Channel 4: the case for privatisation

Privatisation may be the best way to strengthen Channel 4's public service remit.

David Elstein
1 March 2016

Credit: Flickr / David Huntingdon

On his last day of six years in office as chairman of Channel 4, that wisest of owls, Lord (Terry) Burns told listeners to Radio 4’s The Media Show that “you can have the Channel 4 remit, or you can have privatisation, but you cannot have both”.

The logic behind this pronouncement has a respectable history. A previous chairman, Sir Michael (later Lord) Bishop, of impeccable Tory credentials, warned then Prime Minister John Major against any idea of privatisation in 1996: “when conventional shareholder pressures are applied to the TV industry...quality and choice are diminished...with new shareholders seeking to maximize profits, money for dividends would have to be taken from the screen”.

A very similar formula was expressed by the channel’s current chief executive, David Abraham, in 2015: shareholders would expect a 20% annual return on their capital after buying Channel 4, and that could only come from taking money out of the programme budget and abandoning the channel remit.

Other critics of the notion of privatisation (notably the excellent paper from Enders Analysis published last December) have followed a similar line. With EA, the working assumption is that an acquirer would look for a 20% profit margin, even if it were not distributed as a dividend. Normally, that would be true. However, in a carefully managed auction of an asset that may benefit a rival, to your disadvantage, if you fail to bid the full price, that margin may be eroded down to a bare 1 or 2%. 

Clearly, there is abundant evidence that this is not a binary choice between content and dividends. Indeed, 15 years ago, a policy paper issued by the Conservative opposition, in advocating privatisation, noted that the average dividend paid by the largest broadcasters quoted on the London stock market was well below 2%. ITV plc today still yields less than 2%, and both News Corp and 21st Century Fox less than 1%. Of the likely bidders for Channel 4, Discovery and Liberty do not pay dividends, and Viacom pays a bare 3%.

The kind of situation where new shareholders require large dividends is typically a private equity transaction. If one thing is certain in this whole affair, it is that there will not be a sale to private equity. A sale only makes sense to an existing media player – one that can extract synergies and savings from ownership of Channel 4.

The Burns / Bishop fallacy

The fallacy in the Burns/Bishop argument is the assumption that revenues and costs are fixed, such that only a reduction in spending or a significant devaluation of the remit can release value for a new owner. Yet I know from my own experience, when running Channel 5, that this is completely untrue.

I proposed to Channel 4 in 2000 that we merge all our back office functions (finance, administration, HR, transmission, accommodation, airtime sales, acquisition and so on), leaving the programming and marketing staff entirely independent, in order to make savings of between £130 million and £190 million a year between us.

As it happens, Channel 4 rejected the approach (though, ironically, they subsequently tried to buy Channel 5): but the scale of savings that might be achieved by a buyer such as Sky, Viacom (owner of Channel 5), Discovery or Liberty Global (owner of Virgin Media) must easily run to £200 million a year by now. Currently, that is public value going to waste.

The formula so often used by leaders of Channel 4 – we make a valuable contribution to the creative economy “at zero cost to the taxpayer” – is simply wrong. Allowing that £200 million to go begging every year, when public service broadcasting is in long term decline, cannot be the right answer. 

We have ample evidence from Channel 4’s own behaviour (including the attempted purchase of Channel 5) that a stand-alone public service channel is a sub-optimum proposition, unless – as was the case when Channel 4 was originally designed and launched – there is a guaranteed level of revenue and complete protection from the vagaries of the marketplace.

In 1982, this took the form of an annual payment from ITV, which in return derived all the benefit from selling Channel 4’s airtime – and, incidentally, was able to write off its Channel 4 subscription (with the level set by the regulator at the time, the IBA) against the levy on excess profits which prevailed in those days: in effect, the bulk of the cost of Channel 4 in its initial phase was borne by the Treasury.

The removal of this ITV guarantee followed the recommendation from the 1986 Peacock Committee that Channel 4 should sell its own airtime, so as to create more competition for advertisers in the airtime market-place – a conclusion based on the well-founded assumption that ITV was effectively suppressing the true value of Channel 4 airtime. As the Thatcher government pushed this change through, the board of Channel 4 considered its future options – including merger with the yet to be launched Channel 5, and privatisation (which senior board executive member Justin Dukes favoured).

The trade-off


Credit: Flickr / James Box

The debate inside Channel 4 was rather similar to the current argument: once you had to earn your keep, how far might your “remit” – your attempts to innovate, and your commitments to public service content of all kinds – be compromised? Of course, the “remit” that the early Channel 4 set out for itself was largely composed internally: the Broadcasting Acts setting up the channel were remarkably bare of detail, other than a requirement to be “innovative”, be an alternative to ITV (and only ITV), include a suitable proportion of material of an educational nature, and commission a substantial proportion of output from producers independent of ITV (a proportion that Whitehall interpreted as 15%).

It was Jeremy Isaacs and his launch team who decided upon much of what we now regard as the core Channel 4 remit: serving minorities, sexual as well as ethnic; targeting younger audiences; committing to education both formal and informal; supporting filmed drama (both for cinema and TV screen); finding alternative voices and opinions; and growing the share of output commissioned from independents to a clear majority.

What has notably disappeared today from the Isaacs version of Channel 4 is a strong commitment to education, to the arts and to ideas: evidence that the nature and strength of a remit is not in itself dependent upon a particular level of income, even under public ownership. The programme budget for Channel 4 today is 50% higher – even allowing for inflation – than that for 1982, though of course the sheer scale of competition facing the channel is vastly greater.

For Isaacs, the tension was between fulfilling his public service objectives and winning a large enough share of audience to keep ITV happy in its role as sales arm and supplier of a guaranteed budget (he aimed at 10% in a 4-channel system, but never actually exceeded 8% in his six years as chief executive). Cheap imported sitcoms, quizzes and a home-grown soap were required in order to fund the arts, schools, films, current affairs, minority programmes and early evening news that he had chosen to commission.

It is crucial to understand that this trade-off has remained at the heart of the Channel 4 conundrum, however often the dice have been rolled in terms of the underlying financing. This was true of each successive formula adopted by ministers and regulators in an attempt to underpin the Channel’s remit.

So, to begin with, the extra cash that flowed into Channel 4 once it started selling its own airtime seemed to have proved Peacock right. The programme budget grew, but so did the overhead, as some 60 airtime sales staff, paid high salaries and strongly incentivized through bonus schemes, arrived (there are now nearly 200 in the sales team): a change that decisively and permanently shifted the channel’s culture.

Inevitably, senior non-sales staff began to ask why their salaries – and other benefits, such as company cars – did not match those of the airtime team. When the 1991 ITV franchise round approached, Michael Grade – who had succeeded Isaacs as Chief Executive – persuaded the board to offer the channel’s key managers (including him) golden handcuffs in the shape of large cash payments, to compensate them for declining to take part in any of the bids for ITV licences.

In his six years at Channel 4, Isaacs earned a total of £250,000: soon, his successors were earning that every year, then twice as much every year (as with Grade’s successor, Michael Jackson), then three and even four times as much. At one point, the three top managers at Channel 4 earned £4.8 million between them in two years – more than twice as much as the organisation’s total profits.

Today, the average annual salary at Channel 4 for the 800-plus employees (four times the number required when Channel 4 launched – at one point the total grew to over 1200) is over £75,000, and the employment cost to the channel adds another £5,000 per head.

From public service broadcaster to media corporation

One of the reasons that Channel 4’s payroll has swollen so far is that economic logic, changing priorities and an expansive vision of the future have inexorably pushed it that way. It was not just an airtime sales team that Channel 4 had to hire: marketing and lobbying became key departments within the channel, the first to maximize the value of the Channel 4 “brand”, the second to squeeze yet more concessions out of the political class.

The negotiation to induce ITV to give up selling the channel’s airtime (and walk away from the nominal losses incurred in setting up the channel) had resulted in ITV being allowed to claim half the income earned by the newly-independent business, once Channel 4’s income exceeded 14% of all net TV advertising revenues (anything beyond 18% was excluded). The formula further required Channel 4 to allocate half its own share of any surplus generated to a Treasury reserve, with even the remaining half being subject to ministerial approval before it could be used for anything other than the channel budget.

It took some years, but Channel 4 managed to overturn all these restrictions. It emerged as a stand-alone entity (the Channel 4 Corporation), no longer controlled directly by the IBA, with a primary duty to protect the main public service channel, but with the freedom to explore other activities, provided these were “incidental or conducive” to that primary purpose.

In effect, Channel 4 could launch anything it liked: ministers had allowed a determined management, supported by the powerful independent producer lobby and an array of well-wishers, to drive a coach and horses through the original legislation and design of the channel.

Some of that support had been secured by Channel 4 making a series of promises to spend all the money it retrieved (including the £84 million in the Treasury reserve) on new programmes: it even listed the genres and the associated cost. But most of these were forgotten as the channel embarked instead upon a strategy of diversification – naturally, presented as the best way to fulfil Channel 4’s objectives.

Michael Jackson, who became Chief Executive in 1997, went so far as to announce that the whole concept of public service broadcasting was old-fashioned. He decided to shape the new Channel Four Corporation as a multi-faceted media business. He launched pay channels – Film4 and E4 – but on terms (extracted by carriage provider BSkyB) which ensured they could never be profitable: they lost a cumulative £160 million before reportedly reaching breakeven, and then being converted to free-to-air services.

By the time Jackson resigned, in 2001, the Channel Four Corporation had fallen into losses for the first time in a decade. In the five years from 1996 to 2001, Channel 4 had gone from an operating profit of £134 million to a loss of £28 million – a turnaround of £162 million.

Film production and distribution companies set up by Jackson were closed by his successor, Mark Thompson, after losing £40 million. As Thompson put it, in the 2002 Annual Report, “some operations – notably the feature film production unit – were pursuing failing strategies”. He announced that “we have put Channel 4 itself back where it should be – at the centre of everything we do,” cutting nearly 100 jobs and £21 million of costs in his first year. Yet Thompson persisted with Attheraces, which cost Channel 4 £23.3 million before it withdrew from the venture.

Thompson’s successor, Andy Duncan, also bought and invested in third party businesses: £29 million went on a half share of EMAP’s music channels (later disposed of), £500,000 on a website that closed after 8 months, £3.6 million on Life One Broadcasting (promptly written off – Channel 4 had just wanted its EPG slots), £500,000 on Ostrich Media (written off), £200,000 on Popworld, £1.5 million on Fingertip Software, £1 million on a failed speech radio station, and undisclosed millions on a digital radio venture.

At least Channel 4 was not alone in writing off £6.4 million on Project Kangaroo, a video-on-demand joint venture with BBC Worldwide and ITV, who lost £24 million between them after the Competition Commission ruled against the venture (it was eventually taken over by Arqiva, who lost another £15 million before finally admitting defeat).

One way and another, Jackson and his successors squandered nearly £300 million on non-core activities: virtually all the reserves and profits accumulated by Channel 4 and the Treasury since it started selling its own airtime, in just 17 years. That does not even include the £5 million lost when it was deposited with a dodgy bank that then went bust.

I rehearse this awkward history because it would be wrong to imagine that public ownership automatically protects Channel 4 from misguided adventures and flawed strategies on the part of its managements and regulator-appointed non-executives.

Perhaps a commercial company, with real shareholders and their chosen non-executive directors, might have staunched this flow of failed projects, or at least challenged the strategy. Yet the underlying lesson is that all this activity was directly or indirectly designed to underpin Channel 4 as a public service, once the ITV guarantee had been removed.

Building the broader base

Two more important precedents need to be cited before we can directly address the issue of privatisation. The first is the series of attempts to deliver what I had offered Channel 4 in 2000: a larger structure which would generate both savings and new revenues, thereby providing Channel 4 with a cushion against advertising recessions, audience fragmentation and intensifying media competition.

The amount Channel 4 bid for Channel 5 in 2010 – when RTL finally admitted it did not know how to make Channel 5 profitable – was only narrowly beaten by Richard Desmond’s £104 million offer. In the same year, Channel 4 made another £100 million bid, for the Living TV portfolio of channels, which were eventually bought by Sky. The second of these attempts to broaden Channel 4’s base (and make the kind of efficiency savings I had offered a decade earlier) would have left the public service channel surrounded by up to 20 commercial services.

The strategic significance of trying to broaden its economic base by deploying the last of its reserve funds was underlined by that fact that the Channel 4 board was at the same time warning Ofcom and DCMS ministers that it faced a medium-term prospect of a revenue shortfall of £100-150 million a year, which would force a significant cut-back in “remit” programming.

Channel 4 annual reports at the time showed that it allocated just £153 million to what it called “core” public service genres, such as news, current affairs, documentaries, arts, education and religion, or about a quarter of its total content spend.

Ofcom and its former chief executive, Lord Carter (by then the minister in charge of the Labour government’s digital strategy) took the pleas of economic vulnerability seriously, though working to the lower figure of £100 million figure for the annual deficit, rather than Channel 4’s pessimistic estimate of £150 million. Efforts were made to induce BBC Worldwide to enter into some form of partnership with Channel 4, but these were eventually abandoned, with no public statement of either the rationale behind such a deal, or the reasons for its failure.

Given that there was very little overlap between the two enterprises, it would seem that the object of the exercise was simply to underwrite from BBC cash-flow and assets any shortfalls that might occur in Channel 4 revenues: so scarcely a strategic approach – rather, a sticking plaster remedy.

In the event, the financial plight Channel 4 had forecast for itself never materialised: one reason may be that the amount spent on “core” public service genres has dropped from £153m to £85m. The whole episode has been airbrushed from memory: indeed, in their paper on Channel 4 privatisation, Enders Analysis declared that “financial sustainability has never been an issue throughout the course of Channel 4’s 33-year history under successive leadership teams”.

Of course, even if that declaration had been true, it would not have signified much. Channel 4 can always be “sustainable”, one way or another, by simply compromising further in the constant tension between commerciality and public service. To that extent, nothing has changed since 1982. Indeed, the direction of travel over the last decade tells its own story.

The economics of Channel 4


'Skins' is a popular E4 show. Credit: E4

Essentially, Channel 4 has managed to maintain a flat revenue profile for the last decade: total income in 2006 was £937m, and £938m in 2014, with the average for the last five years being £929m. This has been achieved by relying increasingly on its digital channels to supplement the declining audience share of the main service. In 2006, Channel 4 contributed an audience share of 9.6% to the total portfolio share of 11.9%; in 2014, it was 5.6% out of 10.9% (according to the Ofcom Communications Market Report of 2015, the 5.6% is actually 4.8% for the main channel, plus 0.8% for its +1 delayed version).

Of course, ever since the launch of multi-channel television, there has been a recognised phenomenon of audience fragmentation. The “heritage” broadcasters – BBC, ITV and Channel 4, later joined as a terrestrial analogue channel by Channel 5 – worked hard to offset the threat from the hundreds (over 500 currently) of new channels available to viewers, by launching and promoting their own digital services.

The effect of fragmentation on the five PSB channels has been dramatic, with a decline in their combined audience share, in all homes, from 73.8% in 2004 to 51.2% in 2014. The most marked decline has been in Channel 4’s audience share, down over 50% (followed by BBC2 and Channel 5, down by 39%, then ITV, 35% and BBC1, 12%).

But in multi-channel homes, the PSBs fought back. Their new digital channels have almost trebled their audience share in those homes, to 20.7%, effectively replacing nearly all the losses by the main channels. The other 500 channels on cable and satellite have actually lost a fifth of their audience share since 2004, as the PSBs and their portfolios captured 71.9% of all viewing in all homes. The satellite attack has been comprehensively repelled. The key to that success has been the allocation to the PSBs and their portfolio channels of all the best transmission frequencies and EPG slots on the Freeview system.

However, the performance of the components in the various portfolios has been markedly different. BBC and BBC2 have more than held their combined audience share, rising from 26.2% to 27.8% in multi-channel homes between 2004 and 2014, with their digital add-ons (BBC3, BBC4, BBC News, CBeebies, CBBC, BBC Alba and BBC Parliament) only contributing a 2% increase as part of an overall a rise from 29.5% to 33.1%.

ITV (along with ITV+1) has declined by 17% in those homes in those years, but its portfolio (ITV2, ITV3, ITV4, ITV Encore, CITV and ITVBe) has doubled its share, from 3.2% to 6.4%: so overall, a standstill at 22%. Channel 5 has seen a modest combined rise, from 5.1% to 5.9%, with a slight decline for the main service being compensated for by the portfolio channels (5*, 5USA) jumping from 0.2% to 1.5%.

The Channel 4 position is completely different. For the twenty years from the launch of Sky TV, between 1988 and 2007, Channel 4’s audience share averaged 10%, with a low of 9% and a high of 11%. From the 9.8% share in 2006, Channel 4 has fallen away to 4.8% in 2014: a drop of 51%.

Because Channel 4’s digital channels were originally pay services, it makes best sense to measure their relative performance from when they all became free to air. From 2006 to 2013, the Channel 4 portfolio audience share in multi-channel homes averaged 11.2%, dipping last year to 10.9%, but there was a dramatic shift in the balance between the main channel and the add-on channels (Film4, E4 and More4, together with their +1s, 4seven and 4Music).

In 2014, Channel 4’s share was 4.8% out of that 10.9 portfolio total: a ratio of 44:56. If the +1 share is added to that 4.8%, the ratio rises to 51:49. The BBC1/2 ratio to its digital siblings is 84:16; ITV’s 71:29; and Channel 5’s 75:25.

Why should there be such a huge discrepancy? It may be partly because Channel 4’s demographic profile (16-34, up-market) is more prone to the rapid shift in media use from TVs to other devices, and from linear viewing to on-demand viewing. But that alone cannot be a sufficient explanation, as the audience share for E4 – which has a much younger profile than Channel 4 itself – has risen: tolerance – even encouragement – of the shift must have played a part.

Why does it matter? After all, isn’t this outcome a belated validation – after all the misfires and failures – of the diversification strategy? The EA paper sees this high reliance on the digital channels as a sign of strength. Sadly, such a comforting thought misses the point. The portfolio channels are nominally part of the Channel 4 remit, which “applies across all services and genres”, according to the Annual Report. But the fact is that anything recognisably public service about Channel 4’s output is almost exclusively confined to the main channel.

As the proportion of the main channel’s content devoted to core public service declines, and the audience for the channel subsides, we can safely say that much less than 1% of the portfolio’s 10.9% audience share is attributable to public service content: with £900m flowing through the Channel 4 Corporation every year, what we have is a very small dog wagging a very large tail.

Although you will not find the figure in the Channel 4 Annual Report (which contains a mass of detail, but not this), the Ofcom Communications Market Report (CMR) of 2015 tells us that the proportion of total Channel 4 Corporation revenue earned by advertising on Channel 4 itself in 2014 was just £483 million: 56% of the total £860m in advertising and sponsorship that the channels portfolio as a whole brought in (sales of rights earned a further £78m).

Also missing from the Channel 4 Annual Report is any breakdown of the balance of earnings between online and sponsorship sales, and as between the main channel and the rest of the portfolio. The CMR tells us that the non-advertising revenues for ITV, Channel 4 and Five combined were £273m. Somewhere between 20% and 22% is probably Channel 4’s share: say, £55m.

 Likewise, the CMR shows £653m as the commercial PSB portfolio channels’ revenue, with the Channel 4 portfolio’s share probably close to £300m. Online revenue and commission from sales house activities on behalf of third party channels (a gross amount of £135m was earned) accounts for the balance of the £860m.  

It would seem that the main channel’s contribution to the income line is between £540m and £550m. On the expenditure side, according to the Annual Report, £492m was spent on the main channel in 2014, with £110m allocated to the digital channels and online content. The Annual Report gives us no clue as to what allocation of overheads can be made, as between the main channel and everything else. Even where such figures have been reported in the past, the document draws a discreet veil.

For instance, in the 2002 Annual Report, under the heading “transmission and regulatory costs”, we are clearly told that analogue transmission of Channel 4 cost £24.6m and digital transmission £14.1m, with transmission costs for the digital channels coming to £5.9m. Today, analogue transmissions have ceased, but the Annual Report compresses all transmission and regulatory costs into one number: £104m. As regulatory costs cannot be much more than £2m a year, it would appear that transmission costs have multiplied by five in 12 years, with no explanation given; and the split between Channel 4 and the portfolio channels has been concealed.

By contrast, the BBC declares the transmission costs for every one of its nine television services. The total of £111.8m includes £46.2m for BBC1 and £24.2m for BBC2 – both requiring complex transmitter arrangements to allow regional and local variations in output. That does not apply to any of the Channel 4 portfolio channels, which use a single content feed (though their advertising slots can vary regionally). The only reason for secrecy on the part of Channel 4 that I can imagine would be to disguise the true balance between the cost of sustaining the main service and the rest of the corporation.

My working assumption is that the main channel is quite delicately poised. If the government were to pursue its privatisation option, all the underlying figures would have to be declared to potential buyers. They would then have to address the issue of the remit: and the truth about the remit – which may surprise some observers – would then be fully exposed.

The truth about the remit

The original Channel 4 licence conditions from the 1980 and 1981 Broadcasting Acts had quite limited provisions: essentially, most of the characteristics of Channel 4 that are most familiar today were actually nothing to do with legislation, but were introduced by the first – Isaacs-led – management team. In 1982, there was no bar on in-house production, and for many years Channel 4 produced the weekly answer-back programme, “Right to Reply” (an element much missed from the schedule of today).

The sheer volume of proposals from the independent sector ensured there was no need to build up an internal capability. Now, there is actually a legal bar (though the current management would like to change its relationship with the sector, either by retaining more ownership in content it commissions, or by acquiring equity in production companies). Likewise, the commitment to British film was an Isaacs initiative (much encouraged by Channel 4’s first deputy chairman, film-maker Richard Attenborough).

The lengthy document that constitutes the present Channel 4 remit incorporates certain changes flowing from the 1990 and 1996 Broadcasting Acts, which were then extensively re-shaped during the passage of the 2003 Communications Act. The licence issued in 2004 has seen some minor changes subsequently, but is essentially cross-referenced to two dozen clauses of the 2003 Act. We are currently on to the 17th “variation”. Then, in 2010, the Digital Economy Act required Channel 4 to deliver to Ofcom an annual statement on media policy

That there may be some confusion today over what constitutes the Channel 4 remit is largely down to the 2003 Act, and its central feature: the creation of a single media regulator, Ofcom. When the various telecoms and media regulatory bodies were merged in 2003, one crucial level of expertise in the old IBA (which had become the ITC by the time merger occurred) that was lost was quality control.

Licence holders under the old ITV system (pre-1993) were inured to annual meetings with the IBA, where their record of compliance with detailed quota requirements was accompanied by a lengthy interrogation of quality of output, both locally and (where relevant) for the network.

These were no mere formalities. Before licences were auctioned, licence holders were primarily judged on quality, and cumulative negative annual reports could put the licence at risk. IBA officials were experienced and knowledgeable: they were confident of their judgements, and not afraid of issuing yellow cards.

That has all gone, of course. Ofcom lacks any staff with quality control experience, which is why it would need to beef up its Content Board significantly if it were to take over quality control for the BBC. If that were to happen, a much more pro-active version of its current relationship with Channel 4 might become possible.

Ofcom and PSB


Channel 4 was the official broadcaster of the London 2012 Paralympic Games

In the meantime, Ofcom has advanced an elaborate – but ultimately pointless – set of definitions of the purposes and characteristics of public service broadcasting. I say “pointless” because they tell you nothing useful: not whether, and to what extent, designated PSB services (BBC1, BBC2, ITV1, Channel 4 and Five) are consonant with those purposes and characteristics, nor how to make them consonant if they are not, nor why it matters if they still fail, nor what then to do.

Indeed, since 2003, Ofcom has charted a steady decline in the delivery of public service content and of originated programming, without ever suggesting how this depressing trend might be reversed. As far as Channel 4 is concerned, the main changes by Ofcom have been to loosen public service obligations, not tighten them.

As for the 2010 Act, that has simply given statutory weight to a set of aspirations, which Channel 4 is expected to pursue. There is no set measure of success, nor any proscribed penalty for failure. The tests for whether they are being met are devised by Channel 4 itself, and presently show commendable achievement. But if these – or other – tests showed lesser success, or even failure, there is no provision for any remedial action. The requirement is to state the aspirations, not fulfil them in an objective fashion.

If we look at the quantitative obligations, failure here could result in cash penalties (though the point of fining a publicly owned corporation for failing to meet its business objectives is not clear). In fact, the hard quotas are remarkably few in number. The peak-time news hour introduced by Isaacs has become enshrined in law: Channel 4 must offer high quality news bulletins (but then, so must ITV and Channel 5), at lunchtime and in the early evening each weekday, and in the early evening on Saturdays (the Sunday early evening bulletin sometimes turns up very early in the evening). There is no requirement as to how much Channel 4 must spend on news, even as a percentage of the channel budget (it actually spends £25m, or 5%).

There must also be four hours of current affairs every week, of which a proportion must be transmitted in peak viewing time (between 6.30pm and 10 pm). Channel 4 slightly over-delivers on current affairs (an average of five hours a week, three in peak), but not on news.

According to the Channel 4 Annual Report, it is required to supply one hour of schools programmes every year (actually, the Ofcom website says half an hour). That this absurd minimum requirement is satisfied by the provision of four hours a year – a year! – begs the question as to what Ofcom is trying to achieve.

In 1987, Channel 4 had taken over transmission of ITV’s schools programming (it being accepted that it was unfair on ITV to maintain that obligation whilst being denied the right to a second channel, which is where the BBC’s schools programmes were shown at that time). The original obligation was 330 hours a year, broadcast during school hours, which also became Channel 4’s financial responsibility in 1993, after it won commercial independence from ITV.

The service became known as Channel 4 Schools, and then Channel 4 Education and finally 4Learning, in 2000; and programmes continued to be broadcast through to 2009. But by then, the morning slots on the schedule had become commercially valuable, and schools programmes were, first, shunted off to the night hours, for recording and subsequent use by schools, and then out of the schedule altogether, as Channel 4 persuaded Ofcom that non-linear distribution would be much more flexible and economical. By then, the budget for education had been cut to £6m a year, and that resource was primarily re-deployed online.

In 2010, the last Head of Education at Channel 4, Janey Walker, was made redundant, and although the budget for education remains at £6m, there is no longer any “remit” requirement for actual transmissions. 4Learning itself was sold in 2007 to Espresso Group, and re-named (confusingly, but no doubt deliberately) Channel 4 Learning. When Isaacs launched Channel 4, one of his most powerful commissioning editors was for education – Naomi Sargant – with 15% of the channel budget and 400 hours of transmissions in her portfolio.

Even in 2000, Channel 4’s remit included seven hours of education every week, in addition to the schools obligation of 330 hours a year. But Ofcom has simply abandoned that, despite the 2003 Act requiring Channel to make a “significant contribution of programmes of an educational nature and other programmes of educative value” (note the “and”). Also abandoned have been the requirement for one hour of religion each week and the 0.5% training and development levy, along with three hours of multi-cultural content each week.

The licence still speaks of the need to reflect a “culturally diverse society”, but the most recent Annual Report finessed that requirement by offering “diversity” instead, and treating the many hours broadcast from the Sochi Paralympics as Channel 4’s contribution to diversity. I applaud Channel 4’s sustained commitment to disability issues: but disability is not synonymous with culture. 

Under Isaacs, arts and ideas had been a central ingredient of the schedule. A live transmission of Schoenberg’s opera “Moses and Aaron” in peak-time would be unthinkable today. The brilliant array of programmes commissioned by Michael Kustow is a distant memory. Kustow himself did not survive the transition from Isaacs to Michael Grade, but Grade could still place a season of sixteen Allegro Films music documentaries in peak time on Saturday nights for the whole of the Autumn schedule.

Under Jackson and Thompson, there were not only live broadcasts from Glyndebourne, but commissioned operas, such as Jonathan Dove’s “When She Died: Death of a Princess”. Today, the arts are barely visible on Channel 4, and neither the IBA nor its successors – the ITC and Ofcom – ever saw fit to require an arts quota.

Even the fixed quota obligations that seem firmest have soft edges. The most basic – origination – used to be 70% in peak and 60% across the schedule. The 60% is now 56%, and Channel 4 comfortably delivers the requirement. However, this is not a “first-run” obligation. In fact 9% of the peak-time delivery of 77% is repeats. Across the schedule, 29% of the 63% delivery is repeats. Channel 4 could meet these quota obligations without commissioning a single first-run programme, other than news and current affairs.

Before Ofcom took over enforcement of the quotas, there was indeed a “first-run” requirement: 80% in peak, 60% across the schedule. Last year, 43% of Channel 4 transmissions were first-run: that is, 57% repeats. The current remit is scarcely likely to strike fear into the heart of a maiden aunt, let alone major media players like Discovery and Viacom.

Only two quota requirements have edged up. The quota for independent commissions “outside the M25” was raised to 30% (in 2002, pre-Ofcom) and then 35%, as a proportion of both money spent on commissions and hours independent commissions transmitted.  It is being met with some comfort, and could easily be raised to 40%.

Within the 35%, a 3% quota for “the nations” was introduced – 3%! – rising to 9% by 2020 (Channel 4 was given seven years’ notice of this change). Even that would be a very low level, compared to the populations of “the nations” (18% of the UK). The current spend is £21m in Scotland, Wales and Northern Ireland, or 5.5% of the budget. No wonder a former Channel 4 Director of Programmes described the channel’s performance in Scotland as “dreadful”.

The only other fixed quotas – independent productions (25%), European independent production (10%) and European origin (50%) – are relatively straightforward for Channel 4 to fulfil, given its publisher-broadcaster status. Subtitling, signing and audio description quotas are in the same category: readily fulfilled by all the targeted broadcasters.

The Enders Analysis paper includes a table presenting the licence obligations for Five (as Channel 5 is now called) alongside Channel 4’s, implying there is a major difference. In fact, nearly all the measurable quotas imposed on Channel 4 are imposed on Five, even if sometimes to a lesser extent. Contrary to the EA paper, Five is obliged to provide a range of high quality programming and impartial news, as well as current affairs, along with all the quotas for independent production, origination (in peak and across the schedule) and commissioning outside the M25. It so happens that Five continues to supply a large volume of children’s programming (24 hours a week), even though that is no longer a licence requirement (but is 24 hours a week more than Channel 4 supplies). 

The 'soft' targets

Of course, there is a major difference: the “feel-good” attributes that Channel 4 (but not Five) is meant to pursue – being innovative and distinctive, reflecting alternative views and cultural diversity, offering educational content, helping to inspire change and nurture talent, stimulating debate, espousing partnership and investing in high quality content.

Self-evidently, most of these objectives lack any means of objective quantification. All credit, then, to Channel 4, in making a thorough meal of its “statement of media policy” in response to this obligation: 90 pages of evidence, compared with the single page of reporting on fixed quotas (though admittedly that is published twice, in separate parts of the Annual Report).

Yet when you prod this prodigious apologia, you find that “innovation” seemingly comes primarily through “commissioning programmes” – something all broadcasters do (this also fulfils the “nurturing talent” objective).

Diversity is partly expressed through the number of “suppliers” (338), which one unwary analyst interpreted as independent production companies. In fact, Channel 4 commissioned actual programmes from just 207 independents (exactly half the number as were used in 2002 – but you will find no suggestion from Ofcom that, as a result, Channel 4 was failing on the “diversity” front). Also tucked into “diversity” (along with programmes on multiculturalism and same-sex marriage) was “religion”.

In the same vein, reporting from overseas apparently counts as “seeking alternative views” – sadly, this category declined 23% in 2014, partly because of the absence of “Hugh’s Fish Fight”; again, seemingly nothing to worry Ofcom.

Another indicator of “diversity” is cited from the Film 4 schedule: a screening of Kurosawa’s “Seven Samurai”, sixty years after its first release, and after several dozen previous television broadcastsQuite why this should be mentioned ahead of the genuinely laudable premiere for a peak-time transmission of the first film from a Saudi female director – “Wadjda”  is hard to understand. Meanwhile, “stimulating debate” is delivered by the hard quota of news and current affairs (so no different from Five, except that main current affairs output from that channel is an actual live debate).

Impressively, Channel 4 shows up well ahead of the other PSB channels when it comes to public perceptions of which of the five is best at offering diversity and alternative opinions; challenging prejudice; showing minority viewpoints; encouraging people to think differently; tackling difficult subjects and adopting a different approach to them; taking risks and being experimental. This is admirable, but has its limitations.

First of all, Channel 4 has spent 33 years building on its statutory obligation to “be different”, with a constant marketing message. As it compares itself with three channels launched decades before it, “taking a different approach” is scarcely the most demanding of tasks. Indeed, when Five – which makes no attempt to market itself in these terms, but just happens to be a newcomer on the scene – turns up as Channel 4’s nearest competitor (however distant) in several of these measurements, it is a sign we need to take them with a degree of scepticism.

Once Channel 4 reverts to actual hard facts to demonstrate its commitment to innovation, by comparing its number of one-off new programmes in peak time with what its competitors do, it reveals a 27% decline year-on-year, still in second place to BBC2, but at a much more respectful distance.

This change, we are told, is a result of the “maturing” of Channel 4’s renewal strategy, leading to “a much stronger spine of returning series” than in recent years. That might be marginally persuasive, but for the evidence in the Ofcom CMR showing that, over the last five years, the average proportion of spend on new commissions as opposed to returning series has been 28% on Channel 4, compared with 30% on Five and 34% on the BBC.

Lord Burns pointed out, in last year’s Channel 4 Annual Report, that Ofcom’s latest PSB review had said that Channel 4’s “number of new and one-off programmes delivered compares favourably with other PSBs” – ignoring Ofcom’s less flattering observation on returning series (as above, in the CMR). Burns also notes Ofcom’s highlighting of “the resilience of Channel 4’s portfolio audience share”, even though the CMR says it is the least resilient of the PSB portfolios.

None of this is to denigrate Channel 4’s performance and current leadership. It commissions and broadcasts many outstanding programmes. It reaches younger audiences better than other PSB channels, and ethnic minority viewers almost effectively as does Five. It wins many prizes, deservedly (even if we don’t really need to be told that one of its productions had made the “best ten” list of the Boston Online Film Critics, and another that of the Central Ohio Critics Circle).

But we need to be clear-eyed about what its true significance is, and how viable that significance would be under private ownership. For instance, its critical role in supporting the independent production sector – which barely existed when it launched – has now to be seen in the light of that sector’s growth. Channel 4 was once responsible for 90% of the sector’s revenues: now the £279m it spent with qualifying independents in 2014 represents 10% of sector revenues (and just 56% of Channel 4 expenditure).

And although Channel 4 remains reasonably distinctive, such is the imitative nature of the television industry that the lauded distinctiveness is often blurred. For instance, last December, I asked some colleagues to pick out from the Christmas schedules which ten programmes emanated from Channel 4 and which from Five:

Britain’s Favourite Christmas Songs       Britain’s Favourite Children's Books

The Rich Kids of Instagram                       Can’t Pay? We’ll Take It Away

How The Rich Live Longer              On Benefits – Cashing In For Christmas

A Primary School Nativity                         Inside Lego At Christmas

Greatest Ever Christmas Movies            Britain’s Best Loved Double Acts

My Crazy Christmas Lights                       My Crazy Christmas Obsession

The World’s Greatest Spy Movies          Building The Ice Hotel

Million Pound Motors                                The Millionaire Party Planner

A Frozen Christmas                                    Help! I’m Snowtrapped

The World’s Most Expensive Food          Most Shocking Christmas TV Moments

Channel 4's transparency

Another worrying feature of today’s Channel 4 is its tactical avoidance of transparency. It is not just that its expenditure headings (such as “transmission costs”) and its revenue statements (the actual split of income from the main channel and the digital channels, and between advertisements, sponsorship and online) are irritatingly opaque.

It also sets out programme expenditure under two separate and non-comparable sets of headings. The first, on page 16 of its Annual Report, is Channel 4’s preferred design, whilst the second – relegated to page 164 – appears to reflect historic reporting practices.

According to the latter table, the largest single area of output for Channel 4 in 2014 was “education”, with 2,622 hours, costing £98m. This is, surely, a (Freudian) misprint for “factual”. Channel 4’s commitment to education is actually minimal - £6m of spend, and nine hours of origination across the portfolio. As it happens, in addition to what should have been labelled “factual”, this table also includes “other factual” (£25m, 165 hours), and “documentaries” (£25m, 274 hours):  three categories totalling £148m and 3,061 hours.

On page 16, we are offered tables setting out spend (but across the portfolio, not just the main channel) and broadcast hours (but on first-run origination across the portfolio, not all output on the main channel). Here we learn that portfolio spend on “factual” is £169m, and portfolio first-run origination hours 1,174. Obviously, Channel 4 could easily reconcile these confusing different sets of figures, but it has chosen not to do so. Some might regard this as deliberate obfuscation.

At least with drama, we know that the full £100m spent across the portfolio was all on the main channel, but that only 160 of the 579 drama hours broadcast were first-run origination. Likewise, the £22m sport budget all went to the main channel, generating 616 hours of first-run origination (and 198 hours of repeats).

By contrast, £84m is declared as being spent on film, which sounds impressive. But only half of that amount went to Channel 4 (generating a meagre 17 hours of first-run origination, as compared with 961 hours of repeats and acquisitions); the rest went, presumably, to the Film4 channel. The actual spend on film production and development was a modest £16.9 m.

Entertainment, as per the lay-out on page 164, seems to incorporate comedy (which is separately listed in the page 16 version); conversely, quiz and game shows, and music and arts, are separately listed on page 164, but not on page 16, so presumably are incorporated in the definition there of “entertainment”. The combined cost across the portfolio of “comedy” and “entertainment” is stated on page 16 as £167m, of which £134m appears to be for Channel 4 (according to page 164).

News provision and cost is the same on both lay-outs: £25m cost and 242 hours (in other words, everything is on the main channel). Channel 4 carries all the costs of current affairs (£20m, delivering 145 hours of first-run origination and 238 hours in all), and of sport (£22m, delivering 616 hours of first-run origination and 814 hours in all). None of this detail matters very much, however tiresome it is to analyze (and for patient readers to peruse): but then the sting is in the tail.

In the page 16 lay-out, there are entries for “education” (£6m spend, nine hours of first-run origination across the portfolio) and “older children” (£2m, four hours) – a hangover from a previous, belated decision to provide some children’s content, after decades of no provision for children. There is no mention of these categories in the Channel 4 transmissions list on p 164, suggesting that those hours are not actually broadcast on Channel 4. Similarly, the listings for “arts and music” (£8m, 92 hours), and “religion (£1m, 11 hours) on page 164 are not mentioned in the table on page 16, listing (we are told) all the portfolio origination spend.

Brazenly, Channel 4 offers a group of genres which it claims constitute its contribution to core public service broadcasting: news, current affairs, education, schools, comedy, drama, arts and religion, on which it spent £172m in 2014 (or 28% of total portfolio spending). The inclusion of drama and comedy is startling: no annual report a decade ago would have dreamed of trying to squeeze those into the “endangered species” core definition. If we just focus on the other categories, and add in “documentaries” (not listed on page 14, but identified separately on page 164) and “older children”, we come up with a cost of £85m, or 14% of all Channel 4 spend. This delivered 876 broadcast hours: exactly 10% of Channel 4’s total transmissions.

The average amount of viewing of Channel 4 each day is 10.5 minutes. As public service content almost certainly attracts less viewing than entertainment content, it seems safe to say that Channel 4’s contribution to the viewing of core public service content is less than one minute per day per person in the UK.

Perhaps for some people that induces simply a shrug of the shoulders. Isn’t box-ticking public service broadcasting a very nineties concept? Shouldn’t we embrace the fuzzy feel-good definitions that the Digital Economy Act, the Communications Act, Ofcom, the BBC and Channel 4 have set out?

What do we really need?

I can only speak for myself. In my view, the issue with Channel 4 is not privatisation, but how to enhance its central public service broadcasting role. I would like to see Ofcom re-instate all the old Channel 4 quotas, other than for schools programming (for which there is no longer a meaningful broadcasting responsibility).

So: seven hours of education every week (validated by suitably qualified and specially hired staff at Ofcom); one hour a week of religion and ethics; three hours of multi-cultural programming every week; 80% of Channel 4 transmissions to be first-run in peak and 60% across the schedule; with 70% of such transmissions to be origination in peak and 60% across the schedule.

All the current requirements for news and current affairs, for independent production, and for signing, sub-titling and audio-description should be maintained, and the training levy re-instated.

In addition, I would introduce a requirement for one hour a week of arts, with at least half of all arts output in peak; and for 40% of all commissions to be from outside the M25, and 10% (as from 2018, 15% as from 2020) from the Nations. A new requirement would be for at least 300 qualifying independent production companies to receive commissions each year, of which at least 20  would have annual turnover of less than £1m; and for at least two hours a week (from 2018) of programming, sourced from at least 10 companies, where either the director, the producer (of which there should not be more than two) or the executive producer (of which there should not be more than two) is BAME, such that at least 50 different such individuals are identifiable each year.

I would also impose a requirement that the current budget for Channel 4 be ring-fenced and inflation-proofed, along with the budget for news and current affairs. 

In exchange, I would excuse Channel 4 the rigmarole of the annual statement of media policy, though it would be welcome to continue with it, if it so chose.

How could privatisation deliver a stronger "remit"?

Much of the criticism of the government’s exploration of possible privatisation of Channel 4 has started from the Burns premise: you can have privatisation or the present remit, but not both.

I have not the slightest doubt – having examined the reality of the “remit” – that any number of purchasers could deliver the present “hard” quotas and a version of the “soft” (but anyway unenforceable) targets. It therefore does not surprise me that the government has been able repeatedly to assure us that the “remit” would be strengthened within any privatisation.

Interestingly, that is exactly what the Conservatives promised in the document I cited earlier, from January 2001, when putting forward a detailed proposal for Channel 4 privatisation, “with an enhanced remit to deliver high quality drama, current affairs, news and minority programming on its core channel”.  

Perhaps just as importantly, that document pledged to use the proceeds from any sale to create an arts and culture endowment. There is obviously an opportunity today to do something similar, in the shape of a public service content fund, as proposed by – yes! – Lord Burns 10 years ago in his report to Tessa Jowell on the future of the BBC.

I see no evidence that privatisation is being pursued for irrational or ideological reasons: the 2001 document is not confused, nor self-contradictory, let alone insane, as some critics have alleged. The test of the sanity of the proposal will come as and when the Treasury tries to find would-be buyers at the desired valuation, who are willing to take on a much tougher remit and regulatory regime.

The 2001 document was confident that a sale of Channel 4, even with a strengthened remit, would raise at least £2 billion. The reasoning is not complicated. The present Channel 4 headcount of 808 includes 214 in programming, 192 in sales, 110 in marketing, 69 in finance and HR, 66 in rights exploitation, 51 in transmission and engineering, 40 in IT, 36 in corporate affairs, 17 in strategy and 13 in talent support. Clearly, a large media company buying Channel 4 would be able to dispense with at least 500 of these saving some £30-40m a year.

Even larger savings would be available from absorbing accommodation, transmission, acquisition, financing, HR and administration costs. For most acquirers, folding their airtime sales function into Channel 4’s would add a welcome premium to the value of their advertising inventory, without inflicting and significant damage on other ad-funded broadcasters. For some, there would also be tax efficiencies.

The value of all these elements would surely be in the range of £200m a year, to which can be added the value of the Channel 4 premises (£85m) and the cash reserve maintained by Channel 4 (£230m), which a larger company could simply pocket, given its capacity for funding all Channel 4 operations out of its broader cash flow.

Would a buyer accept a stronger remit? We have evidence from the recent sale of Five to Viacom. During the Ofcom approval process for the sale, Viacom offered (note: Ofcom itself did not suggest) stronger quota requirements in three of the licence requirements. Ofcom sensibly accepted them, and re-issued the licence with the new terms. It should learn from that outcome.

There is one factor that might justify a reduced sale price and even a delay in imposing all the new quota requirements: the need to reverse the decline in Channel 4’s audience share. We should never lose sight of the fact that the object of the exercise is to ensure that we use available public resources to enable the creation and consumption of core public service content. How a purchaser proposed to take Channel 4 back to a 6%+ share should be a factor in any negotiation. 

The Enders Analysis paper rightly argued that there is no pressing need to sell Channel 4: the proceeds would make barely a dent in the UK’s debt obligations, and Channel 4 is not in any foreseeable danger of failing. To support that argument, EA presented forecasts for advertising revenue that show a real degree of comfort.

All that may be true, but does not affect the central calculation: if Channel 4 can survive – even thrive – indefinitely in public ownership, thanks to a weak remit, then it is all the harder to justify leaving money, and a stronger remit, “on the table”, unrealized, especially if a proportion of the money raised can be used to provide a contestable public service content fund, thereby reversing the long term trends Ofcom has tracked in its successive reports on PSB.

Ofcom has told us that in 2014 spending by the PSB channels (BBC1, BBC2, ITV, Channel 4 and Five) “on new UK originated programmes has fallen by 15% in real terms since 2008, to £2.5 billion (of which £500m is on sport) – the same level as in 1998”.

Specifically, says Ofcom, spend on arts and classical music has fallen by 25% (32% since 1998), while “provision has all but ceased of religion and ethics (down 26% since 2008, 58% since 1998) and formal education (down 77% since 2008, 70% since 1998)”. That Ofcom itself has failed to impose an arts quota on Channel 4, and has allowed the quotas for religion and education to be abandoned, is a painfully ironic comment on its adequacy as a regulator.

If there is to be a sale process, Ofcom – and especially its content board – needs to be meaningfully strengthened, so that any new remit can be vigorously enforced. The legislation provides for cash penalties for failure to perform, which – even if they are pretty useless with regard to a publicly-owned Channel 4 – can certainly be deployed with a private owner. The maximum penalty is 5% of relevant turnover – or £25-30m – but lower penalties of £5m or £10m could be imposed for repeated failure to meet key quota requirements under a strengthened remit.

There might also be a case for a retrieval mechanism, whereby persistent failure by the new owner to observe the key terms of the new remit would result in the loss of transmission spectrum and associated carriage privileges; and perhaps the brand name, too.

A new regime should also encompass quality judgments from Ofcom, along the lines of those issued by the BBC Trust in relation to the BBC service agreements. The retreat into woolly generalities needs to be halted, and reversed.

It is possible that the present Channel 4 board will volunteer to adopt the tougher remit proposed here, in order to fend off privatisation. If so, well and good: after all, Ofcom floated the idea of auctioning the licences for ITV and Five before they were renewed last year. At the very least, the government would then have a base line of requirements for any privatisation process.

I fully understand that many people would be nervous of privatising Channel 4 – even if that delivered a much stronger remit and a public service content fund – simply because of distrust of the outcome, or even distaste for private ownership. I spent many years of my life campaigning for Channel 4 to be launched as a publicly-owned enterprise, rather than the fourth channel being assigned to an ITV2. 11 years ago, when publishing “Beyond The Charter: The BBC After 2006”, I rejected any suggestion of privatising Channel 4.

So I am conscious of a certain irony in now believing that a carefully managed privatisation might deliver considerably more public value than the status quo. That said, 11 years ago, the collapse of the Channel 4 audience had not begun, and the remit was still robust. I can live with the irony: the needs of public service broadcasting must prevail.

All information in this article is drawn from Channel 4 Annual Reports, Ofcom reports on public service broadcasting, the 2015 Ofcom Communications Market Report, the Enders Analysis report “Channel 4: Sustainability and Privatisation” (December 16 2015), the Conservative Central office news release “Conservatives to Privatise Channel Four” (January 21st 2001), Maggie Brown’s 2007 history of Channel 4, “A Licence To Be Different” and Tim Gardam’s speech “Channel 4’s Public Service Role” (December 13th 2000). Greater detail on the diversification strategy of Channel 4 can be found in my Beesley Lecture (September 24th 2009), available on the Media Guardian website.

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