Chapter 2: Government position and ownership models
37.In the course of its inquiry, the Committee has identified at least seven possible options for the Government to consider in its review of the future structure of C4C. These are laid out in the box below.
Box 1: Ownership options for C4C
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(1)Status quo. Leave the structure and remit of C4C as they are at present and review both nearer the time of the expiry of the current licence in 2024, unless a dramatic change in the broadcasting landscape requires earlier intervention. (2)Status quo with support from regulatory reform. Leave C4C as a publicly owned, not-for-profit company, but assist it with all or some of the ideas in the Ofcom 2015 review (such as treating the remit as across the whole portfolio, EPG prominence for C4C’S digital channels and All4) as well as considering whether changes to the terms of trade and to the current policy on re-transmission fees could also help sustain C4C’s model. (3)Leave the structure of C4C as it is at present but look at implementing a more closely defined remit. (4)Mutualisation. Transform C4C into a mutually-owned, not-for-profit company, limited by guarantee, with a similar structure to Welsh Water on the lines recommended by Lord Burns and described in Chapter 1. (5)Partnership/Merger. Merge C4C with a broadcaster of similar size to create a new company to hold C4C’s licences and be responsible for the remit, on the model of the mergers proposed in the past with Channel 5. (6)Part-privatisation. Sell part of C4C to a larger media organisation. (7)Full privatisation. Sell all of C4C to a larger media organisation. |
38.The Secretary of State made clear that the Government was still looking at every option and had not yet come to a conclusion.31 However he also made clear his view that with the media landscape changing faster than at any other time, the future for C4C was very uncertain. He was concerned that there were significant risks for a publicly owned but commercially funded broadcaster that was almost wholly dependent on advertising revenue. He drew the Committee’s attention to Channel 4’s problems in 2008 and 2009 when its management thought that a ‘black hole’ would emerge in its finances and it might require public support. He quoted C4C’s evidence on potential risks to the Ofcom PSB review in 2015:
“Channel 4 believes the potential downside risks associated with [ … ] factors, such as a faster shift to on-demand viewing, the emergence of new disruptive entrants, faster fragmentation of audiences, production cost inflation outpacing funding, and structural changes to the licence fee of TV, outweigh the potential opportunities. Moreover, Channel 4 is arguably the PSB most likely to face the future first, given its focus on risk-taking and trying new things, and also its targeting of young audiences, who are the most avid users of new technologies and platforms.”32
39.Mr Whittingdale also quoted the advice of Ofcom in its 2015 PSB review that “there is the potential for significant change in this sector over the licence period, and a downside scenario could pose significant risks”.33 The Government in its written evidence also pointed to a downward trend in C4C and main channel audience shares. It pointed out that C4C’s audience had fallen from 11.4 per cent in 2010 to 10.9 per cent in 2014 and the main channel’s audience (including C4+1 and 4Seven) had dropped from 7 per cent in 2010 to 5.9 per cent in 2014, with a fall in average monthly reach from 82.1 per cent to 77.4 per cent over the same period. The Government was particularly concerned about the main channel’s performance as the only channel with PSB status and 90 per cent of C4C’s originations budget.34
40.While not reviewing in detail all the options to deal with this situation, the Secretary of State left the Committee in no doubt that he was concerned that the status quo options—keeping C4C in public ownership with an advertising funded model—left C4C particularly vulnerable to downturns in the advertising market. He was also unconvinced by the case for mutualisation, which he said Lord Burns had presented to him. He did not feel that mutualisation addressed the problem of C4C’s dependence on advertising and thought that it diminished accountability. He did, however, see a number of potential advantages to greater private sector involvement in C4C. He told the Committee, “there is an argument that Channel 4 will have a stronger future if it has a private sector partner, either in part or in whole, that has deep pockets and is willing to invest in the growth of the business.”35
41.He believed that some potential investors had expressed interest because they believed that C4C could grow and there could be greater ambition for C4 with access to investment from a partner.36 He gave the example of Viacom, which had recently taken over Channel 5 and had made a commitment to increased investment in original, UK-produced, programming.37 He believed that at a time when many media companies, such as ITV, were investing in production capacity to reduce their dependence on advertising revenue, C4C might be strengthened by being part of a bigger company that was not just reliant on advertising. C4C could then reap some of the benefits of owning more intellectual property from which it is excluded by its current model as a publisher broadcaster with 90 per cent of its income coming from advertising.
42.Mr Whittingdale also believed privatisation should be able to free up more cash for programme making. He argued that the experience of privatisation in other areas was that it led to efficiency gains and a more streamlined and lower cost operation—and that this would apply to C4C as well: “there is a view that the business can be grown, that it can be run more efficiently and that in itself will reduce costs”. He had talked to a large number of media companies and there was “no shortage of potential interest”.38
43.The Secretary of State said that work on C4C was part of a comprehensive review of Government media policy, including the renewal of the BBC’s charter, and the reviews of the terms of trade for independent producers and the issue of whether public service broadcasters should be paid re-transmission fees by the operators of digital platforms such as Virgin and Sky.39 The Government’s motivation in exploring the possible privatisation of C4C was not to raise money for the Treasury but rather to preserve and if possible strengthen Channel 4’s public service remit, which he felt could be made more explicit. He was concerned that while it was easy to pick up some innovative programmes it was sometimes harder to find them in the schedule:
“Part of the difficulty is that Channel 4’s model is to deliver public service content, but it does so on its main channel for a bit of the time. The rest of the programming is essentially much more popular and is designed to raise money to pay for the public service. That has been the model for many years.”40
44.He did not believe a privatised Channel 4 would be under pressure to abandon or dilute the remit—he saw potential buyers of C4C attracted by the strength of the Channel 4 brand and believed that the last thing they would want to do was to undermine it by moving downmarket or changing the nature of the programming.41 He had not had a figure quoted to him for the value of C4C, given the variables, including the remit. If the remit was strengthened it might have an impact on price, but that would need to be tested. He was also confident that, in any case, Ofcom could be relied on to ensure that the remit was not diluted if C4C was in private or part-private ownership.42
45.That ownership could be an international company so long as it met the ‘fit and proper’ test for being a broadcaster and it met all the commitments of its licence including impartiality in news. Whether a significant UK broadcaster would be allowed to merge with or take control of C4C would depend on the competition authorities.43 (We analyse this in greater detail in Chapter 5).
46.The Secretary of State’s analysis was strongly supported by one of our other witnesses, David Elstein, the former director of programmes at Thames and BSkyB who as Chief Executive of Channel 5 had been involved in merger and takeover discussions with C4C in 2000. He too believed that C4C would be vulnerable if it remained a narrowly based standalone broadcaster. He saw very considerable scope for cost savings—of the 800 jobs at C4C he estimated any significant broadcaster would be able to cut at least 500 if not 600 of them. He estimated that in 2000, when Channel 5 suggested a merger of back office operations, the savings would have been between £130 million and £190 million a year. He thought the merger savings available now would be in the region of £200 million: “That is the money that is lying on the table because we let it. I think that is a public asset and it is incumbent on us to ask why we want to leave it lying on the table.”44 He did not believe that Channel 4 needed necessarily to be part of a large media organisation to make the savings: “there is a lot of wastage in the way it is run at the moment. Anyone would be able to dig that wastage out.”45
47.Mr Elstein also believed that the process of privatisation could be used to trigger a strengthened remit for Channel 4. At present, his view was that Channel 4 could scarcely fail to meet its remit:
“The only formal remit it has is to broadcast four hours of peak time news per week, which it has done since the day it launched … and to ensure that 35 per cent of its commissions come from outside the M25. That is all it has to do. There is no money attached to those obligations. Channel 4 spends £50 million a year on news and current affairs. If it spent less, nobody could do anything about it. If it cut it in half, nobody could do anything about it.”46
48.He did not think that there was a necessary tension between privatisation and the remit as Channel 4, which he thought had been allowed to settle into “a state of comfortable middle age with reduced obligations, most of them verbal, not formal,” had been excused most of the old harder quotas in areas such as education and multi-cultural programming. He saw the privatisation process as offering an opportunity to reinstate formal quotas, apply cash sums to them and see what private companies might offer.47 However, he accepted that the amount the Government could raise was linked to the remit. A sale at £5 billion would result in a “really crummy Channel 4”48 and he preferred to raise the barriers higher and have a demanding quality threshold for any new owners.
49.Mr Elstein’s view was supported by Compact who believed that the status quo might not be the best way to increase investment in production: “An inventive, creative approach to a sale could prove a significant boost to a vital part of the UK economy.” It did not accept that the ability of the Channel to provide significant value to the UK had to change under alternative ownership structures: “In fact, to change to alternative ownership structures may be an opportunity to strengthen Channel 4’s public service remit.”49
50.In summary, the evidence of those of our witnesses who favoured privatisation made clear that their case for change rests on three propositions:
(1)First, they believed C4C is “too small and too dependent” on one source of revenue—advertising. They argued that its current model is not sustainable in the long term.
(2)Second, they suggested that there are significant potential economic advantages of the privatisation options—cost savings, investment, the benefits of vertical integration and being part of a larger media group.
(3)Third, they thought that the current remit and the way that it is regulated did not deliver as much public value as they should or could. David Elstein argued in this context that “if you could get a maximal remit commitment from a buyer and only £800 million cash, that is better than a not very good remit and £1.5 billion, because that is selling yourself short.”50
51.The following chapters examine these propositions, beginning with the central economic question of sustainability.