A privatised future for Channel 4? Contents

A privatised future for Channel 4?

Chapter 1: Background

1.Channel 4 Corporation (C4C) is a publicly owned but commercially funded public service broadcaster with a distinctive role in British broadcasting. It has no in-house production, but commissions all of its British programmes from UK independent production companies. Its primary source of income is advertising and any surpluses either go back into paying for content or to maintain a cash reserve against any future shortfall in revenue. It uses revenue from its more profitable genres to cross-subsidise loss-making genres such as news and current affairs.

2.Parliament has given C4C a specific remit, regulated by the Office of Communications (Ofcom). The six principal obligations of the current remit as described by Channel 4 are:

3.C4C is a statutory corporation with a unitary board of non-executives, including the Chair, (appointed by Ofcom, subject to government approval) and executives (appointed by the board itself). Channel 4 is the main channel of C4C and currently has the sole responsibility for delivering the remit. C4C has also developed a portfolio of non-PSB commercial channels (More 4, E4, Film4, 4Seven and 4Music), as well as five HD and +1 channels and the All4 digital service.

4.Throughout this report the term that will be used is C4C unless specifically referring to the main channel which will be referred to as Channel 4. We recognise that many who gave evidence use Channel 4 as shorthand to refer to C4C.

5.Channel 4’s audience share last year was 5.92 per cent, making it the fourth most watched channel in the UK, after BBC1, ITV and BBC2. The audience share for the entire C4C portfolio of channels was 10.63 per cent, ahead of BBC2. C4C reported total revenues for 2015 of £979 million, making it the fourth biggest broadcaster in the UK in terms of revenue, behind BSkyB, BBC and ITV. The high quality of its output is internationally recognised. This year C4C won more Royal Television Society (RTS) Programme Awards than any other UK channel and had 26 British Academy of Film and Television Arts (BAFTA) TV nominations, winning seven.

6.C4C plays an important cultural role in the UK as a public service broadcaster with unique responsibilities. An Ipsos MORI survey commissioned by C4C in 2014 showed that Channel 4 scored significantly higher than other public service broadcasters on delivering on important remit characteristics such as cultural diversity and distinctive programming; as a home for alternative voices and showing the views of minority groups in society; and for taking risks and tackling issues other channels would not.2 Channel 4 has been a major factor in the creation, development and success of the UK independent production sector which now has a turnover of £3 billion per year.

7.Since its launch in 1982, Channel 4’s structure, ownership and remit have been reviewed on a regular basis by Parliament. The Broadcasting Act 1980 set up Channel 4 as the Channel 4 Television Company, with a not-for-profit, publicly owned model, as a subsidiary of the broadcast regulator, the Independent Broadcasting Authority (IBA). It required Channel 4 “to ensure that the programmes contain a suitable proportion of matter calculated to appeal to tastes and interests not generally catered for by ITV” and “to encourage innovation and experiment in the form and content of programmes”.3 The Channel’s costs were to be paid by the ITV companies, who were given the rights to sell advertising on the Channel. Its programmes were regulated by the IBA, which had the right to intervene ahead of transmission, and there was an IBA executive on the Channel 4 Board.

8.The Broadcasting Act 1990 changed the status of Channel 4. The IBA was abolished and replaced by the Independent Television Commission (ITC) which no longer had the power to intervene pre-transmission. The Channel 4 Television Company became in 1993 the Channel 4 Television Corporation, with its chair and non-executive directors appointed by the ITC, subject to Government approval. It was allowed to sell its own advertising, but with a ‘safety net’ arrangement with ITV to guarantee its income at a certain level. It was granted a 10 year licence. The remit was expanded to include a formal commitment to high quality news and current affairs, education and programmes of European origin and to set a percentage of original programmes to be commissioned from independent producers. The ITC was to regulate the channel’s output with reference to both quantitative measures (quotas) and qualitative assessments of the output.4

9.The Broadcasting Act 1996 made possible the abolition of the ‘safety net’ and the Government decided that from 1999 C4C should be wholly responsible for its own revenues and budgets. The Government also allowed C4C to launch digital services—whether the existing PSB channel or new channels—on the new digital terrestrial multiplexes. In return, the Channel committed to licence conditions with new targets such as a new maximum for repeats, a higher percentage of specially commissioned programmes and strengthened commitments to film, multicultural programmes and education and training. The ITC continued its role as regulator.5

10.The Communications Act 2003 replaced the ITC with the Office of Communications (Ofcom), a lighter touch regulator which relied less on quantitative quotas, but had the duty to review the quality and performance of all public service broadcasting every five years. In 2004 Ofcom granted C4C a 10 year licence for Channel 4. The Act required Channel 4 to commission a proportion of its programmes from production companies based beyond the M25 and to make and broadcast schools programmes. It also prohibited Channel 4 from making any programmes itself, without Ofcom’s consent.6

11.The 2004 Channel 4 licence also included quotas for a minimum proportion of qualifying original production to be commissioned from independent producers; quotas for out of London production; quotas for a specific minimum proportion of programming to be originated for the channel; and requirements for UK news, current affairs and schools programming. In addition, Channel 4 had a specific remit to demonstrate innovation, experiment, and creativity; to appeal to the tastes and interests of a culturally diverse society; to make a “significant contribution” to the need for PSBs to broadcast programmes of an educational nature and of educative value; and to exhibit a distinctive character.7

12.The Digital Economy Act 2010 further expanded Channel 4’s remit with a series of qualitative requirements which for the first time related to the whole of the portfolio rather than only the main channel. It should make “a broad range of relevant media content of high quality that, taken as a whole, appeals to the tastes and interests of a culturally diverse society”; high quality films, news and current affairs; content for older children and young adults, as well as using a variety of digital channels and platforms. In addition, the channel should support young and innovative talent, stimulate well-informed debate and promote “alternative views and new perspectives”, providing “access to material that is intended to inspire people to make changes in their lives”.8

13.In 2014, Ofcom renewed C4C’s licence for Channel 4 for a further 10 years. It retained the 2004 remit and the 2004 quotas and obligations for independent production, out of London production, original productions and UK news and current affairs. It increased the quota for programmes produced in the Nations (Northern Ireland, Scotland and Wales) from 3 per cent of volume and spend to 9 per cent by 2020. Ofcom said that Channel 4’s licence obligations were “sustainable for the broadcaster over the new licence period from 1 January 2015.”9

14.However, a year later Ofcom sounded a note of caution about Channel 4’s longer term prospects. In July 2015 it published its review of Channel 4’s performance over the period 2010–13 and raised questions about the future. It was concerned at the rate at which Channel 4 was losing viewers:

‘‘Recognising that the majority of the main five PSBs also sustained audience losses over the review period, the rate of decline for Channel 4’s reach and audience share was significantly higher. We therefore suggested that further declines in Channel 4’s audience reach and share, at the rate observed between 2010–2013, could create the risk that C4C’s impact could lessen over time”.10

15.Ofcom suggested a number of possible options to help C4C, including giving it a single remit across all its services, which should all be regarded as PSB, and as a result giving the digital channels and All4 greater electronic programme guide [EPG] prominence.11

16.The background to this inquiry is the reportedly accidental disclosure last autumn that the Government was reviewing the future structure of C4C. On 24 September 2015 a civil servant was photographed entering 10 Downing Street with the front page of a confidential document clearly visible. Its title was ‘Assessment of Channel 4 Corporation Reform Options’ and the first paragraph read “Work should proceed to examine the options of extracting greater public value from the Channel 4 Corporation (C4C), focusing on privatisation options in particular, while protecting its ability to deliver against its remit.”12

17.This is by no means the first time that the privatisation of Channel 4 has been on a government’s agenda. It has emerged regularly as an issue, usually when the government of the day has been contemplating major changes to the broadcasting sector.

18.In the discussions ahead of the Broadcasting Act 1981, there was a strong lobby for making the fourth channel a wholly commercial operation as a second channel for ITV. That idea was however rejected by the then Prime Minister and Home Secretary, Margaret Thatcher and William Whitelaw, who opted for the not-for-profit, publicly-owned model, with a distinctive remit and a duty to commission its programmes from independent producers.

19.In 1988, the Government’s White Paper Broadcasting in the 90s had privatisation as its first option for the future of Channel 4. But after lobbying by Michael Grade, its Chief Executive, who argued that the Government “could have a privatised channel or one with a public service remit, but not both”, the Government again rejected the idea.13

20.In 1996, when privatisation was again proposed, this time by John Major’s Government, C4C mounted a second successful defence of its status. The Cabinet was initially in favour, but Michael Grade warned the Government that the easiest way for a commercial owner to boost profits would be to replace Channel 4 News with American films. Channel 4’s Chairman, Sir Michael Bishop, a strong supporter of other privatisations, wrote a personal letter to the Prime Minister, attacking what he saw as “a philistine approach”, and persuaded him to drop the proposal.14

21.The issue of privatisation did not arise in the Communications Act 2003. However, in 2003 C4C’s new Chief Executive, Mark Thompson, started discussions with Channel 515 about a possible merger of the two companies. The proposal faced scepticism from Ofcom and the negotiations came to nothing after Mark Thompson left C4C to become BBC Director-General in January 2004.16

22.When, in the recession of 2008, Channel 4 ran into financial difficulties, the then Chairman, Luke Johnson, told the House of Commons Culture, Media and Sport Committee that “unquestionably, the very robust and successful model that has persisted for over 25 years for Channel 4 needs some adaption”.17 Ofcom itself considered privatisation as a possible solution. In January 2009 it published Putting Viewers First, its review of PSB for the Government’s Digital Britain project. It argued that Channel 4’s financial ability to fund its PSB role “was no longer sustainable”.18 It considered part-privatisation in the form of a merger between C4C and Channel 5. But although Channel 5 was enthusiastic, C4C was not and Ofcom’s conclusion, after itemising all the potential problems, was pessimistic:

“It is possible that this challenge is too great and that structural relationships of this kind cannot be achieved. We recognise that this is an ambitious, challenging and complex proposition, and that structural relationships are likely to carry significant risks and may be difficult to achieve.”19

Ofcom preferred a relationship between C4C and the BBC’s commercial arm, BBC Worldwide. 20 This was fiercely resisted by the BBC, whose Chairman, Sir Michael Lyons, described the proposal as “pretty extraordinary”.21

23.When the Government published its Digital Britain Final Report, in June 2009, it rejected part-privatisation of C4C:

“On balance, the government’s conclusion, which has been strongly supported by the Board of C4C is that a minority privatisation, even on terms that provided significant additional funding over the short to medium term to invest in television programming, could not be assured of delivering the public policy objectives previously outlined over the long term.”22

24.The Government also accepted that a merger between BBC Worldwide and C4C was potentially problematical and that a straight transfer of BBC Worldwide assets to C4C “would have significant competition implications”. The two broadcasters were encouraged to see what more they could do in a less formal partnership.23

25.Before the 2014 general election, a proposal to privatise C4C was circulated round government departments, only to be blocked by the then Secretary of State for Business, Innovation and Skills, Vince Cable MP, and the Liberal Democrats in the coalition government. 24

26.Since the disclosure in September 2015 of the government review there has been a growing public debate about the future of Channel 4 (and of C4C as a whole) focusing on issues of sustainability and possible privatisation. Among those arguing for privatisation are Luke Johnson, the Chairman of C4C from 2004 to 2010, who has said “I think the argument for continued ownership by tax payers of two public service broadcasting networks in the digital age is weak”25 and Lord Grade of Yarmouth, Chief Executive of Channel 4 from 1988 to 1997, who has argued “What you would gain from privatisation is you could build a really big media business around Channel 4. I think the channel needs to be freed up really to move ahead.”26

27.Press reports have suggested the Government is looking at options including the potential sale of a minority stake to a strategic partner.27 C4C have argued that part privatisation would be the first step to a full sale of the broadcaster. David Abraham, Chief Executive of C4C, said, “History tells us that part-privatisations are like crossing the Rubicon and realising you’re on a sinking ship—once you’ve started you can’t go back”.28

28. The idea of privatisation generally has been criticised by David Abraham as “a solution in search of a problem” and by C4C’s former Chairman, Lord Burns, who told this Committee in February: “There would be less risk and less innovation. I characterise this as a situation where the more value you want to extract from it in a sale, the more you have to compromise the channel’s public service obligations.” Lord Burns also argued the case for mutualisation which would transform C4C into a mutually-owned, not-for-profit company, limited by guarantee, with a similar structure to Welsh Water. He told the Committee in his ‘exit’ interview that the main advantages would be that the Government could take some money out of C4C, if it wished, that it would be easier to do joint ventures and that it would provide C4C with a “safe harbour rather than having to refight this battle about the ownership of the Channel every 10 or 15 years”.29

29.Until now the Government has said little about its plans. In January, John Whittingdale MP, the Secretary of State for Culture, Media and Sport, told the House of Commons:

“The reason why we are looking at different options for the future of Channel 4 is to ensure that it can continue to deliver the remit in what is going to become a very fast-changing and challenging environment”.30

This report is the first attempt to analyse the possible options in detail and we are grateful to the Secretary of State for sharing his current thinking with us.

30.In Chapter 2 we look at the case for change—focusing on the views of the Government and others that the current model for Channel 4 is no longer the best way of delivering value, and on the possible advantages of the privatisation options.

31.In Chapter 3 we look at the economic sustainability of the current Channel 4 model as a publicly owned corporation funded by advertising. If C4C is currently in a healthy financial position, what might undermine that over the next few years?

32.In Chapter 4 we look at the potential impact of privatisation on content. Could Channel 4’s remit be strengthened, regardless of a change of business model? If C4C were privatised, would the government be able to protect the PSB remit of Channel 4? Would it be necessary to define and quantify the remit more precisely before privatisation? Is Ofcom suited to, and capable of, adequate regulation of Channel 4 as it currently operates, and as it would operate after privatisation? What changes would Ofcom need to make to its structure and approach to protect the remit in a post-privatisation world?

33.In Chapter 5 we analyse the potential impact of privatisation on the creative landscape of the UK. On the one hand, there could be opportunities for new investment, economies of scale, efficiency gains; and on the other potential loss of revenue from content to pay dividends and a potential loss of the Channel 4 ethos. We also assess the possible value of C4C, who might be interested in buying it and what the impact might be on the wider UK broadcasting ecology.

34.In Chapter 6 we assess the other potential ownership options for C4C, including mutualisation and partnership.

35.We believe that the Government will need to think carefully about all these issues before coming to any conclusion on the right future for a broadcaster which plays such an important role in British public life and the creative industries.

Acknowledgements

36.We would like to thank everyone who gave evidence to us, both at oral evidence sessions, which we held in April 2016, and in writing. We also wish to thank our Specialist Adviser Professor Richard Tait CBE, whose expertise greatly enhanced our work.


1 Channel 4 Corporation, Key Facts about Channel 4 (2016): http://www.channel4.com/media/documents/corporate/C4_KeyFacts_2016.pdf [accessed 23 May 2016]

2 Channel 4 Corporation, Annual Report 2014 (2015) p.23–29: http://annualreport.channel4.com/downloads/Making-an-impact.pdf [accessed 23 May 2016]

3 Broadcasting Act 1980, section 11(1)(a) and 11(1)(c)

4 Broadcasting Act 1990, sections 25, 26 and 27

5 Broadcasting Act 1996, section 83

6 Communications Act 2003, sections 231,263,295 and 296

7 Ofcom, Channel 4 Licence (17 December 2004) Section 1.6: http://stakeholders.ofcom.org.uk/binaries/consultations/renewal-c4-licence/summary/c4.pdf [accessed 4 July 2016]

8 Digital Economy Act 2010, sections 22 and 23

9 Ofcom, ‘Ofcom confirms terms for new Channel 4 licence’ (11 March 2014): http://media.ofcom.org.uk/news/2014/ofcom-confirms-terms-for-new-channel-4-licence/ [accessed 13 June 2016

10 Ofcom, A Review of Channel 4 (2 July 2015) Section 3.7: http://stakeholders.ofcom.org.uk/binaries/consultations/c4-media-content/statement/Channel_4_DEA_Review_Statement.pdf [accessed 13 June 2016]

11 Ibid.

12 ‘Government may privatise Channel 4, document reveals’, The Guardian (24 September 2015): http://www.theguardian.com/media/2015/sep/24/government-considering-channel-4-privatisation-document-slip-up-reveals [accessed 13 June 2016]

13 Michael Grade, It Seemed a Good Idea at the Time (London: Pan Books, 1999), p.308

14 Maggie Brown, A Licence to be Different (London: BFI Publishing, 2007), pp. 192–199

15 Channel 5 was rebranded as Five in 2002 and then rebranded as Channel 5 in 2010. For ease of reference throughout the report we will refer to Channel 5.

16 Maggie Brown, A Licence to be Different (London: BFI Publishing, 2007), pp. 281–288

17 Oral evidence taken before the Culture Media and Sport Committee, 12 May 2009 (Session 2009–10), Q 1 (Luke Johnson)

18 Ofcom, Ofcom’s Second Public Service Broadcasting Review: Putting Viewers First (21 January 2009): http://stakeholders.ofcom.org.uk/binaries/consultations/psb2_phase2/statement/psb2statement.pdf [accessed 13 June 2016]

19 Ibid.

20 Ofcom, Ofcom’s Second Public Service Broadcasting Review: Putting Viewers First (21 January 2009) Sections 1.37–1.53: http://stakeholders.ofcom.org.uk/binaries/consultations/psb2_phase2/statement/psb2statement.pdf [accessed 13 June 2016]

21 ‘Transfer of assets from BBC Worldwide to Channel 4 ‘fanciful’’ The Guardian, (11 December 2008): http://www.theguardian.com/media/2008/dec/11/lyons-bbc-worldwide-channel-4 [accessed 13 June 2016]

22 Department for Business, Innovation and Skills and Department for Culture, Media and Sport, Digital Britain: Final Report, Cm 7650, June 2009, p 148: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/228844/7650.pdf [accessed 13 June 2016]

23 Department for Business, Innovation and Skills and Department for Culture, Media and Sport, Digital Britain: Final Report, Cm 7650, June 2009, pp 144–149: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/228844/7650.pdf [accessed 13 June 2016]

24 ‘Ministers blocked bid to privatise Channel 4’ The Telegraph, (13 September 2015): http://www.telegraph.co.uk/finance/newsbysector/mediatechnologyandtelecoms/media/11093533/Ministers-blocked-bid-to-privatise-Channel-4.html [accessed 13 June 2016]

25 ‘Channel 4 privatisation would be an ‘ideological fire-sale’, says Labour’, The Guardian (25 September 2015): http://www.theguardian.com/media/2015/sep/25/channel-4-privatisation-would-be-an-ideological-
fire-sale
-says-labour
[accessed 13 June 2016]

26 ‘Michael Grade: Channel 4 sell-off would create media powerhouse’, The Guardian, (7 December 2015): http://www.theguardian.com/media/2015/dec/07/michael-grade-channel-4-sell-off-would-create
-media-powerhouse
[accessed 13 June 2016]

27 ‘Channel 4 escapes privatisation after Downing Street intervention’, The Telegraph (10 May 2016): http://www.telegraph.co.uk/business/2016/05/09/channel-4-escapes-privatisation-after-downing-street-intervention/ [accessed 13 June 2016]

29 Oral evidence taken on 2 February 2016 (Session 2015–16) Q 2, Q 4, (Lord Burns)

30 HC Deb, 21 January 2016, col 1532




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