Examination of Witnesses (Questions 1125
WEDNESDAY 7 DECEMBER 2005
Mr Andy Duncan and Mr David Scott
Good morning. Thank you very much for coming again. You know where
we are up to in this inquiry; we have done our first part and
I am going to come back to that, if I may, just on a few points.
We are now moving on to other areas which we did not have time
to consider properly in the first part; I suppose notably sport
in this session because we have already taken evidence on religious
broadcasting. Just on the first inquiry, we were unable to find
a figure for how much the Government stood to make from the sale
of the analogue spectrum and I wondered whether you could help
us in any way about this. Obviously, it will not be known until
it has been sold, but has Channel 4 made any estimate as to the
value of its own allocation of analogue spectrum?
Mr Duncan: Not in terms of what it might be
worth at the point of going to switchover, because it is a very
hard figure to predict. Clearly various estimates are kicking
around the place which other people have come up with. Our view
is that it depends partly on what the spectrum is used for. For
example, up to 14 channels will be released and one of the things
we think would be a very good idea would be to reinvest a chunk
of that capacity into building a seventh multiplex which is going
to be crucial in order to keep DTT up to date and technologically
robust. It is also going to be crucial if we are ever going to
see high-definition television properly available on DTT. If that
sort of policy decision were taken, clearly that would not really
generate any money at all, in fact quite the opposite, whereas
if it were sold off for other uses, potentially mobile phone companies
or things along those lines, it could generate a significant amount
of money. It obviously depends heavily on the economic cycle at
the time and, to some extent, how some of the current activities
that are taking place on developing 3G technology, on broadcasting
on mobiles and so on, takes off over the next few years as well.
Our view on the value of what we have is that historically it
has obviously been incredibly valuable. When it was one of only
four channels initially and latterly one of five it has clearly
been the main public subsidy or mechanism by which Channel 4 has
been allowed to operate. Any surplus we generate through commercial
revenue we keep and reinvest, but it has been a crucial part of
the whole model of Channel 4. It is reducing in value over time,
so if you were to value it now, it would clearly be less than
it was at its peak and our benchmark for that would be the lowering
of licence payments which both ITV and Channel 5 are making for
their spectrum. To be honest, by the time we get towards the end
of the switchover process, it will clearly be worth significantly
less again, unless it is used in some major different way. Our
feeling is that it is more about trying to find a replacement
for us for that indirect subsidy and possibly using some of the
spectrum at the end of switchover for new issues like high-definition,
but it is very hard to put an exact value on it.
But if you were the Government, you might look at it slightly
differently and wonder what the value to you, the Government,
would be if you sold this?
Mr Duncan: Yes. There is quite a wide range
of views. There are some people who believe there is potentially
quite a bonanza in store and potentially the economic windfall
could be one of the reasons for going for switchover. Others are
more sceptical as to whether there will be any real value in terms
of cost benefit and even the report which was done a year or two
ago indicated £1 to £2 billion maximum.
That is not an inconsiderable figure. I do not know what your
feelings are, but £1 billion to £2 billion seems to
me rather a lot of money.
Mr Duncan: It is a lot for Channel 4. The point
is that it is predicated on a few key assumptions and those assumptions
do not have to change much to wipe that £1 billion to £2
billion out. Our feeling is that the purpose of switchover is
not really around the economic windfall: it is more about citizen
benefits, consumer benefits, choice and some of those sorts of
Q1128 Lord Maxton:
I must say that I am not very clear on this. The switchover to
digital starts next year in some areas, but presumably the sell-off
does not come until the final in 2012, is that right? So that
means there is going to be quite a lot of expense between 2006
and 2012, which presumably is going to reduce the benefits from
selling off in 2012, particularly if by 2012 the technology is
such that there will be practically no value at all in it. Would
that be right?
Mr Duncan: The marketing campaign has effectively
started already and the first area Border is switching off in
2008. You are right that there is going to be a significant period
of investment and a lot of effort and upfront cost to drive the
switchover through before potentially the whole spectrum becomes
available nationally. I am slightly repeating what I said when
I came to the Committee before. From a Channel 4 point of view,
it is an easier life if switchover never happens; the old analogue
world suits us rather well. With a broader hat on, we support
the purposes behind it and think it is broadly a good thing to
do, but I do not think the major arguments are economic. The major
arguments are other arguments.
Q1129 Lord Maxton:
But in fact, the way the Government are doing it actually suits
you best really, does it not? It suits the terrestrial broadcasters
to keep digital terrestrial rather than going to some other form,
some other way reaching every household.
Mr Duncan: What would suit us best is not to
have switchover at all.
Lord Maxton: Given that, the next best
is . . . ?
As a working assumption, we can take it, can we not, that the
Government are going to have some receipts from the sale of analogue?
There has been a slight assumption up to now that once we have
gone to digital, analogue will simply fall to the ground and that
will be that, but that really is not the case.
Mr Scott: That is a correct assumption and it
will depend on the use that public policy puts this spectrum to.
There will be a process, which Ofcom will manage, of allocating
the spectrum in due course and of course it is the Government
which will get any receipt which comes from that.
May I just ask you a second question? Given that, what is your
view on the costs of digital switchover? Should those be met by
the Government out of the receipts of general taxation, or should
it all be placed on the licence fee?
Mr Duncan: It is a decision for Government.
Their current thinking that it will be done via the BBC seems
to us perfectly appropriate. The BBC have historically taken on
the responsibility for driving through some of the broadcasting
changes that we have seen. In particular, the BBC have this imperative
of universality, so they are putting hundreds of millions of pounds
a year into their various digital services and up to this point
there are licence fee payers paying who still cannot get those
services or certainly cannot get them free-to-air. So the BBC
seem perfectly appropriate to us and clearly you have different
chunks of cost. You have the transmission build-up which they
absolutely have to do simply to deliver their services to their
audiences. Taking on a key role in the marketing and communications
campaign is perfectly sensible and they have air time availability
to do those sorts of training type campaigns and so on. There
are clearly other options, but it seems to us a perfectly reasonable
way to go.
It does not trouble you that it is a regressive form of taxation?
Mr Duncan: You get into the whole issue of how
the BBC are funded. Our feeling is that it is appropriate, although
there clearly are other options.
Q1133 Baroness Bonham-Carter of Yarnbury:
I think they may need a little help from Channel 4 on the marketing,
but that is just a personal opinion. I should like to ask you
a question about the Window of Creative Competition which you,
in your previous evidence, supported but you did say it had to
be managed very carefully in order not to, to quote you, "feed
big fat indies". Do you think that the way this Committee
have recommended that the BBC should set indicative targets within
WOCC satisfies your concerns?
Mr Duncan: I first of all welcome the fact that
the Committee have picked up on the issue. I guess my honest view
is that I do not think indicative targets are strong enough. Having
spent three years at the BBC, if there is not an absolute requirement,
it will get lost in the wash. Even since we last spoke about this
issue our feelings on this have strengthened, because it is really
clear now that within the independent sector a few very big independents
are merging, buying up other independents; you have probably seen
some of the deals yourselves, the likes of Shed, who recently
bought Ricochet, RDF who have just bought IWC and so on. They
are very good, very strong companies and in most cases Channel
4 is their biggest customer still, but it is getting harder and
harder in fact to secure quality programming from some of the
small- and medium-sized independents and that is a particular
issue outside of London. It is almost inevitable that the BBC,
unless they are forced to do otherwise, will put a disproportionate
amount of extra spend into the big, strong, London-based independents.
In some casesgroups which have bought up one or two regional
offices to satisfy round the back doora real opportunity
would be missed. If an appropriate amount of that moneyin
our case it would be 30 per cent and something similar for the
BBC would work very wellhad to be spent properly to help
drive regional development, it would be a fantastic thing for
the independent sector and it would also strengthen the available
supply base outside of London for other broadcasters including
ourselves. My sense is that it has to be an absolute requirement
on the BBC, otherwise, if it is just a good intention and they
are given some indicative targets, it will get lost.
Q1134 Baroness Bonham-Carter of Yarnbury:
Picking up on what you were saying about the regional companies,
we were up in Manchester recently and they were saying that a
lot of the big London-based independents have opened offices up
there. Now those offices will obviously employ local people. Does
that not satisfy your desire for the BBC to invest in the region?
Mr Duncan: That is part of the answer. It is
perfectly reasonable for some of the regional spend to be with
major groups which happen to have a regional office; that is perfectly
legitimate. There are also mechanisms which could be put in place.
In our case, we source programmes from over 300 independent suppliers,
substantially more than anybody else does, and quite a few of
those are one- or two-person operations which literally make perhaps
one or two programmes in a year. Out of that breeding ground you
get some very innovative new companies emerging and it is a real
struggle regionally. Being very specific, it would be fine for
the BBC to put some money into the Manchester branch of Endemol
or the Manchester branch of RDF, but you also want BBC money going
into the little independent in Newcastle or in Bristol or in North
Wales or wherever it might happen to be. A regional quota could
work with some sort of guidelines around spreading it across a
mix of different sized companies as well.
Q1135 Baroness Bonham-Carter of Yarnbury:
And that regional quota would be operated through . . . ?
Mr Duncan: There are several ways of doing it,
but in the same way that the 25 per cent to 50 per cent WOCC has
to be managed and, prior to that, the old 25 per cent quota had
to be managed and reported on by the BBC, you would simply put
in place within that, that a minimum of 30 per cent has to be
spent outside London.
May I ask just one other question. Do you think there is a case
for Channel 4 as a not-for-profit broadcaster and, for that matter,
the BBC as a licence fee funded body, to be allocated free digital
spectrum by Ofcom?
Mr Duncan: Yes.
And have you put that case to Ofcom?
Mr Duncan: Yes, we have. It is a very current
and live debate for us at the moment, which is back to the conversation
that we had before. We are doing very well in the short term,
but we are increasingly anxious about the pressures in the medium
to long term and, almost by the week, life is moving on. We saw
the Virgin/NTL deal, we have the cable merger which is taking
place, Sky have bought EasyNet and so on and so forth. Our own
sense is that some of the competitive developments which are emerging
mean that we are perhaps two to three years away from when some
of the pressures really start to bite, not least with the switchover
process coming in as well. Capacity has historically been a very
good way of helping drive the public service model, both in our
case and the BBC's case and, going forward, we think it is one
of the best ways in which you could underpin Channel 4. We are
pushing quite hard on some opportunities, which we are discussing
both with DCMS and with Ofcom, which exist specifically at the
moment around possible use of some of the BBC capacity and the
possible windfall that will come through if 64 QAM is adopted
through switchover. In both cases we think it is a very good way
of giving Channel 4 more head space through capacity.
That would mean Government giving up potential revenue, would
Mr Duncan: There are two quite distinct options:
one of which is complicated and I suspect will take some years
to resolve and one of which could be done very quickly. The complicated
longer-term option is what you do with the released analogue spectrum.
Do you sell it off and maximise income or do you reinvest it to
create the chance to do high-definition, those sorts of issues.
I am sure that would be a process of some years of debate and
there is the big International Spectrum Conference next year which
will be part of that. The very specific short-term opportunity
that we see, that we are currently discussing, is that the BBC
has a commitment to run Five and S4C and S4C2 on their BBC multiplexes,
one of which is controlled by Ofcom and one of which is licensed
directly by Government. Capacity will be available outside Wales,
because S4C will run just in Wales on DTT, and Scotland in the
other case because of the Gaelic service. It is very, very unlikely
that the Treasury or Government will take a decision to take that
capacity out of public service broadcasting and there is a very
simple opportunity to rebalance how that is allocated. We are
using our spectrum very efficiently. We have run out of spectrum
actually and are having to buy it on the open market at a very
expensive price. The BBC are using theirs very inefficiently.
There is a very simple opportunity which could be taken literally
in the next six months or so, alongside the White Paper and the
licence fee. We are trying to differentiate between a very specific
short-term opportunity to reallocate some capacity from the longer-term
policy decision about whether more capacity in total is put into
Is there any estimate of how much it would actually cost you if
you were not allocated free digital spectrum?
Mr Duncan: Yes. We have acquired two sources
of capacity this year, two slots from National Grid Wireless,
and although the figures are actually confidential in terms of
how much we paid, the press has speculated that the last one was
in the region of £12 million. We have certainly had to pay
a very significant amount of money which we have decided to do
as a premium for certainty now. The market is obviously developing
very rapidly and if we are going to get on and launch things like
More4and we are looking at other channel ideas including
Film Four going free next yearwe have to do them now while
the market is developing. Our assumption is that we will not have
to continue to pay those very high prices indefinitely and at
some point it will be a clear way to underpin us by providing
capacity in some other way.
Mr Scott: Certainly going forward there is the
idea of spectrum charging, which I know the BBC have written into
their licence bid. The concept of spectrum charging was trying
to look for efficiency in the use of the spectrum and the allocation
of the spectrum, but the way the forecast spectrum is allocated
it is money which will just come straight from the programmes,
so it does not actually lead to any behavioural change.