Select Committee on Communications Minutes of Evidence

Examination of Witnesses (Questions 2240 - 2259)


Mr Luke Johnson and Mr Andy Duncan

  Q2240  Lord King of Bridgwater: How much?

  Mr Duncan: The actual split is commercially sensitive; we could dig it out and arrange to provide it for you but it is not actually published in the public domain how that is split.

  Q2241  Lord King of Bridgwater: You have taken the decision to increase the numbers of Despatches programmes and presumably that must have been a board decision.

  Mr Johnson: The board never gets involved in individual programme strand decisions. What we do is the overall decisions at the time of budget as to the deployment of funds on genres and particular strands but not necessarily individual programmes.

  Q2242  Lord King of Bridgwater: Can you tell us what the inflation cost increases have been of ITN providing you with the service of the news on that contract? Is there a public figure on that?

  Mr Duncan: Again we can arrange to find some information. We spent somewhere in the low twenties in total in terms of news and in programme cost terms that has gone up below general programme inflation. There has been substantial above RPI inflation programming where you have US acquisitions where you have talent related costs.

  Q2243  Lord King of Bridgwater: The Ministry of Defence have a completely separate inflation index. You are nothing like the RPI I imagine, and yet if you start looking at the licence fee and start looking at your revenue coming out of some extra share of the licensing fee, that will then get linked into the RPI.

  Mr Duncan: We can certainly provide more detail on specifically news and current affairs. To pick up on what Luke said, there are two very substantial financial documents we can make available. We publish an annual report and accounts every year that details everything; it is a FTSE 100 type annual report and accounts in terms of a financial document. Last year's copy is already available; this year's will be published at the end of April. We also did a very fundamental piece of work around our funding and programming costs as part of that last year in conjunction with Ofcom and LEK. They themselves then went on to do a major piece of modelling work; this is a very long document indeed which went into great detail. The broad thrust of what you are saying on inflation is that if you take the costs of running the business—which for us are quite low but having an office and an infrastructure and rent and rates we are subject to the cost pressures any business is—within programmes (which is by some distance our biggest cost) the public service type of programming is probably the other way round, it is finding suppliers who are prepared to do it because there is very little export potential and people cannot export the formats to the States, but the costs have not gone up that fast. The more popular programming where there are formats or there is competition from ITV and the BBC, there is hugely above inflation cost increases. That sort of analysis and breakdown is laid out very clearly in the document we did last year and that Ofcom and LEK subsequently looked at. We can make as much information as you like available.

  Q2244  Lord King of Bridgwater: It is going to be at the heart of whether you are going to persuade government that you do not have enough money to carry on your public service broadcasting.

  Mr Johnson: The critical factor is that it is not the costs in news that have been the problem, it is the surplus we can generate on other forms of mainstream entertainment programming, in particular if you look at the history of Channel 4 part of the key secret to its success has been enormously profitable US imports and that source of income, if you like, has steadily dried up in recent years as the cost of buying those programmes from Hollywood has increased dramatically, partly because of demand in the UK from other broadcasters of one sort or another has increased such that, for example, strands of US imports have gone up five or six fold over recent years, completely eliminating the significant surplus that we would then decant into making loss-making news programmes.

  Q2245  Lord King of Bridgwater: That is my point about different indexes. We have been talking about all sorts of things such as should we top slice the licence fee or should we do other things like indirect funding, gifted spectrum, tax breaks, direct public subsidy, all these ideas but they are all dependent on whether you actually need the money.

  Mr Duncan: On that point the simplest way we would tend to try to look at it is to say that we have had a model over 25 years where we have had a highly valuable analogue spectrum subsidy. Had the Treasury sold that commercially it would have been worth an average of £150 million a year in current money over that period of time. That has been the mechanism, together with profits being made on things like acquisitions and other more popular programmes that have funded the loss-making programmes. The work we did which Ofcom and LEK agreed with is that the revenues are under pressure—back to the earlier advertising point—but also our ability to make profits on things like acquisitions and different formats has also diminished. There is a strong consensus, I have to say, between ourselves and Ofcom and LEK that there is likely to be a funding problem.

  Q2246  Lord King of Bridgwater: You are keeping your powder pretty dry; what is your preferred option?

  Mr Johnson: We obviously have our views that we discuss extensively at the board but ultimately it is for you and your neighbours to make the decision.

  Q2247  Chairman: It is difficult for us to make a decision if you do not tell us what your views are.

  Mr Duncan: What we have said very clearly is that we think there is a gap going forward roughly the same size as the historic spectrum subsidy, so somewhere between £100 and £150 million.

  Q2248  Chairman: That is by 2012.

  Mr Duncan: Yes, but that gap comes in before then. Already this year we have had to cut the programme budget back and again next year we will have to cut the programme budget back. Very specifically we are saying that we want to remain as commercially self-reliant as we can and we think the 85% commercial self-reliance historically we can still achieve going forward through prioritisation, through self-help, through keeping the overheads down to a very low base. Having said that, we are very clearly saying that we do need a new form of public subsidy or public support to replace the analogue spectrum of the same order of magnitude. There are half a dozen ideas, as you mentioned, that are kicking around. As we understand it Ofcom are planning to publish a range of ideas in their document in the middle of April and then there is a process over about six months where they want to look at those options with some care. Our view is that we should work with them in that process and I think we have said in the document that we would aim to have a preferred position by this autumn. We want to work with that Ofcom process and indeed there is a government think tank process. We do think it needs to be looked at properly but urgently. We would ideally like to get to a preferred option within six months.

  Q2249  Baroness Bonham-Carter of Yarnbury: One of your board members has been quite vocal in front of us and suggested that the £600 million that the BBC have allocated to switchover should just be rolled over basically and that this would be a nice neat way of not appearing to take licence fee money but would be a source of resources. I do not know what your response to that would be.

  Mr Johnson: There is an elegance to it. Clearly, as someone said when we launched Next on 4 the other day, what we certainly do not want to do is get into an unseemly fight with any other public service broadcasters over the money they receive. Ultimately it is for the legislators to make the decision. We have told them the amount, we have told them the timing and we are working with Ofcom to come up with possible choices. That is one possible source.

  Q2250  Baroness Bonham-Carter of Yarnbury: In the past you have expressed concern—Mr Duncan has anyway—that money from the licence fee ties Channel 4's hands in a way.

  Mr Duncan: It is clearly one of the options that Ofcom want to look at; it is clearly one of the options we have had conversations about. There are obvious pros and cons to it, it is fair to say. I think the particular thing that Lord Puttnam mentioned had an additional potential issue which is that it is not yet clear whether in fact there is any spare money there or not. There is a certain amount of the licence fee which has been ringfenced to cover switchover; there has only been one area so far—a small town—bigger areas start to happen next year. I think the early view is that it may well be the case that there is some spare money within that ringfence but I also think the view is that it will be a couple of years' time before anyone can say for certain. I think there are almost two sets of issues, one is the principle of the licence fee as an option and the second is the practical issue in that case.

  Q2251  Baroness Eccles of Moulton: I would just like to ask about the growing funding gap between now and 2012. You say you would like a decision by the autumn; would you see some arrangement being made whereby the increasing funding gap which is causing you to cut back on programmes as you have just said might be partly resolved by some measure coming into play based on the outcome of Ofcom's and your work together which would help ease that funding gap?

  Mr Johnson: Yes, precisely; that is what we want. We want a resolution so that we are not forced to make what we think will be very damaging cuts to our provision of public service broadcasting that we think will diminish what is an important asset.

  Q2252  Chairman: Is the trouble with top slicing—not the greatest phase, but taking money from the licence fee—that the one certainty of that is that you are taking money away from public service broadcasting and from the BBC by definition?

  Mr Johnson: As I say, we do not want to get into that row.

  Q2253  Chairman: It is quite difficult for you to avoid a row.

  Mr Johnson: The BBC does things like buy American programmes and overseas films; I do not think that is all public service broadcasting, is it?

  Q2254  Chairman: Any more than Big Brother is public service broadcasting for you.

  Mr Johnson: Yes, but we will always, we believe, generate the substantial majority of all our revenue that pays for programming through commercial means.

  Q2255  Chairman: Reading between the lines—which is actually quite difficult—it seems to me that you are trying to get some sort of agreement with the BBC on this.

  Mr Johnson: Clearly there is a finite pot and it makes sense to have an agreed solution rather than the alternative.

  Q2256  Chairman: I think the answer is "yes" to that point.

  Mr Duncan: To my mind the challenges are very clear. There are one or two cynics but I think there is a general acceptance that the old model is now not working for obvious reasons and there is a funding problem coming. I think most people would accept that. I think what we have tried to lay out in the document here is why we think Channel 4 should remain a public purpose organisation with the unique role we think we can play and, very importantly, the complementary role we play to the BBC. It is not just the direct impact we have as Channel 4 to the public—which is very big impact—it is not just the wider benefit we have to the creative economy but actually the third big point is that we have an indirect, very effective raising of the quality bar with the BBC in terms of programming. For example, in the BAFTA nominations yesterday Channel 4 was the top nominated channel and typically Channel 4 does keep the BBC very sharp. Ideally what we want at the end of this is a strong public service broadcasting system where—I think this is Ofcom's phrase—the BBC are the cornerstone of that system and we want Channel 4 to be the sort of cornerstone of providing plurality within that system. At the end of the day we want Channel 4 to be there very strongly in order to compete with the BBC.

  Q2257  Chairman: The Government are going to make a profit from the sale of analogue. One option which is open to you is to actually go to the Government and say, "You are making a profit out of the sale of analogue, how about having some of that money back"?

  Mr Johnson: Exactly. That might be an alternative. We would support any alternative that delivered the funding in a certain manner so that we could carry on doing what we are doing. We are not, as I say, desperate to have any specific arguments; we want Parliament to make decisions.

  Q2258  Lord Maxton: Over the next few years, up to 2012, the BBC basically has £600 million for digital switchover. The speed at which people are moving to digital of their own accord will mean that that £600 million will not be used in its entirety, maybe very little of it. Do you think you ought to get a part of that?

  Mr Johnson: It is certainly one option. It might seem an elegant solution, as was already indicated. I guess it is for the regulator, Ofcom, to work through the possibilities, make a recommendation to Government, for them to make a decision and pass the legislation.

  Q2259  Lord Maxton: Coming back to costing the news, I do not quite understand what you are saying. Presumably one of the reasons you have the news at that point in time, at peak time, is because you cannot sell advertising around it as easily as you can around other programmes. Would that be right?

  Mr Johnson: Yes.

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