Chapter 4: Impact of privatisation on content
82.If C4C seems in no need of rescue over the next decade, the case for changing or privatising it must be that a different structure or form of ownership would deliver greater public value. David Elstein told us that he too believed that C4C was sustainable—”How could it not be? It has £900 million of revenue and no cash spend obligation at all. It could go on for 100 years on that basis. For me, that is not the issue.”86 The central argument around the future of C4C must be whether or not it could deliver greater public value—in terms of a stronger remit and more investment in programmes—if the current model was replaced by one of the privatisation options. That argument is considered further in this chapter.
Current remit
83.Channel 4’s statutory remit is summarised in Box 3. These obligations were extended by the Digital Economy Act 2010 to relate to the whole of Channel 4 Corporation instead of just the main channel. (See Appendices 4, 5 and 7)
Source: Written evidence from Channel 4 (SCF0019)
84.C4C is also subject to a number of quotas as set out in its licence obligations. (see Box 4) (See Appendix 6 for full text)
Box 4: Current licence obligations for C4C
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Source: Written evidence from Channel 4 (SCF0019)
85.C4C is also governed by the public service remit that covers all public service broadcasting in the UK. (See Appendix 7)
Is the current remit specific enough?
86.Some witnesses criticised Channel 4’s remit and the extent to which it holds Channel 4 to account. John Whittingdale said of Channel 4, “I’m separately looking at its remit which is rather fuzzy. It needs to be more specific.”87 David Elstein told the Committee, “I simply had not realised the extent to which the famous remit had been allowed to atrophy … For me, the notion that there is a tension between privatisation and the remit is misconceived.” He was of the opinion that privatisation was “an opportunity to strengthen the Channel 4 remit.”88
87.C4C dispute this interpretation. The Chief Executive, David Abraham, told the Committee:
“We are puzzled by that, because the picture that we see is the reverse. We have a wide range of public service obligations and responsibilities. They sit formally in two different places, which I think is where the complexity lies. They sit in statute, with our public service remit, and they sit in our public service broadcasting licence with Ofcom.”89
88.Mr Abraham also claimed that “our public service responsibilities have increased substantially over time, and … our accountability for them has also increased, not the reverse.”90
89.C4C attributed the difference of opinion to the complicated nature of the remit and the fact that it is drawn from two different areas. The first is statute which contains primarily qualitative themes and genres to which C4C are required to appeal. C4C said that these have increased since the Communications Act 2003: “Pre-2003, there were five elements of the remit that we were obliged to fulfil. Now, in 2016, the number has risen to 15, so the number of remit obligations that we have has trebled”.91
90.The second area is the licence agreement which contains 16 quotas. Mr Abraham explained that some of the subjects of those quotas had changed over time:
“we used to have an obligation to produce religious programmes—a quota for religious programmes per week. We do not have that any more, but we have a quota for producing programmes in the nations of the UK. There have been some small changes to the absolute level and the numbers attached to the quotas, but they are relatively incidental in the grand scheme of things.”92
91.When asked to expand on his statement that the remit was “fuzzy” Mr Whittingdale said:
“It is very easy to decide whether or not Channel 4 is meeting one of them, because of its quantitative requirements—its production quotas: a certain number of hours have to be produced outside London or in the nations; there are independent production quotas; and there are some programming quotas, principally for news and current affairs. The other is the much broader requirement that programmes should demonstrate innovation, or should appeal to culturally diverse audiences, or should be educational. I have sometimes wondered … which programmes are remit-serving programmes and which programmes are revenue-generating programmes. “Channel 4 News” is plainly meeting the remit, but other programmes I think stretch the definition of the remit, and there is a case perhaps for making clearer exactly the kind of programming that we expect Channel 4 to deliver in order to serve the remit. Then the distinction between that and the more populist commercial programming will be clearer.”93
Current regulation of C4C
92.There is a debate as to whether the current regulatory regime for C4C is robust enough to hold the Corporation fully to account. David Elstein felt that there was confusion “over what constitutes the Channel 4 remit” and that “There is no set measure of success, nor any prescribed penalty for failure”. He has argued that C4C would be a better PSB in private hands with much tougher regulation.94
93.Dr Steve Unger explained that Mr Elstein’s comments related specifically to the additional provisions under the Digital Economy Act. Dr Unger saw an “element of truth” in Mr Elstein’s view “in what he says in that much of that process is qualitative”.95 He told the Committee:
“In these remits there is always a mixture of quantitative metrics, which are easy to understand. The problem with quantitative metrics is that they never really capture all that you really care about. Metrics are a great way of measuring the quantity of stuff that is produced, but they are never as good at capturing the quality, the tone, the type of content. One always has a mixture of quantitative metrics and, if you like, a qualitative narrative, and, compared with those metrics, that qualitative narrative is intrinsically slightly fuzzier.”96
94.As David Abraham explained to the Committee, “Culture is ‘fuzzy’, but the regulatory framework in which we operate from a management perspective is far from that.”97 Dr Steve Unger agreed that this was necessary, “I live with a degree of fuzziness in much of our work, because you cannot capture everything perfectly with KPIs and metrics in any aspect of our regulation … It is not possible to capture perfectly through quantitative metrics what a broadcaster delivers.”98
95.Dr Steve Unger told the Committee about the complications around measuring quality: “We ask audiences about their perception of the different content they watch. That gives us an evidence base, and that is what informs our assessment, probably more than anything else. However, it is not quite as much of an exact science as measuring the quantity”.99
96.Ofcom said that the current combination of both qualitative and quantitative was “important, because it allows us to take a more strategic, holistic view of where the public service broadcasting ecology is, combining quantitative and qualitative analysis and making recommendations.”100
97.John McVay of Pact raised concerns about the current system, in relation to children’s programming, and the danger that a commercial operator could exploit it, “because it [Ofcom] does not have the powers from Parliament to require Channel 4 to do more about that, it can wring its hands and say, “We are not very happy. Can you do some more, please?” If you were under the current regime, any smart commercial operator would continue to behave in the same way, or would go further, and I do not think Ofcom would have the powers to do anything about that.”101
98.Dr Steve Unger disputed this:
“there are teeth; as an absolute backstop, the Digital Economy Act makes clear that we have the ability to direct Channel 4 and we ultimately have the ability to vary its licence. The threshold for doing so is high, but that is probably appropriate. It is not necessarily right that we should on an annual basis continually tinker with the licence of broadcasters—that is not good for business certainty. Therefore it has teeth, but the threshold for applying those teeth is quite high.”102
99.The Committee recognises that there will never be a regulatory system which can judge cultural quality and cultural significance, objectively and definitively, not least because these attributes can take a long time to become apparent.
100.The Committee notes that no post-legislative scrutiny has been carried out on the Digital Economy Act 2010: such an exercise could consider the success of regulation so far in assessing the quality of C4C’s activities.
Would privatisation have an impact on the culture of C4C?
101.David Abraham explained the extent to which the content is bound up in the ownership and remit of C4C:
“We encourage our creative teams to take that extra level of creative risk that they would not have the privilege of doing if they were working in a commercial environment. It is part of that culture to work with young talent, to push investigations further and deeper than other editorial organisations are free to do.”103
102.He cited a recent Dispatches programme about the airline industry and practices in ticketing: “These kinds of investigations come from an independent, bold editorial organisation. In every department and genre, we are seeking to do things differently and take those risks. I strongly believe that the culture would change under a private model.”104 VLV agreed with this: “While we understand the argument that C4C’s future could be secured by a clear definition of remit and that the ownership of the company is irrelevant, it is our view that the culture and strategy of any company is deeply linked to its structure and in particular the way it is funded”.105
103.A number of witnesses stressed the importance of preserving the unique culture of C4C, which they felt came from its current model as commercially funded but not for profit, which allowed C4C to be bolder than the BBC and less vulnerable to financial pressures than its commercial competitors. David Abraham compared his position as Chief Executive of C4C with his experience of running commercial channels. He outlined some recent examples of C4C taking risks in developing new talent in television and film: “Channel 4 is in a position to take greater risks with more companies and more unusual projects … because it is in the privileged position of not having to deliver those profits.”106 John Newbigin, Chair of Creative England, agreed, arguing that “even with sincere commitment and goodwill on the part of an owner the history of privatisation suggests that, before long, creative risk taking would hit the brick wall of shareholder interest.”107
104.This view was shared by representatives of the programme making community. John McVay, Chief Executive of Pact, said “I look at other, large commercial global media companies and Channel 4 is not like them. However, it was designed to be not like them because of its purpose. They are two different things.”108 He defined C4C’s culture as “allow[ing] in mavericks, innovators and disrupters, and people who probably would not get a commission at ITV or somewhere else, and that is a very valuable purpose, particularly when the big debate across all our creative industries is about diversity.”109
105.TAC, representing the independent production sector in Wales, felt privatisation would ‘“inevitably turn Channel 4 to a more risk averse strategy, investing in proven talent and production companies and therefore reducing the amount of exciting new talent able to break through.”110 For Colin Browne of the VLV, the culture of C4C was inextricably linked to its business model: “my experience—and I have worked in both the public and private sectors in different forms of ownership—is that the culture of any organisation inevitably reflects the way in which it is funded. If you become to some extent a profit-driven organisation, your incentives change.” He felt that although it might not happen overnight, the culture of C4C and its output would change.111
106.The Committee is concerned that in the case of a privatisation or part-privatisation the different priorities of the relationship between the public and private entities could lead to operational tensions.
Protected areas of remit
107.The following paragraphs examine several areas of C4C’s remit in detail. In the event of any sell-off, the Secretary of State has pledged to protect news, current affairs and Film4.112 We now consider the genres of news and current affairs, older children and young adults and film along with two other specific areas where people have raised concerns—diversity and nations and regions.
News and Current Affairs
108.In its third Review of Public Service Broadcasting, Ofcom found that:
“News remains the most important PSB genre for audiences. Viewing of TV national and international news by adults remains broadly stable. Overall, PSBs still account for 95 per cent of TV news viewing, with multichannel providers such as Sky and CNN ensuring that a wide choice of television news remains available.”113
109.C4C is required to provide news content (either on television or online) and the main channel is subject to quotas for national and international news. Channel 4 has a long and distinguished history of news and current affairs programming. John Newbigin, Chair of Creative England, told the Committee that C4C’s “commitment to news and current affairs, presented in the best traditions of objective public service reporting, but still retaining a radical edge, has contributed positively to the setting and the maintenance of high standards of news across the UK media landscape.”114
110.Ofcom has previously raised concerns about a decline in the audience share of Channel 4 News. In its 2015 review of C4C against its media content duties the regulator said “The falling consumption of news from C4C has been a concern since 2010, but we welcome the performance of Channel 4 News both on TV and online in 2014.”115
Figure 5: Share of viewing to ‘national and international news’ on television by UK adults (per cent)
Source: Ofcom News Consumption in the UK: research report (15 December 2015): http://stakeholders.ofcom.org.uk/binaries/research/tv-research/news/2015/News_consumption_in_the_UK_2015_report.pdf [accessed 14 June 2016]
111.ITN, which produces Channel 4 News, argued that this downward trend in audience share had changed: “In 2015, Channel 4 News broadcast 238 hours of in-depth news reaching 40 million viewers. Year on year it has achieved audience growth of 4 per cent a year for the past 2 years, and gained 6 per cent in share, most significantly in the vital BAME demographic.”116
112.On current affairs, Ofcom said that from 2010 to 2013, “C4C increased both its current affairs spend and output, and the main channel showed substantially more of this output in peak time than did any of the other main PSB channels.”117
Hard to reach audiences
113.C4C is also held as an example of a success in terms of traditionally harder to reach audiences for news. Ofcom “recognised the high quality, distinctive nature of Channel 4 News and its ability to attract hard-to-reach audiences (16–34s and BAME viewers).”118 As VLV commented, “Channel 4 News plays an important role in attracting key hard to reach audience groups, with a greater proportion of 16–34 and BAME viewers than the other main PSB channels news programmes.”119 As Trevor Philips recently wrote in his diversity report, “Channel 4 News is more popular amongst minority viewers by a factor of 78 per cent.”120 The chart below, taken from this report, shows the comparison in appeal between all individuals and BAME for the major news bulletins.
Figure 6: News programmes by audience share 2015
Source: ‘British media: not quite black and white’, Opendemocracy (2 March 2016) https://www.opendemocracy.net/ourbeeb/trevor-phillips/british-tv-not-quite-black-and-white [accessed 14 June 2016]
114.ITN told us that Channel 4 News “has by far the highest percentage of young viewers (16–34) of any news programme—making up 15 per cent of its audience (the BBC is around 7 per cent).”121 This is an example of the diversification of C4C to respond to changing audience habits and expectations. In 2015 “Channel 4 News videos had more than half a billion views on Facebook. Facebook likes more than trebled to over 1 million with two thirds coming from under 35s.”122 The chart below shows Channel 4’s share of viewing with 16–24s in comparison to other news providers.
Figure 7: Share of viewing to national and international news on television UK adults (16–24) (per cent)
Source: Ofcom, News consumption in the UK: research report (15 December 2015) http://stakeholders.ofcom.org.uk/binaries/research/tv-research/news/2015/News_consumption_in_the_UK_2015_report.pdf [accessed 14 June 2016]
Plurality
115.Robin Foster of the Reuters Institute for the Study of Journalism has said that plurality of news is recognised as essential for a functioning democratic society:
“News media have a significant role to play in supporting the effective functioning of a democratic society. There is a clear and widely accepted public interest in ensuring that measures are taken, where needed, to secure at least two key goals: first, that all citizens can access a range and diversity of high-quality news, opinion, and analysis from different sources, and second, that no single media owner can exercise undue power and influence over the political agenda.”123
116.Channel 4’s News was cited as playing a key role in the plurality of UK news coverage. The VLV said it “provides an alternative view of the world and reinforces the plurality of UK broadcast news. It also tends to provide more in depth coverage of international affairs than other bulletins.”124 ITN praised the current system as “high-quality, independent provision from multiple sources [that] is fundamental to a pluralistic news environment in delivering choice and alternative viewpoints that form part of our democratic process”.125 It was concerned that this “should be protected at all costs when considering any future policy intervention.”126
Risks
117.There is a concern that news would be particularly under threat under private, profit-making ownership as it is not as profitable as other genres. Luke Johnson told the Committee during our recent BBC inquiry that:
“Channel 4 broadcasts “Channel 4 News” between 7pm and 8pm. Effectively, it loses a huge amount of money doing that, quite deliberately, because it sees it as important; if you like, it is public service broadcasting. It pays the price directly because it gets less advertising, because the audiences are lower.”127
118.Channel 4 identified the risks inherent in privatisation for this genre as: “the extent to which, as editor in chief, you take those kinds of risks in the full knowledge that you might upset commercial interests. That is a very real issue in an editorial organisation … So we would be more cautious and less robust in our contribution to news and current affairs plurality as a result.”128
119.C4C also warned that it would be possible to keep quantity but lose quality and depth.129 The International Broadcasting Trust (IBT) agreed with this position:
“if C4C were privatised its weekday hour-long news could be maintained but the quality of its journalism and investigations would deteriorate in order to minimise costs. There would be fewer reports from international locations, especially those where security is an issue and which are therefore more expensive to produce; time-consuming investigations would be discontinued in favour of studio interviews; and the production team would become increasingly dependent on the wires as their primary source of information.”130
It felt privatisation would alter the tone of the content: “We predict that in order to maximise profits and reduce production costs, a commercially driven company would fulfil the commitment to provide voices from around the world through VT inserts in its main news bulletin and drop the existing current affairs provision such as Unreported World.”131
120.Channel 4 News is important because it provides a different reporting style and viewpoint to other public service broadcasters. The Committee considers that there is a significant risk that this genre could be adversely affected by privatisation.
Older children and young adults
121.There have been questions raised as to whether C4C is meeting its obligations in regard to older children and young adults, which it defines as 10–14 and 14–19 respectively. Channel 4’s remit states it has to make “relevant media content that appeals to the tastes and interests of older children and young adults”.132
122.The Children’s Media Foundation said “Channel 4 committed to providing content for the 10–14 year-old audience in their last Licence renewal application. However, in the last three years they have made very little content for this age group—in fact only a single short-run series each year.”133 Pact were also concerned about this.134
123.When Sharon White, Chief Executive of Ofcom, appeared before the Committee she said “We have had a debate with Channel 4. From Channel 4’s perspective, there are understandable commercial issues here. They have said that they particularly want to focus on family programming that is also going to be attractive to older children. We are looking to be convinced that the programme is sufficiently focused on and attractive to older children.”135 The Secretary of State has also stated his concern “about its lack of children’s programmes”.136
124.John McVay of Pact told the Committee:
“Making more children’s programming would probably lose Channel 4 money, but it is part of the PSB compact that there are certain things we require as a trade-off for the benefits the PSBs receive, to give us content that is otherwise not supplied by the market, or not sufficiently supplied by the market. That is why I would ask Channel 4 to do more children’s programming, because that is part of its PSB”.137
125.C4C has indicated a change in its strategy from commissioning bespoke content for 10–14 year olds, instead seeking “to serve this audience with general commissions on the main channel in pre-watershed, peak-time slots, which you [C4C] consider will resonate with both older children and a broader audience.”138 The rationale for this approach is that prime-time, broad appeal output should attract a greater volume of young viewers than would otherwise be delivered by more targeted content in less prominent parts of the schedule.
126.In Ofcom’s analysis of C4C’s Statement of Media Content Policy 2015, it said “an important part of Ofcom’s role is to highlight areas where we believe C4C should place greater emphasis. One such area is C4C’s approach to providing content that appeals to older children.”139
127.The Committee concludes that the current programming for older children and young adults from C4C is unsatisfactory. We strongly recommend that C4C demonstrates a greater commitment to making programmes specifically for this age group.
128.Although we recognise the limited nature of the current remit, the Committee wishes to see Ofcom take action if it determines, using measurable outcomes, that C4C’s programming for older children and young adults remains inadequate.
Film
129.C4C spent £15m on films in 2015 and this is reportedly due to increase to £25m in 2016.140 Many of those who provided evidence to our inquiry spoke positively about C4C’s contribution in this sector. John Newbigin said it is “the most creative and risk-taking patron of independent British cinema”141 and Creative England said “Film 4 is a major pillar in the UK’s film ecosystem and has developed and co-financed some of the most successful UK films ever made.”142
130.The investment division of Film4 was cited by the British Film Institute (BFI) as “a very important source of public investment in British films, working alongside organisations such as the BFI and BBC Films to unearth, support and promote the careers of British film talent.”143 The BFI said Film4 had operated as a ‘loss leader’ for C4C, “helping the Corporation to deliver on its broader, statutory PSB remit, but being rewarded through the cache attached to the success of their award-winning projects such as Danny Boyle’s Slumdog Millionaire and Steve McQueen’s 12 Years a Slave.”144
131.Some witnesses were concerned that, as with news, current affairs and diversity, a C4C in private ownership might not have the same positive impact on the UK film industry. The BFI said it would “have concerns around any ownership model which may erode some of C4C’s existing statutory duties, including its obligations to British independent film.”145
132.C4C plays an important role in the UK film industry via Film4, not least in terms of cultural exports. The Committee notes that this aspect of C4C’s work could be vulnerable if C4C was privatised.
Diversity
133.Lack of diversity has been identified as a wider problem in the broadcasting industry. David Lammy MP stated in a debate in the House of Commons:
“Ofcom has made it clear that all public sector broadcasters must do more on diversity and the portrayal of under-represented groups. Its latest research found that 26 per cent of black viewers saw people from black ethnic groups on TV daily. Over half of black viewers feel both under-represented and unfairly portrayed across our public service broadcasts. Some 55 per cent of viewers from a black ethnic group felt there were “too few people from black ethnic groups on TV” … “and 51 per cent felt that black, Asian and minority ethnic people were shown negatively on TV.”146
134.Channel 4 has a statutory remit to reflect the cultural diversity of the UK. Stonewall told the Committee that “Channel 4’s particular remit … has led to a much richer and more diverse portrayal of LGBT people and has helped to shift attitudes in wider society as a result.”147 The Creative Industries Federation told the Committee, “Audiences have rated the channel above other PSBs for showing the views and perspectives of BAME, LGBT and people with disabilities.”148
135.As a result of their ‘Unseen on screen’ research project Stonewall found that “Channel 4 showed the highest proportion of programming featuring LGBT people … of all of the channels monitored” and that “Channel 4 contributed significantly (25 per cent) to the total time spent in portraying LGBT people in a realistic and positive light.”149 They also cited YouGov polling of over 2,000 LGB people for Stonewall’s Gay in Britain report which found that 50 per cent of respondents thought the portrayal of LGB people on Channel 4 was realistic—”the highest of all major channels.”150
136.Equity welcomed C4C’s 360° Diversity Charter to improve on and off screen diversity, including new Commissioning Diversity Guidelines which “set targets for on screen representation of female, LGBT, BAME and disabled performers in scripted programming.”151 The Campaign for Broadcasting Equality also cited the Charter with reference to staff employed by C4C: “It pledged that 20 per cent of all staff be black, Asian or minority ethnic (BAME) by 2020 and included targets for employing disabled and lesbian, gay, bisexual and transgender (LGBT) staff.”152 The CBE argued that C4 has done more than any other public service broadcaster to advance diversity. C4C cited a Marketing Week study which found that “Channel 4 is the most successful British brand at communicating diversity in its marketing and advertising, across the UK.”153
Paralympics
137.The Paralympics were referenced by many in evidence as an example of C4C’s promotion of diversity. The Creative Industries Federation said “the Paralympics … was watched by 40m people—83 per cent of whom said the coverage would positively change perceptions of disability.”154 Evidence provided by Carolyn Jackson-Brown, whose PhD thesis focusses on Channel 4’s coverage of disability at the Paralympics, demonstrated that the “creative lynchpin [Meet the Superhumans] used by Channel Four to successfully market disability to a mainstream audience” was rejected by “outside stakeholders who did not want to risk the edgier representations needed to fulfil the PSB remit”. She credits C4C’s current “unique business model” as the main driver which “allowed the C4C editorial and creative teams to exercise their autonomy and resist this stakeholder veto”.155
138.Based on this evidence she concluded that “It was the exercising of this freedom to take creative risks in the choices made about representations of the Paralympians that produced the high quality coverage affecting perceptions about disability in society. The retention of creative freedom is fundamental to any future structure of this unique channel”.156
Risks
139.The Creative Industries Federation said that C4C’s “position as a commercial channel with a public remit and ownership means it is able to push diversification to the top of their agenda without consulting shareholders.”157
140.There was concern about the effect privatisation would have on this part of the remit. In his speech to the 2016 Oxford Media Conference Trevor Phillips said, “Based on the actual data about how people behave, Channel 4 right now is the most important agent of integration in our national media. Privatisation would destroy that at a stroke.”158 This sentiment was echoed by many who felt that C4C’s role with minority audiences would be adversely affected by privatisation. The IBT suggested that this was because the “content which tends to appeal to such audiences is considered less commercially successful and therefore it would not be included in peak time schedules.”159
141.Stonewall believes that Channel 4 in its role as a public service broadcaster, “has made a significant contribution to tackling homophobia, biphobia and transphobia, promoting greater understanding of the diversity of LGBT people and, in turn, furthering lesbian, gay, bi and trans equality in society. We would be deeply concerned at the implications of privatisation in terms of improving social equality for LGBT people and for other communities.”160
142.The Committee notes that C4C has put a lot of work and effort into its 360° Diversity Charter and we would be loath to see a private company discontinue the good work that C4C has done in this area.
143.The Committee’s view is that there would be a considerable risk from privatisation to the diversity part of C4C’s remit.
Nations/Regions
144.Creative England told the Committee that “C4C invested over £153 million on content from independent production companies based outside London in 2014 and over half (52 per cent) of all hours of new original programmes on the main channel were from outside the capital.”161
145.The Creative Industries Federation told the Committee that in 2014, of the production companies C4C works with:
“more than half of these were situated out of London, which has given an essential boost to the Government’s ambition of fostering creative industries hubs outside of the capital and the South East. Without a public remit, there would be no requirement on Channel 4 to use these companies—they could move production wholly or predominantly in-house with consequences for the current independent production sector and, potentially, the diversity of content currently demonstrated.”162
146.The C4C quota for “Out of England” production was increased as part of the 2014 licence awarded by Ofcom to nine per cent by 2020. Equity welcomed this “as an important step towards increasing investment in television and film production in the UK Nations”.163 Claire Enders felt that “If the law changes, that will have massive impacts, particularly on the production industry outside the M25.”164
147.TAC, the body which represents the independent TV production sector in Wales, felt that private ownership would turn Channel 4 to a “more risk- averse strategy, investing in proven talent and production companies … For companies in Wales, TAC believes this risk-averse approach would lead to a more London-centric strategy.”165
148.The Committee concludes that the amount of programming and the amount of investment made in the nations and regions, that is. outside London, could be adversely affected as a result of privatisation of C4C.
Would a commercial operator be incentivised to maintain the quality?
149.The Secretary of State told the Committee:
“I am aware that some have argued that a private-sector part or full owner would want to dilute the remit. I do not think that is the case. One thing that has come across very strongly since this public debate began is that a lot of broadcasters are potentially interested in Channel 4 but that one reason for that is the strength of the Channel 4 brand. It is a very visible, very well-respected broadcaster, and the last thing they are going to want to do is undermine that by moving it downmarket or changing the nature of its programming.”166
150.Ofcom stressed the link between the brand values and the attractiveness of C4C to potential investors:
“The prospect of an American company, or anyone else coming in, acquiring that company and then setting about destroying all the cultural values that have made it such an appealing target in the first place is at least questionable; you would want to unpick that. I would also point to the strong demand for UK content abroad. You need to look at the reasons they want to invest in the first place and getting access to the best of British content is a compelling proposition for them.”167
151.C4C view the ownership model as inextricably linked with their ability to deliver the remit. David Abraham, CEO of Channel 4, said “I believe the good work our staff does is directly related to the operating model that we have.”168 Therefore C4C believes that if the ownership model were to change, the quality of C4C’s output would deteriorate.
152.The Secretary of State took the opposite view: he told the Committee “I regard the remit as a separate issue from whatever ownership structure is chosen. The remit should, in my view, be continued and possibly strengthened whichever ownership structure we decide is appropriate.”169 This view is supported by Lord Grade of Yarmouth who believes that regulation and statute could be used to protect Channel 4 and “preserve the brand” if it was privatised.170
153.Mr Whittingdale felt that the remit could be protected: “The first way in which you avoid it [eroding the spirit of the remit] is by setting very clear requirements as part of the remit that are enforced by Ofcom. As I said, there is perhaps a case for making the remit more explicit in some areas. That would be a condition of the broadcasting licence issued by Ofcom, and it would be regularly reviewed in the way it is now.”171
154.This view was challenged by C4C and other evidence the Committee received. Professor Sylvia Harvey said:
“The Secretary of State has indicated that he would prefer to sell the Channel to a new owner but with its remit intact. If the totality of the existing remit were to be transferred to a new licence this might retain something of the character and quality of what C4C has come, historically, to represent. However … enforcement of the wide-ranging remit could seriously limit the market-based decisions made by the new owner and would almost certainly limit the profitability of the new company.”172
155.We are not confident that the value of retaining the C4C brand would be a sufficient incentive to protect the distinctive culture and quality of C4C in the event of privatisation.
Impact of commercial realities
Could a privatised or part privatised C4C deliver its current remit?
156.C4C operates a cross-subsidy model, which enables it to use revenue from commercially successful programmes to finance less commercially viable content. The VLV told the Committee that it did not think it would be possible to maintain the remit as the existing cross-subsidy model “would not be appropriate for a commercial company and risk taking would be difficult to justify to shareholders”. It considered “it will be difficult, if not impossible, to maintain delivery of its remit while also serving the needs of its shareholders.”173 Lord Hollick, former Chief Executive of United News and Media, agreed with this view: “a partial privatisation would create a pantomime horse with the forelegs pressing hard to deliver the remit and the hind legs scampering to secure a generous return on its investment.”174
157.Lord Burns told the Committee:
“I cannot see how you can have part privatisation of the holding company of Channel 4, because it would present the same set of problems as privatisation, which is that you introduce a share of ownership the objective of which would be increasing shareholder value rather than focused upon meeting the remit. The incentives then become very different and are very much those of audiences and of removing those loss-making programmes.”175
158.The Chief Executive of Discovery Communications, David Zaslav, said that they would look at C4C if it became available, however, “When we look at opportunities, what we want is to be able to add value, and it’s not clear what we could do with C4 given the requirements”.176
Could C4C be a profitable investment with the current remit?
159.C4C believe that it would not be possible for a privatised C4C to be profitable yet still provide the same content that a public C4C does currently. Dan Brooke told the Committee:
“The fundamental incentive structure of the organisation would change overnight. At the moment, it is remit-maximising first. If we were no longer non-profit, which one assumes would happen if it was privatised, suddenly the primary incentive would be profit maximisation and everything else second.”177
160.Mr Brooke argued that it would be possible to keep the “words on the page” and therefore fulfil the remit but that the output would be much changed:
“you only have to look at the difference in output between Channel 4 and the other commercial public service broadcasters that are profit-maximising—just the difference across a range of genres and activities—to see something approximating what one would get if one changed the incentive structure.”178
161.Professor Sylvia Harvey agreed that “If the totality of the existing remit were to be transferred to a new licence this might retain something of the character and quality of what C4S has come, historically, to represent” but she saw a major drawback of this was that “enforcement of the wide-ranging remit could seriously limit the market-based decisions made by the new owner and would almost certainly limit the profitability of the new company.”179
162.ISBA suggested that this may have a detrimental impact on advertising revenue “if shareholders/ dividends had to be paid, it would come out of revenue in turn depleting funds for quality content. This would then have an impact on the channel’s ability to attract and retain new and current advertisers who are targeting the hard to reach audience.”180
What changes to the remit would be necessary for profitability?
163.David Abraham told the Committee that changes would be necessary to the current output in the event of privatisation because “It is an obligation of a private company to maximise returns. The argument that these two priorities [public and private ownership] are somehow natural bedfellows is very difficult to demonstrate in practice, because we have not seen it.”181
164.Mr Abraham said that you could make Channel 4 more profitable if you: “asset-strip[ped] the organisation, if you took fewer creative risks, if you sliced the news back, did fewer “Dispatches”, stopped doing independent British film, worked with 50 companies not 300.” 182 He told the Committee:
“You would go to children’s programming. You would go to the amount of comedy that we do—it is a very challenging genre in terms of profitability. You do less drama, you do more acquisition, you buy more entertainment shows and gameshows, you acquire more and you repeat more. These are the basic practices of optimising the commerciality of a schedule.”183
165.The Secretary of State reassured the Committee that raising revenue for government was not the rationale behind the assessment of the options for C4C: “the Treasury ultimately controls the shareholder executive that is the Government’s representation in the ownership, but I have had no pressure from the Treasury to proceed with this on the basis of trying to raise money.”184 However, witnesses were concerned that a company might be prepared to pay more for C4C if they were able to alter the remit to generate more revenue from it.185
Could a protected remit withstand future commercial pressures?
166.Even if the current remit was preserved during a privatisation process, some witnesses were concerned that it might be eroded over time. David Abraham told the Committee: “as we have seen with other broadcasters, there would be efforts to optimise profitability by adjusting the remit over time.”186 ITN were particularly concerned about news provision; they told the Committee that they would call for a form of “guarantee that in the event of a change of ownership the remit would be “fixed” to maintain PSB obligations; specifically the future of the hour long news. However, whether or not this in future would be altered due to commercial and market pressure is unclear.”187
167.Professor Harvey suggested that there was provision in the Communications Act 2003 for a company to negotiate its position outside the remit. She told the Committee “it cannot be assumed that the regulator, Ofcom would at all times require adherence to the existing remit. This is in part because the 2003 Act requires the regulator to take account of the costs and resources available to providers (Section 264 (7)).”188
168.According to John McVay, “If a big company with deep pockets wants to lobby to change regulation or legislation, then they are perfectly able to do so. You may start off in a very firm, tough place, but you may not end up there, and then I would question why you did it in the first place.”189 John Newbigin agreed with this sentiment, “Even with sincere commitment and goodwill on the part of an owner, the history of privatisations suggest that, before long, creative risk-taking would hit the brick wall of shareholder interest.”190
169.In response to a question regarding the sale of Cadbury, the Secretary of State gave assurances to the Committee that the broadcasting industry was tightly regulated: “this is a broadcaster, where it is not just about accepting somebody’s word; there is a legal requirement to deliver on commitments. If they break their word, they will be in breach of the terms of their broadcasting licence.”191
170.The sanctions available to Ofcom in the event of a breach in broadcast licence conditions are listed in the box below.
Box 5: Sanctions available to Ofcom in event of a breach of broadcast licence
|
Source: Ofcom, Procedures for the consideration of statutory sanctions in breaches of broadcast licences (19 July 2013): http://stakeholders.ofcom.org.uk/broadcasting/procedures/procedures--sanctions/ [accessed 14 June 2016]
171.In the case of licensed public service broadcasters the maximum financial penalty payable is 5 per cent of ‘qualifying revenue’.192 The ultimate sanction of revoking a licence is not applicable in the case of Channel 4. As Ofcom confirmed, “Ofcom does not have the power to revoke the C4 licence; this would require a change in legislation.”193
172.A licence holder could hand back their licence, at which point, they would cease to be a public service broadcaster and would be unable to benefit from the associated conditions such as EPG prominence and must carry, must offer obligations.194 However they would be able to continue broadcasting a service on another channel. Ofcom told us that “The Corporation [C4C] is a statutory corporation which has a duty to secure the continued provision of C4. Whether a future purchaser was able to hand back the C4 licence would depend entirely on the statutory framework at that time.”195
173.C4C’s portfolio channels, such as E4, More4 and Film4, are not subject to the same obligations and regulation as the main channel. Therefore in the event of privatisation it would be up to the new owner to determine what sort of content should be broadcast on the digital channels. Ofcom told us:”How the Corporation uses its portfolio channels is a decision for the Corporation, subject to compliance with its statutory and licence obligations.”196
174.The Committee notes that Ofcom does not have the power to revoke C4C’s licence and we are alarmed by the prospect that prospective new owners of C4C could walk away from their public service broadcasting obligations, with Ofcom unable to prevent this.
ITV
175.Witnesses concerned about a future reduction in obligations as a result of commercial pressures used ITV as a case study. During the financial crisis in 2009, ITV requested of Ofcom that their obligations be reduced. Lord Grade, at the time Chief Executive of ITV, reportedly said that “If we can’t get quick resolution then … there is an option for ITV to give up its public service status … It’s not a threat, it’s a realistic scenario.”197 At the time Ofcom agreed that there was clear risk. In 2004 Ofcom said “By 2011, one or more of the ITV1 licensees may face a commercial decision to hand back their licences.”198 Peter Philips, then Partner for Strategy & Market Developments, told a conference in Cardiff “It is absolutely clear that the costs of being a commercial public service broadcaster will soon outweigh the benefits for Channel 3 licensees.”199
176.C4C argued that, as a result, “ITV’s current affairs quota was cut from 78 hours to 43 hours per year. Its regional production quota was also cut from 50 per cent to 35 per cent hours and spend in 2009, after it was fined by Ofcom for not meeting its 50 per cent out of London expenditure quota in 2006 and 2007.”200
177.Professor Sylvia Harvey, Visiting Professor at the University of Leeds, said:
“In the case of ITV we have clear evidence that over time, and under external cost pressures, the regional remit, for example, was significantly eroded … Between 2004 and 2014—the first ten years of Ofcom’s existence—ITV reduced the hours of regions and nations programming by 31 per cent and their cost by 66.5 per cent … Here is clear evidence that public remits can be changed by private providers.”201
178.The end result, as argued by David Elstein, “is an immensely profitable ITV, which has been allowed to get away with a short-term measure to chop its obligation to news and current affairs regionally.”202 Claire Enders echoed this: “Now that ITV is doing phenomenally well—we do not have an advertising recession at all—it is not like those have been reinstated. They have not—they are permanent losses to viewers.”203
179.The Committee has concerns that the same situation in terms of a reduction in its obligations as for ITV, could happen in the case of C4C, if subject to greater commercial pressures.
Channel 5
180.Others cited the purchase of Channel 5 by Viacom in 2014. This was the first occurrence of a British public service broadcaster being bought by an American company.204 Gareth Barr of Ofcom told the Committee, “Viacom already owns Channel 5. I have not noticed a demonstrable change in the channel’s approach.”205
181.On that occasion the public service broadcasting obligations were increased by Ofcom during the change of control process. C4C told the Committee, “Viacom agreed to increase quotas for peak-time original production (40 per cent to 45 per cent), news (260 hours to 280 hours) and news in peak time (100 hours to 120 hours) following its acquisition of Channel 5 in 2014.” However, C4C suggested, “these increases were to ‘bake in’ Channel 5’s current performance relative to its quotas at that time with a view to ensuring continued delivery of originations and news at those levels.”206
182.In addition to the extended quotas, Channel 5 pledged to “increase investment in UK originated content on a voluntary basis”.207 In comparative terms Channel 5 invested £90m on first-run originated content on its main channel in 2013, compared to C4C’s investment of £377m on first-run originated content on its main channel208. However this was a voluntary agreement and there is no legal manner in which Ofcom are able to enforce it. The Secretary of State told the Committee that this acquisition “is still early days, but the commitment that Viacom made in acquiring Channel 5 was a substantial commitment to investment in this country”.209
183.Although this process was only completed in 2014 and the long term impacts are not yet known, the Committee notes that the purchase of Channel 5 appears so far to have had a positive impact on the amount of public service broadcast content.
184.We are, however, concerned about recent events concerning the owner of Viacom and his board of trustees. The Chief Executive, Phillipe Dauman, has been removed from the board of National Amusements Inc., which owns 80 per cent of Viacom’s voting shares, by the owner Sumner Redstone. A legal challenge has reportedly been issued in response in what has been referred to as a “bitter succession feud.”210 This could have implications for the future of Channel 5.
185.The Committee notes that once a company has passed into private ownership it is very difficult to control what subsequently happens to it, as demonstrated by the issues currently facing Viacom, Channel 5’s owner.
Could Ofcom at present regulate a privatised remit for Channel 4?
186.We now consider whether Ofcom has sufficient ability and expertise to ensure effective delivery of the remit in the event of a change in C4C’s ownership. This would require a different approach by the regulator, more akin to ‘quality control’ than the economic approach currently taken. Such a change in role is a similar challenge to the one that Ofcom will face when it takes over the regulation of the BBC.
187.The Committee asked Ofcom if it currently had the ability and the expertise in place to regulate a privatised Channel 4. Ofcom responded: “We have to start with what the remit is, and we then have to work out the best way of holding them to account against it. But there have been plenty of circumstances in the past where remits have changed in response to changing market conditions and changing priorities.”211 However they did state that the mechanisms for accountability and governance would need to change.
188.The system of regulation flows from the remit. Therefore the quality of regulation can only be reliant on the quality and clarity of the remit. The responsibility for setting the remit would lie with the Government. Ofcom told the Committee: “at the point of privatisation, the Government have the option of deciding whether they want to place any constraints on how that privatisation takes place. That is a question for government.”212
189.In the event of any proposal for part or full privatisation of C4C we expect the Government to set out its proposition for a full, public consultation. If statutory change were proposed we would expect this to be subject to pre-legislative scrutiny.
What changes would be needed to the current regulatory system in order to hold a privatised or part-privatised C4C to account?
190.Dr Steve Unger of Ofcom confirmed that changes to the current regulatory system would be needed in the event of a change in ownership of C4C:
“I am assuming that there is at least a question as to what the remit would be post-privatisation. If there is no change to the remit, we would still have to go through the analysis, because clearly something would have changed—the governance mechanisms of the organisation would have changed. We would certainly need to look at whether the mechanism for holding it to account, given the desire to keep the existing remit, would still be effective given the changed governance and incentives of the organisation. I would not assume that it would stay the same, though. Equally, I would not assume that we could not do it at this stage. I think we would have to work through the analysis.”213
191.It could be argued that a more closely defined remit would be an essential pre-requisite for regulation of a privatised or part-privatised C4C. Yet the Committee received evidence from those who felt that tighter regulation of C4C could lead to a reduction in creativity. The VLV said “If the regulatory model governing C4C is changed from being based on a mixture of qualitative and quantitative measures into one based more on quantitative metrics, VLV believes this would be likely to be restrictive and not encourage innovation which is at the heart of C4C’s mission.”214
192.Dan Brooke argued that the “only way you could even attempt to do it would be through large amounts of additional bureaucracy and then substantial amounts of micromanagement by the regulator.”215
193.David Abraham told the Committee that, whilst discussing a proposed merger of Channel 5 and C4C in 2008, there was an attempt to “combine a holding company that was reporting back to a foreign privately-owned company and then to merge it with the interests of the public service centre of Channel 4 … Ofcom’s view at that time … spelt out quite clearly that this was a very challenging thing for Ofcom to oversee in the long term.”216
194.Some witnesses doubted Ofcom’s ability to do this at present. Colin Browne of the VLV told the Committee, “Ofcom’s core competence is as an economic regulator. When one gets into some of these other areas, particularly to do with qualitative217 judgment and programme-making, it is not an area where Ofcom claims to have expertise or even wants to have expertise. It is not impossible, but things would have to be changed to make it happen.”218
195.A change of this kind would signal a return to an older style of regulation, akin to that of the ITC. As John McVay told the Committee:
“the journey of British broadcasting through regulation and legislation over the past two decades or more has been to become more flexible and more able to let broadcasters with public purposes interpret that. We see that the days of ITC or IBA tick-boxing have been consigned to history. You would have to go back to that if you were going to hold a private owner’s feet to the fire.”219
196.This would lead to a large disparity between C4C and the other commercial public service broadcasters which would still be regulated in the newer, more light-touch economic based system.
197.John McVay told the Committee, “if you were doing it for Channel 4, you would have to do it for everyone … Channel 4 is a commercial operator and you would have an asymmetrical degree of regulation for people who are competing in the commercial market.”220 Dan Brooke agreed that this disparity of regulation across the PSBs was likely to be a concern. He said that “a new owner [of C4C] would say, “ITV and Channel 5 don’t have that degree of bureaucracy and micromanagement, so can’t we have as little as they’ve got?”221
198.If regulation by genre quotas was determined to be the best way to preserve the remit it would be necessary to determine how those genres were defined, and by whom. The Committee would expect Ofcom to play a key role in this process.
199.If any form of C4C privatisation is taken forward, it will be necessary to consult on the impact of regulatory change, not just on C4C but on the public service broadcasting ecology.
87 ‘Abraham hits back at Whittingdale’s privatisation plans’, Broadcast (15 March 2016): http://www.broadcastnow.co.uk/news/abraham-hits-back-at-whittingdales-privatisation-plans/5101548.article [accessed 14 June 2016]
94 ‘Channel 4: the case for privatisation’, Opendemocracy (1 March 2016): https://www.opendemocracy.net/ourbeeb/david-elstein/channel-4-case-for-privatisation [accessed 14 June 2016]
112 ‘Channel 4’s public service remit will be protected, vows Culture Secretary’, The Guardian (21 January 2016): http://www.theguardian.com/media/2016/jan/21/channel-4s-public-service-remit-will-be-protected-
vows-culturesecretary [accessed 14 June 2016]
113 Ofcom, Public Service Broadcasting in the Internet Age: Ofcom’s Third Review of Public Service Broadcasting (2 July 2015): http://stakeholders.ofcom.org.uk/binaries/consultations/psb-review-3/statement/PSB_Review_3_Statement.pdf [accessed 9 May 2016]
115 Ofcom, A Review of Channel 4 (2 July 2015): http://stakeholders.ofcom.org.uk/binaries/consultations/c4-media-content/statement/Channel_4_DEA_Review_Statement.pdf [accessed 13 June 2016]
117 Ofcom, A Review of Channel 4 (2 July 2015): http://stakeholders.ofcom.org.uk/binaries/consultations/c4-media-content/statement/Channel_4_DEA_Review_Statement.pdf [accessed 13 June 2016]
123 Robin Foster, News Plurality in a Digital World, Reuters Institute for the Study of Journalism (July 2012): https://reutersinstitute.politics.ox.ac.uk/sites/default/files/News%20Plurality%20in%20a%20Digital%20World_0.pdf [accessed 12 May 2016]
132 Digital Economy Act 2010, section 22
136 ‘Abraham hits back at Whittingdale’s privatisation plans’, Broadcast (15 March 2016) available at: http://www.broadcastnow.co.uk/news/abraham-hits-back-at-whittingdales-privatisation-plans/5101548.article [accessed 14 June 2016]
138 Ofcom, Response to Channel 4 Corporation’s Statement of Media Content Policy (10 May 2016): http://stakeholders.ofcom.org.uk/binaries/broadcast/tv-ops/c4/Ofcom_letter_to_Channel_4_Corporation_on_its_Statement_of_Media_Content_Policy_2015_2016.pdf [accessed 14 June 2016]
139 Ibid.
140 ‘Film4 funding increased to record $36m; signs Fox Searchlight deal’ Screendaily (9 February 2016): http://www.screendaily.com/news/film4-funding-increased-to-record-36m-signs-fox-searchlight-deal/5100007.article [accessed 14 June 2016]
158 ‘Trevor Phillips: BBC 2 is Britain’s whitest station’, The Guardian (2 March 2016): http://www.theguardian.com/tv-and-radio/2016/mar/02/bbc2-trevor-phillips-bbc2-whitest-channel-4-privatisation [accessed 14 June 2016]
168 David Abraham, ‘Speech to Enders Analysis Conference’ (9 March 2016): http://www.channel4.com/info/press/news/david-abraham-speech-to-enders-analysis-conference [accessed 14 June 2016]
170 ‘Michael Grade backs Channel 4 privatisation’, Campaign (7 December 2015): http://www.campaignlive.co.uk/article/michael-grade-backs-channel-4-privatisation/1376013 [accessed 14 June 2016]
176 ‘Zaslav: C4 remit a potential barrier to Discovery bid’, Broadcast (2 June 2016) http://www.broadcastnow.co.uk/news/zaslav-c4-remit-barrier-to-discovery-bid/5104523.article [accessed 9 June 2016]
192 ‘qualifying revenue’ is all payments received or to be received by the licensed service for advertisements, programmes or sponsorship.
194 The Communications Act 2003 requires that PSBs offer their core PSB channels for carriage to all major platforms, and that Electronic Communications Networks (ECNs) must carry them.
196 Ibid.
197 ‘ITV may hand back its public service licence, says Michael Grade’, The Telegraph (6 August 2008): http://www.telegraph.co.uk/news/uknews/2511454/ITV-may-hand-back-its-public-service-licence-says-Michael-Grade.html [accessed 14 June 2016]
198 Ofcom, Ofcom’s Second Public Service Broadcasting Review (10 April 2008): http://stakeholders.ofcom.org.uk/consultations/psb2_1/execsummary/ [accessed 14 June 2016]
199 Ofcom, ‘Ofcom Content Board Public Service Broadcasting Conference, Cardiff’ : http://media.ofcom.org.uk/speeches/2008/ofcom-content-board-public-service-broadcasting-conference-cardiff/ [accessed 14 June 2016]
204 Liberty Global own a 10% share in ITV.
207 Ibid.
208 Ibid.
210 ‘Viacom CEO Seeks to Reassure Employees Amid Turmoil’, Variety (May 24 2016): http://variety.com/2016/biz/news/viacom-ceo-philippe-dauman-reassure-employees-1201782525/ [accessed 14 June 2016]
217 Understood to mean judgement of quality rather than qualitative judgement