Channel 4 – written evidence (SCF0019)

House of Lords Select Committee on Communications inquiry into the Sustainability of Channel 4

Introduction

Channel 4 welcomes this inquiry from the Lords Communications Committee, which will provide an important platform for evidence-based discussion at a time when Channel 4’s future is under scrutiny.

There is widespread agreement across Parliament and industry that the success of the UK’s television industry is due to the special ‘ecology’ within the sector, with a range of different organisations with different goals, business models and sizes. These different models mean that there is strong competition between a mix of public service and commercial operators, but with different objectives and incentives. This mixed ecology has led to the UK’s content sector – in broadcasting, film and digital content and games - becoming one of the best in the world in terms of quality and economic success.

C4 has a unique and important place within this highly successful ecology. This contribution is enabled by the specific way in which Channel 4 is set up – in terms of the role it is asked to play by Parliament through its remit and the model under which it operates.

Channel 4’s statutory public service remit requires it to deliver a specific set of social, cultural and economic impacts. These are contained in the Communications Act 2003 and updated in the Digital Economy Act 2010.

Channel 4’s remit – laid out in statute – is comprised of 15 elements:

1. INVEST IN HIGH QUALITY CONTENT: “participate in the making of a broad range of media content of high quality”
2. INNOVATION: “Demonstrate innovation, experiment and creativity in the form and content of programmes.”
3. DISTINCTIVE: “Exhibit a distinctive character.”
4. CULTURAL DIVERSITY: “The making of a broad range of relevant media content of high quality that, taken as a whole, appeals to the tastes and interests of a culturally diverse society.”
5. TALENT DEVELOPMENT: “Support the development of people with creative talent, in particular people involved in the film industry and at the start of their careers.”
6. STIMULATE DEBATE: “Support and stimulate well-informed debate on a wide range of issues, including by providing access to information and views from around the world and by challenging established views; promote measures intended to secure that people are well informed and motivated to participate in society in a variety of ways.”
7. ALTERNATIVE VIEWS: “Promote alternative views and new perspectives.”
8. INSPIRE CHANGE IN PEOPLE’S LIVES: “Provide access to material that inspires people to make changes in their lives.”
9. PARTNERSHIP: “Working with cultural organisations.”
10. MULTI-MEDIA: “The making of a broad range of relevant media content of high quality; the broadcasting or distribution of relevant media content by means of a range of different types of electronic communications networks.”
11. EDUCATION: “Make a significant contribution to meeting the need for the licensed public service channels to include programmes of an educational nature” and to provide educational content for teens, reflecting the requirement to provide “a sufficient proportion of schools programmes.”
12. OLDER CHILDREN AND YOUNG ADULTS: “The making of relevant media content that appeals to the tastes and interests of older children and young adults.”
13. NEWS: “The making of relevant media content that consists of news.”
14. CURRENT AFFAIRS: “The making of relevant media content that consists of current affairs.”
15. FILM: “The making of high quality films intended to be shown to the general public at the cinema in the United Kingdom – as well as the broadcasting and distribution of such content and films.”

This contrasts with the significantly more limited statutory remits for Channel 3 and Channel 5, which are limited to: “the provision of a range of high quality and diverse programming.”

Since 2010 the Channel 4 remit can be delivered across C4’s portfolio of outlets – TV channels and on online and digital platforms, as well as through investment in film for theatrical release – although formal public service status (and associated obligations and benefits) applies only to the main channel. Through its Ofcom public service licence a number of additional quotas are imposed, reflecting certain aspects of the remit. These include quotas for news, current affairs and production (origination and commissioning from the Nations and regions) and access service obligations. Channel 3 and Channel 5 mainly have similar quotas, albeit with some points of differentiation, so the obligations that set Channel 4 apart and ensure that its output is distinctive are the qualitative statutory elements.

There are a number of features of the Channel 4 model which support the fulfilment of the remit:

-          It is publicly owned and entirely commercially funded. This means that it earns all its money in the marketplace but puts all of these profits back into programmes, at zero cost to the taxpayer. As such, it is incentivised to focus on delivering its remit and generating the funds to do so – it is not distracted by the needs of shareholders; and its self sufficient funding means it is able to operate independently of both Government and shareholders which particularly supports its remit to be risk-taking innovative, distinctive and alternative.

-          As a publisher-broadcaster, it commissions all its content (in TV, film, online and games) from hundreds of production companies, mostly SMEs, from right across the UK.

-          This specific set of attributes has enabled Channel 4 to play a vital role in British life for the last 30 years – investing more than £10bn  in programming since its inception, developing hundreds of production companies from micro-businesses to global players, and launching the careers of creative talent such as Sacha Baron Cohen, Steve McQueen, Danny Boyle, Graham Norton, John Boyega, Alexandra Roach, Andrea Risborough and the latest award winning comedy talent Michaela Coel, Sharon Horgan and Rob Delaney.

Despite considerable change in the broadcasting sector over the last thirty years, Channel 4 remains in robust health, partly driven by its remit for innovation. Channel 4’s portfolio of channels account for c.11% of viewing – a footprint that has remained broadly stable over 30 years, as well as having the second highest share of commercial impacts. Channel 4’s sales house commands over 25% of the UK TV ad market, drawing in around £1bn in revenue, over £600m of which goes into content every year. Currently, revenues and investment in UK content are the highest in C4’s history, we have won a record number of industry awards and audience reputation statements show that perceptions of Channel 4’s remit delivery are at an all-time high.

Taken together, these metrics – which we discuss in more detail below, and are supported by extensive third party expert analysis – show that Channel 4 is delivering its two core objectives very successfully: delivering its remit and ensuring the organisation is financially secure. On this basis Channel 4 looks set to remain sustainable – creatively and commercially – for the foreseeable future, and in a position to continue to make a substantial and meaningful contribution to British broadcasting, its audience and the creative industries it supports.

About this response

In this response Channel 4 sets out its views on each of the topics identified by the Committee in its call for evidence.

Funding

The Committee has asked for views on the extent to which Channel 4 is financially sustainable under its current model. Our strong view is that this is the case – and it is a view which a range of independent experts support. This includes Ofcom, who renewed Channel 4’s licence for ten years after extensive analysis of C4’s long-term forecasts, as well as expert analysts such as Enders Analysis and Ernst and Young after comprehensive analysis of market forecasts. A key excerpt from each of these reports shows the level of consensus around Channel 4’s financial sustainability:

• “In relicensing the core C4 service for ten years in 2014, we made it clear that we believed that the current funding model for that channel was sustainable.” Ofcom 2015

• “Channel 4 is delivering its remit with great success, is commercially sustainable and promises both to remain highly sustainable and grow its PSB contribution through its current licence ending in 2024”. Enders Analysis, 2015

• “Overall, Channel 4 has a track record of demonstrating flexibility and adaptability in the face of changing policy, consumption patterns, and economic conditions that impact on both short and mid-term profitability. This stands it in good stead to deal with future challenges – and we expect Channel 4 to remain sustainable as a standalone business, assuming it retains its current flexibility and ability to adapt.” Ernst and Young, 2016

Channel 4’s own revenue data shows that, rather than the last few years indicating gradual decline, Channel 4 has remained very stable. This has come about as a result of Channel 4’s particular appeal to valuable audiences to advertisers (especially young adults and light TV viewers), its propensity to innovate and the strength of the TV advertising market. As the chart below shows, Channel 4’s core TV advertising revenue has remained strong over the last five years; at the same time digital revenues have grown. Channel 4 is set to show a sizable increase in its revenue in 2015, to be published shortly in its Annual Report, and is currently on track for growth in 2016.

Channel 4 has been consistently fast to respond to market developments: in the early years of multi-channel television Channel 4 launched a suite of portfolio channels; in the early years of internet connectivity, we were the first broadcaster in the world to launch a video on demand platform; and in an age of personalisation we were the first broadcaster in the UK to launch a first party data-strategy.

This strong financial performance has seen Channel 4 increase content investment over the same period – rising to a new high of £602m in 2014, and is set to show a further record content investment figure when its 2015 figures are published.

Table 1: Channel 4 Corporation revenues and content spend (£m), 2010-15

Channel 4’s core business model continues to be television advertising, which is in robust health. Indeed, while there has been an enormous growth in the online advertising market this has been largely at the expense of print media rather than television. Viewing to the TV is forecast to be stable over the next 10 years at over 3.5 hours per day[1], with the decline in viewing live and 7 day catch-up TV on the TV screen forecast to slow to less than 1% per year, as the level of tablet take-up and broadband speeds plateau over time. Alongside this, viewing of broadcasters’ content on other screens, such as mobiles and tablets, is expected to grow –with the broadcasters’ video-on-demand services forecast to grow by more than 300% by 2025[2].

In addition, TV will also remain effective at delivering mass reach. Advertisers continue to see TV as the best way to reach a mass audience, despite the small decline in linear viewing, with 2014 commercial impacts for individuals, ABC1AD and AD1634’s 27%, 34% and 10% higher than in 2004[3]. The TV advertising market topped £5bn for the first time in 2015, and is forecast to grow even further over the next few years. Channel 4’s total sales house commands 25.9% of the advertising market, with total revenue of over £1bn in 2014.

It is also worth noting that while much has been said about the rise of global OTT services such as Netflix and Amazon, it is to traditional, linear TV that these companies turn to market themselves. 2015’s biggest new TV advertiser was none other than Facebook. Google, Facebook and Netflix spend over 60% of their marketing budgets on TV advertising[4].

Within the TV advertising market, Channel 4 has been able to maintain its commercial premium, and is well-placed to do so in future as a result of high levels of content investment, innovation in the ad-break market, such as live and split-screen ads, as well as its continued resonance with hard to reach groups highly valued by advertisers, such as the 16-34s demographic.

In addition to the resilience of television advertising, Channel 4 has grown its revenues in recent years as a result of diversification. Channel 4’s appeal to hard to reach audiences particularly the young, translates into the digital world. This has included significant investment in our data strategy, which now has over 13.5m million viewers registered with Channel 4, including half of all 16-34 year olds in the UK. This has enabled us to work with commercial partners to offer innovations like targeted advertising. We have evolved 4oD into All4, a service that incorporates live TV, catch-up, box sets, shorts, and exclusive online originals. This is a unique offer and has ensured we are responding to the media habits of younger audiences - the average age of an All4 user is 28.

The combination of a compelling digital proposition, underpinned by a data strategy that enables us to charge sales premiums, has meant that Channel 4 is now broadly indifferent – in revenue terms – between whether a viewer watches content on Channel 4 or All 4. Channel 4 was also the first broadcaster in the UK to launch programmatic buying for digital ad sales – an automated form of sales which uses software and data to buy ad spots and increases the potential for new, innovative forms of advertising, with more precise targeting. This strategy, with solid growth in digital viewing, is translating into dynamic and significant growth in online revenues which were £63m in 2014. Put simply, we are trading ‘analogue pounds’ for ‘digital pounds’.

We have also developed new areas of investment and innovation - for example All4Games, our games publishing arm based in Scotland, the Indie Growth Fund, in which we take minority stakes in burgeoning production companies, and the Commercial Growth Fund, in which we take equity stakes in companies in lieu of advertising spend. These areas are ways in which Channel 4 can continue its role in supporting and nurturing emerging businesses, as well as providing new business and revenue opportunities.

No company is immune to market change, but Channel 4 has shown itself able to innovate successfully over 20 years of technological change from multi-channel, the internet and mobile. Channel 4’s strategic investments in recent years have ensured it is on the best possible footing to compete in a digital world, and there is no evidence that Channel 4 could not continue to innovate and stay ahead of market developments under its current ownership model. Indeed, it is the current model that in part enables C4 to take the kind of creative risks and invest in innovation that appeals to younger and harder to reach audiences. In this sense the model and the remit are positively and mutually self-supportive.

Significantly, external analysts have noted that Channel 4’s track record of innovation in the face of technological change means that it is well placed to respond to changing viewing trends and that this is a key attribute in supporting Channel 4’s future financial sustainability. Channel 4 continues to appeal strongly to younger audiences and has a younger audience profile than other broadcasters, with 28% of its share coming from 16-34s. While it is true that 16-34s watch less live television than the average UK population, Ofcom’s latest figures show that 72.5% of 16-34s viewing is still to live or recorded TV versus 85% for all adults. A further 6.5% is to free on-demand platforms such as All 4 and iPlayer and only 5% of 16-34 viewing is to sites like YouTube. In addition, the proportion of Channel 4’s prime time audience which is aged 16-34 has remained constant despite the changes of the past five years, from 18.5% in 2010 to 18.4% in 2015.

In terms of future viewing trends, EY has concluded that “there is limited evidence that UK VOD viewers will shift significantly away from UK content such as that provided by Channel 4”, while Enders Analysis has predicted “a sharp slowdown in the rate of decline among adults 16-35 over the next two years, based on our analysis of recent trends”, and have forecasted that, on the basis of current BARB trends, 74% of total viewing of video programme content will remain live or up to 7-day time-shift/catch-up across 2015-2025.

Should a more marked decline in live TV viewing occur, analysts have concluded that the innovations that Channel 4 has made in recent years, such as increasing moves towards on- demand content and the ability to monetise on-demand viewing, will ensure its sustainability in the face of future change. This is further reinforced by Enders Analysis’ forecast that broadcasters’ live and on-demand content will still account for 83% of video viewing across all screens in 2025. In addition, Enders Analysis has forecast that Channel 4’s innovations in both digital content and the way it sells digital airtime will result in a doubling of digital revenues, driven by an increase in digital video viewing.

The Committee have also asked whether any other revenue streams for Channel 4 should be considered. Channel 4 is clear that it is not seeking to be a recipient of public funding. We believe the independence of our not-for-profit commercially-funded model is a better way to deliver our unique remit than by receiving public money. Indeed, we would go as far as saying we believe that public funding could undermine Channel 4’s existing model: we would be reluctant to move away from an entirely self-sustaining model. As outlined above, we will continue to look at self-sustaining ways to innovate our core advertising funded model – such as through the use of first party data and striking new types of partnerships with third parties.

In addition, we have identified a number of policy and regulatory solutions that policy- makers could consider with the aim of enhancing the public service broadcasting system as a whole. In its submission to Ofcom’s Third Review of Public Service Broadcasting, Channel 4 called for updates to the current regulatory framework that impacts on public service broadcasters more widely, to ensure that maximum value is being extracted from the system, and reinvested back into UK content. This includes reform to the current regulatory system which governs the relationship between pay TV platforms and PSBs, updates to the regulation underpinning the commercial relationship between broadcasters and producers, and strengthening the EPG prominence regime to ensure it is fit for purpose as viewers begin to move away from traditional EPGs.

Viewing

The Committee asks whether viewing to Channel 4 is sustainable – noting declines in reach and share on the main channel.

Viewing to all the main public service TV channels (BBC1, BBC2, ITV1, Channel 4 and Channel 5) has declined in recent years. However, we would note that in relation to Channel 4, declines have actually stabilised in recent years, and in some areas reversed. In 2015 the main channel bucked the trend of the other PSBs to see audience share increase in 2015 for the first time in nine years. Channel 4 was the only public service channel to see growth in all three of the key demographics of: all individuals (up 1% year on year), 16-34 year olds (up 2% year on year) and ABC1 Adults (up 6% year on year). More broadly, Channel 4 has responded to market changes through investing in its own portfolio channels. Despite intense competition C4 portfolio audience share has been stable – with 10.6% share in 2015 compared to 10.8% in 2005.

Table 2: Audience share (%) of broadcasters’ portfolios, 2005-2015

Channel 4’s viewing has also been stable in key public service areas. Channel 4 delivers most of its original programming in its peak-time schedule, to maximise the impact of its public service content. In 2014 (the latest reported data), 68% of the main channel’s peak- time schedule was devoted to first-run originations. Peak-time viewing is therefore an important metric of public service impact. C4C’s portfolio share in peak-time has grown every year for the last three years, and in 2015 was at its highest level since 2008. Growth of peak-time viewing on the main channel was even stronger – up 8% year on year in 2015, and was also up year on year for 16-34 year olds and ABC1 Adults. Channel 4 News also increased share and reach in 2015 – the first time reach has increased since 2008 and second successive year in which its share increased.

Crucially in an age where young people are migrating to other platforms, Channel 4 has a particularly strong relationship with 16-34 year olds. Channel 4 is the only broadcaster in the world with a larger share of viewing amongst 16-34s than the general population, and 2014 saw Channel 4 achieve the highest ever share of 16-34 year olds in its history with a record share of 17% across our portfolio of channels. We are also a vital provider of news, current affairs and documentaries that engage young people – 86% of the top 50 factual programmes amongst 16-34s in 2015 were on Channel 4, and Channel 4 News has the youngest profile of any of the main news programmes with 16-34’s accounting for 14% of viewing. Our programmes play a vital role in informing young people about wider social issues – whether through finding engaging ways to address contemporary themes like Cyberbully (a drama about a teen being bullied  online) and Hunted (a game show highlighting the implications of surveillance in Britain) as well as topical programmes like The Last Leg and Gogglebox.

Channel 4 also has a more diverse audience than the other public service broadcasters, with a higher proportion of BAME viewers – an audience which broadcasters find traditionally hard-to-reach. In 2016 to date, 9% of Channel 4’s portfolio audience have been BAME viewers, compared to 6% for both the BBC and ITV. In 2015, the Channel 4 portfolio had 10.1% share of BAME viewers, compared to 10.6% for all individuals. Channel 4 also has a smaller differential between its TV portfolio viewing shares amongst BAME and white viewers than that of any of the other PSBs (-6% in 2015 vs. -31% for the BBC, -33% for ITV and -15% for C5). In addition, Channel 4 News has a higher proportion of BAME viewers than other public service broadcasters – in 2016 to date, BAME audiences have accounted for 18% of Channel 4 News’ audience (+3%pt year-on-year), compared to 7% for BBC1 and ITV.

Remit

How the remit works

Channel 4 has a unique public service remit. It is clear and comprehensive, set out in statute and agreed by Parliament. Unlike the other commercial PSBs, Channel 4’s remit applies to all its content across all of its services, including its digital channels and online content, as well as its non-programming activities. It was last updated as recently as 2010 through the Digital Economy Act. As outlined in the introduction the remit contains 15 core elements. These incorporate a detailed set of behaviours and purposes - including requirements to be distinctive and innovative, to inspire change in people’s lives, stimulate debate, show alternative viewpoints, nurture talent, as well as requiring Channel 4 to invest in particular genres such as film, news, current affairs and educational content for teens. The remit also requires quotas to be applied to areas of production such as original commissioning, and production in the Nations and regions and in certain genre areas. These are set out (in relation to the main licensed PSB channel) in the Ofcom licence.

In addition to the statutory remit, Channel 4’s licence to broadcast issued by Ofcom contains specific quotas as required by legislation. Table 3, below, summarises the remit and licence obligations:

Table 3: Summary of remit and licence obligations

Channel 4’s specific quantitative quotas, set out in its Ofcom licence, have remained constant or increased (with the exception of a small reduction in its originations quota in 2010 from 60% to 56% and adjustments to its schools and lunchtime news requirements to reflect digital delivery). For example, Channel 4’s regional production quota was increased from 30% to 35% in 2010, while new quotas for 9% Nations production by 2020 was set at licence renewal. C4 has often made additional voluntary commitments, such as its annual engagement with the Ofcom Nations Committees alongside its increased Nations quota and to a 100% subtitling target. Channel 4 has never missed a quota and over the past decade has consistently exceeded its quotas – particularly for peak time news, peak time current affairs, regional and Nations production, independent production and audio description.

As part of Ofcom’s change of control process for Channel 5, Viacom agreed to increase quotas for peak-time original production (40% to 45%), 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 it is worth noting that 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. At the time of Channel 5’s acquisition, Viacom also pledged to increase investment in UK originated content on a voluntary basis. While increased investment is of course a positive development, when this commitment was made Channel 5 was investing relatively low levels in UK content (C5 invested £90m on first-run originated content on its main channel in 2013, compared to Channel 4’s investment of £377m on first-run originated content on the main channel). In addition, there is no legal backstop for Ofcom to enforce this. Indeed some commercial broadcasters, while exceeding their quotas in some areas, have been forced to seek regulatory relief and significantly reduce quotas in other areas, including news, current affairs, regional programming and children’s, due to commercial pressures. For example, as a result of the economic downturn in 2009, ITV’s current affairs quota was cut from 78 hours to 43 hours per year. Its regional production quota was also cut from 50% to 35% hours and spend in 2009, after it was fined by Ofcom for not meeting its 50% out of London expenditure quota in 2006 and 2007.

Like all broadcasters, C4 is regulated by an external independent regulator, Ofcom, who oversees our compliance with the Ofcom Broadcast Code as with all other broadcasters. To ensure that Channel 4 is fulfilling the qualitative and quantitative components of the remit, Channel 4 also has in place a comprehensive and detailed governance and accountability framework – comprising internal and external mechanisms. This rigorous framework is unique to Channel 4; it does not apply to Channels 3 and 5:

• A unitary Board chaired by a Non-Executive Chairman and comprised of Executive members and a majority of Non-Executive members with a wide range of expertise. Non-Executives are appointed independently by Ofcom and approved by the Secretary of State. The Board is required to fulfil two core functions: fulfilment of the remit and ensuring the Corporation is financially secure to do so.
• Scrutiny from Ofcom for delivery of its public service remit: Ofcom oversee Channel 4’s specific accountability arrangements, comprised of the Statement of Media Content Policy (SMCP), an annual report which details how Channel 4 has delivered against its public service remit as outlined in legislation. The SMCP is developed in consultation with Ofcom and the accountability process includes a formal annual scrutiny session with the Ofcom Content Board, extensive information exchanges with Ofcom executives over a period of months, concluded by a public letter from the Chair and Chief Executive which provides an assessment of Channel 4‟s remit delivery.
• The Digital Economy Act 2010 also requires Ofcom to conduct a periodic and longer-term review of Channel 4‟s assessment of its remit delivery – the most recent of which was published alongside Ofcom’s PSB Review in 2015 and which concluded that “overall, C4C is performing well”
• Accountability to Parliament through the laying of our Annual Report and a voluntary annual public scrutiny session of our Chairman and Chief Executive with the Culture Media and Sport Select Committee.
• Additional voluntary accountability arrangements on key remit areas such as reporting on the progress of our 360 Diversity Charter, and formal additional engagement with Ofcom Nations representatives on delivery of our Out of London quota.

How Channel 4 delivers the remit

In recent years, Channel 4 has been engaged in a process of Creative Renewal, through its Investing in Innovation strategy. As a result, UK content investment has been maintained at high levels over the past four years, with Channel 4’s creative contribution accounting for 73% of revenue and investment of £430m in UK original content in 2014. In 2015, Channel 4 also increased Film4 funding from £15m to £25m a year.

As well as investing peak levels in content, crucially this has led to peak levels of creative success and reputational recognition for remit delivery.  The strategy – in part triggered by the decision to end Big Brother and other long running strands, and free up hundreds of hours in the schedule – has been based around experimenting with a vast range of new titles and developing returnable hits. This has led to a schedule that now features an array popular, returning series which form a ‘spine’ of familiar programmes, such as 24 Hours in A&E, Educating (Yorkshire/Essex/Cardiff), The Undateables, First Dates, One Born Every Minute and Gogglebox, around which we continue to experiment with new and one off programmes – such as The Tribe, Hunted, Escape from ISIS, Cucumber, Things we don’t say about race that are true, The Murder Detectives, Humans, Indian Summers and Grayson Perry’s series ‘Who Are You?’

Over this period Channel 4 has seen numerous notable creative successes as a result of its strategy, which demonstrate the ways in which the remit can be delivered across a wide range of genres and programme formats. From poignant and quirky comedies such as My Mad Fat Diary and Chewing Gum – which tackle the issues faced by teenagers as they grow older - to innovative factual shows such as Hunted (with themes of online identity and privacy) and Gogglebox (which holds a mirror up to society and now commands nearly 6m viewers per episode). High quality and thought-provoking dramas such as Indian Summers and Humans - Channel 4’s largest drama audience for 20 years – also tackle important issues including the UK’s colonial past and the impact of artificial intelligence, as well as being beautifully crafted cultural works in their own right.

Channel 4 also airs more news and current affairs than any other main PSB channel. Recent ground-breaking news and current affairs investigations include the Emmy award-winning Children on the Frontline and Nigeria’s Hidden War, the moving and award-winning documentary Escape from ISIS – and of course, Sri Lanka’s Killing Fields. In 2012, Channel 4 also brought Paralympic sport to the mainstream with its coverage of the London 2012 Paralympics. Watched by just under 40m people, it transformed perceptions of disability and disabled sport, with 83% of viewers agreeing that Channel 4’s coverage would positively change perceptions of disability. Channel 4 is currently preparing to broadcast the Rio Paralympic Games in September.

Diversity is a key part of the remit and a key part of Channel 4’s creative priorities. In 2015, Channel 4 launched its 360° Diversity Charter, a five year plan of 30 commitments aimed at improving diversity within the organisation and proactively across the media, encompasses all under-represented groups – including BAME, LGBT, disability, gender and social mobility. Through the Charter, Channel 4 has introduced Commissioning Diversity Guidelines - genre- specific two-tick criteria to ensure that its programmes across the board work towards increasing diverse talent on and off-screen. As of January 2016, 85% of Channel 4 commissions now meet the guidelines, up from 67% pre-Charter. Programmes such as Muslim Drag Queens, Kitchen Impossible with Michel Roux Jr and First Dates continue to showcase a diverse range of on-screen talent, while behind the camera more people from diverse backgrounds are making programmes, such as Humans, Time Crashers and No Offence. Beyond programmes, Channel 4 has also invested £1.6 million in a new generation of exciting, BAME-led indies in 2015 through its Indie Growth Fund and discovered fantastic new writing talent from the North of England, Sharma Walfall and Nuzhat Ali, through its Northern Writers’ Award.

Among viewers, Channel 4 has a 25%pt lead over other public service broadcasters for showing minority viewpoints; a 23%pt lead over the average for showing different kinds of cultures and opinions and a 22%pt lead over the average for challenging prejudice. In 2015, a Marketing Week survey also found that Channel 4 is the most successful British brand at communicating diversity in its marketing and advertising, across the UK.

Engaging young people with a wide range of public service and educational content is another key priority for Channel 4, particularly given its strong appeal to young audiences. For example, during the 2015 General Election, Channel 4 shut down E4 - the biggest digital channel for 16–34-year olds – to encourage young people to vote. Over three quarters (76%) of the audience to Channel 4’s Alternative Election Debate on Election night were aged 16- 34s, while Cameron & Miliband Live: The Battle for Number 10 had the highest proportion of 16–34-year-olds than any of the other main debates (24.6%).

Channel 4’s new strategy for reaching older children (10-14 year olds) is also starting to bear fruit, with programmes reaching much larger volumes of this younger audience while also performing strongly with a broader audience. Importantly the success of this new strategy has been reflected in the kinds of programmes which have proved most popular with 10–14-year-olds. UK originated public service content features strongly with programmes like Gogglebox, Educating Cardiff, Born Naughty and The Secret Life of 4, 5 and 6 Year Olds all performing particularly well with this audience, with the latter doubling Channel 4’s slot average for 10–14-year-olds. Highlights from 2015 also included a special episode of Gogglesprogs, which replaced Channel 4’s usual Gogglebox cast with children ranging from 5–12-year-olds giving their uninhibited opinions and hilarious takes on the key TV moments from the last year; while Britain’s Favourite Children’s Books, a special 90 minute programme, counting down the nation’s 50 best-loved children’s books was watched by 258% more 10–14-year olds than the slot average.

Channel 4’s creative success has been reflected in significant awards success over the past five years, with record BAFTA and RTS nominations and award wins. Channel 4 also won Channel of the Year at the Edinburgh TV Festival in 2014, Campaign Advertiser of the Year and Medium of the Year in 2015, as well as Channel of the Year at the Broadcast Awards in 2016, with judges of the 2016 Broadcast award noting: “Distinctive and popular, C4’s output is at its strongest since Jay Hunt took over in 2011.” In film too, Film4 has seen record creative success, with popular hits such The Inbetweeners movie, as well as the Oscar- winning Twelve Years a Slave, The Imposter, The Iron Lady, Room, Amy and Ex Machina.

Creative Renewal has also seen Channel 4 broaden its production base to work with a wider range of companies, including many SMEs and companies based outside London. Channel 4 has deepened its relationship with suppliers, working with over 250 production companies across TV, digital and film, and in 2014 accounted for over a third (36%) of all spending on indies by the public service broadcasters (a higher proportion than BBC 1 and 2 combined). Over 50% of programme hours on its main channel were also commissioned from outside London in 2014.

Since 2015, Channel 4 has had an increased Nations quota (rising to 9% by 2020) and is actively engaging with production companies in the devolved Nations to further develop those areas of the sector on a sustainable footing. In addition to regular focused commissioning briefings across the UK, the team also oversees the Nations and Regions portion of Channel 4’s £2m Alpha Fund which supports diverse indies across the UK seeking to grow, be it through developing a creative idea into a programme or gaining their first commission.

Channel 4 also works with more independent production companies than any other channel and 28% of its investment in 2014 was in independent production companies with a turnover of £25m or less. Beyond programme commissions, Channel 4 has been supporting creative SMEs in a number of ways. For example, its Indie Growth Fund, launched in 2014, is a £20m fund established to support the UK independent production sector outside of the normal commissioning cycle by providing access to funding for small to medium-sized creative companies. Since launch, it has invested in nine companies.

Alongside this upwards trajectory of creative and commercial success, remit delivery is also at an all-time high, with the majority of Channel 4’s remit reputation trackers (7 out of 10) at their highest ever levels as of 2015.

Figure 4: Channel 4 remit reputation trackers, 2009-15

Ownership

As noted above, Channel 4 is in strong commercial and creative health, is financially sustainable, well placed to respond to disruptive market change and is comprehensively and successfully delivering its public service remit.

It is entirely appropriate for Government to look at the ownership of Channel 4 as a publicly owned asset, and we have engaged constructively in the review of ownership process. However, it is not clear what problem radical reform to Channel 4’s ownership would be seeking to solve.

Successive Parliaments and Governments (including the current one during the course of this review) have stressed the importance of C4’s special public service remit and the need for it to be maintained. This stability and clarity of purpose has provided the bedrock on which C4 has been able to innovate and evolve in response to radical market changes. For C4 the model is based on an incentive of ‘remit-maximisation’ – as opposed to ‘profit- maximisation’. The alternative ownership change that has been talked about most often in relation to Channel 4 by the current Government has been a privatisation or part-privatisation. Whatever the exact structure of a privatisation or the identity of any new owner, this would represent a change from a ‘profits into programmes’, profit maximising structure to one of profit-maximisation. For the managers of C4, this would fundamentally alter C4’s incentive structure. We would expect to see a difficult tension between remit and profit and a reduction of the remit.

In its most recent PSB Review, Ofcom highlighted the different incentives of the UK’s public service broadcasters. It noted that “growth in TV advertising and other sources of income for the commercial PSBs does not necessarily translate into growing investment in content, unless the right incentives are in place.” Ofcom stated that Channel 4’s “public ownership and the public service remit and obligations” mean that “the correct incentives are in place for C4C to maximise investment.” By comparison, Ofcom noted that the privately-owned public service broadcasters, ITV and Channel 5, may have “only limited incentives to maximise investment in content”, and that they “may be incentivised to invest only to the degree required to compete effectively for audience share”. In particular, it noted that Channel 5 “is unlikely to be incentivised to increase investment to any great degree in lower audience genres such as current affairs, religious programmes and arts programmes” and that “lower-audience niche PSB genres such as serious international/investigative current affairs […] are unlikely to be commissioned in any volume as there will always be higher-audience, more commercially attractive options.” As a result, increased competitive pressures, with investment prioritised in shows likely to most increase audience share, may lead ITV and C5 to narrow their PSB contributions, reducing them to the minimum required in their licences, to enable them to maximise value for their shareholders. As the PSB contributions from ITV and Channel 5 decline, the role of the BBC and Channel 4 as public service broadcasters would become even more important.

Any profit incentive would place both qualitative and quantitative elements of C4’s public service delivery under constant pressure to be reduced – as has consistently been the case with ITV over the last 10-15 years. As such, it is hard to see how the delivery of C4’s public service remit could be maintained as it is today.

1. Less UK content, more acquired content, more repeats: in order to deliver a 20-30% profit margin (ITV’s is 28%), C4’s UK programme spend would be cut – by up to £200m pa – and replaced by bought-in content, likely to be cheaper US content, and more repeats
2. Distinctiveness of programming would be lost: investment in loss-making genres would be cut altogether, or reduced, and a more ratings-chasing approach taken – especially in News, Current Affairs, British Film, Paralympics, Documentaries, Education, Drama, Comedy. Far fewer new programmes would be tried, with a greater focus on long-running formats; plus there would be much less creative risk-taking with programme ideas, subject matter and talent.
3. C4’s current support for the UK’s independent production sector would be significantly diminished: a profit-maximising owner would want to take substantial amounts of production in-house, to the detriment of entrepreneurial SMEs across the UK. Far less production would be spent through indies and far fewer independent producers would be worked with. There would also be even greater pressure to minimise ‘terms of trade’ obligations with producers. As a result, a recent in-depth survey from Broadcast magazine found that 76% of the UK’s independent producers were very concerned about the prospect of Channel 4 privatisation (see Annex).
4. Impact with hard-to-reach audiences would reduce: a reduced focus on hard- to-reach audiences and diverse subject matter; reduced investment in grass roots training, new talent & diversity initiatives.

Leading figures in the industry have publicly expressed concern about privatisation and a negative impact on Channel 4’s remit, including analysts, advertisers, programme-makers, talent, diversity specialists, competitors, educationalists and independent production companies:

• “If Government is considering privatisation of Channel 4, considerable thought should be given to the implications for remit delivery and the potential for organisational uncertainty. Given Government’s commitment to continued PSB status for Channel 4, any consideration of privatisation options needs to be accompanied by a clear statement of the problems that Government is trying to address, and the outcomes that Government is seeking to achieve. In particular, there is a need to balance the potential (but inherently uncertain) benefits that privatisation may bring against the potential risks to remit delivery if Channel 4 moves from a not-for-profit to profit-maximising status. Any privatisation process is also likely to be a complex one, and that complexity could create uncertainty within the current Channel 4 organisation. It is important to minimise this uncertainty, in order to avoid risks to the public value generated by Channel 4’s PSB remit and original content investment.” – EY
• “[…] fulfilling the remit in terms of its harder and softer items is, as we have said earlier, much more than just  about ticking boxes for the  regulator to  assess performance. It has also, and we cannot underline this strongly enough, everything to do with creating a mindset that makes the remit and the Channel 4 brand come alive. On this account, privatisation of Channel 4 will present two major risks. First, private ownership automatically involves a completely different and profit-oriented mindset. […]The second major risk in the event of privatisation is that the purchaser will set its priority on solely producing content for the UK market that can be exported to other markets, thereby generating revenue synergies. This would very significantly alter the independent production sector, potentially completely eliminating 300 suppliers.” – Enders Analysis
• “As things stand, Channel 4 remains relevant for audiences and advertisers alike. It offers something different to its competitors and that is important. To privatise it would be to potentially jeopardise the status of Channel 4 and that is not a risk worth taking.” – Karen Blackett, Chief Executive, MediaCom
• “A quirkily brave and occasionally brilliant broadcaster will be reduced, as ITV companies were, to a profit centre. Hundreds of millions of pounds which are currently used to make programmes will be diverted into shareholders’ bank accounts. Channel 4, as we know it today, will cease to exist.” – Peter Kosminsky, Director of Wolf Hall and The Promise
• “Private ownership 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. For companies in Wales, we believe this risk-averse approach would lead to a more London-centric strategy. We have already seen ITV lobby to drastically reduce its commitments to out-of-London production over the years, and focused spend more on a smaller number of producers, including its own in-house operation.” - Iestyn Garlick (Chair, TAC – representing 55 production companies in Wales)
• “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.” – Trevor Phillips, Former Head of the Equality and Human Rights Commission
• “I am concerned about privatisation […] The impact of changing Channel 4 could be disastrous. It does an extraordinary job at taking risk on commissioning programmes that might not otherwise be commissioned.” - Stephen Lambert (Chief Executive, Studio Lambert)
• “Channel 4 promotes diversity in three ways: the content it broadcasts, the audience it attracts and the talent it promotes… At a time when diversity has rightly risen to the top of the ad industry’s agenda, we should unite in expressing our support for Channel 4 in its current form as a force for good in Britain’s cultural and commercial life, which costs the taxpayer precisely nothing.” - Tom Knox (President, Institute of Practitioners in Advertising)
• “When C4 launched in 1982, the public got a bold, risk-taking, innovative broadcaster, and the economy got a new independent production industry that would go on to become one of the UK’s most valuable exporters… “The consequences of privatisation are clear. Put simply, there’s a very real danger we’ll lose both.” – Melanie Leach (Chief Executive, Twofour Group)
• “But would a move into commercial ownership make such a difference? I think it would – and not for the better. The UK television ecosystem is one of the best in the world precisely because it supports rich complementary diversity, and reducing the variety endangers the whole. It is Channel 4’s public ownership within a commercial framework that enables bolder longer-term decisions on creative output, develops a unique "membership" model with its viewers and supports the infrastructure of independent production and creative talent.”- Mark Lund (Chief Executive, McCann Worldgroup UK)
• “The animus of shareholders is growth and profit. In television, this means familiar replaces unpredictable, mass beats niche, forget experimental, minimise risk… The British TV diet contains a ton of good stuff that suits viewers and shareholders alike. Channel 4 exists for the other space. Shareholders have to have growth – either dividends or value. They won’t give you a carrot for greatness.” - Richard Eyre (Chairman, Internet Advertising Bureau)

ANNEX

Quotes from stakeholders

Iestyn Garlick (Chair, TAC), TAC Letter to Chancellor on Channel 4, Nov 2015

• “Private ownership 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. For companies in Wales, we believe this risk-averse approach would lead to a more London-centric strategy. We have already seen ITV lobby to drastically reduce its commitments to out-of-London production over the years, and focused spend more on a smaller number of producers, including its own in-house operation.”

John McVay (CEO, PACT) The Guardian, September 2015; Broadcast, 3 December, 2015

• “Clearly the big concern, if it was no longer a not-for-profit organisation, is that it would no doubt diminish the amount of money it spends on original British content... The government has to take that into account as well and not just make a quick buck out of Channel 4.”

• Pact chief executive John McVay said C4 moving into in-house production would be “disastrous” for the UK’s broadcasting ecology, whatever its ownership model. “C4’s publisher/broadcaster status drives a wide range of access to market for the whole ecology. Indies working in risky factual would have nowhere to go.”

Melanie Leach (Chief Executive, Twofour Group), Broadcast magazine, 3 December 2015

• “Dubbed the potential privatisation of C4 as “arguably the greatest threat the independent production sector has ever faced”.

• “When C4 launched in 1982, the public got a bold, risk-taking, innovative broadcaster, and the economy got a new independent production industry that would go on to become one of the UK’s most valuable exporters… “The consequences of privatisation are clear. Put simply, there’s a very real danger we’ll lose both.”

Karen Blackett (Chairwoman, MediaCom UK) Channel 4's unique remit must be cherished, Campaign magazine, 3 December 2015

• “A privatised Channel 4 could be leaner and more commercial, but it’s highly likely that the pressure for profit would be noticeable on screen, with less risk-taking and more formulaic programming. In this world, Channel 4 would have to go after audience – any audience – otherwise it would find itself stuck in a vicious circle of losing share and therefore revenue and programming budget.”

• “As things stand, Channel 4 remains relevant for audiences and advertisers alike. It offers something different to its competitors and that is important. To privatise it would be to potentially jeopardise the status of Channel 4, and that is not a risk worth taking.”

Mark Lund (Chief Executive, McCann Worldgroup UK) Campaign magazine, 3 December 2015

• “As someone who has worked on both sides of the private/public sector demarcation line, I know that the marriage of the two can be a fraught one. The fact that they use different currencies – money and power respectively – is only the start.

• Against this unpromising backdrop, the hybrid beast that is Channel 4 has been a great success, and… it has done it while satisfying a public-service remit and the commercial obligation to cover cost and sell a brand.

• But would a move into commercial ownership make such a difference? I think it would – and not for the better. The UK television ecosystem is one of the best in the world precisely because it supports rich complementary diversity, and reducing the variety endangers the whole. It is Channel 4’s public ownership within a commercial framework that enables bolder longer-term decisions on creative output, develops a unique "membership" model with its viewers and supports the infrastructure of independent production and creative talent.

• If a big strand of the UK’s post-imperial strategy is to be one of the great creative engines of the world, this continued incubator role alone is enough to justify Channel 4’s hybrid status remaining a point of pride.”

Richard Eyre (Chairman, Internet Advertising Bureau) Campaign magazine, 3 December 2015

• “The animus of shareholders is growth and profit. In television, this means familiar replaces unpredictable, mass beats niche, forget experimental, minimise risk… The British TV diet contains a ton of good stuff that suits viewers and shareholders alike. Channel 4 exists for the other space. Shareholders have to have growth – either dividends or value. They won’t give you a carrot for greatness.”

Lord Puttnam (Former deputy chairman, Channel 4) Campaign magazine, 3 December 2015

• “Putting the channel into private hands would utterly change its nature and, ultimately, its contribution to the vitality of the nation’s creative industries. No commercial investor would be likely to support Channel 4 News in its current form.”
• “The reality is that the channel only becomes a serious commercial proposition if its remit is diluted. Its support of innovation and risk-taking would, over time, become severely diminished. The dismemberment of the UK’s regional television system provides a cautionary tale. If it teaches us anything, it’s that promises would be made – then broken – and vital obligations chipped away, resulting in something indistinguishable from Channel 5, which cannot possibly be in the interest of the broad televisual audience.”

• “I believe it’s important that all those who care for the future of public-service broadcasting raise their voice in persuading the government that privatisation could only do irreparable damage to the ecology that underpins the UK’s extraordinarily successful creative sector.”

Greg Dyke (FA chairman) Funding the future of public service television event, 15 December 2015

• “I work in both the public realm and the private realm, I work with private equity companies etc. quite regularly. If you let private equity get anywhere near Channel 4 they will destroy it, I have no doubt about that they will destroy it because once you take on Channel 4 and your only role is to maximise profit then you destroy it…..
• …. we have to have a way of ensuring that Channel 4 isn’t given over to the total free market and the Americans…if you give it over to the free market totally, forget about the remit they will put with it, look we’re all clever enough to know how to get round all of that, only civil servants and politicians believe this stuff is real, remits in the hands of people trying to maximise profits are not remits at all.”

Adam Crozier (CEO, ITV), Lords Communications Committee evidence, December 2015

• “You have to bear in mind the debate that seems to be, as I understand it, raging around Channel 4 and its future, that could potentially again have a rather big impact on the industry. We talked a number of times today about the independent production community, of which Britain should be extremely proud. Channel 4 are right at the heart of that and anything that impacts negatively on their remit would have to be seriously looked at from an industry point of view and very carefully looked at. We are big supporters of Channel 4. Again, I think they are a really important part of the ecology of the UK market.”

Peter Kosminsky (Director of Wolf Hall and The Promise) The Guardian, 4 January 2016

• A quirkily brave and occasionally brilliant broadcaster will be reduced, as ITV companies were, to a profit centre. Hundreds of millions of pounds which are currently used to make programmes will be diverted into shareholders’ bank accounts. Channel 4, as we know it today, will cease to exist.

Trevor Phillips Oxford Media Convention, 2 March 2016

• “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.”

Russell T Davies (TV Producer), Radio Times, 11 March 2016

• Russell T Davies joined in the defence of Channel 4 when he picked up his [Broadcasting Press Guild] award. He said his drama “didn’t particularly work, it wasn’t a huge success, and when they privatise Channel 4 this is exactly the sort of risk-taking that will cease to exist. That’s what’s under attack, a strange ideological attack”.

Laura Mansfield (Outline Productions and Chair of Pact), What is the Future for Channel 4 in the UK Media Ecology event, 14 March 2016

• “Channel 4 is disproportionately crucial as a part of that success story, in helping Indies punch above our weight.”

• “Channel 4 and the British independent sector grew up together. Our success is interlinked. If for example, this publisher broadcaster status was changed, that would be irreversibly damaging to the indie sector. The fact that Channel 4 can’t be vertically integrated means all of its content is produced by external producers. This is something incredibly valuable and which needs to be protected.”

• “Many production companies have grown up with Channel 4 and simply might not exist without the channel - this doesn’t come from a lack of competitive efficiency but from the fact that the distinctive programming they make appeals to Channel 4, and diverse audiences across the UK who aren’t served by the other channels – and in particular young and BAME audiences.”

Stephen Lambert (Chief Executive, Studio Lambert) Broadcast magazine, 17 March 2016

• “I am concerned about privatisation,” he said. “The impact of changing Channel 4 could be disastrous. It does an extraordinary job at taking risk on commissioning programmes that might not otherwise be commissioned.”

David Henshaw (Henshaw Productions) Broadcast Magazine, 21 March 2016

• “Privatisation will affect Channel 4’s current affairs, news and investigative programming,” “One of the things it would undoubtedly do is push Dispatches back to later time slot because those aren’t commercial projects.”

Edmund Coulthard (Founder and Creative Director, Blast! Films) ‘C4 privatisation would be catastrophic for UK indies’ – Broadcast magazine, 23 March 2016

• “Jay Hunt is right when she says the privatisation of Channel 4 would be a catastrophe for the independent production sector… For independent producers like us, there is nothing in the least bit fuzzy about the broadcasters remit… Forcing C4 to become just another player in the crowded marketplace of commercial broadcasting would not just be a calamity for us, but a disaster for viewers too – denying them the kind of innovative programming that would never have been available elsewhere.”

Philip Collins (Journalist, The Times) ‘Here's how to restore our trust in the BBC’ - The Times, 1 April 2016

• “Privatisation seems like a solution in search of a problem. If there is any organisation that seems to answer to the description set out in Mr Vaizey’s white paper, it is Channel 4. When the communications regulator Ofcom renewed the channel’s licence for another decade last year, it gave a glowing report. Revenues and audiences have grown: the Bafta and Oscar count has been impressive. Channel 4 is charged, by law, with public education and a requirement for diversity and regional balance. It is the broadcaster that attracts the highest share of the young. A change to the status of Channel 4 would require primary legislation that would encounter implacable resistance in the House of Lords. It is a major battle, for now more than a single £1 billion payment and an obscure cultural purpose. It’s not worth the effort.”

Tom Knox (President, Institute of Practitioners in Advertising) ‘A beacon of diversity, Channel 4 must be protected’ - Campaign magazine, 7 April 2016

• “Channel 4 promotes diversity in three ways: the content it broadcasts, the audience it attracts and the talent it promotes… At a time when diversity has rightly risen to the top of the ad industry’s agenda, we should unite in expressing our support for Channel 4 in its current form as a force for good in Britain’s cultural and commercial life, which costs the taxpayer precisely nothing.”

21 April 2016