to-day activities that you think may be pulled in question by the review?

Damian Collins: Well, there are criticisms in the review about the operation of watershed policy, in particular for broadcasters. Obviously, from what you said, you clearly do not think there is an issue there for Channel 4. There is a general complaint about the sexualisation of children by exposure to the wallpaper of what they see around them, and you clearly do not think that the programming aimed at younger people, certainly to do with sex education, that you broadcast is something you need to change or review. You clearly feel that the security processes you have in place at 4 on Demand are adequate. So I would say all of these things are things that are touched on by the report and, just on those subjects, there is nothing that you have said which suggests that you feel you need to respond to at all. You take into account what the report said, but you do not feel that you need to do anything differently.

Lord Burns: I will just say that they are issues that are constantly-it is not that we have just been prompted by this-being thought of and being addressed, report or no report. These are bread-and-butter issues that broadcasters have to make decisions about. All the issue about the technology of pin numbers and so on, and how to try to make it difficult for people to watch programmes they should not be watching, are things that are business-as-usual issues for us. So we are not coming at it blindly, there are issues that have been addressed and are done on a regular basis.

David Abraham: It is not a fixed thing. Basically, every programme has to be reviewed on its merits and Jay Hunt is responsible for that and then, when there are more complex issues, there is a referral up process and that can be discussed at an executive level. So it is very dynamic, it is not a "one size fits all, we are doing fine". It is constantly reviewed and we obviously pay close attention to the direction of this report and the spirit of it is something that we would also commend.

Lord Burns: We have a programme on tonight, the programme David referred to earlier, which is going out at 11 pm.

David Abraham: At 11 pm because of the strength of its content.

Q82 Chair: We will set our video recorders. I think that is all we have for you. Thank you very much.

David Abraham: Thank you very much.

Lord Burns: Thank you.

Prepared 20th June 2011