Examination of Witnesses (Questions 2240
- 2259)
WEDNESDAY 19 MARCH 2008
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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