Memorandum submitted by Channel 4
Channel 4 welcomes the overall intentions
of the draft Bill and, in particular, the definition of the Channel's
remit and powers.
The Channel is actively preparing
for the future as an innovative public service broadcaster in
a more open and competitive commercial market.
The Channel can only sustain its
ambitious remit to be innovative, experimental and distinctive
if it can also sustain the commercial dynamism and scale necessary
to pay for it.
It is essential to maintain a genuinely
competitive advertising sales market between the commercially-funded
It is essential to maintain a genuinely
competitive programme supply market. We suggest this may be assisted
by controls on intra-group trading, minimum thresholds for UK-originated
content and reciprocity requirements for non-EU based buyers of
major UK media assets. As well as protecting the range of programming
Channel 4 can offer the public, these measures would reduce the
risk that consolidation poses to the UK production sector.
Channel 4's licence obligations and
investment in digital services more than pay for the value of
any spectrum used for transmitting its analogue service.
The must offer/must carry provisions
set out in the draft Bill require further strengthening.
The draft Bill fails to recognise
the actual and potential significance of platforms as a definable
and discrete market to be ranked alongside newspapers, radio and
Further thought should be given to
(a) the general public service broadcasting requirement, (b) the
proposed extent of "self-regulation" with regard to
content and (c) the relationship between the OFCOM main Board
and the OFCOM Content Board.
Channel 4 proposes a specific threshold
for investment in training by all licenced broadcasters.
2. A DRAFT BILL
2.1 Channel 4 welcomes the draft Bill:
in its recognition that convergence
demands a single unified regulatory structure for all communications
in its drive toward economic regulation
by means of competition law;
in its drive toward self-regulation
and "light touch" as the keystones of content regulation;
in its strong endorsement of the
continuing importance of public service broadcasting.
2.2 Channel 4 particularly welcomes the
definition of Channel 4's remit offered in the draft Bill and
the definition of its powers proposed in the accompanying policy
document. Both are a positive and emphatic affirmation of what
Channel 4 is and does.
2.3 Other aspects of the draft Bill which
Channel 4 supports include:
plurality of news provision; lifting
of ownership limits on nominated news provider from 20 per cent
to 40 per cent; requirement that ITV nominated news provider be
retention of 25 per cent independent
renewed commitment to nations and
a strong consumer panel with its
own research resources;
further moves to bring BBC within
the ambit of OFCOM;
the acceptance of the need for must
offer/must carry rules for satellite as for other platforms;
OFCOM powers with regard to code
of practice for EPG operators.
All of these proposals can help Britain's broadcasters
and content creators move forward into a digital multi-channel,
multi-platform world in which pay services will increasingly compete
with free to air services and in which vertically integrated trans-national
media giants are likely to become the dominant reality.
3. THE CONTEXT:
3.1 Channel 4 is already implementing strategies
to meet the rapidly evolving world which the draft Bill foresees,
not only through its main channel service but also through its
new subsidiary, 4 Ventures.
3.2 Channel 4 has been a consistent force
for innovation in British television throughout its 20 years:
providing diversity and quality in
every genre of programming;
sustaining Britain's creative economy
by leading the development of an independent production sector
and by continuing to commission hundreds of independent programme
and service suppliers;
complementing the "market failure"
public service broadcasting provided by the BBC with an innovative,
experimental public service ethos which gives a platform to new
voices, new ideas and new companies;
providing public sector competition
for the BBC;
reaching new audiences (the young,
ethnic minorities, &c) with public service programmes from
comedy and drama to news to education.
3.3 But the Channel has not rested on its
laurels. Over the past four years, it has developed a strategy
to transform itself from a single analogue service into a digital
offering that extends across multiple channels and platforms in
ways which support Channel 4's values and creative mission.
3.4 The strategy is already beginning to
Channel 4 has created a new company,
4Ventures, to give greater focus and commercial discipline to
its new businesses, to foster new strategic partnerships and,
in time, to contribute to the core Channel's revenueswithout
fundamentally changing the nature and structure of Channel 4.
Despite the severe downturn in the market in 2001, 4Ventures exceeded
E4 is the most successful new pay
channel launched by a terrestrial broadcaster. Only 18 months
old, it is already the third most watched digital entertainment
channel in Britain, and second most popular amongst 16-34 years
olds. It is significantly ahead of its business plan, which foresees
break-even in 2005. With a third of its budget devoted to original
material, six of its programme ideas have already proved sufficiently
successful to be migrated to the main channel.
Channel 4 has led the way in developing
interactivity and sophisticated cross-platform initiatives, from
Big Brother to Test Cricket to Kumbh Mela, and in exploring ways
of developing new revenue streams from them.
Although it comfortably exceeds its
required level of original UK production (82 per cent in peak-time
against a licence requirement of 70 per cent) Channel 4 has also
pursued an outward-looking acquisitions policy, systematically
bringing the best of US entertainment to British audiences and
creating the only dedicated foreign language film channel in the
4Learning not only makes consistently
high quality television (winning seven of a possible eleven Royal
Television Society awards last year, currently with 16 of a possible
33 nominations this year) but it has pioneered interactive on-line
learning services from Homework High to Grid Club and the Black
and Asian history map, and has won international recognition for
doing so. It sees learning as a vital component of its public
service remit but, equally, a key driver for its commercial future.
Channel 4 has re-interpreted the
best values of traditional public service broadcasting for a generation
which is overwhelmingly sceptical about the very idea of public
service. Last year Channel 4 News, the only regular hour-long
news and news analysis programme in peak time, was also the only
TV news programme to significantly increase its audience amongst
16-34 year olds. 85 per cent of the users of Channel 4's confidential
on-line health counselling service are under-25 and the service
works in close co-operation with the drama serial Hollyoaks to
give prominence to health issues which are likely to be of particular
concern to young people.
4. CHANNEL 4'S
4.1 The draft Bill makes it clear that the
government recognises Channel 4's unique contribution and wants
it to continue to thrive. But Channel 4 can only fulfil its ambitious
remit to be innovative, experimental and distinctive if it also
retains the commercial dynamism and scale to pay for it. The Channel
interprets the draft Bill's proposals for self-regulation and
co-regulation of content as an intelligent framework within which
the flexibility to achieve this can be managed.
4.2 The delicate balance between economic
regulation and content regulation, which lies at the heart of
OFCOM, is especially important for Channel 4. There is a risk
that while the Bill sets out an ambitious remit for Channel 4
it also creates a commercial environment in which it becomes impossible
to sustain that remita case of willing the ends but not
the means. This is the source of most of the concerns about the
draft Bill which are set out in this section of our submission.
4.3 The first set of concerns relates to
the changes to the rules on ownership which the draft Bill envisages.
While the proposed legislation would leave the BBC and Sky essentially
unchanged, the draft Bill exposes Channels 3, 4 and 5 to the possibility
of rapid and radical change:
by allowing Carlton and Granada to
merge (subject to competition law);
by opening up the possibility of
US ownership of Channel 3 and 5;
by allowing the possibility of the
dominant pay TV provider acquiring a free-to-air terrestrial broadcaster,
by allowing Channel 5 to combine
with Carlton or Granada or, ultimately, both.
4.31 It is important to emphasise that our
concern is not about ownership per se, but about the potential
for ownership changes to distort key markets on which Channel
4 depends for its commercial and creative success.
4.32 The first of these markets is the advertising
sales market. This is a market which Channel 4 inhabits alongside
Channels 3 and 5 as well as numerous smaller digital playersa
world of commercially-funded channels in which programme budgets
are dictated in whole or in part by the ability to win a smaller
or larger slice of a single advertising revenue cake.
As a proportion of total display advertising
in the UK, television advertising remains remarkably stable. It
was 43 per cent of the total in 1993 and 43 per cent of the total
in 2001, with little variation in between. New owners, new investment
and major consolidation are unlikely to increase the size of the
cake but will almost certainly alter the division of slices.
Evidence from the United States suggests a growing
trend towards long-term, multi-platform advertising contracts
between major advertisers and major media organisations. One of
the largest advertisers in the world, Procter and Gamble, estimate
that up to 40 per cent of all advertising expenditure in the United
States may become packaged in this way. The recently announced
four-year £320 million agreement between ITV and Unilever
indicates that Britain is not immune from this trend. The Joint
Committee may want to consider the need for OFCOM to have the
powers to cap the size and duration of such deals to guard against
Channel 4 is concerned:
about the potential impact of further
Channel 3 consolidation on the UK advertising sales market;
about the impact on the advertising
sales market if part or all of Channel 3 or all of Channel 5 is
owned by an advertiser (as the draft Bill makes possible) or by
an international media player with both extensive cross media
assets and powerful global advertising interests.
We therefore believe that there may be a case
for increasing OFCOM's proposed powers to police and guarantee
a free, fair and open advertising sales market.
4.33 The second market which Channel 4 believes
could be adversely affected by the change in ownership rules is
the programme supply market.
Consolidation of media assets in the hands of
a few vertically-integrated multi-nationals may have the effect
of shutting Channel 4 (and other broadcasters) out of some key
markets for new content; for example, the markets for feature
films, US television series and sports rights.
Evidence from around the world suggests that
large-scale vertically integrated content owners are beginning
to both integrate in-house production with their broadcast businesses
and buy rights across pay and free-to-air platforms, in both cases
using their terrestrial channels as shop-windows and marketing
tools for the brands they own and which they can exploit commercially
on other platforms. A major consequence of this integration is
the removal of major content brands from the open market as they
are retained for in-house distribution.
The Joint Committee may wish to address this
issue by considering the benefits of a specific competition rule
to require prior approval for any intra-group licensing of free
to air rights to Channels 3, 4 or 5. This would benefit viewers
as well as broadcasters by assisting the continuation of genuinely
competitive programme supply in what will, in any case, remain
a highly regulated part of the market. It would not impede the
normal operations of the market but would prevent a major global
content owner effectively denying UK terrestrial broadcasters
the right to bid for key programme rights.
4.4 A further and related concern is that
the change in ownership rules allowing Channels 3 and 5 to become
part of vertically integrated global media businesses might have
an adverse impact on the UK production sector.
4.41 Channel 4 is committed to a strong
production base in the United Kingdom, with a mixed economy between
the large in-house operations of the BBC and ITV companies and
a healthy and growing independent sector. The Channel's unique
contribution to the UK's media economy has been to champion the
growth of the independent sector which now makes a major contribution
to domestic viewing and to the UK's success in the international
programme and format sales markets. The Channel intends to continue
working with PACT and others to ensure that independent producers
can enjoy the rights and terms of trade they need to remain a
vibrant and sustainable force in the content market.
4.42 The potential ability of non-EU (in
effect, US) majors to buy into the UK market is therefore significant.
All the likely US buyers own very substantial libraries of audio-visual
content in English which is eminently saleable to a UK audience.
For obvious commercial reasons, they may be tempted to increase
the proportion of such content on their UK channels to drive down
costs and increase competitiveness, as well as to build the brand
value of such programmes with UK audiences so as to increase their
value in secondary markets such as video, DVD, merchandising and
4.43 In their introduction to the policy
paper which accompanied the draft Bill, the two Secretaries of
State claimed that their proposals would create the right conditions
for "high levels of employment". It is difficult to
imagine a scenario in which consolidation and foreign ownership
would not lead to a reduction in employment in the production
industry unless there were specific safeguards with regard to
content originated by UK producers.
4.44 The UK production focus of US parents
is also likely to change, with a greater priority being placed
on formats which can be exploited globally, rather than simply
in the UK. The potential loss of content with local relevance
and diversity, let alone the loss of minority interest programming,
is therefore also of real concern.
4.45 The Joint Committee may therefore wish
to consider thresholds and qualifying criteria for origination,
perhaps related to share of advertising revenue, as a further
effective, non-discriminatory and transparent way of helping to
sustain the dynamism of UK production.
4.46 The Joint Committee may also wish to
propose amending the Bill so that any change in the rules governing
non-EU ownership of free-to-air broadcasters would require reciprocity
between the EU and the country in question.
4.5 For the reasons set out above, we believe
that the Channel's revenues could be put under unexpected competitive
pressure before its own digital strategy has had time to take
We therefore believe it is particularly important
that other unnecessary pressures should not be brought to bear
on the Channel's finances. This is especially relevant in the
consideration of potential spectrum charges.
4.51 Channel 4 has argued consistently that
it already provides full value for its use of analogue spectrum
through its public service obligations. For 2002 the Channel has
budgeted over £150 million to meet the costs of education,
news, training and talent development, regional development, film
production and the other services which form part of its public
service obligations. Channel 4 endorses the observation made at
para 23 of the ITC's Memorandum to the Joint Committee that this
investment should not be put at risk because of spectrum charges.
Furthermore, until analogue switch-off there is no perceptible
gain to be achieved in terms of spectrum efficiency by the Channel.
The allocation of Channel 4's spectrum is by administrative means,
designed to ensure universal coverage and is outwith the Channel's
control. Channels 3 and 5 benefit from a ``digital dividend''
in recognition of the fact that by encouraging conversion to digital
they (in common with all terrestrial broadcasters) weaken their
long-term market position. It could be argued that Channel 4's
contribution to driving digital take-up should be recognised in
a comparable way (Channel 4 currently has about 12 per cent share
of audience in five channel analogue homes, but less than 7 per
cent share in multi-channel digital homes).
4.6 Channel 4 welcomes the commitment to
the principle of must offer/must carry for public service channels
which is set out in the draft Bill, but questions the clarity
of the proposals with regard to satellite conditional access systems.
The Bill makes clear that, at switchover, public service broadcasting
channels must be made available on satellite platforms at no additional
cost to viewers, but at the cost to the broadcasters of the necessary
smart cards for those satellite viewers who do not wish to pay
for subscription services. At present, the pricing of these smart
cards is entirely at the discretion of the satellite operator,
leaving public service broadcasters vulnerable to open-ended charges.
4.61 The Joint Committee may want to consider
the lack of a level playing field in meeting the costs of universal
access for public service broadcasters. The terrestrial broadcasters
have already incurred substantial costs by investing in digital
terrestrial television, as they were asked to do by government.
Cable operators have also incurred costs because they have always
been obliged to provide public service broadcasting channels free
to viewers. There seems little logic in leaving satellite as the
only platform with not even a modest obligation in this regard
(the draft Bill does not even specify any responsibility on the
satellite platform to ensure an adequate inter-face between electronic
programme guides and other support services offered by free to
air public service channels and similar services supplied as part
of the main platform). Alternatively, it is worth considering
whether the government itself might shoulder some of the burden
of advancing digital take up since it will be the beneficiary
of proceeds from any released spectrum. To create a genuinely
level playing field in terms of must offer/must carry this issue
should be addressed.
4.7 The final issue which relates to the
issue of ownership and market dominance is that of platform ownership.
In its submission to the DCMS consultation on media ownership
issues held in the run-up to the publication of the draft Bill,
Channel 4 expressed the view that: "Platform ownership should
be recognised as a form of media ownership, akin to newspapers,
television and radio and should, like them, be taken into account
when assessing levels of market influence." The Channel 4
submission went on to say "Channel 4 sees merit in the proposal
for a ``plurality test'' and in OFCOM being responsible for publishing
guidance and reviewing it periodically." The collapse of
ITV Digital only serves to emphasise the significance of platforms
in the digital world and Channel 4 hopes the Joint Committee will
wish to consider ways in which this principle might be included
in the final Bill.
4.8 OFCOM will be a regulator of unprecedented
size and power. Transparency of process and clarity of purpose
will be vital in ensuring that it delivers the strategic intentions
of the Bill. There is some way to go in guaranteeing those outcomes.
4.81 The first issue is whether the general
Public Service Broadcasting remit is sufficiently explicitly defined.
Channel 4 agrees with the ITC's view that "there could be
a mismatch between expectations and what is possible in a commercial
environment" (ITC Memorandum to the Joint Security Committee.
Para 16). In particular, Channel 4 is concerned that the specific
remits of the other commercially-funded public service broadcasters
should be clear enough and specific enough to guard against the
possibility of a gradual degradation of public serviceor
the attempted migration of public service responsibilities from
Channels 3 and 5 to Channel 4. As suggested above, one way of
guarding against this would be to allow OFCOM to relate levels
of origination (and perhaps other public service obligations)
to advertising revenue share, increasing the requirement for Channels
to invest in creative and innovative programming and training
in line with their ability to afford it.
4.82 Channel 4 welcomes the Statement of
Promises as a means of encouraging broadcasters to think imaginatively,
rather than mechanically, about delivering their remits. However,
the requirement on broadcasters to consult OFCOM before making
any "material change" to their Statement of Promises
(Policy paper, section 220.127.116.11) threatens to reduce ``self-regulation''
to a meaningless aspiration. At worst, it could create a situation
in which the promised ``light touch'' regulation became an addition
to the present detailed content regulation of public service broadcasters,
rather than a replacement for it, in effect collapsing the distinction
between Tiers 2 and 3. OFCOM should be required to comment retrospectively
and annually on the broadcasters' delivery of their remit and,
similarly, should be required to make an annual report to Parliament
on the fulfilment of the remit, perhaps with a dedicated Parliamentary
Committee to consider this and the other aspects of OFCOM's work.
4.83 Channel 4 welcomes the proposed Content
Board and its role in representing a broad range of public and
regional interests. Channel 4 welcomes the proposals to delegate
powers from the main Board to the Content Board, but retains some
concern that the relationship between the Content Board and the
main OFCOM Board should be close enough and substantial enough
to ensure that content issues are properly considered at the level
of the OFCOM main Board in the discharge of its broader economic
and competition responsibilities.
4.84 Channel 4 has argued consistently that
in a talent driven industry like broadcast television, a highly
trained work force is vital, both in terms of the domestic UK
audience and in terms of international competitiveness. The Channel
has argued that its own licence requirement to commit a minimum
of half of one percent of revenue to training should be set out
in the Bill as an industry standard for all licenced broadcasters.