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The future of Channel 4 Contents

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Chapter 3: Independent production companies

57.Throughout our inquiry, witnesses underscored the role of C4C in stimulating the independent production sector. Unlike other public service broadcasters, C4C has no in-house production company; it is a ‘publisher-broadcaster’ which must commission content from a range of external production companies.

58.Some witnesses argued that C4C does more to support independent producers than competitors. John McVay OBE, Chief Executive of Pact, described the publisher–broadcaster model as a “genius construct” for facilitating entrepreneurship and nurturing new talent.52

59.As we argued in Chapter 2, relaxing the Terms of Trade and enabling C4C to acquire a greater share of the secondary and international rights to programming could create, as a previous report by Enders Analysis states, “a conceivable revenue boost” that would significantly reduce C4C’s dependence on the advertising market.53

60.Some witnesses from the independent production sector have argued, however, that retaining IP in their productions for C4C under the Terms of Trade was crucial in enabling them to grow their own companies and contribute to the diversity and plurality of the sector. A report commissioned by Pact argues:

“it is the right to IP ownership that allows new start-ups to access finance, grow, export, attract a buyer and inject renewed creativity into larger independents and the broadcasters’ studios, before key talent splits off to create a new start-up and begin the cycle again”.54

61.Alex Mahon, CEO of C4C, emphasised the value of the existing system to the sector: “we keep the barriers to entry very low and we allow the big ones to make more money … It’s a Governmental choice whether there should be the support for the small and medium businesses or there shouldn’t.”55

62.However, several witnesses questioned the size of some companies that are included under the Terms of Trade. While intervention is designed to foster start-ups, much larger companies are also included. Lord Grade and Luke Johnson argued that C4C’s original role of stimulating independent production companies was no longer necessary, as the sector had reached maturity. Lord Grade told us:

“[C4C] was the mother and father of the independent sector, which is one of the great success stories of the British creative industries, but it is no longer the only buyer. There are a million buyers out there for independent producers, which do not need protection.”56

63.Between 2010 and 2020, the contribution of PSB commissions to sector revenue fell from 58 to 41 per cent, due in large part to the growth of international revenue.57 Claire Enders praised C4C’s record in fostering plurality in the independent production sector but told us:

“RTL owns Fremantle, Banijay is 30 per cent owned by Vivendi … These companies that dominate Pact are arguing to continue to have terms of trade and exemptions that they probably have not needed for a generation. I will not go to the stake to defend the interests of Endemol Shine, thank you very much.”58

64.Luke Johnson added that C4C “negotiates with one hand tied behind its back on IP ownership” while independent producers are made “millionaires”. He also questioned the practice whereby PSBs bid against each other for existing content such as The Great British Bake-Off, further driving up the price of programmes in the context of already escalating production costs.59

65.Lord Grade argued: “the minnows will become big if they are good enough”.60 However, several witnesses indicated there is still ample reason to stimulate the smallest production companies, underscoring that the market power of the SVODs can create a ‘producer-for-hire’ relationship: “You get given a salary and that is it—take it or leave it.”61 Krish Majumdar, co-founder of Me + You productions told us that enabling small independent production companies to retain IP is crucial for the plurality of the sector:

“Off the back of An Idiot Abroad, I managed to set up a production company because I had a stake in the IP… Lots of people and distributors want to buy into it and support it, but we retained our independence. That is really important, because we can decide the shows that we want to do, the things that are important to us and what we want to say about this country, sell our shows internationally, and benefit from that.”62

66.Enders Analysis identified the Government’s potential support for renegotiating the Terms of Trade to restore C4C’s original purpose of supporting and building start-ups and small indies. It quoted John Whittingdale, the then Minister of State for Media and Data, as saying in August 2021, “We may look at perhaps changing the remit, so it is more targeted on those [start-ups/small indies], and not on the kind of big independent production companies which are now successful, and selling programmes to every single broadcaster.”63

67.Regardless of the question of ownership, we recommend that changes be made to the Terms of Trade for all PSBs, and the publisher–broadcaster model relaxed for C4C. Enabling C4C to invest in IP ownership would substantially enhance its financial resilience and market power in the face of global competition. The interests of large, established production companies should not take precedence over C4C’s long-term sustainability. We also recommend that C4C’s role in stimulating small, medium, diverse and regional production companies be strengthened, and that the Terms of Trade should be revised to apply to producers with a turnover under a certain cap.

68.As well as operating under the Terms of Trade, all public service broadcasters have quotas enforced by Ofcom to commission original content from independent producers. Under the Communications Act 2003, ITV, Channel 4 and Channel 5 all have the same quantitative obligations to commission 25 per cent of programming hours from independent producers. All three have consistently exceeded these quotas, as figure 4 shows, with privately owned ITV and Channel 5 exceeding the quota by smaller margins than Channel 4.

Figure 2: PSB performance against independent production quota in qualifying hours

Source: Ofcom, Public Service Broadcasting: Annual Report 2021 (4 August 2021): https://www.ofcom.org.uk/tv-radio-and-on-demand/information-for-industry/public-service-broadcasting/annual-report-2021 [accessed 15 November 2021]

69.Figure 3 shows the size of production company each broadcaster gave commissions to from 2018 to 2020.

Figure 3: External commissioning value by UK broadcaster split by company turnover band, 2018–20

Source: Pact UK Television Production Census 2021, Oliver & Ohlbaum analysis (July 2021)
Note: *Includes STV/UTV **Includes Sky and other multichannel groups

70.As Figure 3 shows, though Channel 4 spends a greater proportion of its commissioning spending on smaller production companies than ITV, it spends a smaller proportion than does Channel 5. The proportion of Channel 5’s commissioning spending going to producers with a turnover of less than £5 million rose from 3 per cent in 2018 to 20 per cent in 2019. This put it ahead of the BBC (16 per cent), Channel 4 (9 per cent) and ITV (5 per cent). This suggests that private ownership does not necessarily lead to decreased investment in SME companies.

71.The quota on commissioning programmes from independent production companies should be refocused on smaller independent production companies in order to strengthen broadcasters’ role in stimulating start-ups and smaller producers.

72.As part of its Indie Growth Fund, C4C provides funding to help small independent production companies grow their business, in exchange for a stake in the company and proceeds from the eventual sale of the company.64 In February this year, Lightbox, one of the first companies to join the Fund when it launched in 2014, jointly agreed with C4C to buy back its shares for an undisclosed amount.65 As well as helping to foster the independent production sector, the Fund assists C4C in diversifying its revenues. As raised in Chapter 2, C4C has already committed to scaling up the Indie Growth Fund as part of its Future 4 Strategy. In addition, Charles Gurassa told us C4C has access to further capital it is not currently using.66

73.C4C should consider investing more of the existing capital it has highlighted to us, up to its borrowing limit, in the Indie Growth Fund in order to partner with and grow more small, diverse and regional production companies. This would help foster new talent in the independent production sector, alongside helping C4C diversify its revenues.

74.Several witnesses noted that the production sector outside London is significantly less developed. Green Dragon Media, a production company, told us that as an SME in Northern Ireland they were particularly concerned about the impact of any change to C4C, arguing that privatisation:

“would bring an end to development funding for micro indies who needed help to make their ideas commissionable. It would end the nations and regions remit and put in place a homogenized one size fits all commercial doctrine that would not benefit the local production industry nor the national audience… We can’t compete with the super indies both in terms of development spend or ease of access to the front line of commissioning.”67

75.The TAC (Teledwyr Annibynnol Cymru), the trade association of the independent television production sector in Wales, praised C4C’s investment in the region, telling us that C4C has spent £77m in Wales over the last ten years. In contrast, the TAC expressed concern that a new private owner of C4C would be unlikely to commit to the same level of regional investment, noting that “where the type of media organisation which might purchase Channel 4 has already invested in UK production, this has tended to be in South-east England. Netflix’s production hub is in Surrey’s Shepperton Studios and Disney’s has a long-term lease for Pinewood Studios near London.”68

76.Alex Mahon told us: “We particularly focus on the supply chain in the nations and regions … That is how we are building up companies in Yorkshire, how we are doing it in Scotland and how we are changing the sector in all those places… The sector is not as developed, so a lot of work needs to go into how you nurture those smaller and medium businesses and how you grow them up.”69

77.Ofcom imposes a quota for production in the nations and regions, which it defines as programmes that are made outside the M25, of 35 per cent for both Channel 4 and ITV, and 10 per cent for Channel 5 (in terms of both hours and spending).70 Channel 4 has volunteered to increase this to 50 per cent by 2023.

Privatisation

78.Several witnesses argued that if the Government decides to proceed with privatisation it could harm the independent production sector. A report commissioned by Pact argues that if C4C were privatised and permitted to make and control its own programmes, an estimated £80 million of content spending would be lost to an in-house production arm in the first year, and after five years this would rise to £1 billion. The report also claims that this would result in an opportunity cost of £3.7 billion to the sector over a 10-year period.71

79.In a report commissioned by C4C, EY stated:

“If the new owner of Channel 4 reduced its total spend on commissions as a proportion of revenues in line with that of ITV, but committed to 50 per cent of this lower total spend being in the Nations and Regions, we estimate that Channel 4’s contribution to GVA through its supply chain in the Nations and Regions would decrease by 18 per cent (£500m), and the number of jobs supported by Channel 4 in its supply chain each year in the Nations and Regions could decrease by 18 per cent (600 roles) compared to a scenario where Channel 4 is not privatised.”72

80.As this highlights, there is no quota for the amount C4C spends on content as a proportion of its revenues. This presents a risk that a new private owner of C4C could cut overall content spending to reduce costs, while maintaining the proportions set out in quotas. The Media Reform Coalition shared this concern, citing research by Ampere Analysis suggesting that if C4C were privatised, a new owner would likely seek to increase profit margins for its shareholders by cutting its content budget by between 40 and 50 per cent.73

81.The Government, however, questioned some of the assumptions underlying the EY report, which it told us were unevidenced:

“Using Channel 4’s historical growth trends and assumptions from Channel 4’s three-year plan to forecast over a ten-year period does not answer the question about Channel 4’s long-term sustainability … Without any consideration of a downside scenario, in which changes in the market could lead to concerns about Channel 4’s future sustainability under its current ownership and operating model, we feel the report is not a balanced piece of analysis.”74

82.The express purpose of EY’s report is not to analyse C4C’s sustainability—rather, its purpose is to analyse the potential impact of privatisation on C4C’s economic contribution in terms of GVA and employment and its investment in the independent production sector. As such, it repeats and maintains C4C’s case that the corporation is self-evidently sustainable. In response to the Government’s criticism, EY told us that:

“Looking forward, Channel 4 expects to remain financially sustainable under its current ownership model, and our analysis is based on this expectation. The scope of our work was to consider the potential impact of different scenarios for the privatisation of Channel 4 on the UK economy, and on the creative sector in the UK more generally, it was not to conduct an assessment of Channel 4’s commercial model and financial projections.”75

83.The report does not consider how the potential impact of privatising C4C could be mitigated by other policy actions or market changes such as increased spending by other broadcasters or content providers. EY state that they “consider this to be a wider policy consideration and not within the scope of our analysis.”76

84.EY argue that their assumption that C4C “would behave in line with ITV and Channel 5” is reasonable “as these are comparable UK linear commercial public service broadcasters.” It defends its assumption that if privatised, C4C would reduce its commissioning costs as a percentage of total revenue to the same proportion of comparable revenues as ITV. The report also correctly states that C4C “invests significantly more in UK content than Channel 5.”77 However, it elides the fact that though Channel 5 has a smaller overall content budget, it spends a similar proportion of its revenues on content as does C4C (C4C spent 71 per cent of its revenues on programming in 2018, while Channel 5 spent 70 per cent. ITV was much lower at 50 per cent).78 Channel 5’s overall content budget has also increased since its acquisition by Viacom in 2014, with first-run spending up by an average of 7 per cent per year between 2014 and 2018.79

85.Enders Analysis also questioned EY’s conclusions, arguing that “historically when broadcasters have changed hands in this country there has been a significant uptick in investment.”80 Enders added:

“A new entity will have a significantly larger budget to bring to bear on the UK’s creative ecosystem, allowing much more substantial investment … In terms of bringing new and original programming to the viewer, it is clear that Channel 4 is doing less, whilst Channel 5 has increasingly performed the reverse, galvanised by the superior resources the parent can bring to bear”.81

86.Taken together, EY and Enders Analysis’ evidence indicates that it is hard to conclude with any certainty whether privatisation would necessarily lead to an increase or decrease in C4C’s investment in content as a proportion of its revenues.

87.Claire Enders had seen “no resistance” from potential buyers to the idea of enhanced quotas, such as an increase in independent production quotas closer to C4C’s actual expenditure. In the event of a sale, she told us: “the Government can and should—and will, I am sure, after speaking to Ofcom—specify that Channel 4 will continue to trade with small companies and in the nations and regions.”82

88.We recommend that regardless of ownership C4C’s voluntary higher quota for production in the nations and regions be codified in legislation and enforced by Ofcom.

Skills and training

89.Alex Mahon referred to the investment C4C makes in training, tripling their existing commitment to training 15,000 young people in the industry each year.83 Krish Majumdar argued that C4C made unique contributions not just to training but to increasing the diversity of the industry: “It has the Alpha Fund, which looked at minority-led companies and gave them money to do research and development. That money was easier to access than at any other broadcaster.”84

90.Enders Analysis cautioned: “Channel 4’s various apprenticeship schemes, youth outreach programmes and production traineeships are certainly valuable, but it would be very difficult to draft prescriptive guidance that would guarantee a similar or better outcome under a different owner.”85

91.ScreenSkills cited C4C’s contributions to skills and training, including through its “pivotal” role as a founding partner with the BBC of the ScreenSkills Unscripted TV Skills Fund.86 However, it noted that privately owned networks including Sky, A+E Networks UK, Discovery UK and Channel 5 are now signatories to the fund, and “would not suggest that a commitment to training and skills is limited to those without a profit motive.”87

92.ScreenSkills highlighted potential alternative sources of funding for skills and training, such as direct government investment, as part of a wider skills strategy, or increased allocation of National Lottery funding.88

93.We welcome C4C’s historical commitment to skills and training. If C4C is privatised, the Government should consider how to mitigate any impact on skills and training, such as a fund to support the development of skills in the TV production industry, including through apprenticeships.

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