Last month’s Commons Culture Committee’s critical report on Channel 4 raised a large question mark over the channel’s financial acumen, future structure and continuing role as a key supplier of public service content. By default, the oversight of Channel 4’s financial systems – whose frailty the Commons report highlighted – will be further weakened if the Digital Economy Bill passes into law this week, as part of the “wash-up” of legislative leftovers that the parties fudge together when there is a dissolution of parliament.  

The Commons report and the proposed legislative changes have triggered almost no discussion, inside or outside parliament. Do we really want the fate of Channel 4 to be resolved in such absent-minded fashion, or is there a radical alternative that might better suit the needs of public service broadcasting?

Channel 4 was designed as a lean, quasi-commercial intervention into the television duopoly of the 1980s, to supplement ITV and the BBC’s two channels. Its brief was to be innovative, alternative and subversive: seeking out new audiences – young, gay, multi-ethnic, radical – that the duopolists largely ignored, and injecting into peak-time slots the kind of public service content that channels battling for audience share were reluctant to include.

Its funding mechanism protected it from direct market pressure. ITV sold Channel 4's advertising breaks and kept the proceeds, but paid a levy (through the then regulator, the Independent Television Commission) to fund the channel, which often exceeded the declared revenue generated by Channel 4’s schedule. ITV complained little: better a small loss than head-to-head competition for TV advertising.

Under Jeremy Isaacs’ pioneering leadership, Channel 4 also far enlarged the minor role that independent producers had been envisaged as providing. Soon, the great bulk of Channel 4 originated UK content came from the hundreds of independents who set up shop, and who then also infiltrated the BBC and ITV schedules.

What Isaacs’ successor, Michael Grade, had spotted was that ITV was probably understating the value of Channel 4 airtime for its own purposes. He campaigned for independence, and won the battle in the 1990 Broadcasting Act. Within a decade of its launch in 1982, Channel 4 was successfully selling its own airtime.

Grade then fought successfully to eliminate a funding formula he had been forced to accept in order to win the airtime dispute. This had provided for ITV to underpin Channel 4’s revenues in bad times (which never materialized) in exchange for receiving 50 percent the surplus that Channel 4 earned, above a modest threshold. A further 25 percent of that surplus had to be held in a statutory reserve, to which the Treasury held the key.

Once ITV had been sidelined, Channel 4 – expertly scheduled by Grade and his brilliant director of programmes, John Willis – became seriously profitable, with operating profit of nearly £150m per annum at its peak.  However, Grade’s successor, Michael Jackson, was determined to escape what he saw as the quaint constraints of public service broadcasting by turning Channel 4 into a multi-faceted media business.

His board, his regulator (the ITC) and his political masters indulged this dream. Channel 4 became a corporation, and a range of new businesses – pay TV channels, film production, film distribution and joint venture enterprises – were created.

E4 and Film 4 were the most prominent of the Jackson launches, and the failure to set up separate structures to account for them – as required by law – was the first indication that Channel 4 itself might be exposed to risk through this public sector entrepreneurship.

Even when the ITC forced Channel 4 to correct the initial legal errors, there were those who pointed to the specific obligations in the 1990 Broadcasting Act to argue that it was contrary to the Act for the new ventures to be funded by earnings from Channel 4 – the only part of the corporation with a public service remit.

As the corporation’s staff ballooned (Isaacs had needed little more than 200 employees: Jackson sailed past 1,200), so did its wage bill and infrastructure costs. Channel 4 campaigned to be released from the legal restrictions on how it spent its revenues, even if they were honoured more in the breach than the observance. Meanwhile, the corporation fell into loss and Jackson departed.

His successor, Mark Thompson, closed down some of the most expensive of Jackson’s commercial failures, but did not reverse the political drive to escape the restrictions of the 1990 Act, which were duly repealed in the 2003 Communications Act.

Schedule 9 of the new Act created a set of rules for financial transparency, avoidance of subsidy by Channel 4 of new commercial ventures and management of risk, which the new media regulator, Ofcom, would be able to monitor; but the immediate result of the legislative change was to release £84 million from the statutory reserve, for Thompson’s successor, Andy Duncan, to spend fruitlessly on a whole new set of business investments. How anyone can believe that the £84 million was not money generated by Channel 4, which had then been used to subsidise new commercial ventures, contrary to Schedule 9, is a mystery.

The list of large and small failures is too long to enumerate here (it can be found in my IEA Beesley Lecture).  The new House of Commons report cites my estimate that some £300 million has been spent by Channel 4 on these commercial ventures, which remain a drain on the channel’s resources. The MPs do not accept that the Schedule 9 rules have worked as Parliament intended.

The report – a mere fifteen pages – briefly delineates three specific recent episodes where Channel 4’s financial judgement and transparency were badly askew. As is standard with these documents, where responses have been satisfactory, no additional comment is made. However, the section which is perhaps the most eloquent is the description of the exchanges with Channel 4’s finance director, Anne Bulford, as she fends off the committee’s attempts to pierce the veil of corporate confidentiality.

What we learn from Ms Bulford is that Channel 4’s claim – in its last annual report and in evidence to the MPs – that its digital channels (Film4, E4 and More 4) were substantially profitable was not true.  The committee at one of its hearings had winkled out of management that the reported £41 million profit – boosted by wholly improbable allocations to Channel 4 of costs jointly incurred by the digital channels – did not reflect the £92 million still owed by the digital channels to Channel 4: a figure which had been tucked away in an opaque footnote.  Ms Bulford now conceded that the three digital channels – two of which had been launched eleven and nine years ago respectively – were not expected to reach collective break-even till 2012.

And these were investments that had survived! No mention was made of all those which had been abandoned or written off. Nor could the committee accept that there were any grounds of commercial sensitivity that justified the refusal to publish detailed figures for the digital channels. The falsity of Channel 4’s other claim – that the digital channels helped diversify Channel 4’s revenue base – was so self-evident (like Channel 4 itself, they are all almost entirely dependent on advertising revenue) that the MPs did not even bother to comment on it.

The specific criticisms of Channel 4’s (now departed) leadership are painful to read. Andy Duncan and his chairman, Luke Johnson, had told the MPs in 2007 that three series targeted at ten- to sixteen-year-old children were “currently being made” and were “ready to go, in the stocks”, but with transmission being delayed to avoid a negative impact on Channel 4’s profit and loss account (an excuse that might cut some ice with the publicly-quoted ITV, but made little sense with Channel 4).

The issue had real political sensitivity. Channel 4 – after decades of avoiding involvement in children’s programming – had decided to make “older children” part of its new role in the future. Indeed, Channel 4 – this unlikely source of such important output – claimed to have set aside a £10 million funding pot, and persuaded Lord Carter to include this target audience in his Digital Britain report as part of Channel 4’s strategic remit (along with the equally ill-judged concept of partnership with BBC Worldwide).

Channel 4 has now admitted to the MPs that only one of the three projects was ever commissioned – twelve 30-minute programmes entitled “First Year at Big School” – along with about £200,000’s worth of development spend. Only a small fraction of the £10 million has been spent.

The MPs also commented adversely on Channel 4’s major losses on Project Kangaroo and commercial radio. Kangaroo was a video-on-demand venture involving all the terrestrial broadcasters that was heavily dependent on the BBC’s commitment and the Competition Commission’s approval.

The MPs noted that Andy Duncan’s assurances that the BBC was wholly committed to Kangaroo, and that there was little opposition to the project, had proved worthless. The BBC Trust told the MPs that it only ever authorised BBC management to hold discussions with Channel 4, with no commitment to final approval. It also transpired that thirty separate objections to Kangaroo were sent to the Competition Commission, which turned the proposal down, costing Channel 4 £6.4 million.

On 4Radio, Andy Duncan and Channel 4 refused to disclose the costs of the abandoned project, either to the MPs or in their Annual Report. From Duncan’s comments that the investment was only “a modest amount”, less than 1 percent of Channel 4’s £900 million revenue, the MPs concluded that £9 million had been lost. They criticised the failure to disclose the actual figures as inexcusable.

The most important of the report’s conclusions was that Channel 4’s governance structure was too weak and ill-fitted for the future. The Digital Economy Bill provides for the removal of Schedule 9, and of the separation between Channel 4 and the eleven purely commercial digital channels which surround it.  In future, Channel 4 and the other channels would become a public service “network”: meaning that actual public service content would be yet further marginalized.

As the MPs noted, out of the £900 million revenues earned by Channel 4 and the digital channels, just £153 million was spent last year on what Channel 4 itself described as “core public service”: news, current affairs, education, comedy, single drama, drama series, religion and arts. Less than 2 percent of the 12 percent total viewing to Channel 4 and the digital channels was to this content.  The new arrangements, about to become law in the “wash-up” at the end of the parliamentary session, will give a formal imprimatur to the two decades of evading statutory controls that Channel 4 has successfully managed: all to the detriment of public service broadcasting.

So here is a radical proposal. Sell the digital channels and all other investments. Withdraw Channel 4 from the advertising market-place.  Fund the £153 million needed for core public service, plus transmission and staff costs, out of 5% of the licence fee (£175 million) plus the income from the sale proceeds. Enough of the £750 million released back into the advertising market-place will flow to ITV to allow Ofcom to re-impose the modest PSB requirements – notably in relation to regional output – that it was planning to cancel.

Channel 4 would revert to a single task, with a fraction of its current staffing and overhead. The other part of its activities would sit squarely where they belong, in the private sector. The newly appointed Chief Executive, David Abraham, fresh from running UKTV, would be the ideal person to lead the sale of the non-core businesses. Director of Programmes Julian Bellamy would be an excellent person to sustain Channel 4’s PSB obligations. And the dismal consequences of this slack and mindless legislative “wash-up” process would be avoided.