House of Commons Culture, Media and Sport Committee

Channel 4 Annual Report

First Report of Session 2010–11

Report, together with formal minutes, oral and written evidence

Ordered by the House of Commons to be printed 7 December 2010

HC 423 Published on 14 December 2010 by authority of the House of Commons London: The Stationery Office Limited £13.50

The Culture, Media and Sport Committee

The Culture, Media and Sport Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of the Department for Culture, Media and Sport and its associated public bodies.

Current membership Mr John Whittingdale MP (Conservative, Maldon) (Chair) Ms Louise Bagshawe MP (Conservative, Corby) David Cairns MP (Labour, Inverclyde) Dr Thérèse Coffey MP (Conservative, Suffolk Coastal) Damian Collins MP (Conservative, Folkestone and Hythe) Philip Davies MP (Conservative, Shipley) Paul Farrelly MP (Labour, Newcastle-under-Lyme) Alan Keen MP (Labour, Feltham and Heston) Mr Adrian Sanders MP (Liberal Democrat, Torbay) Jim Sheridan MP (Labour, Paisley and Renfrewshire North) Mr Tom Watson MP (Labour, West Bromwich East)

Powers The committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the internet via www.parliament.uk.

Publication The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the internet at www.parliament.uk/parliament.uk/cmscom. A list of Reports of the Committee in the present Parliament is at the back of this volume.

The Reports of the Committee, the formal minutes relating to that report, oral evidence taken and some or all written evidence are available in a printed volume.

Additional written evidence may be published on the internet only.

Committee staff The current staff of the Committee are Tracey Jessup (Clerk), Andrew Griffiths (Second Clerk), Elizabeth Bradshaw (Inquiry Manager), Ian Hook (Senior Committee Assistant), Keely Bishop/Alison Pratt (Committee Assistants) Gabrielle Henderson, (Committee Support Assistant) and Laura Humble (Media Officer).

Contacts All correspondence should be addressed to the Clerk of the Culture, Media and Sport Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 6188; the Committee’s email address is [email protected]

Channel 4 Annual Report 1

Contents

Report Page

1 Introduction 2

2 New team, new vision 4 A funding gap? 4 Going it alone 6 The scale of the independent-funding challenge 7

3 New remit 11 Digital Economy Act 11 Public Bodies Bill 13

4 Public service delivery 14 Core Channel 14 Network of services 15 Risks and challenges 16 Nations and regions 20 Film 21 Big Brother 22

5 Remuneration 23

6 Transparency and accountability 26 Transparency 26 Accountability under the Digital Economy Act 28

Conclusions and recommendations 30

Formal Minutes 33

Witnesses 34

List of printed written evidence 34

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1 Introduction

1. For the past three years, the Culture, Media and Sport Committee has conducted an annual evidence session with the Chairman and Chief Executive of the Channel Four Television Corporation (“Channel 4”) because, as a statutory corporation, without shareholders, established and regulated under successive Broadcasting and Communications Acts, Channel 4 is ultimately accountable to Parliament for the delivery of its statutory remit. As Lord Burns, Channel 4’s Chairman, explained to us at the start of this year’s oral evidence session “I regard my key task here as trying to ensure that we implement Parliament’s wishes with regard to Channel 4 as effectively as possible and to make a success of that.”1

2. Our purpose is to assess, on behalf of Parliament and viewers, the extent to which Channel 4 is fulfilling its remit. Ofcom, the independent regulator, also has a scrutiny role. Channel 4 is obliged to provide specific elements of public service broadcasting on its core channel,2 receiving in return free analogue and digital spectrum, “must carry” status3 and due prominence on electronic programme guides. It is right, therefore, that Channel 4 receives more scrutiny than its commercial rivals who do not have the same level of privileges or obligations. The Digital Economy Act4 also gives the Channel a statutory role for its other services such as its digital channels and online services that has a very similar public service dimension, providing an additional element to our scrutiny. We welcome, therefore, the acknowledgement by Lord Burns that “we do regard these annual sessions as a very important part of our accountability, so we are not reluctant attenders at all.”5

3. We held this year’s oral evidence session with Channel 4 on its Annual Report and Financial Statements (“Annual Report”) on 28 July 2010. This was the first time the Committee had taken evidence from Channel 4 this Parliament. We took the opportunity to welcome a new top team—Lord Burns having replaced Luke Johnson as Chairman in January 2010 and David Abraham having replaced Andy Duncan as Chief Executive in May 2010—and to explore with them their vision for Channel 4 and the extent to which it differs from their predecessors.

4. We were aware that this year would be remembered as a significant moment in Channel 4’s history. The enactment of the Digital Economy Act (“the Act”) at the end of the last Parliament, amongst a number of other things, amended the Communications Act 2003 to give Channel 4 a new and expanded remit and duties. As the Act was passed in the ‘wash-up’6 before the General Election, and because other clauses were rather more

1 Q 1 2 The original and main Channel 4 television channel 3 i.e. satellite and cable companies must provide Channel 4 4 Digital Economy Act 2010 5 Q 1 6 Wash-up is the short period at the end of a Parliament - after the election has been announced but before dissolution. All the unfinished business - mainly Bills which have not completed their passage - must be dealt with swiftly. The Government, in co-operation with the Opposition, agree to pass certain Bills. Some might be lost completely, others might be fast-tracked, but in a much-shortened form.

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controversial than the Channel 4 elements, the House of Commons gave only limited scrutiny to them. We also took the opportunity, therefore, to consider—in more detail than was possible during the Act’s passage—some of its implications for Channel 4 and for viewers. We also inquired into Channel 4’s remuneration policy, and asked whether the £731,000 that the previous Chief Executive had received after his resignation, in lieu of notice, had been justified. Finally, we considered, in the light of the preceding analysis, whether Channel 4 was sufficiently transparent and accountable as an organisation, particularly given its new responsibilities.

5. Our Report details the outcomes arising from our main lines of inquiry both during the oral evidence session and in subsequent correspondence, all of which are published as part of the Report. We would like to extend our thanks to our specialist adviser to this inquiry, Mr Ray Gallagher, for his invaluable contribution.7

7 Ray Gallagher declared that he is a Member of the British Screen Advisory Council and a Fellow of the Royal Television Society and that he had joined the Sky pension plan during his employment and ceased contributing to it when he left the company in February 2006.

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2 New team, new vision

A funding gap? 6. Channel 4 is in a unique position as a publicly owned, not-for-profit broadcaster funded solely from commercial revenues but with public service broadcasting (PSB) obligations. Although it also undertakes other commercial activities, its primary means of raising revenue is through selling advertising minutage on its channels. PSB content, on its own, would not bring in sufficient advertising revenue to sustain the Channel. It operates, therefore, a cross-subsidy model, whereby it is allowed to broadcast cheaper and more advertiser-friendly non-PSB content as well as PSB content in order to generate sufficient advertising revenues to finance its primary remit. The previous Channel 4 management team argued before our predecessor Committee, and elsewhere, that this model was becoming untenable as advertising revenues declined and that, in the future, Channel 4 would require some form of additional financial support if it was to continue to deliver the same level of PSB. 8

7. The case for additional financial support was articulated in Channel 4’s 2008 strategy document Next on 4, which warned that “as the 10% decline in viewing experienced by the core channel between 2006 and 2007 suggests (from 9.8% to 8.7%), historic levels of Channel 4’s advertising revenues are unlikely to continue in the face of increased competition brought about by digital switchover.”9 Next on 4 prayed in aid consultants LEK, whom Ofcom had tasked in late 2006 to review Channel 4’s finances, and whose final report “confirmed the arguments that Channel 4 had previously made that it will face a significant funding gap by the time the digital switchover process is completed by 2012.”10 Next on 4 drew the conclusion that “[...]with no change to the current model, it will increasingly face the choice between moving into losses or having to cut back on public delivery.”11

8. There was a second strand to Next on 4’s case for additional funding; namely that:

Channel 4 has always had some kind of public support to enable it to deliver its remit. [...] Throughout its existence, Channel 4 has benefited from an implicit subsidy in the form of gifted analogue spectrum which, at its height, is estimated to have been worth 15-20% of turnover. [...] The residual value of analogue spectrum will fall away completely once the digital switchover process is completed in 2012 [...]12

9. For the previous Channel 4 management team, therefore, an estimated £100 million funding gap was the consequence of an irreversible combination of declining advertising revenue and an associated decline in the value of the gifted analogue spectrum, which they

8 Culture, Media and Sport Committee, Third Report of Session 2009-10, Channel 4 Annual Report, HC 415, Ev 1 9 Channel 4, Next on 4, March 2008, p 101 10 Ibid. 11 Ibid. 12 Next on 4, Executive Summary, p 9

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saw as an implicit public subsidy. They did not specify a solution in Next on 4, stating that “we remain open to the best model of support to the organisation—whether another form of indirect support, to replace the value of gifted analogue spectrum, or some kind of indirect subsidy.”13 Next on 4 was, though, very clear on what would occur if a solution was not found:

[...] much of the public value that Channel 4 delivers will diminish or disappear entirely. It would have to reduce its overall level of originated programmes, along with its commitments to loss-making genres such as arts, religion, comedy, drama and film. Even across its popular output, there would inevitably be less innovation, risk-taking and diversity. Off-screen, there would be a significant scaling-back of Channel 4’s commitment to development and training, and to the range of independent companies that we work with.14

10. When the previous management team appeared before our predecessor Committee in May 2009, the then Chairman and Chief Executive reiterated their concerns about the impending funding gap. Chairman Luke Johnson asserted that “unquestionably, the very robust and successful model that has persisted for over 25 years for Channel 4 needs some adaption,”15 and said that:

[...] because we are almost deliberately investing money in things like Channel 4 News that we know will effectively lose us money, then there is a need, if society and our stakeholders feel they believe in the plurality of public service broadcasting, for some form of support [...] 16

Mr Duncan drew the Committee’s attention to the “unprecedented level of ad market decline,”17 the fear that “with the structural change as well it simply will not bounce back.”18 He argued that “it would be a huge mistake just to sit back for another two or three years, particularly given the speed of change.”19 He told the Committee in 2009 that he had a preferred solution, which was for additional funds to come from a partnership with BBC Worldwide. He advised us that both Channel 4 and BBC Worldwide were enthusiastic about the deal, and anticipated that the main negotiations could be concluded in a few weeks20. Although he favoured an indirect solution that he felt went “with the grain of self- reliance”21 he accepted, in response to Committee questioning about the option of Channel 4 receiving some licence fee funding, that were the Worldwide deal to fall through then “some sort of contestable fund around the licence fee is a good idea.”22

13 Next on 4, Executive Summary, p 9 14 Ibid. 15 Culture, Media and Sport Committee, Third Report of Session 2009-10, Channel 4 Annual Report, HC 415, Q 1 16 Ibid, Q 33 17 Ibid, Q 35 18 Ibid. 19 Ibid. 20 Ibid, Q 10 21 Ibid. 22 Ibid, Q 14

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Going it alone 11. Given the evidence given to the Committee in 2009, we were intrigued to read the statement of the incoming Chairman, Lord Burns, in the 2009 Annual Report that “although it can be tough at times, I also like the discipline of Channel 4 having to earn its living in the market place rather than being dependent on Government funding.”23 This statement, and media stories where he outlined his vision for a policy of self-reliance,24 appeared to us to suggest a significant change of tack from the previous regime. We asked Lord Burns to explain his position. He told us that:

[...] seeking to find solutions, certainly through Government in these circumstances, is not the way forward. I think that one has to face the position that one is given. The commercial realities are that we have to make a success of it within the framework that is set out by Parliament, and that is what we propose to do.25

12. On a more upbeat note, Lord Burns observed that:

what we have seen this year is some pick-up in advertising, a welcome pick up. I think we are quite well positioned and my preference and ambition is to make a success of what we have rather than trying to seek solutions externally to get additional implicit subsidy into the company.26

Lord Burns was clear that, if the Government were ever to introduce a contestable element into the licence fee, he would then want to consider applying for it. However, he stressed that “what I do not want to do is to be out there arguing that we need Government money in order to survive.”27 He also confirmed that “there are no discussions taking place with BBC Worldwide.”28

13. New Chief Executive David Abraham placed further stress on the benefits of going it alone, suggesting that the cross-subsidy revenue model, independent of public funding, encouraged independent thought and creativity; “from a creative point of view there is great virtue in the independent funding model of Channel 4 in that part of our remit is to look at things in different ways from the BBC, to give a platform for these independent voices [...].”29

14. In light of these statements, we pressed the new top management team on whether the risk of a £100 million funding gap had gone away. Mr Abraham responded that:

There has probably been some misunderstanding about what was meant originally about a gap. A gap is defined by the point at which you measure it and it is the case that we are

23 Channel 4 Television Corporation, Report and Financial Statements 2009, p 4 24 See e.g. “Lord Burns: Channel 4 does not need public subsidy”, The Guardian, 23 June 2010 25 Q 3 26 Ibid. 27 Q 4 28 Q 5 29 Q 4

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spending considerably less on content now than we were three or four years ago. Do we think we can still deliver to our remit on that budget? Absolutely yes. 30

Lord Burns added:

I do not want to appear critical of predecessors about this issue because there is a clear sense that historically there was a much larger implicit subsidy that Channel 4 was receiving through the terrestrial broadcasting system when there were only the main terrestrial channels. I think it was right for them to point out that much, indeed virtually all, of that implicit subsidy was going to disappear in the digital world, and therefore if Channel 4 was to continue in the same balance relative to others there was a gap that was appearing. I am not challenging that logic. What we are saying is that it seems to us clear now, looking at the new Act which covers our activities, that we really have to settle for what is set down there and that our main task is to get on and deliver that and to live within our means and do our best to generate the commercial earnings that are necessary to be able to provide outstanding television.31

15. Having listened to the comments of the new Chairman and Chief Executive, we conclude that the question of a “funding gap”—a central component of the previous regime’s strategy—has indeed been consigned to history, replaced by a more robust assessment of future advertising revenues, albeit still below previous highs, and of the potential for further efficiencies. This is, in short, a commitment as Mr Abrahams explained to us, “to operate very much within our means.”32

16. Although Lord Burns did not want to appear critical of his predecessors, Lord Puttnam, Deputy Chairman of Channel 4 since February 2006, has not felt the need to be so circumspect. During an interview on Radio 4’s The Media Show in September 2010,33 he commented unambiguously that the previous top management had “cried wolf”34 and that they “had hopped up and down too early far too much”35 and implied strongly that the Chief Executive had not listened to the counsel of the non-executives on the Board on this issue. We conclude that the previous management overplayed its hand on the funding gap issue, and that Channel 4’s need for additional public funding was not as mission- critical as was claimed. We recommend that Channel 4 non-executive Board members review whether they ought to have challenged the previous management more strongly and whether there are lessons for the future to be learned from this experience.

The scale of the independent-funding challenge 17. The ‘funding gap’ has proved something of a red herring. Nevertheless, the self-reliant approach of the new team is not without risk. As the table below shows, total Channel 4

30 Q 6 31 Ibid. 32 Q 2 33 Radio 4, The Media Show, 22 September 2010 34 Ibid. 35 Ibid.

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advertising revenue is down year- on-year since 2007, which must be of concern given that some 85% of Channel 4’s revenues is derived from advertising.

Table 1: Channel 4 financial trends

C4 core other channel channels Total

total advertising advertising advertising total all operating total £ million revenue revenue revenue revenue costs profit 2009 535.1 170.7 705.8 830.3 826.4 0.3 2008 619.7 169.6 789.3 906.1 906.6 1.8 2007 676.8 148.4 825.2 944.9 953.7 0.5 2006 664.4 112.7 777.1 936.9 922.9 14.5 Source: Channel 4 Annual Reports and accounts, various years 18. In 2009 Channel 4 experienced a 10.5% year-on-year decline in advertising revenue, slightly better than the total TV advertising market which declined by 12%. It is noteworthy though that Channel 4’s advertising revenue trends are not uniform across the network. Whilst its core channel advertising revenue has fallen significantly over the last three years, advertising revenue on its digital channels and future media (that is, internet and on-demand services) has risen. One consequence of these trends is that, whilst the core channel has shown significant and rising losses in recent years—it last made a profit in 2006—the digital channels have recorded rising operating profits, as the table below shows.

Channel 4 Financial Performance

2007 operating 2008 operating 2009 operating profit/(loss) £m profit/(loss) £m profit/(loss) £m

Core Channel (7.8) (24.0) (59.4)

Digital channels 16.2 41.1 53.5

Source: Channel 4 Annual Report and Accounts, various years 19. In 2009, the Channel 4 Corporation as a whole recorded an after tax profit of £300,000. Then Interim Chief Executive Anne Bulford noted in her foreword to the 2009 Annual Report that “record profits from our digital TV channels were the most important factor in helping the Group break even.”36 The question is whether Channel 4 can continue to expand and exploit advertising and other revenues throughout its portfolio of services. In his evidence to us, Chief Executive David Abrahams was positive, observing that:

[...]without innovation television is likely to stay at the plateau that it is currently on. [...] But Channel 4 has always innovated. It innovated when it first ceded from ITV and had a new way of serving audiences, younger, up-market audiences, packaging it very effectively to ad agencies in creating a good price position in the marketplace. I believe our task now is to innovate another time in this area and that is where a lot of my focus is.37

36 Channel 4 2009 Annual Report, p 5 37 Q 20

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20. Subsequently, on 6 August 2010, Channel 4 made an announcement38 that it had signed agreements with BT and Sainsbury’s to sponsor London 2012 Paralympic games programming on channel 4. This adds weight to Mr Abraham’s confidence in Channel 4’s ability to generate more advertising revenue. The accompanying press release commented that

[...] the two multi-million deals will see BT and Sainsbury’s share sponsorship equally across a variety of programmes across the Channel 4 network leading up to the London 2012 Paralympic Games as well as the live coverage and highlights shows broadcast during the Games themselves. This ground-breaking dual sponsorship also includes sponsorship of Channel 4’s new website dedicated to the Paralympic games, www.channel4.com/paralympics, programming on PC and TV VOD [view on demand] as well as the joint creation of Short Form Programming content.39

Further evidence that Mr Abraham’s plans for future advertising revenue may be bearing fruit came in October 2010, when he was reported to be expecting Channel 4’s advertising sales to achieve in excess of £1bn during 2011, benefiting from its stake in YouView,40 and the addition of the UKTV sales contract offer. 41

21. In supplementary evidence, we also asked Channel 4 how the Contract Rights Renewal (CRR) mechanism affected their ability to raise advertising revenue. The CRR mechanism is a remedy imposed by the Competition Commission in 2003 as a condition of the merger of Carlton and Granada (two of the largest Channel 3 licence holders). The CRR was imposed in recognition of the concerns of advertisers about the extent of ITV plc’s market power after the merger. As a result, the CRR imposes conditions on ITV plc which are intended to ensure that advertisers and media buyers are no worse off after the merger than before. It includes an automatic “ratchet”—a linkage which reduces the amount advertisers will have to commit if ITV1’s audience shrinks. During evidence to our predecessors, Michael Grade, then Executive Chairman of ITV, argued that the CRR was damaging to all commercial broadcasters.42 However, the Competition Commission recently confirmed that the CRR was still needed to prevent ITV plc from exploiting its position to the detriment of advertisers and other commercial broadcasters.

22. Channel 4 responded that it agreed with the decision taken by the Competition Commission because “ITV1 still has dominant market power so there is a need for a competition remedy to constrain ITV1 from exploiting its position.”43 They emphasised that, were the CRR mechanism to be relaxed, then “gains that ITV might accrue [...] are likely to mean losses for other commercially-funded broadcasters—with a negative impact on their ability to invest in UK content.”44 They also identified the structural shift towards

38 Channel 4 press release, BT and Sainsbury’s to sponsor London 2012 Paralympic Games Programming on Channel 4, 9 August 2010 39 Ibid. 40 Previously Project Canvas – Channel 4 is a partner in this joint consortium aiming to offer free-to-air, internet- connected TV 41 Reported in Media Week, Channel 4 to take £1 bnin TV ad revenue in 2011, says boss, 10 October 2010 42 Culture, Media and Sport Committee, First Report of Session 2007-08, Public service content, HC 36-I, para 169 43 Ev 22 44 Ibid.

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digital television—rather than any constraints imposed by the CRR mechanism—as the primary cause of the decline in the TV advertising market.

23. There is a second key variable, namely the extent to which Channel 4 can compensate for any reduced advertising revenue by reducing operating costs. As table 1 at paragraph 17 shows, in recent years Channel 4 has made substantial progress in reducing operating costs—reducing them by 8.8% in 2009, following a fall of 4.9% the previous year—partly achieved through a significant headcount reduction. Despite the scale of the cuts already made, in evidence to this Committee Mr Abrahams was also positive about the potential for further savings, telling us that we was looking at “the scale of management and the volume of management at the top end of the organisation”45 and also at “the adjacencies between departments: can we work more efficiently?”.46 As with future advertising revenues, he stressed above all the gains that could be made through innovation, in this case in working practices:

[...] convergence is about joining up these different platforms and getting the creative teams to work in a completely joined-up and holistic way, so any departmentalism, any silos, is really where our focus has been to date.47

However, he did also warn that: “if we were to cut any deeper I think it would really impinge upon our ability to deliver the schedules and the high quality content that you would expect from us.”48

24. In the current economic climate, Channel 4’s decision to pursue self-reliance through exploiting existing and new revenue sources and further reducing operating costs is the right one. However, given the extent to which Channel 4 has already made efficiencies, and uncertainties over future advertising revenue trends, it will be a considerable challenge for Channel 4 to innovate to the extent required to make available sufficient funds to maintain current levels of public service content. We do not under-estimate the size of the task and, for this reason, we will continue to monitor Channel 4’s progress closely. We would not rule out re-examining Channel 4’s funding regime in the medium term if, despite its best efforts, advertising revenue were to drop significantly.

45 Q 69 46 Ibid. 47 Ibid. 48 Ibid.

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3 New remit

Digital Economy Act 25. Prior to the Digital Economy Act (the Act), Channel 4’s primary functions covered only securing the continued provision of Channel 4 and the fulfilment of a public service remit on its core Channel 4 television channel. The Act broadens its primary functions to the making, broadcasting and distribution of “relevant media content” on other types of channels and services.49 By amending the 2003 Communications Act, the Act gives legislative effect to the conclusion of the previous Government’s Digital Britain White Paper,50 which proposed a modernised remit for Channel 4.

26. As well as confirming the role of Channel 4’s portfolio of services, the Act also stipulates additional tasks for Channel 4 to undertake, which also have a strong public service flavour. The Act contains a general direction that Channel 4 must participate in “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.”51 One further notable addition is that Channel 4 must participate “in the making of high quality films intended to be shown to the general public at the cinema in the United Kingdom.”52 Other newly specified tasks that Channel 4 must deliver as a consequence of the Act include:

• The making of relevant media content that consists of news and current affairs;

• the making of relevant media content that appeals to the tastes and interests of older children and young adults;

• the broadcasting or distribution of relevant media content by means of a range of different types of electronic communications networks;

• promoting measures intended to secure that people are well-informed and motivated to participate in society in a variety of ways;

• supporting the development of people with creative talent;

• supporting and stimulating 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;

• promoting alternative views and new perspectives; and,

• providing access to material that is intended to inspire people to make changes in their lives.53

49 Digital Economy Act 2010, section 22 50 Digital Britain, June 2009, Cm 7650 51 Digital Economy Act, section 22 52 Ibid. 53 Digital Economy Act, section 22

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27. The intent is to answer the challenge the then Government set itself in Digital Britain to:

[...] establish whether a long-term and sustainable public service organisation providing competition for quality to the BBC could be defined and designed drawing in part on Channel 4’s assets and a re-cast remit, a greater focus on online and multi- media and able to develop innovative partnerships with the wider and public sector, a ‘PSB2’.54

Channel 4 appears very content with this vision—unsurprisingly, as Channel 4 had a strong influence on the drafting of the legislation. Digital Britain notes that Channel 4: “[...] has itself proposed many of the elements for a new remit in the work it has undertaken in Next on Four. The Government welcomes that work and agrees that it provides an important series of aspirational goals for C4C [the Channel 4 Corporation].”55

28. Given the extent of Channel 4 involvement in the genesis of the corporation’s new remit, we considered as part of this year’s evidence session whether Channel 4 would be doing anything differently as a result of the Act, or whether it simply reflected changes that it had already made. In this context, it is notable that Channel 4’s Statement of Programme Policy for 2009 already committed Channel 4 to “build on the significant progress made over the last year towards fulfilling the public service vision that it set out in Next on 4.”56 Subsequently, Channel 4’s Annual Report, written before the Act came into effect, asserted that “it remains our ambition to pursue the vision set out in Next on 4” and welcomed the Digital Economy Bill for this reason, noting for instance that it enshrined in legislation the four public purposes—Nurture, Challenge, Champion and Inspire—that Channel 4 was already using to measure public impact.57

29. Furthermore, during the limited opportunities for debate on the Digital Economy Bill, several MPs acknowledged the need to revise Channel 4’s remit for the digital age because of the extent to which, in practice, it was already delivering to this new remit. When we put this point to Mr Abraham at our June 2010 evidence session, his response certainly pointed to evolution rather than revolution:

The Act [...] very much articulates in more detail the areas where we are aiming to achieve delivery, such as developing new talent, creating well-informed debate about issues around the world, providing alternative views and fresh perspectives.58

30. We note the general consensus that the Channel 4 sections of the Digital Economy Act helpfully redefine Channel 4’s remit for the new digital era in broadcasting, and agree that, in broad terms, they do capture the activities it needs to undertake, and in a number of respects is already undertaking, to maximise its potential as a public service broadcaster. The true test of the new framework, however, will be what it actually delivers most importantly in terms of public service content. With this in mind, we look next in

54 Digital Britain p 144 55 Ibid. 56 Channel 4, Statement of Programme Policy 2009, p 1 57 Channel 4 2009 Annual Report, p 84 58 Q 26

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more detail at one key assumption behind the Act; that the expanded remit will provide additional public service benefits for viewers.

Public Bodies Bill 31. The Committee notes the inclusion of Channel 4 in Schedule 7 of the Public Bodies Bill59 and is concerned that the effect of this would be to allow the Government to privatise Channel 4 simply through the introduction of secondary legislation. We call on the Government to explain why Channel 4 is included in Schedule 7 of the Public Bodies Bill and—unless there is good reason—to remove it.

59 Public Bodies Bill [Lords], Schedule 7 [Bill 55/1 (2010-11)]

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4 Public service delivery

Core Channel 32. Before the Digital Economy Act, Channel 4’s formal public service responsibilities were focused almost exclusively on its public service broadcasting (PSB) obligations on its core Channel. 60 The Act leaves unchanged Channel 4’s core channel public service remit to “provide a broad range of high quality and diverse programming which, in particular—

• Demonstrates innovation, experiment and creativity in the form and content of programmes;

• Appeals to the tastes and interests of a culturally diverse society;

• Makes a significant contribution to meeting the need for the licensed public service channels to include programmes of an educational nature and other programmes of educative value; and

• Exhibits a distinctive character.61

33. The Act also leaves unchanged the terms of Channel 4’s TV licence, which specifies targets for hours of news, current affairs, schools programming and for percentage of programmes that are original productions, independent productions, subtitled, audio- described, and regional productions as a means of measuring the extent to which Channel 4 is delivering its public service remit on its core channel.

34. Our predecessor Committee was somewhat sceptical about the volume of PSB on the core channel, commenting that: “it is far from clear that the level of PSB content that is broadcast has been properly examined. Indeed at times, the core channel’s output appears composed largely of non-PSB programming.”62 Some statistics in Channel 4’s 2009 Annual Report support this concern. In 2009, Channel 4 spent £145 million on what it terms as its key UK-originated, PSB genre programming on the core channel.63 This was 5% less than the previous year (down by £8 million from £153 million in 2008). 64 Moreover, this comprised a minority of the £341 million expenditure spent on all UK-originated programming on the core channel, and an even smaller proportion of the expenditure of £471.9 million on total programme and other content on the core channel (down 8.5% by some £44 million in 2009 from £516 million in 2008).65

60 The requirement to produce school programming online being the only exception 61 Communications Act 2003, Section 265 62 Culture, Media and Sport Committee, Third Report of Session 2009-10, Channel 4 Annual Report, HC 415, para 13 63 First-run Uk-originated content in the following genres: News, Current affairs, Education, Comedy (part of the Entertainment category) single dramas, drama series, and Film4 productions (part of Drama), Religion and Arts (part of Arts and Music). See Channel 4 2009 Annual Report, p 69. 64 Channel 4 2009 Annual Report, p 69 65 Ibid.

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35. On the other hand, Channel 4 also recorded in its 2009 Annual Report that it had met or exceeded all the PSB programme obligations placed on it by Ofcom.66 Mr Abraham further defended the balance between PSB and non-PSB programmes to us, arguing that:

Every broadcaster around the world [...] has to find the right balance of content that can fund the areas of the schedule which deliver brand value and public service value in our case. I am immensely proud of the fact that in the same week when those hardworking shows [repeats, reality TV and American imports] ran we also had a show last night, The Fairy Jobmother, about helping unemployed people back to work. We have a new strand straight after the news, 4Thought.TV, which is produced regionally and gives voice to opinions about religion and spirituality, which is a really innovative show. At the end of the day it is a mix and remember that we have the Channel 4 News there permanently at seven o’clock. This is not a commercial proposition but it is a very important backbone of the schedule for Channel 4 and it is made possible by the way in which we manage our schedule overall [...]67

Network of services 36. In supplementary evidence to this Committee, Channel 4 argued further that its public service delivery “should be assessed more broadly than by sole reference to total expenditure on first-run originations in “key PSB genres” on the main Channel 4 service,” noting in particular that “the updated remit recognises the public value provided by Channel 4 beyond the main Channel 4 service.”68 This is a very important observation, which raises the issue of how the Committee, and Ofcom and viewers, should assess Channel 4’s public service performance following the passage of the Digital Economy Act.

37. This may be quite challenging. As set out in paragraphs 25-26, Channel 4 now has primary functions and tasks relating to its whole portfolio of services with a clear public service component. However, Channel 4’s licence and measurable targets still focus solely on its core channel’s PSB remit. As Lord Burns pointed out in supplementary evidence to the Committee “the Act does not give the digital channels public service status—with commensurate public service obligations and benefits.”69 The Act provides a framework for recognising the public value of the digital channels, “their role in creative and public service terms,”70 as Channel 4 put it. There is, however, as yet no clear external guidance as to how their contribution might be measured and assessed—though Channel 4 does include them in its own assessment of its Public Impact, published as a separate Report within the Annual Report.

38. It is unfortunate—a consequence perhaps of the lack of proper scrutiny of the Bill by the House of Commons during the final period before the general election— that the Act does not do more to clarify the status of Channel 4’s network of services. As a consequence,

66 Channel 4 2009 Annual Report, p 137 67 Q 23 68 Ev 23 69 Ev 21 70 Ev 23

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Channel 4 appears to have far greater leeway as to how it delivers a public service- orientated remit outside the core Channel.

39. One cross-network obligation Channel 4 does have under the Act is to produce an annual statement of media content policy. In November 2010, Ofcom published, for consultation, draft guidance for Channel 4 on how to complete this document. For Ofcom, this guidance note “represents a new approach to the regulation of C4C’s duty to provide public service content across the full range of its media platforms.” We infer from this that the Government and Ofcom are looking to the media content policy as the key means of establishing Channel 4’s public service content-related obligations outside the core channel. If this is indeed the case, then we would expect to see emerging from this process, measurable performance targets for its new primary functions, similarly to those contained in the TV licence for its core channel, building-on and validating Channel 4’s own Public Impact assessments. The draft guidance does provide some reason for optimism in this regard. We welcome, in particular, the proposal that the media content policy statement “should discuss overall strategy and the balance between content provision on the various platforms—including the reasons behind decisions to deploy different platforms.”71 We also agree that “C4C should “review its actual performance against the stated policy goals. The review should be rooted in measurable data, but include narrative assessment where appropriate.”72 On the other hand, the draft guidance note also states that the measures that may—as opposed to must—be included. Furthermore, the proposal that Channel 4 should provide “an indication of the relative levels of investment involved” when discussing overall strategy and the balance between content provision on the various platforms, is potentially weak, leaving unclear, for example, how much Channel 4 is spending on public service content on each digital channel.73 This is, perhaps, indicative of the caution with which Ofcom is approaching its oversight role of Channel 4’s new remit. In turn, this gives rise to a concern that the eventual final guidance might allow Channel 4, should it be so minded, to cherry pick favourable measures rather than present a more rounded picture of performance across its network.

40. We welcome Ofcom’s attempt to establish a regime for establishing, monitoring, reviewing and enforcing public service-related obligations for Channel 4 across its network commensurate with its new remit under the Digital Economy Act. The final outcome should enable everyone to better understand what Channel 4 can be expected to deliver, and viewers to receive, in terms of public service-related output across Channel 4’s portfolio of services and allow Ofcom, and Parliament, to hold Channel 4 to account for the delivery of these undertakings.

Risks and challenges 41. During oral evidence, Channel 4 offered the Committee some examples as to how it expected the non-core services to complement the core channel’s PSB remit and enhance its public service delivery. Mr Abraham looked ahead to a future in which Channel 4 would

71 Ofcom Draft guidance note for completion of C4C combined statement of programme and media content policy, published 24 November 2010 p 2 72 Ibid, p 3 73 Ibid.

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use new technology to increase the reach and impact of its PSB content, building for instance on the success of the Embarrassing Bodies formula which combines TV viewing with internet interaction. He told us that:

[...] We are building web applications, we are doing on-demand services and we have got linear services, so what I understand to be digital in the future is a very powerful moment where these things are available in a connected way. The social networking side that backs up behind our shows as well as using the power of the linear channel to drive interest around certain areas will create new potential and new creative opportunity.74

42. By way of further example, Mr Abraham also commented that “I am very interested to see what the potential of news provision is in an era of greater convergence.”75Anne Bulford, Channel 4’s Chief Operating Officer, saw Channel 4’s coverage of the London 2012 Paralympics Games as a good opportunity to increase public impact through “not just live streaming of events [...] but also the way in which we would want to use social media to join people up and to really make it a participative digitally inclusive event.”76

43. Channel 4’s digital vision, underpinned by the new Digital Economy Act framework, is an enticing one. On a more cautionary note, however, it can be argued that the contributions that, for example, the digital channels have made to public service delivery to date have been small. E4, for instance, showed just 35 hours—less than an hour a week— of first-run UK originated programming in 2009 (excluding Big Brother), a 24% reduction from the previous year.77 In aggregate, first-run originations across the digital channels (excluding Big Brother streaming) totalled less than one hour a day (0.8 hours, down from 1.1 hours a day in 2008).78 Channel 4’s total investment in UK originated content on its digital channels was only £24 million in 2009, down again from £32 million the previous year.79 Among the results of the cutbacks was the ending of More4 News.80 Although it is certainly plausible to argue—as Channel 4 maintains—that Channel 4’s digital channels have the potential to provide “valuable opportunities to innovate and experiment and reach diverse audiences such as younger viewers,”81 this potential would appear to us to have some way to go before it is fully realised. The award winning E4 commissions Skins and Inbetweeners may well point the way forward, but are not sufficient justification on their own for a portfolio of channels.

44. There are questions around the extent to which Channel 4’s additional services and new technologies are capable of enhancing the content and impact of Channel 4’s public service delivery, not least because of the money Channel 4 has spent on establishing them. As we noted in paragraph 19 above, the narrative in the 2009 Annual Report is that the

74 Q 26 75 Q 87 76 Q 32 77 Channel 4 2009 Annual Report, p 18 78 Ibid, p 68 79 Ibid, p 69 80 Ibid, p 5 81 Ev 23

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profits of the digital channels have come to the rescue of the loss-making core channel and that, as then Interim Chief Executive Anne Bulford put in her foreword to the Report, “with so much pressure on the core channel’s performance, 2009 was a year when the wisdom of our long-term investment in digital became ever more apparent.”82

45. It is, however, possible to take a different view. Our predecessor Committee noted that some critics had claimed that:

Channel 4’s expansion into non-core, non-PSB ventures has been wasteful and reduced its public service focus. Among the claims is that ‘Channel 4 has squandered the best part of £300 million on non-core activities: nearly all its accumulated post- tax profits since 1990.’83

In supplementary evidence to our predecessor Committee, Channel 4 admitted that its portfolio of digital channels was not expected to fully recoup their costs since inception until 2012.84

46. In this context, the fate of Channel 4’s 4iP project provides a salutary lesson of the perils inherent in using a full portfolio of channels and services to deliver an acceptable return of public service content. In Next on 4, Channel 4 committed itself to growing its presence across digital platforms, including by launching a major digital media pilot fund—4iP—for content and services with clear public service ambition. The document further explained that:

This fund will allow us to deliver on our public purposes in entirely new ways, working with a new generation of creative talent in digital media, and providing new ways for audiences to engage with their personal interests and with wider social issues. The fund will invest up to £50 million over the next two years, of which we have already secured commitments of £40 million. Channel 4 will commit £20 million and we have provisional agreement for at least the same level of funding comes from a number of partners [...]85

Significantly, Next on 4 termed 4iP: “one of the biggest and most exciting calls-to-action to new and emergent digital media companies in the UK. For Channel 4, it represents a significant step towards our transformation into a truly cross-platform network.”86

47. Channel 4’s update on 4iP in its 2009 Annual Report—one year into the pilot fund— hinted that progress had been slower than originally envisaged. While Next on 4 envisaged a fund that would invest up to £50 million over the next two years, with Channel 4 contributing £20 million, the Annual Report noted: “Since 4iP’s launch [at the end of 2008] Channel 4 has invested a total of around £3 million in approximately 40 companies. [...] a

82 Channel 4 2009 Annual Report, p 5 83 Culture, Media and Sport Committee, Third Report of Session 2009-10, Channel 4 Annual Report, HC 415, para 26 84 Ibid, Ev 18 85 Next on 4, pp 86-87 86 Ibid, p 87

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further £2 million was leveraged from regional funds [...]87, raising questions as to the amount of public service content that it was generating.

48. In October 2010, Channel 4 announced the cancellation of the 4iP project and the end of the 4iP brand.88 According to media reporting, some £12 million of Channel 4’s own budget had been spent on the project, whilst generating few if any successful businesses.89 Daniel Heaf, Channel 4’s former digital commissioner, was reported by the Telegraph as saying that “I think 4IP was absolutely set up to fail. Not deliberately so, but it didn’t have any clear objectives, so how could it have worked in the long term?” Revealingly, in terms of the capacity for new technology projects to draw funds aware from core PSB programming, Mr Heaf was also reported as commenting that “”Andy Duncan was 4iP’s founding father, so it is hardly surprising that it is no longer a priority for the new chief executive—who has a lot of fires to put out at Channel 4, and is choosing to focus on the TV schedule, which has a bit hole in it, [since Big Brother finished]”.90 The head of a project funded by 4iP was quoted in the press as commenting that “They could have created a lasting edifice, but where did that money go?”91

49. The Head of 4iP, Tom Loosemore, who is leaving Channel 4, wrote on his blog that the upsides of 4iP were “a truly, truly, fantastic team. The excitement of doing risky new stuff. And the joy of working with so many wonderful small companies.” But he also commented that the downsides were: “Pretty much as Dan Heaf described, I’m afraid. No-one could ever agree what 4iP was for, a failure for which I must take some responsibility.”92

50. Channel 4 has a difficult balancing act to maintain if it is to reap maximum public service impact from its full portfolio of channels and services. On the purely financial side, it must assess whether they have the potential to generate profits that can then be used in support of public service content, or whether their associated operational costs risk diverting money away from it. On the creative side, it must balance the need to sustain public service content on its core channel—where the audience is highest—with the potential of its new platforms to reach new audiences. Channel 4’s new portfolio of channels have greatly increased the volume of non public service content that it broadcasts If Channel 4 makes the right choices, then its new framework will deliver on its promise to provide additional public service benefit to viewers. If Channel 4 makes the wrong choices, then there is a risk—not least given that its new portfolio of channels have greatly increased the volume of non public service content that it broadcasts— that the new framework will lead to PSB content becoming diluted or ghettoised. Mr Abraham’s observation to us that: “[...] I am looking carefully at some of the fundamentals. How do we take our overall budget and allocate it between the genres? Which genres are delivering more directly and more indirectly?”93 implies that he is aware of the tensions.

87 Channel 4 2009 Annual Report, p 72 88 “Channel 4 axes 4iP”, The Guardian, 7 October 2010 89 Ibid. 90 “Channel 4 ‘set up 4iP to fail’, The Telegraph, 12 October 2010 91 “Channel 4 axes 4iP”, The Guardian, 7 October 2010 92 Tom Lossemore’s blog, 15 November 2010, http://blog.tomski.com/ 93 Q 26

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51. There is also a further issue arising from Channel 4’s new portfolio of services and the increasing volume of non public service content that they generate, namely the competitive impact of its activities on the wider market. As our predecessors observed, “the extension of Channel 4’s primary functions beyond the core PSB television channel, along with the growth of non-PSB activities, means the market impact this public organisation has might increase significantly, raising questions about how this impact should be monitored and controlled.”94 This is an important issue, which the Committee may consider in more depth next year, as more evidence emerges of the overall impact on the markets of Channel 4’s new remit.

52. Channel 4’s new remit and its plan to operate as a public service network beyond the core channel has some financial and creative risk. We recommend Channel 4 clearly articulates its strategy for the amount of public service delivery to be returned from its commercial activities for each individual channel and online. The Committee will be looking to Channel 4 to demonstrate that its growing empire is constructed so as to support its primary functions, and not detract from them.

Nations and regions 53. Channel 4’s 2009 Annual Report emphasises the importance it attaches to supporting creativity across the UK, recording an investment of “more than £100 million on programming outside London in 2009, including some of Channel 4’s most popular series, from Location Location Location to Skins.”95 It also noted that: “notwithstanding the reduction in total programming budgets in the year, and resulting decrease in the volume of first-run originations, there were increases in the proportion of commissions made outside London both by volume and by expenditure.”96

54. However, during our oral evidence session we observed that, in percentage terms the amount Channel 4 was spending on regional production (32% in 2008, 37% in 2009)97 was not far above the minimum 30% requirement set by Ofcom. We asked whether Channel 4 had an aspiration to do better. Both the Chief Executive and Chief Operating Officer were keen to reassure us on this point. Mr Abraham explained that:

[...]one of our biggest shows on air, Hollyoaks, [is] produced in Liverpool and we are very proud of the fact that we work with a greater number of regional smaller independent producers than most of our competitors [...] For us it is as much to do with creating talent bases and working with new producers and other commissioners to create the local ecosystems that develop these new companies and I think if you go back through the history of Channel 4 there is a good record of that [..] we will continue to work hard to improve this. The whole issue of diversity and regionality is one that is at the very centre of delivering to our remit.98

94 Culture, Media and Sport Committee, Third Report of Session 2009-10, Channel 4 Annual Report, HC 415, para 17 95 Channel 4 2009 Annual Report, p 16 96 Ibid, p 70-71 97 Ibid, p 137 98 Q 57

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Ms Bulford further observed that:

We take it very seriously [...] We consistently put money and resource into not only developing ideas but helping new companies to establish. [...] what is encouraging is in 2009 we had the new quotas, as you know, moving up from 35% and our regional production spend increased to 37% and our hours were higher, up to 45%, which is good, and we are on track at the moment to exceed those quotas in 2010.99

55. We pressed in particular on the percentage of programming coming from the nations, noting that the quota of 3% of network spend on originated programming coming from Northern Ireland, Scotland and Wales was rather low, given a total population share of 15% of the UK population. We suggested that Channel 4 should be setting more challenging targets, and received a holding response from Mr Abraham: “[...] three months in I probably need a little bit of time to give you a more informed response, [...] but I can give my commitment that when I sit here in a year’s time I will give you a fuller assessment”.100

56. We also asked whether Channel 4 could consider taking a leaf out of the BBC ‘s book and move commissioners out of London to stimulate commissioning outside the M25. Mr Abraham gave us some encouragement, observing that “I am not aware of whether that has been looked at from a cost or feasibility point of view, but it is certainly something that I will look [at].”101 We urge Channel 4 to redouble its efforts to increase the proportion of UK-originated commissioning from the nations and regions. We propose that Channel 4 set a medium term target of 15% of network spend on originated programming coming from the nations, in line with their total population share. We look forward to hearing next year the results of the Chief Executive’s reviews of targets for commissioning from the nations and the potential benefits of re-locating commissioners out of London.

Film 57. Channel 4 has an enviable record of supporting the British film industry. Its 2009 Annual report noted that “the Oscars that Film4 achieved for Slumdog Millionaire in February were a reminder of Channel 4’s special creative alchemy and our ability to shape the [British] culture.”102 The Report also noted that the success achieved during 2009 by a number of other films with Film4 investment behind them, including Nowhere Boy, Looking for Eric and The Lovely Bones, and recorded that Film4’s early involvement in films helped to attract additional funding worth four times its own investment.103

58. Historically, Channel 4 has spent £10 million annually on film production. However, more recently this had fallen to £8 million as Channel 4’s revenues have fallen. During our oral evidence session we welcomed Channel 4’s new commitment to increase the annual

99 Q 57 100 Q 62 101 Q 60 102 Channel 4 2009 Annual Report, p 10 103 Ibid, p 71

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film budget back to £10 million. We asked, given that film production was now explicitly within Channel 4’s PSB remit under the terms of the Digital Economy Act, whether we could expect the budget to grow further. Mr Abraham was non-committal, although he did acknowledge the importance of Film4, suggesting that it is “at the very upstream end of idea development of unique British writers and filmmakers”104 and observing that it “is certainly something that I would be very passionate about protecting and building on.”105 Subsequent to our evidence session, on 14 October 2010, Channel 4 announced a further increase to Film4’s budget to £15 million per annum, effective from 2011, guaranteed for the next five years. We commend Channel 4 for increasing its financial commitment to UK film production, which is particularly welcome in the present climate of public sector austerity and following the Government’s decision to close the UK Film Council. We are considering the decision to close the UK Film Council in more detail as part of our ongoing inquiry into the funding of the Arts and Heritage.

Big Brother 59. Big Brother has been a lucrative fixture of Channel 4’s schedules for nearly a decade, though opinion remains divided on whether it has been a PSB success as well as a commercial one. Its end leaves a big hole in Channel 4’s schedules, and we were keen to hear how Channel 4 planned to replace it. Mr Abraham was predictably upbeat, telling us that:

For some time before my arrival there was a process of creative renewal under way. I have arrived and am impressed by the progress that we have been making, but obviously I want us to see it go a lot further in planning for next summer, which will be the first part where the schedule withstands those year-on-year comparisons. [...] Big Brother was the kind of show that happens in the television industry once in a decade and we should not be looking for the next Big Brother. What we should be looking for is a series of ideas that perhaps would make our schedule more balanced and more diverse out of which we could find a number of quite big hits. We are in the fourth quarter and the first quarter of next year intensively piloting and testing new ideas. Whilst this task in broadcasting terms is a very big one, it is also a very exciting one and the producers that I speak to are very excited to have an opportunity to come forward with new ideas and that is very much at the heart of our remit.106

60. We are encouraged by Channel 4’s intent to replace Big Brother with a more balanced and diverse schedule, but do not underestimate the size of the challenge facing Channel 4 to achieve this while holding on to ratings. We look forward with interest to Channel 4’s assessment next year as to how successful these efforts have been.

104 Q 88 105 Ibid. 106 Q 24

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5 Remuneration

61. Channel 4 states that the aim of its remuneration policy is to “attract, motivate and retain high calibre staff and executive Board members by rewarding them with competitive salary and benefit packages.”107 We do not disagree with this, but were struck by the size of former Chief Executive Andy Duncan’s remuneration in 2009—a grand total of £1.481 million. By comparison, Mark Thompson, Director-General of the BBC, received ‘only’ £838,000 in financial year 2009/10. Mr Duncan resigned as Chief Executive in November 2009. The breakdown of his remuneration for 2009 is as follows:

£514,000 in salaries and fees

£225,00 in long term incentive payments

£731,000 in pay in lieu of notice

£11,000 in benefits

It is noteworthy that the long term incentive payment, which required Mr Duncan to stay for only two years (from 1 July 2007 to 30 June 2009) and to meet certain performance criteria, was originally higher—a maximum of £445,000. The Channel 4 Annual Report records that “Andy offered to waive 50% of his entitlement to his long-term loyalty scheme payment due and this offer was accepted by the Remuneration Committee.”108

62. During our oral evidence session, we put it to Lord Burns that this level of remuneration was unjustifiable. Lord Burns observed that remuneration was “an extraordinarily difficult issue.”109 He mounted a partial defence of high salary levels, arguing: “that is just the commercial reality of life. You pay people not what is necessary to get them out of bed but what is necessary to get them out of bed and come and work for you rather than go and work for somebody else.”110 He did though suggest that the days of salaries at the level of Mr Duncan’s were in the past, observing that:

some of the numbers you are looking at and some of the figures that you are quoting do go back and relate to a period when the whole culture sector was in a much healthier economic situation than it is today [...] some of the salaries that you quote reflect a period when there was enormous competition and people were being bid from one channel or one company to another [...] I would expect the days of those very high salaries are gone for the time being.”111

63. When pressed on the details of Mr Duncan’s payment in lieu of notice, Lord Burns placed the blame on the previous regime, explaining that: “I was not at Channel 4 at the

107 Channel 4 2009 Annual Report, p 132 108 Ibid, p 133 109 Q 35 110 Ibid. 111 Ibid.

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time that those decisions were taken so I am not in a position to be able to explain it.”112 Chief Operating Officer Anne Bulford, who was there at the time, confirmed that, even though Mr Duncan had resigned, Channel 4 was legally obliged to pay him £731,000 “under the terms of his contract.”113 The Channel 4 team refused to be drawn on our speculation that one implication that could be drawn from the settlement was that Mr Duncan’s departure had not been entirely voluntary.

64. Not for the first time—see paragraph 16—Channel 4’s deputy Chairman Lord Puttnam was rather more forthright,114 asserting baldly that salaries at Channel 4, in common with those at the BBC, had got out of control “in a moment of madness.”115 He made clear, though, that the deals for Mr Duncan and Channel 4’s former director of television Kevin Lygo, had already been done when he arrived on the Board.

65. The current Channel 4 team was on safer ground outlining the measures in train to curb previous excesses. As Lord Burns noted, “David [Abraham]is being employed on a lower salary than his predecessor”116 and said that “if you compare it with the chief executive of ITV and the chief executives of the other commercial broadcasters I think you will see that it is significantly lower.”117 Mr Abraham is on a basic salary of £490,000, which is £180,000 below Mr Duncan’s basic salary at its height.118 Mr Abraham further explained that he had been recruited “without a long-term incentive package (LTIP) [...]there has been a correction in salary and there has been the removal of LTIP so there has been quite a significant correction in the benchmarks that have been used so far.”119 He is, though, entitled to a performance related bonus of up to 50% of his basic salary.120

66. Mr Abraham also promised to be firmer on other top salaries at Channel 4, affirming that: “I can guarantee that we will not be hiring the senior programming executive at the same level as the individual who has occupied that role until recently.”121 In addition, Mr Abraham observed that fewer people were now earning higher salaries at Channel 4, explaining that: “one of the things I have done since my arrival is to look quite carefully at the number of people in senior management at Channel 4 and recently announced my intention to reduce that by around 25% at the end of the year.” In response to our questioning, he told us that there were previously around 90 people at Channel 4 earning in excess of £100,000, but that this had now been reduced to “around 70 people, so the direction of travel is significantly lower.”122 Mr Abraham summed up Channel 4’s overall approach as follows:

112 Q 41 113 Q 44 114 Radio 4, The Media Show, 22 September 2010 115 Ibid. 116 Q 35 117 Q 49 118 Channel 4 2008 Annual Report, p 129 119 Ibid. 120 Q 53 121 Q 49 122 Q 35

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we are seeking to create the right trade-off between that attraction [of working for Channel 4] and being reasonably competitive but never paying top dollar.123

67. The remuneration package that Mr Duncan received was unacceptably high. The award of a loyalty bonus for only two years service was wrong and should not be repeated. We deplore the decision process that previously inflated the remuneration packages of top Channel 4 management to indefensible levels, and welcome signs that Channel 4 is now taking steps to adjust senior remuneration downwards. We will continue to keep a close eye on senior remuneration in future Annual Reports.

123 Q 53

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6 Transparency and accountability

Transparency 68. As we noted in the previous chapters, Channel 4 faces a series of challenges—both financial and creative—if it is successfully to deliver on its new vision and remit. Given what is at stake in terms of plurality and diversity of public service content in the UK, and its role as a publicly owned, public service broadcaster, Channel 4’s progress towards meeting these challenges needs to be transparent so that it can be held to account. Lord Burns acknowledged this line of argument during our evidence session, observing that:

[...] Channel 4 is a publicly owned corporation and that brings with it a great deal of public scrutiny, which is also correct. I have no fear of public scrutiny, none at all. It seems to me that if you are in this type of world that is part and parcel of it.124

69. There is however one aspect of Channel 4’s activities which is not transparent, namely the costs and benefits associated with its individual digital channels (E4, More4 and Film4). In its Annual Reports Channel 4 does not give a breakdown of the financial figures for E4, More4, and Film4 on a channel-by-channel basis. Instead they are grouped under the business segment “4Channels.” Our predecessor Committee argued that more information was required to form a judgement of the contribution of Channel 4’s non-core channels to the network, and that this would become more important once the new legislative framework provided by the Digital Economy Bill was in place. It concluded that:

[...] Channel 4 occupies a unique position as a broadcaster in the UK and should be transparent on the costs and benefits of its non-PSB channels. It is not obvious to us what, if any, commercial disadvantage Channel 4 could suffer if this information was in the public domain.125

Moreover, we find this lack of transparency on its digital channels incompatible with Channel 4’s ambitions for them to be part of a public service network, as proposed in the Digital Economy Bill.126

70. We re-opened this issue during our oral evidence session, asking whether the new management team was prepared to commit to greater transparency in future annual reports. Lord Burns replied that he was “surprised”127 by the conclusions of the previous Committee and, in supplementary evidence to us, expressed further surprise at our continued interest in the role and financing of Channel 4’s digital channel portfolio.128 During oral evidence he commented that “it feels that we are very transparent in all of our dealings”129 and argued that:

124 Q 25 125 Culture, Media and Sport Select Committee, Third Report of Session 2009-10, Channel 4 Annual Report, HC 415, para 39 126 Ibid, para 40 127 Q 54 128 Ev 21 129 Q 54

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[...] When it comes to the particular issue of the breakdown by individual channels I would hazard a guess that the only people who are interested in this information, apart from this Committee, are our competitors who would like to find out more about our advertising performance with regard to different channels, and our programme budgets with regard to different channels, and who wish to put themselves into a competitive advantage with regard to ourselves [...]130

71. Lord Burns went on to say that he felt strongly that “it would be entirely wrong [...] to start giving more information about our income generation by channel than any other broadcaster who is reliant upon commercial income does”131 and asked the Committee to take into account the fact that Channel 4 outsources all its programming:

We have to have negotiations every day in life with people who are making programmes for us. If we are to get the best value that we can for viewers we have to do some of that in a position where we are not giving everybody all of the information that they need in order to get their best deal [...] When you buy the package that says we are a commercial funded organisation and that we are commissioning outside all of our programmes, it seems to me that one has got to accept some of the commercial confidentialities that then go with that model.132

72. Mr Abraham added that “there are certain contracts that have non-disclosure elements to them where we would have to redact information anyway. There are some very specific reasons why we need to protect agreements towards confidentiality across our business.”133

73. We are sceptical that the top level strategic breakdown of total operating expenditure costs that we are advocating would be commercially sensitive at the micro-level of individual contracts. Contrary to what is implied in the remarks of the Chairman and Chief Executive above, neither we nor our predecessor Committee have ever proposed the disclosure of individual programme or contract details. What we have noticed, however, is that as a public service broadcaster, Channel 4 naturally benchmarks itself against the BBC rather than ITV or other commercial broadcasters, and that the BBC does break down costs by individual channel—with the exception of its channels under BBC Worldwide, which are purely commercial undertakings. Chief Operating Officer Anne Bulford countered during the evidence session that it was sufficient that Channel 4’s cost allocation processes were transparent to Ofcom and its auditors:

In terms of the allocation of costs between channels there is very considerable regulation around that and we are held wholly accountable through the process which is set out in Schedule 9 [of the Communications Act 2003]. I do not think it is the case that we are not subject to due process and regulation over that.134

74. We are surprised that this Committee’s continued focus on the role and financing of Channel 4’s digital portfolio should be thought unreasonable. Our concern is that,

130 Q 54 131 Ibid. 132 Ibid. 133 Ibid. 134 Q 56

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Schedule 9 notwithstanding, there is limited information in the public domain about the detailed workings of Channel 4’s cost allocation process in relation to its digital channels. This matters because we have a duty, as part of our scrutiny role, to understand how the digital channels contribute to Channel 4’s primary functions. Although we acknowledge and welcome Channel 4’s willingness to share more detailed financial information with us on a confidential basis, because we are not able to make use of it in public, its value to us as a scrutiny tool is limited. As we explained in a previous chapter, our ability to conduct scrutiny in this area is particularly important because of the ambiguity in the position of the digital channels—being neither PSB channels nor purely commercial entities.

75. Lord Burns suggested in supplementary evidence to us that “the digital channels are becoming increasingly important not simply as a source of revenue, but also in creative and public service terms.”135 If this is so, we welcome it, but we need to be able to test the validity of this statement. Without greater financial transparency on an individual channel basis, it is not possible for the Committee to form an independent judgement as to the extent to which individual channels are contributing positively to Channel 4’s core functions, and the extent of their potential to do more. We continue to find Channel 4’s arguments in relation to non-disclosure of costs by individual digital channel unconvincing on commercial sensitivity grounds and deficient on transparency and accountability grounds. We remain unclear as to the exact nature and scope of the potential damage that Channel 4 fears the additional financial disclosures we recommend would cause. We urge Channel 4 to review its position.

76. We also note that the Schedule 9 arrangements of the Communications Act 2003, which are aimed at securing (among other things) “transparency objectives”— so that there is appropriate financial and organisational separation between the activities of C4C that relate to the carrying out of their primary functions and their other activities, and transparent reporting where there is a connection between commercial and primary activities (for example, shared resources)—may be subject to periodic review by Ofcom.136 We recommend that Ofcom undertake a review of, and public consultation on, the Schedule 9 arrangements, in order to ensure that the adequacy and transparency of the arrangements have been considered fully, and that the arrangements are updated as may be appropriate in light of changes to Channel 4’s remit.

Accountability under the Digital Economy Act 77. The Digital Economy Act provides new measures for the monitoring and enforcement of Channel 4’s duties in relation to media content, reflecting its expanded remit. Under section 23, Channel 4 must publish annual statements of media content policy and monitor its performance against the proposals contained therein. The same clause also extends Ofcom’s regulatory role to cover all Channel 4’s media content, giving it enforcement powers to direct Channel 4 to revise its media content policy or to remedy any failure in it on pain of having its licence varied. In supplementary evidence, Channel 4 wrote that:

135 Ev 21 136 Communications Act 2003, Schedule 9

Channel 4 Annual Report 29

From 2011, under the new arrangements in the Digital Economy Act 2010 Channel 4 will adopt an enhanced accountability framework. Building on the measures developed in Channel 4’s Public Impact Report, Channel 4 will publish a statement of media content policy, setting out is public service ambitions across the entire Channel 4 portfolio. It will also review the Channel 4 portfolio’s public service delivery in the preceding year. Channel 4 is working with Ofcom to develop an appropriate framework for the annual statement of media content policy, and believes this will be a useful tool in assessing its public service delivery across all platforms in future.137

78. As we noted in paragraph 39 above, Ofcom is taking steps to establish a monitoring and enforcement regime around Channel 4’s annual media content policy statement. Like our predecessors, however, we note that Ofcom—unlike the BBC Trust in relation to the UK’s other main publicly-owned, not-for-profit broadcaster—does not set overall budgets and strategic priorities for Channel 4. In practice, its ability to influence Channel 4 policy across its network—and hence to police the delivery of its new remit under the Act—is relatively limited. As things stand, there is an onus on the Channel 4 Board to undertake a strong, independent, scrutiny role. The Board, however, is composed of Channel 4 executives as well as independent non-executives, and by Deputy Chairman Lord Puttnam’s own admission has either been unable or unsuccessful in challenging or influencing management on some matters in the past.

79. The Digital Economy Act sets out sensible primary functions for Channel 4 to work towards, and Channel 4 has identified the correct method—self-reliance—to deliver them. However, aligning all its portfolio of channels in support of these primary functions will not be easy, and it is very important therefore that there is adequate external scrutiny of Channel 4’s progress. In this context, we are not convinced that Channel 4 is sufficiently accountable for its output outside its core channel. We recommend, therefore, that the Government review Channel 4’s governance arrangements to determine whether they are fit for purpose for a public service network. We also recommend that Ofcom clarify its understanding of its role and its plans for oversight arrangements under the new framework.

137 Ev 24

30 Channel 4 Annual Report

Conclusions and recommendations

A funding gap? 1. Having listened to the comments of the new Chairman and Chief Executive, we conclude that the question of a “funding gap”—a central component of the previous regime’s strategy— has indeed been consigned to history, replaced by a more robust assessment of future advertising revenues, albeit still below previous highs, and of the potential for further efficiencies. (Paragraph 15)

2. We conclude that the previous management overplayed its hand on the funding gap issue, and that Channel 4’s need for additional public funding was not as mission- critical as was claimed. We recommend that Channel 4 non-executive Board members review whether they ought to have challenged the previous management more strongly and whether there are lessons for the future to be learned from this experience. (Paragraph 16)

The scale of the independent-funding challenge 3. In the current economic climate, Channel 4’s decision to pursue self-reliance through exploiting existing and new revenue sources and further reducing operating costs is the right one. However, given the extent to which Channel 4 has already made efficiencies, and uncertainties over future advertising revenue trends, it will be a considerable challenge for Channel 4 to innovate to the extent required to make available sufficient funds to maintain current levels of public service content. We do not under-estimate the size of the task and, for this reason, we will continue to monitor Channel 4’s progress closely. We would not rule out re-examining Channel 4’s funding regime in the medium term if, despite its best efforts, advertising revenue were to drop significantly. (Paragraph 24)

Digital Economy Act 4. We note the general consensus that the Channel 4 sections of the Digital Economy Act helpfully redefine Channel 4’s remit for the new digital era in broadcasting, and agree that, in broad terms, they do capture the activities it needs to undertake, and in a number of respects is already undertaking, to maximise its potential as a public service broadcaster. (Paragraph 30)

Public Bodies Bill 5. We call on the Government to explain why Channel 4 is included in Schedule 7 of the Public Bodies Bill and—unless there is good reason—to remove it. (Paragraph 31)

Public service delivery 6. We welcome Ofcom’s attempt to establish a regime for establishing, monitoring, reviewing and enforcing public service-related obligations for Channel 4 across its

Channel 4 Annual Report 31

network commensurate with its new remit under the Digital Economy Act. The final outcome should enable everyone to better understand what Channel 4 can be expected to deliver, and viewers to receive, in terms of public service-related output across Channel 4’s portfolio of services and allow Ofcom, and Parliament, to hold Channel 4 to account for the delivery of these undertakings. (Paragraph 40)

7. Channel 4’s new remit and its plan to operate as a public service network beyond the core channel has some financial and creative risk. We recommend Channel 4 clearly articulates its strategy for the amount of public service delivery to be returned from its commercial activities for each individual channel and online. The Committee will be looking to Channel 4 to demonstrate that its growing empire is constructed so as to support its primary functions, and not detract from them. (Paragraph 52)

Nations and regions 8. We urge Channel 4 to redouble its efforts to increase the proportion of UK- originated commissioning from the nations and regions. We propose that Channel 4 set a medium term target of 15% of network spend on originated programming coming from the nations, in line with their total population share. We look forward to hearing next year the results of the Chief Executive’s reviews of targets for commissioning from the nations and the potential benefits of re-locating commissioners out of London. (Paragraph 56)

Film 9. We commend Channel 4 for increasing its financial commitment to UK film production, which is particularly welcome in the present climate of public sector austerity and following the Government’s decision to close the UK Film Council. (Paragraph 58)

Big Brother 10. We are encouraged by Channel 4’s intent to replace Big Brother with a more balanced and diverse schedule, but do not underestimate the size of the challenge facing Channel 4 to achieve this while holding on to ratings. We look forward with interest to Channel 4’s assessment next year as to how successful these efforts have been. (Paragraph 60)

Remuneration 11. The remuneration package that Mr Duncan received was unacceptably high. The award of a loyalty bonus for only two years service was wrong and should not be repeated. We deplore the decision process that previously inflated the remuneration packages of top Channel 4 management to indefensible levels, and welcome signs that Channel 4 is now taking steps to adjust senior remuneration downwards. We will continue to keep a close eye on senior remuneration in future Annual Reports. (Paragraph 67)

32 Channel 4 Annual Report

12. We continue to find Channel 4’s arguments in relation to non-disclosure of costs by individual digital channel unconvincing on commercial sensitivity grounds and deficient on transparency and accountability grounds. We remain unclear as to the exact nature and scope of the potential damage that Channel 4 fears the additional financial disclosures we recommend would cause. We urge Channel 4 to review its position. (Paragraph 75)

Transparency and accountability 13. We recommend that Ofcom undertake a review of, and public consultation on, the Schedule 9 arrangements, in order to ensure that the adequacy and transparency of the arrangements have been considered fully, and that the arrangements are updated as may be appropriate in light of changes to Channel 4’s remit. (Paragraph 76)

14. The Digital Economy Act sets out sensible primary functions for Channel 4 to work torwards, and Channel 4 has identified the correct method—self-reliance—to deliver them. However, aligning all its portfolio of channels in support of these primary functions will not be easy, and it is very important therefore that there is adequate external scrutiny of Channel 4’s progress. In this context, we are not convinced that Channel 4 is sufficiently accountable for its output outside its core channel. We recommend, therefore, that the Government review Channel 4’s governance arrangements to determine whether they are fit for purpose for a public service network. We also recommend that Ofcom clarify its understanding of its role and its plans for oversight arrangements under the new framework. (Paragraph 79)

Channel 4 Annual Report 33

Formal Minutes

Tuesday 7 December 2010

Members present:

Mr John Whittingdale, in the Chair

Ms Louise Bagshawe Damian Collins David Cairns Paul Farrelly Dr Thérèse Coffey Mr Adrian Sanders

Draft Report (Channel 4 Annual Report), proposed by the Chair, brought up and read.

Ordered, That the draft Report be read a second time, paragraph by paragraph.

Paragraphs 1 to 79 read and agreed to.

Resolved, That the Report be the First Report of the Committee to the House.

Ordered, That the Chair make the Report to the House.

Ordered, That embargoed copies of the Report be made available, in accordance with the provisions of Standing Order No. 134.

Written evidence was ordered to be reported to the House for printing with the Report.

[Adjourned till Tuesday 14 December at 10.30 am

34 Channel 4 Annual Report

Witnesses

Wednesday 28 July 2010 Page

Lord Burns GCB, a Member of the House of Lords, Chairman, Mr David Abraham, Chief Executive, and Ms Anne Bulford, Chief Operating Officer, Ev 1 Channel 4

List of printed written evidence

1 Letter from David Abraham, Chief Executive, Channel 4 Ev 19 2 Letter from Lord Burns GCB, Chairman, Channel 4 Ev 21

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Culture, Media and Sport Committee: Evidence Ev 1 Oral evidence

Taken before the Culture, Media and Sport Committee on Wednesday 28 July 2010

Members present Mr John Whittingdale, in the Chair

Ms Louise Bagshaw Paul Farrelly David Cairns Alan Keen Damian Collins Mr Adrian Sanders Dr The´re`se Coffey Jim Sheridan Philip Davies Mr Tom Watson

Witnesses: Lord Burns GCB, a Member of the House of Lords, Chairman, Mr David Abraham, Chief Executive, and Ms Anne Bulford, Chief Operating Officer, Channel 4, gave evidence.

Chair: Good morning. Welcome to the first session to earn; that the viewers will enjoy the viewing of the new Culture, Media and Sport Select experience; and that the independent production Committee. We are very pleased to have as our first sector will continue to regard us as a very important witnesses Channel 4. Can I therefore welcome the part of the cultural landscape of the UK. If we can Chairman, Lord Burns, the Chief Executive, David do that we will be very pleased. We are a very Abraham and the Chief Operating Officer, Anne important competitor, to the BBC, in terms of public Bulford. This is our annual session where we service broadcasting. The whole way that the digital consider Channel 4’s Annual Report. May I invite world is moving, I suspect, is going to mean that Philip Davies to start? more of television becomes devoted to straightforward commercial television and that the Q1 Philip Davies: Lord Burns and Mr Abraham, I battle will remain to keep a vibrant and successful suppose this is directed particularly at you two public service broadcasting environment. We think rather than Anne because you are a relatively new we have a very important part to play in being top team at the head of Channel 4. Given that, different from the BBC—to a significant extent would you like to set out to the Committee exactly competing in the same area as far as programming is what your vision is and perhaps how we might in concerned—but having an income generation future look back on your time and what you think is mechanism which is very different. David will say a the measure of success that you would like us to little bit more about the programming and how it is judge you by? that we want to take the creative part forward. Lord Burns: May I say first of all that we are very Mr Abraham: Good morning; it is good to be here at pleased to be here. Indeed, we are particularly my first Committee meeting. I have been in the job pleased that we should be at your first meeting of this for three months now. My opening remarks centre new Committee. We do regard these annual sessions on what I think is going to be occurring in our as a very important part of our accountability, so we industry over the next five to seven years. Over the are not reluctant attenders at all. I will just say a last 10 years we have seen the emergence of multi- short amount and then David will say more about channel television that initially was analogue based the vision question. I regard my key task here as and became digitally distributed. We are now very trying to ensure that we implement Parliament’s close to digital switchover so the fragmentation of wishes with regard to Channel 4 as effectively as linear channels is almost complete. What is now possible and to make a success of that. Of course, we about to occur is the much heralded idea of have had some new legislation on top of the original convergence and we are seeing the emergence of a legislation. This is a very important part of the number of players who are preparing for the public service broadcasting landscape. Channel 4 convergence of linear channels with the power of the has a number of unique characteristics. It has an Internet and the on-demand capability that important remit with regard to public service technology can now provide. In fact, as I was just broadcasting and it finances itself almost entirely skipping through the cuttings this morning there was through its own resources, money which it has to a very good piece in today’s Daily Mail that projects earn in the marketplace. We have therefore to strike the development into the living room of what is the right balance between programming that enables described as intelligent television sets, television sets us to fund the channel and also programming that with probably more chips inside them than the meets the remit. I hope that by the time we get average laptop had 10 years ago. This is giving rise through four or five years we are able to demonstrate to a variety of players led by Google and Microsoft that in this rapidly changing world, where there is a and others who are preparing to develop their huge amount going on, we have been able to meet platforms in this converged environment. I would that challenge; that we have delivered the remit, that say that this presents Channel 4 with both a we have done it within the resources that we are able tremendously exciting but also a challenging set of Processed: 09-12-2010 22:06:37 Page Layout: COENEW [E] PPSysB Job: 005463 Unit: PAG1

Ev 2 Culture, Media and Sport Committee: Evidence

28 July 2010 Lord Burns GCB, Mr David Abraham and Ms Anne Bulford objectives over the next three to five years for me to reduction in internal costs and a reduction in deliver to the remit, and the Digital Economy Act programming costs and managed to break even specifically states that we should deliver quality and against one of the most severe downturns in diversity and creativity across electronic advertising, if not the most severe. Certainly when I communication networks that are now emerging. It started looking at this, when I was approached as to is my belief and my view and my ambition that we whether or not I would be interested in this job, I can continue to have the same level of cultural and have to say I was very surprised to discover the way creative impact as we have had historically but do so in which the company had managed to navigate its by very different means through convergence and way through the recession. What we have seen this the environment that is now emerging, so as we go year is some pick-up in advertising, a welcome pick- through the questions I shall talk to you a little bit up. I think we are quite well positioned and my about some of the initial changes that I have preference and ambition is to make a success of what introduced that I believe will help to prepare us for we have rather than trying to seek solutions those changes. externally to get additional implicit subsidy into the company. I think it is possible and the three of us are Q2 Philip Davies: How does your approach and your working together to try to find a way forward that vision differ from your predecessors’, or does it not? will enable us to do that. Mr Abraham: We are very much building on a period in which many of the services, such as 4oD and 4iP, were in a sense working at the periphery of the Q4 Philip Davies: That is a big difference from your organisation. They have begun now to achieve predecessors who were looking for some kind of sufficient scale but what I am seeking to do is bring either direct or indirect subsidy from the them into the centre, for example, to have the Government. We have recommended in past select commissioning teams working much more hand in committee reports that we believe in a top-slicing of glove with the online teams to deliver editorials to the licence fee to open it up to other broadcasters. the viewer which are completely joined up, and I When you say, “I like the discipline of Channel 4 think this will be very much a theme of how we need having to earn its living in the market place rather to move forward. The other distinction that we will than being dependent on Government funding”, are be touching on today is that we are very much a team you saying that if the Government offered to top- that has been given a remit and intends to work slice the licence fee and distribute it more widely or within the realities of the marketplace. We are not allow it to be contested you would not be interested looking for external solutions. We are looking to do in that because you like the fact that you are not the best we possibly can from a commercial point of dependent on the Government, or did you say what view and for that reason we are looking at tactical you said simply because you did not think it was partnerships, such as the recent advertising going to happen so you tried to make a virtue out of arrangements that we secured with UKTV, to operate very much within our means. something that you did not think was going to happen? Lord Burns: Good question. First of all, of course, I Q3 Philip Davies: What is going to be different am on record during the period that I was helping between you and Luke Johnson, Lord Burns? the Secretary of State with the BBC Charter Review Lord Burns: That is very difficult to tell because I back in 2004/2005 as proposing a different solution overlapped with Luke for a relatively short period. I as far as the Government and the BBC were think we have to recognise that there was a two-year concerned and opening up the possibility of—I did period when there was quite a lot of debate as to not like to call it top-slicing, having a fund which whether or not Channel 4 was sustainable in the new might be competed for in order to commission environment. Of course, it was a period when there particular types of public service broadcasting. If was a very sharp reduction in advertising revenue that were to happen then clearly we would want to generally, and even though Channel 4 maintained its look at that and we might well find that we would share of that revenue quite effectively there were doubts as to where that was leading because of the wish to bid for funds. What I do not want to do is to disappearance effectively of some of the implicit be out there arguing that we need government subsidy that was involved in terrestrial television money in order to survive. I spent too long in the which had helped to support Channel 4. My Treasury to know that this is in any case a pointless personal view is that seeking to find solutions, activity. There is no better way of making people certainly through Government in these doubt the worthiness of what it is you are doing than circumstances, is not the way forward. I think that asking for public funding. There is no doubt that one has to face the position that one is given. The Channel 4 for the foreseeable future, in any commercial realities are that we have to make a outcome, will have to earn the vast majority of its success of it within the framework that is set out by income through the marketplace. I think it is better Parliament, and that is what we propose to do. The to set your mind to that, to plan on that basis and company has been enormously successful—and I not, in a sense, to have an ongoing hope that think this is a great tribute to the previous something else is suddenly going to come to your leadership—in getting through the period of rescue. I took on this job on the basis of knowing recession and the very sharp decline in advertising by what it was that Parliament had said it wanted from breaking even. They did it by a combination of a Channel 4, what the funding arrangements were, et Processed: 09-12-2010 22:06:37 Page Layout: COENEW [O] PPSysB Job: 005463 Unit: PAG1

Culture, Media and Sport Committee: Evidence Ev 3

28 July 2010 Lord Burns GCB, Mr David Abraham and Ms Anne Bulford cetera, and I propose to do it, in that way to the best have changed on a number of levels in terms of how of my ability. I do not propose to spend my time we procure the content at more efficient levels, how saying that I want some other source of revenue. we balance the schedule between the different genres. Mr Abraham: If I could add to that, my Some of the things that we could do before in understanding of the history of the inception of expensive genres like drama have been scaled back, Channel 4 is that it has helped to generate a very so this is all under the banner of cutting our cloth. effective and competitive marketplace in the There has been probably some misunderstanding independent production sector and those producers about what was meant originally about a gap. A gap have in Channel 4 a platform to express their ideas is defined by the point at which you measure it and that is independent of all strings, so in looking at this it is the case that we are spending considerably less from a creative point of view there is great virtue in on content now than we were three or four years ago. the independent funding model of Channel 4 in that Do we think we can still deliver to our remit on that part of our remit is to look at things in different ways budget? Absolutely yes. from the BBC, to give a platform to these Lord Burns: I do not want to appear critical of independent voices, these independent creative predecessors about this issue because there is a clear entrepreneurs, and to do so through our revenue sense that historically there was a much larger model, and, obviously, evolving it and developing it implicit subsidy that Channel 4 was receiving with technological change it underpins the strength through the terrestrial broadcasting system when of the creative effort of Channel 4, so operating from there were only the main terrestrial channels. I think an independent point of view has merit from the it was right for them to point out that much, indeed point of view of an independent revenue model. virtually all, of that implicit subsidy was going to disappear in the digital world, and therefore if Q5 Philip Davies: So can we take it that the Channel 4 was to continue in the same balance partnership deal with BBC Worldwide is now dead relative to others there was a gap that was appearing. and buried? I am not challenging that logic. What we are saying Mr Abraham: What we have done and will continue is that it seems to us clear now, looking at the new to do is look at rational commercial partnerships Act which covers our activities, that we really have where they make sense for both parties. I think the to settle for what is set down there and that our main UKTV ad sales arrangement, for example, which task is to get on and deliver that and to live within had always formed a part of that grander vision, as our means and do our best to generate the I understand it, is something that we believe makes commercial earnings that are necessary to be able to sense, but it is, as it were, between two commercial provide outstanding television. operators and it is a commercial partnership that works for both parties. Q7 Paul Farrelly: Lord Burns, your description of Lord Burns: And there are no discussions taking the way you intend to proceed in the future is place with BBC Worldwide. completely at odds with all the commentary surrounding your appointment. People were saying Q6 Ms Bagshawe: Mr Abraham, you have talked that you were the consummate insider. You were about delivering your unique vision for Channel 4 there as the man able to know where the money was and expanding that over the platforms—digital, TV in Government and able to pull the strings to get it. channels and others. Ms Bulford has said, “Record In fact, you were no Michael Grade. I do not think profits from our digital TV channels were the most you have got an Uncle Lew but I am sure if you have important factor in helping the group break even”. he did not commission the same Thunderbirds and As we have heard, you did break even, partly due to The Prisoner. You are not a TV man. What would these new methods of delivering content. Would you you say to those commentators now? say then that the “£100 million funding gap” Lord Burns: I think I have already explained that I identified by your predecessors was perhaps a little took on the job not on the basis that I was going to bit of scaremongering? I recognise that there were spend my time going round with a begging bowl to losses in the core channel but you do seem to have my former colleagues in government departments to made that up through profits incurred from the new seek to obtain more revenue for Channel 4. I took it platforms through which you are delivering content. on on the basis that I have explained. I regard my Can we now put the £100 million funding gap to role as chairing the board, making sure that we have bed? an effective board which holds the management to Mr Abraham: There are a number of different account, which, along with the management, helps factors at play there. The report upon which that to develop a strategy for Channel 4 which enables us analysis was based goes back several years and is to fulfil the wishes of Parliament with regard to pegged back to a historic high in the advertising Channel 4. Anyone who thought that I was taking market and, given the remit of Channel 4 to plough on this job in order to raid the Treasury through the all of its revenues back into on-screen investments, it back door was sadly mistaken. was understandable that when we had some cyclical change in the market place there was a reduction in Q8 Paul Farrelly: Assuming there is some money still programming spend. It was right to say there are left there. reductions, and indeed we are programming our Lord Burns: When I think of all that has happened network at considerably lower levels than we did at since it demonstrates that that other strategy might the peak of the marketplace. Having said that, things have been a pretty forlorn one. Processed: 09-12-2010 22:06:37 Page Layout: COENEW [E] PPSysB Job: 005463 Unit: PAG1

Ev 4 Culture, Media and Sport Committee: Evidence

28 July 2010 Lord Burns GCB, Mr David Abraham and Ms Anne Bulford

Q9 Paul Farrelly: But not quite. The £100 million, keeping a low profile on this issue. We are watching the debate and the reports around the funding gap and we are listening and noting what it is that is were quite important in the wider debate about top- being said. slicing the BBC. You have now got a Government that wants the BBC cut down to size. You have got Q12 Chair: There may not have been an attempt to some sympathy there in other parties for top-slicing privatise Channel 4 but there was an attempt by you to help, other broadcasters. If that is on offer will to nationalise Channel 5. Would you like to tell us you not take it? your thinking behind that and also how Channel 4 Lord Burns: I have already said that if it was on offer would have financed a possible acquisition of clearly we would look at it, but we would want to be Channel 5? quite careful that it was being done in an open and Lord Burns: As you know, the owners of Channel 5 transparent and competitive way and not in a way made clear that it was up for sale and they asked us that was producing a situation where we were to join in some discussions with them as to whether dependent upon government funding, either directly there was any way in which we might take over or indirectly, in order to meet our remit. I felt when Channel 5. We did quite a lot of work on this and I I was involved with the BBC Charter Review that it will ask David in a moment to set out some of the was very important to maintain competition with thoughts that we had on it. We then looked at the the BBC in terms of public service broadcasting, and whole question of the pro forma earnings of the panel of people that I chaired then came to the Channel 5 and what we thought it was worth, view that the likely consequence of digital including what the synergies might be in terms of switchover was that the amount of competition to combining it with Channel 4 to see if it was possible the BBC might well begin to be reduced, particularly to make a case whereby within our own resources we from ITV and Channel 5. Therefore there were could bring about this combination and provide a important mechanisms that had to be thought of as better outcome for the viewer and a better outcome to how to sustain that competition. I regard that as for the independent production sector, and we had a public policy issue and one that I was engaged in some conversations with people about this. We did with a different hat on. I think it is important when not in the end engage in any detail about this, we had you take on a job of this type, and with a public no detailed negotiations with the owners of corporation that you take it on with your eyes open Channel 5 about this but we did signal to them how and that you accept the situation as set out in the it was that we thought we would be able to combine legislation. If the situation were to change, if there them if that outcome appealed to them, and we also were to be different arrangements that were signalled the scale of financial arrangements that we introduced with regard to top-slicing and the licence thought could make it work. As it happened, fee, then, obviously, we would look at it. throughout this conversation they were really quite far advanced in discussions with another party and Q10 Paul Farrelly: Can I explore very briefly one then that came to a conclusion last week. We did area where your experience of Government might some exploration of it, we tried to see whether there also prove useful to Channel 4, the issue of was a way in which bringing the two together could be in the interests of the viewers and in the interests privatisation, the speculation? All this comes up of the independent production sector. particularly when other parts of the family silver are being flogged off. Since your arrival since the election can you just tell us what inquiries you and Q13 Chair: You do not see any problem with an Channel 4 have made of the coalition Government’s outcome whereby three out of the four terrestrial likely thinking on this? It would be a bit strange if broadcasters would all then have been in state you had not made inquiries. ownership? Lord Burns: I have not been going around saying to Lord Burns: I was conscious and we were conscious people, “Do you plan to privatise Channel 4?”. of this issue. At a time when privatisation of many What I do is look very carefully at the various things is on the agenda I asked myself the very statements that are made and when I have question, Chairman, that you are asking: would this conversations with people I listen very carefully to make sense? That is why we went to the extent of what it is they are saying, what their body language trying to put together a proposal which was not is, what the nuances are, and there has been no simply taking the two channels and saying, indication up till now of any intention that has been “Channel 4 will now become the owner of Channel 5 signalled to me of wanting to privatise Channel 4. and Channel 5 will continue as before”. We put Mr Abraham: Jon Snow did ask the question on the together a proposal that was really very different and Channel 4 News of the Secretary of State and the would have made quite a significant change in the answer was that it is not on the agenda. offer. We regarded ourselves throughout this process as a default position rather than one where we were aggressively bidding for it. Q11 Paul Farrelly: You see how topical the Mr Abraham: As a new team, obviously, we were question is. approached pretty much on day one by the RTL Lord Burns: When you have a public expenditure management because of the extensive conversations review on the scale that is taking place at the that had occurred in previous years on the concept moment, again, I know from my own experience of a merger, so it took us some time to digest what that all sorts of things get looked at, but we are had happened historically and we were given to Processed: 09-12-2010 22:06:37 Page Layout: COENEW [O] PPSysB Job: 005463 Unit: PAG1

Culture, Media and Sport Committee: Evidence Ev 5

28 July 2010 Lord Burns GCB, Mr David Abraham and Ms Anne Bulford understand that those previous concepts had Q17 Paul Farrelly: Okay. On BBC Worldwide, of involved the potential loss of editorial control at course, the Government has said most recently in Channel 4 of its own schedules in terms of a new This Week that it is looking at possibly selling off management structure, so we were obviously BBC Worldwide in part or in whole. If the minded not to pursue that particular route. Also, we negotiations that you had with BBC Worldwide were need to remember that we are creating revenues in a not just pointless flirtation what bits of BBC competitive marketplace and we would not be doing Worldwide might be of interest to Channel 4? our jobs properly if we were not assessing the Lord Burns: I have had no discussion of this issue at competitive implications of an asset moving in and all, the board has had no discussion of it and I think consolidating within the marketplace, and it was not it would not be right to speculate like that. until the very latter stages of the process that it became clear where the asset would actually go. We Q18 Paul Farrelly: David was going to say were doing our due diligence but, as our Chairman something. has said, it was never likely that as a publicly owned Mr Abraham: I was just going to say that I come with institution we would get involved in a bidding war. the perspective of having spent three years running We were simply doing our due diligence to UKTV, which was a significant joint venture understand what our position would be as a default between BBC Worldwide and Virgin Media. and we are encouraged to learn that the asset is now Obviously, there are many things that would need to in the hands of an owner who remains committed to be understood about what was meant by the the public service expectations and provisions of privatisation of BBC Worldwide before being able to that licence, which we think is beneficial from a come to a view, most critically what the flow of rights public service broadcasting perspective. would be between the public service centre of the BBC and its commercial exploitation in perpetuity, Q14 Paul Farrelly: Lord Burns, just to finish off on and I think any private investor would have that at privatisation, you were, if I am not mistaken, at the the heart of its decision making, so that is why I Treasury when that lovely juicy plum that no-one think our Chairman is correct in saying that it would really owned, the Trustee Savings Bank, was sold off be premature to judge the decision around that to Lloyds, thereby reducing the pluralism of before that being understood. ownership in the financial sector, so you know how tempting these plums are to the Treasury. In four or Q19 Damian Collins: You referred earlier on to the five words what would your attitude be to the historic high in the advertising TV market. How Government if privatisation came up as a possible long do you think it would take in cash terms for option? Would it be, “Channel 4 is not for sale”, or, advertising revenue to get back to those levels? “Hands off Channel 4”? What four or five words Mr Abraham: This is a very central question. I take would you use to convey a message to the the view that if we are to fund the excellent public Government? service, high quality content that we provide to our Lord Burns: I think it would be very difficult to carry viewers we are going to go through a fundamental out the remit that is given to Channel 4 by change now in terms of how we provide value to Parliament if it was in the hands of private advertisers. The relationship between advertising ownership. It might be done by surrounding it with overall and GDP is still strong but the choices a great deal of regulation but I think you would quite available to advertisers as to how they divide up their quickly find that that regulation was really quite budgets between different media options has clearly intense and that there would be an ongoing and quite got more complex and more sophisticated. I am very difficult tension about trying to do what is asked of much a glass half full person with regard to the it in the Act against the background of a for-profit power of television, particularly the creative power company. I think the most important thing about of television produced in this country based on Channel 4 is not so much that it is owned by the powerful ideas, and I think Channel 4 has a very Government but its not-for-profit status, which central role to play in its commissioning process in means that instead of seeking to make a profit creating these powerful ideas, but I would say that subject to doing the minimum requirements that are the way in which we trade our medium, the way in put upon it by the regulator it operates the other way which it is packaged and provided to advertisers, is round, which is that its ambition is to fulfil the remit inevitably going to evolve in the next three to five with the minimum requirement of breaking even. years given what is happening technologically. I believe it should be possible for television as a Q15 Paul Farrelly: That is not very pithy though, is medium to become more responsive to the power of it? What would be your four or five words? the Internet and for us to have a message to Lord Burns: We will deal with that when— advertisers in which we are competing more effectively with many of the alleged benefits of Internet advertising. Let us remember that much of Q16 Paul Farrelly: It is not going to look well on a the growth of internet advertising has been at the tee-shirt, is it—“We will deal with it when it expense of classified advertising and local happens”? advertising rather than brand building television Lord Burns: You are trying to tempt us into advertising, so we do have here a difficult thing to developing a position about public policy which untangle—the structural changes that are occurring seems to me at this point to be unnecessary. which need innovation and a response, and the Processed: 09-12-2010 22:06:37 Page Layout: COENEW [E] PPSysB Job: 005463 Unit: PAG1

Ev 6 Culture, Media and Sport Committee: Evidence

28 July 2010 Lord Burns GCB, Mr David Abraham and Ms Anne Bulford cyclical changes which have occurred over the last mix and remember that we have the Channel 4 News two years. As the Chairman has said, it is there permanently at seven o’clock. That is not a encouraging that we have, at least for now, hit the commercial proposition but it is a very important bottom of the cycle of the traditional television backbone of the schedule for Channel 4 and it is advertising cycle. What I am focusing on now is made possible by the way in which we manage our building innovation back into our proposition. schedule overall, which ultimately is no different from any broadcaster in how we create an overall Q20 Damian Collins: From what you have said so far proposition for our viewers. it sounds like the answer to my question might be “Never”. Q24 Damian Collins: I want to ask one final question Mr Abraham: I would agree that without innovation about programming. Obviously,this is your final Big television is likely to stay at the plateau that it is Brother series. I appreciate that probably the weight currently on. I think most commentators would of reality TV may reflect that we are in the middle of agree with that. But Channel 4 has always Big Brother at the moment and that is something you innovated. It innovated when it first ceded from ITV have got cross-platform as well and that is obviously and had a new way of serving audiences, younger, a major chunk of your scheduling. How are you up-market audiences, packaging it very effectively to seeking to replace that? ad agencies in creating a good price position in the Mr Abraham: For some time before my arrival there marketplace. I believe our task now is to innovate was a process of creative renewal under way. I have another time in this area and that is where a lot of my arrived and am impressed by the progress that we focus is. have been making, but obviously I want us to see it go a lot further in planning for next summer, which Q21 Damian Collins: This month the IPA’s will be the first part where the schedule withstands bellwether report suggested that there had been a 5% those year-on-year comparisons. The way I see it is decline in marketing spend by companies in the three that Big Brother was the kind of show that happens months up to this month. Has that decline been in the television industry once in a decade and we reflected in your advertising sales? should not be looking for the next Big Brother. What Mr Abraham: What we are looking at is sectoral we should be looking for is a series of ideas that differences. Retail has come back quite strongly. perhaps would make our schedule more balanced Other areas are working on different inventory and more diverse out of which we could find a cycles, but certainly we are encouraged by the very number of quite big hits. We are in the fourth quarter latest economic stats that were issued this week. The and the first quarter of next year intensively piloting marketplace is looking on a month-by-month basis and testing new ideas. Whilst this task in at news, which is relatively positive, but we must be broadcasting terms is a very big one, it is also a very reminded that it is only recovering many of the huge exciting one and the producers that I speak to are losses that we experienced in the previous 18 very excited to have an opportunity to come forward months, and right now visibility on 2011 is poor. with new ideas and that is very much at the heart of our remit. Q22 Damian Collins: I asked about the previous Jim Sheridan: I just want to say that I am delighted quarter. The IPA bellwether report is that marketing that Big Brother is coming to an end. How anybody spend declined by 5% in the previous quarter and is can watch people sleeping is beyond me. that reflected in your revenue from advertising in the Chair: That is a comment. last quarter? Mr Abraham: For the last quarter, no. We obviously Q25 Jim Sheridan: Lord Burns, can I just step back are delivering a quality audience and we are and probe you just a wee bit very briefly about your delivering a product to advertisers that they value relaxed attitude towards public spending? and we are competing effectively. Obviously, that is based on your experience in the Treasury in the sense of do not ask a question when Q23 Damian Collins: Looking at your schedule you know what the answer is going to be. Did the today,with the exception of the racing there is a good extent of public scrutiny that comes with public deal of repeats, reality TV and American imports. Is funding also concentrate your mind in the sense of that cheap TV? trying to achieve public funding because you are Mr Abraham: Every broadcaster around the world, very relaxed in the sense of “should we get public and I have run a television network in America, has funding or not”? Is it worth the hassle? to find the right balance of content that can fund the Lord Burns: Public funding clearly comes with a areas of the schedule which deliver brand value and great deal of public scrutiny, and quite rightly, but public service value in our case. I am immensely Channel 4 is a publicly owned corporation and that proud of the fact that in the same week when those brings with it a great deal of public scrutiny, which is hardworking shows ran we also had a show last also correct. I have no fear of public scrutiny, none night, The Fairy Jobmother, about helping at all. It seems to me that if you are in this type of unemployed people back to work. We have a new world that is part and parcel of it. What is important strand straight after the news, 4Thought.TV, which is though, as David was implying earlier, is the produced regionally and gives voice to opinions independence that is necessary if one is going to about religion and politics and spirituality, which is produce high quality television which is challenging, a really innovative show. At the end of the day it is a which is different, which is innovative. Wherever Processed: 09-12-2010 22:06:37 Page Layout: COENEW [O] PPSysB Job: 005463 Unit: PAG1

Culture, Media and Sport Committee: Evidence Ev 7

28 July 2010 Lord Burns GCB, Mr David Abraham and Ms Anne Bulford your funding comes from what is important is that it their GP, so these things are of great interest and I should have mechanisms which both give think these are the kinds of things that we will be accountability as far as your stewardship is building on. To go to your point, for me convergence concerned and provide you with independence as far is exciting because right now we are building as programme making is concerned. applications in different silos. We are building web applications, we are doing on-demand services and Q26 Mr Watson: Mr Abraham, what are your we have got linear services, so what I understand to priorities for public service content creation and be digital in the future is a very powerful moment what are you going to do differently as a result of the where these things are available in a connected way. Digital Economy Act? The social networking side that backs up behind our Mr Abraham: The Act, as I have read it, very much shows as well as using the power of the linear articulates in more detail the areas where we are channel to drive interest around certain areas will aiming to achieve delivery, such as developing new create new potential and new creative opportunity. talent, creating well-informed debate about issues around the world, providing alternative views and Q29 Mr Watson: What I find curious is that over the fresh perspectives. In our Annual Report we have last two or three years Channel 4 has won a been developing for a number of years now ways to staggering number of awards for brilliant video calibrate our delivery to those criteria which I find games in the education spec. Do you think you very useful. We also now as an executive will be might be winning BAFTAs in years to come for the presenting a review of our public service delivery to work you are doing in the video game sector and the board on an annual basis as well as a budget contribute to that growing market? process, and then we will together take that to Mr Abraham: I think we would have to focus that Ofcom for scrutiny as well, so there are greater levels effort specifically around delivery of our remit. I of structure around the delivery overall. Obviously, would not see us necessarily just going into that as a three months in I am looking carefully at some of the commercially driven decision. fundamentals. How do we take our overall budget and allocate it between the genres? Which genres are Q30 Mr Watson: So in your Annual Report where delivering more directly and more indirectly? There you talk about the responsibility to produce new are so many variables in this in terms of working digital content you would not specifically think that with the nations and regions, working with younger video games are part of that definition? and new talent, the balance between current affairs Mr Abraham: It is an area that we are looking at. We and entertainment. All of these things need to be have a project which has not yet been developed at weighed up and it is difficult without sitting down all since my arrival which is looking at this area, but, with us, probably for several days, and watching for example, the decision to look at education and how we work to give a potted answer to this. I would say “was the way that we were scheduling our linear say that the way we deliver, particularly within the education proposition on air, on the main channel, creative community, our appetite to work with new as effective as taking that budget and spending it on companies, with smaller companies, with regional line?” I think was a good decision. We have been companies, is an expression of how our version, our learning a lot about interacting with younger flavour, of public service differs from the BBC. audiences in new ways, and insofar as expressing those educative purposes through gaming is Q27 Mr Watson: Can I just test you a bit more by concerned, if that is a good vehicle then I am all for playing devil’s advocate? You have sort of leapt into it, but I think we have to make that decision based a geek future. You have talked about harnessing on the remit. technological innovation quite a few times but you have not really talked about harnessing the Q31 Mr Watson: If Channel 4 has got any distinctive participative culture of the Internet. Are you characteristics now it is because you have captured a basically just going to do all TV on new distribution generation of adolescents who do things differently. channels? They do not just want to watch TV. They watch it Mr Abraham: I think it is more than that. I have been with their laptops sitting next to them. incredibly impressed by, for example, the work that Mr Abraham: I think we are in a transitional period has been done in the health area by Channel 4. There in which they are spending time on their laptops and is a very popular programme called Embarrassing their phones whilst watching TV and I think that is Bodies which is on one level— a very important development in behaviour, but we are also keeping our eye on what happens when all Q28 Mr Watson: But you have sort of been dining those technologies come together in the same out on that for a while. You are on the sixth series of viewing experience, which is what convergence that now, are you not? offers, but that is going to take some years to come. Mr Abraham: These things have a lot of enduring You are absolutely right: these forms of behaviour impact in terms of the way that the viewer interacts that young people are expressing are going to remain with them, and in fact the production company, very important in the medium term. Maverick, who have made this show have been commissioned by the National Health Service in Q32 Mr Watson: It is not just the viewing experience, Birmingham to run a pilot to encourage people to is it? It is the participative experience which is where use this web application as an alternative to going to you distinguish yourselves. Processed: 09-12-2010 22:06:37 Page Layout: COENEW [E] PPSysB Job: 005463 Unit: PAG1

Ev 8 Culture, Media and Sport Committee: Evidence

28 July 2010 Lord Burns GCB, Mr David Abraham and Ms Anne Bulford

Ms Bulford: What might be helpful is the example of people in the media get paid the kind of money they the Paralympics which we were very pleased to win are getting paid, and you seem to have sidestepped the contract for 2012 coverage of just at the turn of or avoided the current financial difficulties that the year. A very important part of our description of everybody else is going through. I will take a guess what we were going to do was not just live streaming that you will use the standard argument that you of events, which is a big bit of it, but also the way in need to pay these people the appropriate rewards in which we would want to use social media to join order to get the best talents, because that is usually people up and to really make it a participative the argument that people have when they get large digitally inclusive event, not just focused on younger salaries. The previous Chief Executive was paid people but, of course, you are absolutely right: it is £731,000 in lieu of notice and he also received that generation that so resonates with our brand, our £225,000 for long-term incentives. Incentives in activity, our education activity that we can bring other industries usually mean that if you do not do through in everything we do. The reorganisation your job you get the sack. Why do you need to pay which David announced a few weeks ago in terms of somebody £225,000? bringing the digital commissioning into the heart of Lord Burns: Remuneration is always, as you rightly all of our commissioning activity is really, I think, a say, an extraordinarily difficult issue. Some of the big signal of exactly that sort of culture shift that you numbers you are looking at and some of the figures are describing, that it is not just linear tele plus; it is that you are quoting do go back and relate to a how can you think about it across the board— period when the whole culture sector was in a much gaming, social media. All those sorts of things are healthier economic situation than it is today, but I fundamental to it. think Channel 4 on its own is not going to be able to change this. We have to live in the world as we find Q33 Mr Watson: So does that mean you are not it. We are publicly owned but we are commercially going to ditch 4iP? funded. We have to be able to hire the people that we Mr Abraham: We are going to build on it. We have need to be able to generate the revenue from just had an organisational review in which managing advertising and also to be able to commission the 4iP as a separate silo in the organisation is programmes that we need which that revenue potentially duplicative going forward, so we are in depends upon. We have no ambition to pay more the process of bringing it into the heart of the than is necessary to get people to come and work for organisation. Many of the things that 4iP have done us rather than for someone else. I think some of the and are doing are very innovative and interesting, salaries that you quote reflect a period when there but I would like to see us combine forces in a more was enormous competition and people were being integrated way. This is also with the grain of the bid from one channel or one company to another. I cutting the cloth approach inasmuch as I have had think it is worth noting that we are now in the to look at where I felt as the new Chief Executive that process of reducing some of those senior salaries in there was organisational duplication and address it response to the economic situation. David is being whilst making sure that the new forms of behaviour employed on a lower salary than his predecessor. were at the very centre of our thinking. That very much reflects the change in the economic environment and I would expect that the days of Q34 Mr Watson: 4iP was never going to make those very high salaries are gone for the time being, money. Essentially is that where you are making but I cannot see any circumstance in which we are your efficiency gains because the whole idea behind not going to be recruiting people into the senior it was that you let a thousand blossoms bloom? You positions at salaries rather greater than that which are not going to find any tech ad model for some of the Prime Minister receives. That is just the the things that 4iP have done, are you? commercial reality of life. You pay people not what Mr Abraham: I am looking at it primarily from the is necessary to get them out of bed but what is point of view of what is the grain of our editorial necessary to get them out of bed and come and work priorities and where 4iP ideas can fit within that, for you rather than go and work for somebody else. which, of course, many of them can, and in terms of There is a very delicate balance between earning our the current affairs applications, the health commercial living and commissioning programmes applications, these are all things that are very which will justify those earnings, having talented complementary to what we are doing. Obviously, we people who are able to spot the programmes and have important partnerships regionally on these develop them as well as, of course, what we have to projects and so there is a lot of really useful learning, spend on the programmes themselves. I think we are but I think it is too early to say precisely where all of going through a de-escalation of top media salaries those things will land. and we are seeing that in Channel 4 as well. I would expect that the job that we are about to fill in terms Q35 Jim Sheridan: Could I come to the question of of Chief Creative Officer will be filled at a remuneration, particularly in Channel 4 and indeed considerably lower salary than that of the person the whole media industry? We have here a list of who has left. some of the salaries for people in Channel 4 and it is Mr Abraham: Obviously the two factors are the quite breathtaking when you see some of the salaries actual numbers and then the number of people that people are being paid. Even if you compare the earning those larger amounts. One of the things I job they do to that of the Prime Minister, the general have done since my arrival is to look quite carefully populace have some difficulty understanding why at the number of people in senior management at Processed: 09-12-2010 22:06:37 Page Layout: COENEW [O] PPSysB Job: 005463 Unit: PAG1

Culture, Media and Sport Committee: Evidence Ev 9

28 July 2010 Lord Burns GCB, Mr David Abraham and Ms Anne Bulford

Channel 4 and recently announced my intention to Q40 Jim Sheridan: The last time you appeared reduce that by around 25% by the end of the year. before the Committee you suggested that less than Where I can merge departments and reduce the 10% of your employees were earning in excess of number of people who directly report to me by quite £100,000. What is that figure now? a marked degree I am doing that. I think we do Mr Abraham: We have been working to reduce that. understand the climate in which we are operating I think when the last figures were quoted at the and have already made in the last 10 weeks some beginning of last year they were around 90 people quite painful decisions involving senior people in our and now that has been reduced down to around 70 organisation and we do not take those decisions people, so the direction of travel is significantly lightly. lower. We will continue to work at that. We are not complacent on this point at all. Q36 Jim Sheridan: The 25% figure is similar to what the BBC are hoping to achieve in terms of reducing Q41 Chair: Can I look specifically at Andy Duncan? their senior management’s salaries. How do you Andy came before this Committee in May last year measure somebody’s worth? Do you just measure it and told us that he had no intention of leaving and against the BBC or “What the BBC pay, we’ll pay”? six months later he had resigned. Why does Mr Abraham: We go through a variety of different somebody who resigns acquire £731,000 in lieu of techniques to market test. notice? Lord Burns: I was not at Channel 4 at the time that those decisions were taken so I am not in a position Q37 Jim Sheridan: I am just trying to establish why to be able to explain it. What I do know is that he is somebody worth £785,000, a director of television, received his contractual entitlements and no more. or a sales director £513,000. That is grotesque. Mr Abraham: These were salaries quoted from the Q42 Chair: I do not see how he could have had a previous— contractual entitlement to £731,000 in lieu of notice Lord Burns: They are salaries quoted from some when he resigns. time ago. Bear in mind the person who is our sales Lord Burns: I do not know the details of how it was director, his job is to raise £800 million worth of that he came to leave Channel 4 but I have been advertising sales. We are in very, very strong assured that the circumstances in which he left meant competition with ITV and other commercial that he was entitled to pay in lieu of notice. channels. We need somebody who is doing that job who is at the top of their game and that means that Q43 Chair: Anne, you were there at the time. Was we have to pay in a competitive marketplace. If that this a contractual obligation that you had to pay? is the going rate for people with those sorts of Ms Bulford: Andy Duncan did not work through his talents, are we going to pay £100,000 less and lose a notice period, he left partway through that term and large part of our revenue? was paid in lieu of notice in accordance with his contractual entitlement. Q38 Jim Sheridan: Where are they going to go? Lord Burns: These are the decisions that have to be Q44 Chair: You were legally obliged to pay him taken. We do not pay anybody any more than is £731,000? necessary. We seek not to pay anybody any more Ms Bulford: Under the terms of his contract. than is necessary to get them to do the job, to get the person who we think is best suited to do that job. Q45 Paul Farrelly: Did he choose to go halfway through or was he forced to go? Q39 Jim Sheridan: So if you do not pay these high Ms Bulford: He left partway through his notice salaries where are these people going to go? period and his contractual entitlement was paid out. Mr Abraham: In the commercial space they would I was not party to the discussions about the timing go to Sky,they would go to ITV,they would go to the when he left. That was how it worked through and American broadcasters. When we are in the business then there was an interim period where I acted before of raising our own revenue we are competing in a David came along. slightly different pool from the BBC. I have often lost talent that I have been seeking to employ Q46 Jim Sheridan: Under your stewardship, Lord because I have to acknowledge that it is not possible Burns, do you envisage that happening again? to meet the competitive salaries that other players Lord Burns: I believe that you have to pay people are prepared to pay, and that happens regularly. I their contractual entitlement. The circumstances think it is important to distinguish on these points. under which people leave, as you know, are often Scheduling a commercial channel that is delivering very complicated. commercial impacts in a commercially competitive environment is different from the BBC. Our self-help Q47 Jim Sheridan: Some of us leave with very few model requires us to be effective and accountable at packages. that in order to deliver the remit. This is what makes Lord Burns: If you take a situation where someone working at Channel 4 challenging but very leaves in order to go to do another job then clearly rewarding because we have to go out there and earn you pay them up to the point at which they are our keep. Hopefully we are doing that in a very keen allowed to move but you do not pay them any more and competitive way. than that. The process by which you decide and Processed: 09-12-2010 22:06:37 Page Layout: COENEW [E] PPSysB Job: 005463 Unit: PAG1

Ev 10 Culture, Media and Sport Committee: Evidence

28 July 2010 Lord Burns GCB, Mr David Abraham and Ms Anne Bulford come to an agreement that it is in the interests of example, in some of our major commercial everybody concerned that somebody should leave competitors share options and things like that would very often puts you in a position whereby you have be available whereas clearly that is not appropriate a contractual entitlement to pay them their notice for a state-owned broadcaster. That is our broad period. There are plenty of legal precedents for this approach. Then we undertake an exercise pretty and cases go through the courts on a regular basis. I much annually to look at outliers from some of these can say quite clearly that nobody has any incentive medians and understand why that is. For example, to pay people more than we have to. In the various at different points we have had a richer mix of IT worlds in which I work these are conversations staff working for us on some of our software projects which go on fairly regularly. How they are then and we have sought to understand that. Our described afterwards is very often itself a part of structure as a publisher/broadcaster means that in that— contrast to either ITV or the BBC we do not have large numbers of people engaged at the less Q48 Chair: Is not the explanation essentially that experienced levels of either production or facilities Andy Duncan’s departure was not entirely management, so we have a more concentrated group voluntary? of people who are engaged in that commissioning Lord Burns: It was clearly felt by those involved that activity. We employ a higher proportion relative to the nature of his departure warranted paying out his our overall staff base of senior people working on, notice period and that was his entitlement. That is all for example, legal contracting. I can say. I was not there, Chairman. I was not party Mr Abraham: We also do all of our on-air creative to those discussions. I have no way of knowing that work ourselves in-house which economically is very other than I have sought assurance that this was effective, but again we are competing with the considered to be something to which he was creative talent from the advertising industry and contractually entitled and the answer was yes. other industries there. We seek to offer a working environment, a creative environment, which is incentivising to creative people which mitigates the Q49 Dr Coffey: I would like to follow on that line fact that we cannot offer the top salaries. Again, we just to ask if current and future contracts are going look at that in the round and overall it is very to be kept to the 12-month limit as is common in effective for us to have that in-house rather than to plcs. What I really want to ask is what percentile do outsource it and add the expense line elsewhere. you aim to pay and what do you actually pay? How does that vary between executive level and lower down the organisation? Q51 Dr Coffey: You were explaining earlier how the Lord Burns: As far as at the top is concerned, I have sales director is bringing in £800 million. Of only had one case so far which was when I recruited particularly the executive board how much of the David as Chief Executive. remuneration is guaranteed and how much is bonus, Mr Abraham: I was recruited without a long-term percentage wise? incentive package (LTIP), which of course has Lord Burns: Of the executive board it is generally boosted some of these numbers. There has been a 30% and in David’s case it is 50%. It is variable. correction in salary and there has been the removal There is a potential of up to that. I realise the whole of LTIP so there has been quite a significant issue of bonuses generates quite a lot of concern in correction in the benchmarks that have been used so some parts but I do not tend to think of them as far. I will continue to cascade that down as I hire bonuses. senior people. I can guarantee that we will not be hiring the senior programming executive at the same Q52 Dr Coffey: It is variable pay, is it? level as the individual who has occupied that role Lord Burns: It is variable. until recently. Lord Burns: There are a relatively small number of Q53 Dr Coffey: The higher up the organisation you players. We are paying David more than he was would expect to have a lot higher variable element? earning in his previous role, but if you compare it Lord Burns: Yes. For the executive directors it is a with the chief executive of ITV and the chief 30% potential and in the case of the chief executive executives of the other commercial broadcasters I under the new arrangements it is a 50% potential. think you will see that it is significantly lower. You Mr Abraham: We compete in the open market for cannot say percentiles because we are dealing here sales executives and it is the case, when I can, that the with really quite small numbers of people when you potential for bonus in our sales team is kept lower are talking about the very senior roles. than the limits that I understand exist elsewhere. We tend to attract individuals who are committed to the Q50 Dr Coffey: So lower down the organisation? principles of what Channel 4 can offer and want to Lord Burns: Yes. be part of it. As the Chairman has said, we are Ms Bulford: In terms of the staff we participate in a seeking to create the right trade-off between that number of benchmarking arrangements across not attraction and being reasonably competitive but only broadcasters but also major independent never paying top dollar. production companies and relevant companies in comparable sectors. We aim to pay at or around Q54 Mr Sanders: Our predecessors concluded that median across the board taking into account there was a lack of transparency on the finances of ancillary benefits where that is important. For your individual digital channels and we asked for Processed: 09-12-2010 22:06:37 Page Layout: COENEW [O] PPSysB Job: 005463 Unit: PAG1

Culture, Media and Sport Committee: Evidence Ev 11

28 July 2010 Lord Burns GCB, Mr David Abraham and Ms Anne Bulford figures because it was difficult to get figures further 4, the digital channels, 4Rights, our DVD and down in the different channels. Will you now commit consumer products business and our online future to greater transparency in future annual reports? media business. Those five segments do exactly what Lord Burns: I will make a general comment on this you suggest in separating allocation of costs between and Anne will say some more. I was surprised to see the core channel and the digital channels. What they the challenge in the report about transparency as it do not do is then go down to a further level and certainly does not feel like that to me. It feels that we separate the channels into those individual ones, E4, are very transparent in all of our dealings. When it Film4 and More4, which is wholly consistent with comes to the particular issue of the breakdown by the approach adopted by our commercial individual channels I would hazard a guess that the competitors and in particular ITV. Indeed, in only people who are interested in this information, operating with five segments, even though we are a apart from this Committee, are our competitors who much smaller business, we disclose two more would like to find out more about our advertising segments than our competitors at ITV. performance with regard to different channels, and our programme budgets with regard to different channels, and who wish to put themselves into a Q56 Mr Sanders: On the one hand you look at the competitive advantage with regard to ourselves. The BBC and use the BBC as a benchmark for a lot of one area that we have to be extremely careful about things that you do, where all costs are broken down, is putting us into a position where we are but how can anybody hold you to account for that disadvantaged relative to other people in areas decision unless we are able to break those costs down where we are competing very strongly. There are within Channel 4? large sums that are at stake in doing that. I think it Ms Bulford: The public information that is would be entirely wrong—I would put it as strong as published in the financial statement splits between that—to start giving more information about our the core channel and digital channels. In terms of the income generation by channel than any other specific issue around cost allocation, the allocation broadcaster who is reliant upon commercial income of cost between the core channel and our commercial does. I also think that you have got to take into activities is governed by Schedule 9, which is set out account the very special circumstances whereby we in the Broadcasting Act. We are required under the outsource all of our programming. Our Act to work out how we are going to do it, and to programming is all commissioned. We have to have disclose, the process to our regulator, Ofcom, and negotiations every day in life with people who are then the process by which our costs are allocated is making programmes for us. If we are to get the best dealt with under those arrangements, is audited value that we can for viewers we have to do some of annually by in this case Deloitte, who are that in a position where we are not giving everybody independently appointed, and they produce an all of the information that they need in order to get independent report which is printed in the document their best deal. The only reason why we have any in front of you and also have a discussion with hesitation about this, and why we believe very Ofcom about it. In terms of the allocation of costs strongly that this would be a very damaging route to between channels there is very considerable go down, is because we want to protect the financial regulation around that and we are held wholly position of the channel with regard to our accountable through the process which is set out in competitors and the people that we are working Schedule 9. I do not think it is the case that we are with. Apart from that I have no issues about not subject to due process and regulation over that. transparency. There is nothing to hide other than from those people that we are competing with. When you buy the package that says we are a commercial Q57 David Cairns: I just draw attention to my funded organisation and that we are commissioning registered interest having just spent a placement with outside all of our programmes, it seems to me that Channel 4 through the Industry and Parliament one has got to accept some of the commercial Trust, and thank you for hosting me. I want to talk confidentialities that then go with that model. about what your Annual Report refers to as Mr Abraham: Indeed there are certain contracts that supporting creativity across the UK, by which is have non-disclosure elements to them where we meant the amount of programmes which are would have to redact information anyway. There are commissioned outside the M25. According to your some very specific reasons why we need to protect Report, from a budget of about £341 million for agreements towards confidentiality across our originated UK programming you commission about business. £117 million outside the M25, which by my arithmetic is just over 30% which is the minimum Q55 Mr Sanders: I do not see that it is commercially requirement as set out in your licence obligation. sensitive if you are able to break down how the costs Given what you said, Lord Burns, in reply to a are allocated between the core channel and the question from Paul Farrelly earlier, and I think you digital channels. You publish the actual breakdown said, “we have ambitions far above the minimum of profit. required of us by the regulator”, in this area your Ms Bulford: In notes one and two to the financial ambitions are not that far above the minimum statement there is segment reporting in equivalent required by the regulator and historically have been format to the format that we published last year. almost entirely at the minimum required by the That is divided into five separate segments: Channel regulator. Do you have plans to change this? Processed: 09-12-2010 22:06:37 Page Layout: COENEW [E] PPSysB Job: 005463 Unit: PAG1

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28 July 2010 Lord Burns GCB, Mr David Abraham and Ms Anne Bulford

Mr Abraham: There are two aspects to this question. Also, the specific new quotas that we had for the The stats suggest that we increased our delivery, in nations we met in 2009 and we are on track to meet terms of spend, against regional quotas from 32% to or exceed those in 2010. 37% in 2009. The stats suggest that we are working above the minimum and continuing to work at that. I have taken a number of steps since my arrival at Q58 David Cairns: Could you remind us what they understanding this issue. We held our very first are? Board Meeting in Wales where we met with all of the Ms Bulford: The quota is 3% of network spend on local production companies there and I shall be up originated programming coming from the nations, in Scotland during the Edinburgh Festival season which we expect to reach. talking to producers there as well. Under Stuart Cosgrove’s leadership we take very seriously our role Q59 David Cairns: That is 3% out of a population in facilitating an escalator of talent development in share of 15%. the regions and in the nations. We obviously have Ms Bulford: I understand that. We would like to do one of our biggest shows on air, Hollyoaks, produced more and we continue to invest in new companies in Liverpool and we are very proud of the fact that and to work with producers there. The other sorts of we work with a greater number of regional smaller things that we have been doing are ring-fencing parts independent producers than most of our of some of our returning strands for production competitors, if not all of them until perhaps very companies based outside London and in the regions. recently given the cuts that we have made that we are Mr Abraham: I draw attention to the fact that one of now being able to readdress. For us it is as much to Film4’s next productions is The Eagle of the Ninth, do with creating talent bases and working with new which is Kevin Macdonald’s next movie based on a producers and other commissioners to create the popular children’s book and there is obviously local ecosystems that develop these new companies strong regional representation there, and Neds, and I think if you go back through the history of which is a Peter Mullan movie. Film4 also is working Channel 4 there is a good record of that. Again, we hard in Wales and Scotland to get behind regional are also working with an industry that is voices, regional writers, and co-produce with consolidating where some of the qualifications of regional funds as well. producers that were completely independent are changing and becoming part of bigger consolidated groups. There are a number of different issues here Q60 David Cairns: I know Stuart Cosgrove very we are trying to manage. For example, in the five well, I spent time with him in Glasgow and in Bristol o’clock aspects of our schedule we have been and I spent time with 4iP in the West Midlands, so I struggling in the last year. We have been trying to am aware of what is going on. If you have a target of find new shows that work. There was a very big show 35% for a population of in excess of 80% and a called Iron Chef that we tried, and unfortunately it nations’ target of 3% for a population of 15% there was not successful, but we made an overt decision to is a gap between your aspirations and something take that production to Scotland. Had the show that is more broadly reflective of where people live, worked, and this is creative experimentation, that albeit an aspect of the population of where would have put in base a very long running franchise independent production companies are would not there just as we have in Bristol with Skins and as we exactly mirror that, nonetheless there are big have done with Hollyoaks with Lime in Liverpool. independent production sectors in Salford, Glasgow, We are not complacent on the point and we will Cardiff, the West Midlands and Bristol. Would you continue to work hard to improve this. The whole consider doing what the BBC are doing, which is to issue of diversity and regionality is one that is at the move commissioners out of Horseferry Road to be very centre of delivering to our remit. based in some of these places on the understanding Ms Bulford: We take it very seriously. It has been a that the talent follows the money and wherever these well-known difficult structural issue because so people are based they might actually stimulate more much of other broadcasters’ programming from business? outside of London has been from their in-house base Mr Abraham: I am not aware of whether that has and we work very hard to bring on new companies been looked at from a cost or feasibility point of and new talent. Through the course of 2009 we view, but it is certainly something that I will look. worked with something like 100 different companies This is a complex area because so much talent is very outside of London across not only television but also mobile, particularly in the production sector. One of some of the emerging digital agencies and some of Stuart’s great skills is to match make creative people the games companies that Mr Watson was speaking from the regions in the appropriate way and quite about earlier. We consistently put money and often someone who is very new in order to realise resource into not only developing ideas but helping their idea may be well advised to be housed within new companies to establish. I think what is a more established company that may have different encouraging is in 2009 we had the new quotas, as you status in terms of being part of a bigger group and know, moving up from 35% and our regional then automatically not qualifying. We have always production spend increased to 37% and our hours got to balance off the effectiveness of delivering to were higher, up to 45%, which is good, and we are on the idea and the remit with the issue of nations and track at the moment to exceed those quotas in 2010. regions. It is a difficult trade-off. Processed: 09-12-2010 22:06:37 Page Layout: COENEW [O] PPSysB Job: 005463 Unit: PAG1

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28 July 2010 Lord Burns GCB, Mr David Abraham and Ms Anne Bulford

Q61 David Cairns: I accept that. I am delighted that Q64 Mr Sanders: Audio description is something you have said that you will examine the possibility of that you could work with others on. For example, if relocating commissioners. I think that is very you are showing a film with somebody audio important. describing that film, that film could be shown on the Mr Abraham: What I said is I have not been aware television. of any assessment of that and I will ask whether that Ms Bulford: It is one of the things that we are very has ever taken place. Obviously I do not have a view open to, particularly with things like films, how best on it at this point without that information. to, if you like, inherit across from the studios some of the investment that has already been put in. It is something we are looking at all the time and would Q62 David Cairns: I would be interested to hear your welcome other ideas. assessment of it. If the answer is not moving commissioners, is the answer more challenging targets? The 3% target is low. The 35% target, whilst Q65 Mr Sanders: What about in your better than 30%, is still low. Would you consider commissioning of foreign produced material, do you increasing your targets for production outside the have any discussions there? M25? Ms Bulford: We would if we were a co-production Mr Abraham: Again, I think it is something that partner. If it is a Film4 production and we have some three months in I probably need a little bit of time to money in at the front then we are in a better position give you a more informed response, to be honest. I to have those sorts of discussions. If we are buying have spent some time in the regions, not as much as from US studios we are quite a long way down the I would have liked to yet, but I can give you my chain of influence. commitment that when I sit here in a year’s time I will give you a fuller assessment of this. I have been Q66 Mr Sanders: If broadcasters were prepared to hugely impressed by the traditions of Channel 4 to pay more for products that came with audio push big creative decisions into the regions which description would that not have an impact on the create microclimates of talent and which has real market? momentum. In addition to which, the way in which Ms Bulford: There is a balance to be struck in terms onscreen talent is hunted out and the many good of where it is most efficient and most cost-effective to examples of actors, like James McAvoy who do it. On the whole we are looking to put those appeared in Shameless, who became Hollywood access services across as much of our programming stars and the history of Channel 4 in providing this as possible. You are absolutely right, it is something talent escalator in the film area and drama and that we are very open to working with others on and entertainment area is second to none. We continue to finding practical ways through so the sum of look at this in a very committed way. If you would everyone’s investment is as accessible as possible to allow me to spend a bit more time to review it I look our audiences. We are very committed to it and forward to following up with you. regard it as something very important.

Q63 Mr Sanders: On Ofcom’s obligations you Q67 Mr Watson: Could I quickly ask you how you exceed the compliance for audio description by a intend to fulfil the new role for older children and little, which you should be congratulated for, but young adults and what your plans are? I realise you what is to stop you exceeding it by a great deal? Is are only three months in. there anything that Government could do to help? Mr Abraham: We talked a bit earlier about the Ms Bulford: As you will be aware, partway through direction of funding into education online and I this year one of the things we looked at was how we think that is a very important aspect. Obviously could move to increase access services across the there is something in the remit now that is more piece and to bring our overall shares of subtitling explicitly in the area of this specific demographic. I and audio description up. It is something that has look at this in two ways. One, to what degree does made a big difference by putting more investment our main schedule speak to this group. I think at the into that. There are issues with audio description higher end of 10-15 shows like Hollyoaks that particularly in relation to live events in terms of regularly have public service initiatives built into keeping up with it and making that work well. It is them are very, very important. The sex education something we are grappling with in the planning for series that we had a couple of weeks ago was very the Paralympics as to how best to set about that. We successful again at the higher end of the regard it as something that is tremendously demographic. I note that in the Committee there has important. Access services across the piece are very, been debate around specific commitments to the very valued by many sectors of our audience and we group and there are currently pilots ongoing and I would welcome any further discussion about other am still very much in the catching up phase on the things that could be done to advance that. I am not half a million pounds that has been allocated in aware of any particular barrier around what we do addition to the 4.5 million pounds that has been at the moment, it is more about where we best committed into the education sector. Clearly there is prioritise the funds that we have in that area. We more to be done here, but it also has to be have moved it on quite a lot bringing up the acknowledged that certainly until very recently proportions of subtitling that we are putting through Channel 4 was coping with some very severe cuts in to have everything we are putting out subtitled. investment onscreen, so I think some of the ambition Processed: 09-12-2010 22:06:37 Page Layout: COENEW [E] PPSysB Job: 005463 Unit: PAG1

Ev 14 Culture, Media and Sport Committee: Evidence

28 July 2010 Lord Burns GCB, Mr David Abraham and Ms Anne Bulford that had been there with the previous executive and on the current and future economic situation. Were this group in this area have taken longer to develop you surprised by the higher increase in activity and we need to acknowledge that. announced last week? Do you think that the economy is going to suffer from the speed at which Q68 Mr Watson: That would be using the pilot you the cuts that are being made? These questions are all did in 2008. I think you set up an innovation fund. in relation to Channel 4’s prospects. Mr Abraham: Some of that money was then frozen Lord Burns: First of all, as far as the advertising and was a victim of the cuts that we made. In looking market is concerned it has been stronger throughout at putting money back in now we are reviewing the this year than was expected when I arrived back in degree to which that can flow back having also December/January. Indeed, as I have been debating addressed the issues on the main part of the with myself about what the economic outlook this is schedule. one of those straws in the wind that was actually Mr Watson: Excellent. So when you move your quite positive about how things were developing. We commissioners to the West Midlands, as David has had a huge drop in output that took place at the got you to concede— height of the crisis. The economy has now been David Cairns: Or Scotland! picking up for two or three quarters. It has gone in Mr Watson: Thank you very much. a slightly uneven fashion. At some stage there will probably be some small setbacks and it is possible that it will be a relatively slow pick-up compared to Q69 Alan Keen: We have talked a lot about staffing other cycles. The real pressure is coming not so much costs. Is there very much left in operational costs to from cuts in public expenditure or increases in make savings? What is the percentage? taxation, but remain financial pressures within the Mr Abraham: There was a very significant banking system and the demands that are now being headcount reduction at Channel 4 that occurred made in terms of increased liquidity, increased before I arrived in 2009, you will remember. I think capital, et cetera, with the aim of trying to ensure this the staffing went down from just below a thousand does not happen again. That is all going to put some to around 700 where it now sits. restraint on the economy and that is why we remain Ms Bulford: Yes, that is right. very cautious about what is happening to our Mr Abraham: My view upon my arrival was that in advertising revenue despite the fact that we have had terms of the troops that things had been cut down a much better time in the first half of the year than very significantly and the area I needed to look at, as we expected. In terms of our planning, I think the we touched on earlier, was the scale of management central scenario is to think that we will get recovery and the volume of management at the top end of the but that it will not be exciting and will remain organisation. I have looked at that and set some reasonably modest. I would hope that we will keep objectives there and we are beginning to implement the gains that we have had in the last few months but those. It really is then about looking at the we are not counting on the extent of those gains adjacencies between departments: can we work more continuing. It has been welcome. It has meant that efficiently. At the end of the day, to speak to the we have been able to put some more money back earlier point of innovation, I would predict if I went into programming. There is no doubt that during the back to the board in a few months’ time with my recession, as well as cutting the staff in Channel 4 strategic plan and it required significant amounts of there were also quite substantial cutbacks in the new and extra investment it is going to be a programming budget in order to create breakeven challenging time to ask for that, so I need to go back and we can see some of the effects of that in the with the leanest possible organisation that can schedules and in our audiences. Going back to the deliver more capacity for innovation. Where there previous question that David was talking about, our are adjacencies, where there is duplication between priority now is to try and get some money back into departments, that has been my main are of focus. At programming so that we can refresh some parts of the end of the day we believe convergence is about the schedules that suffered. joining up these different platforms and getting the Mr Abraham: For example, on Sunday night we had creative teams to work in a completely joined-up and a very good show about an orchestra working in a holistic way, so any departmentalism, any silos, is community and then we had an interesting really where our focus has been to date. Beyond that, programme about an Amish family coming to a I would have to say that if we were to cut any deeper community in the south east of London. Those were I think it would really impinge upon our ability to primetime premier shows on a Sunday night that we deliver the schedules and the high quality content have probably not seen the like of for some time. We that you would expect from us. are being able to reinvest back in at the weekends and at the 11 o’clock slot as well, which has been very Q70 Alan Keen: Obviously revenue is crucial to the much a slot of repeats, we are starting to reinvest. We whole issue. You would not have any problems if the are pleased to be able to offer to advertisers at a revenue was going to increase. You have already critical time a strong schedule for the fourth quarter explained that the advertising industry is very and going into first quarter. Of course, with the complex, so an increase in the economic activity known demise of Big Brother they are expecting to nationally is not necessarily going to bring the same see that happening. We are working very hard in the percentage increase to you. As we have got Lord engine room at Channel 4 to make sure that those Burns here, given his other hat, it would be a shame new ideas take root and advertisers will come with us to have you here without asking for your comment and commit to the Channel for 2011. Processed: 09-12-2010 22:06:37 Page Layout: COENEW [O] PPSysB Job: 005463 Unit: PAG1

Culture, Media and Sport Committee: Evidence Ev 15

28 July 2010 Lord Burns GCB, Mr David Abraham and Ms Anne Bulford

Lord Burns: We continue to take a cautious finding new talent and developing it. Channel 4 approach to our income, although what we have often does that at the expense of its own situation seen so far has been very welcome. It is consistent because the talent moves on to bigger broadcasters with having seen some significant pickup in in the future, but that is part of the cycle. We would economic activity during this period, but we do need like to be judged by our ability to keep doing that. to remain cautious. Q72 Alan Keen: I have a great nostalgia for sitting at Q71 Alan Keen: You have also talked a lot this home, falling asleep and waking up as the results morning about competition for talent. It would be come in. Obviously I am not going to have the helpful, as we have got you here, if you could tell us pleasure of doing that for a while. how you see the television industry as a whole Mr Abraham: You would not have done that if you developing and how that is going to affect the had watched our show! competition? There are many changes we can see taking place. Can you give us a quick overview of Q73 Damian Collins: Going back to the BBC, do you how you see it? think that the purchasing power of the BBC for Lord Burns: My first remark would be that the talent both onscreen and off-screen has a distorting popularity of television remains enormously strong. effect on the UK TV market? When one looks at newspapers and books, et cetera, Lord Burns: Severe recessions have always created that have come under threat from other kinds of problems in this respect because inevitably, given the media, the extent to which television continues to way the BBC is financed, it means that its income is maintain its audiences is striking. Part of it is not subject to the same cyclical effects as the because the product that we get is outstanding. I commercial channels. In those periods when you get think part of it is because of the constant technical a severe advertising downturn it does become pretty improvements in television: big screens, high tough. The whole issue of how the BBC should be definition, better sound, flat screens. I remain quite funded and the long-term issues about the licence optimistic about that. We are going to go through fee, I do not think are an issue for me in my present the next stage, which David described earlier, about role. I have been involved in that in the past and the interaction of that with Internet and the whole spent quite a lot of time on it. I am a huge admirer catch-up TV and being able to watch a much greater of the BBC and so much of what it does. Now that spread of programmes on demand. Within that, it I find myself in competition with them I can also feel does remain hugely competitive. The commercial the sharpness of the elbows and the weight of that sector has had a very difficult time during the competition. As I say, it particularly bites during the recession and it has been competing with the BBC kind of economic environment that we have had which has not seen its income suffer in the same way over the past two or three years. that the commercial sector has. I think you can see that reflected in some of the audience figures. We are Q74 Damian Collins: I suppose the second point I both competing for audiences and in particular we was driving at, without wishing to tempt you into are competing with commercial channels in terms of commenting on the licence fee, was what do you the share of the commercial income. I am reassured have to factor in in terms of what you are going to by the strength of the underlying health of television, have to pay for on and off-screen talent is what and the demand for good quality television, and that people might be paid by the BBC and is that one of whole world that we describe as public service the biggest factors in considering the level you have broadcasting remains something where there is also to pay? great support both by you and opinion formers. We Lord Burns: It is an important factor but there are are not in a bad space as far as television is concerned other channels too that we have to take into account. and with our adaptability and fleetness of foot in We welcome, of course, some of the things that are terms of working with the new technology, trying to now being discussed by the Trust in terms of trying make sure that we do keep a prominent role. to rebalance some of the activities in the BBC so that Mr Abraham: On the point of talent, obviously in in some areas they do not compete with the our remit is the development of new talent, so in our commercial channels in quite the head-on way in autumn schedules we are bringing on to the screen which they sometimes appear to do. new comedians, new formats, new ways of Mr Abraham: Their ability to invest in technological presenting things, some of them in the area of solutions is of benefit of the whole industry. We are blending entertainment and current affairs, satire. partnering with the BBC on the Canvas Initiative Some of you may have seen that we had a very and with the ISPs and many other broadcasters as successful night on the election night, an alternative well. That, combined with our UK TV partnership, election night, absolutely bang-on for Channel 4 probably heralds a slightly new era in terms of how offering alternatives. we, as public service broadcasters, understand our Lord Burns: This committee may not have been the distinguishing features but partner where it makes target audience for that programme! commercial and practical sense for us. Mr Abraham: It was a very successful show. We beat ITV in the ratings that night. For me, the thing Q75 Dr Coffey: In terms of the operational costs about talent is if there is an escalation in the cost of element, I am sure you want to try and achieve a talent, as occurred in the previous cycle, that can higher percentage of profits to revenue than you are absolutely be addressed by our recommitment to currently doing and you have committed you will Processed: 09-12-2010 22:06:37 Page Layout: COENEW [E] PPSysB Job: 005463 Unit: PAG1

Ev 16 Culture, Media and Sport Committee: Evidence

28 July 2010 Lord Burns GCB, Mr David Abraham and Ms Anne Bulford not go into deficit. I am not quite sure what your first the table will know, are very volatile. Insofar as the six months are like for revenue increase, but if it is value of the property is below historic depreciated not going in the way you want it to it does suggest cost, which was where it was last year at this very low how you are going to be looking at your costs for the point in the cycle, we are required under the rest of this financial year. One of the things that I accounting rules to take that write off the profit and have particularly noticed is that property costs, loss account, and we are doing that annually. onerous leases, impairment of Horseferry, are biting into your profitability. Could you tell me a little bit Q81 Dr Coffey: So you have to do that annually? more about how much of your costs are tied up in Ms Bulford: We have to do that. In terms of the property, what utilisation you are getting of utilisation of Horseferry Road, it is full to the buildings and how often are you revaluing your gunnels. In the last number of weeks we have property? I recognise there are accounting rules to completed the outsource of our transmission follow, but if you are doing it every year and then in facilities to Red Bee Media at White City which and out of the accounts that is not very helpful releases some space on the lower ground floor and either. we now move into a project to take that space, and Lord Burns: Before Anne answers that, which she turn it into offices which will enable us to complete will do very fully, I am sure, the first point you were the release of the second building we have in that implying was that things had not turned out quite as area under a lease, which is a building called Francis we had hoped. House, where we had three floors in that building and have made provision for subletting those. When Q76 Dr Coffey: That is what I am trying to we took the headcount down we could consolidate understand. into one building, which was our plan, and we are on Lord Burns: In the first half of this year our revenue track to do that. Since the year-end I am pleased to has been stronger than we anticipated and we have report that we have managed to sublet those two been putting some money back into— floors, so we are in pretty good shape on it. The onerous leasing provisions on that, again, are as Q77 Dr Coffey: Roughly how much have you grown required under the accounting rules and take year-on-year thus far? account of rental holiday periods and all the rest of Mr Abraham: We announced in the last few days it. that we have been able to put £50 million back into the schedules just this year. That is versus budget. The budget obviously was down on 2009. Effectively Q82 Dr Coffey: So you are not leasing anywhere our programming spending in 2010 is now flat with really outside of Horseferry Road now? 2009. Ms Bulford: We have some small offices in Manchester and in Glasgow. We have a sales activity in Manchester and we have offices in Scotland on Q78 Dr Coffey: So you cannot share what revenue leases. Then we have some very old leases dating growth you have had year-on-year thus far? back many years around the Charlotte Street area Mr Abraham: Not the revenue growth. We can share before Channel 4 relocated to Horseferry Road the expenditure that is visible on the schedules. which is sublet and full provision against that has Remember, this is against a budget where we been in the accounts for some years. assumed at the beginning of the year that the market would be down potentially a couple of points. On a previous year it was down 12 points. We are now up, Q83 David Cairns: There is lots of space in the the whole market is up, and we are able to start Glasgow office, Chairman! reinvesting back. Ms Bulford: That is not unique to Channel 4 either.

Q79 Dr Coffey: So you are up? Q84 Paul Farrelly: I just wanted to pick up a thread Ms Bulford: There is a range of industry estimates as on costs very briefly. There is a world of difference to how far up the end of the year will come and the between setting an example if it is felt needed on top fourth quarter will make a huge difference. There is a executive pay and joining the competitive race in the sort of consensus at the moment somewhere 6% and way the Department has to put people out on the 10% in terms of overall revenue up year-on-year. streets. They are two entirely different issues. David, How that will finally work its way through remains I was very comforted to hear that you talked about to be seen. In terms of our share of that revenue we the potential impact of deep cost cutting on fulfilling are very much on target to broadly hold where we your remit and in particular public service are. broadcasting in that respect. Dispatches for you is not just a programme that is bought in, you employ Q80 Dr Coffey: The property cost is really the a former colleague of mine, Anthony Barnett, for major cost. presumably very good internal editorial reasons, so Ms Bulford: There are two groups of property cost it involves a staff member. Presumably there will be which are biting on these accounts. On Horseferry other areas where you cannot fulfil your remit as Road, which is a freehold building, because we fall effectively as possible without actually employing under the whole of government accounts process we people as well as buying in programmes. I will finish are required to revalue that each year. The property that statement with a question. In this environment values in the Westminster area, as everyone around of cost cutting, what are your plans for current Processed: 09-12-2010 22:06:37 Page Layout: COENEW [O] PPSysB Job: 005463 Unit: PAG1

Culture, Media and Sport Committee: Evidence Ev 17

28 July 2010 Lord Burns GCB, Mr David Abraham and Ms Anne Bulford affairs television, news and the like of Dispatches for and that is an opportunity for the Freeview platform the future? Do you intend to invest more in that upon which we rely for our distribution in the free- strand? to-air space to be enhanced technologically. With Mr Abraham: As I think I mentioned earlier, we that comes immensely exciting opportunities with regard the Channel 4 News and current affairs regard to how certain genres are served to our strands as at the absolute epicentre of the delivery of audiences, and I think news and current affairs is our public service remit. Within the organisation and going to be very much at the forefront of those to the team at ITN I have expressed my personal opportunities. commitment and passion for what it is that they do. It provides an important element of plurality in news provision in the UK for the UK viewer. I think that Q88 David Cairns: £50 million extra for the the nature, makeup, quality and distinctiveness of programming budget is obviously great news, but their journalism is really important for this country. any more dosh for Film4? They do a terrific job. It is really the bedrock for the DNA of Channel 4. Their budget was cut along with all the other cuts You are right, it has had to bear some of the pressure and I know some more money been put back into it. in the cost cutting period. More4 News had to be Now it is in the remit can we look forward to seeing foregone. What we have been focusing on with the budget growing? Dispatches is a debate, which I think is a useful one, Mr Abraham: It was fantastic news that almost in about volume versus impact. One of the things that my first week, if not on my first day, I had the is happening right now is investigative pieces with opportunity of attending a Film4 event before real impact. We saw the very strong piece about the Cannes and breaking the news that we were able to witch children earlier in the week. Those pieces take put the two million pounds back into the budget to longer to prepare, they have a lot of impact and they take it back to 10 where it has been historically. We create a lot of discussion. Insofar as we can do more remain very committed to protecting those funds. that has that kind of scale then I know our Head of Film4 works, as you know, in a very unique way. It News and Current Affairs, Dorothy Byrne, is very is at the very upstream end of idea development of committed to that. We have not yet got to the point unique British writers and filmmakers. Effectively it of being able to allocate any of the increased budget is a form of IP funding because we do require match specifically into genres, but rest assured that the funding for almost all of those movies, particularly current affairs team and what they do are very front those that are above the absolute smallest of and centre of our thinking. budgets, and very often partnered with the US major studios. Again, under review in terms of how we get Q85 Jim Sheridan: In relation to the headcount the maximum creative return on investment. It is reduction that you referred to a lot of very talented wonderful that in Tessa Ross and her team we have people probably left the company. Were they offered a team of people who are hugely respected in their any incentives to go, long-term or otherwise? ability to develop relationships with up and coming Ms Bulford: People who left the company were paid talent and back the right kinds of projects and, redundancy on terms which have become equally importantly, nurture their ideas and help to established over time at Channel 4 which consist bring them to fruition. When the Film4 stamp goes of— on a project other funding partners around the world pay attention. That is certainly something that Q86 Jim Sheridan: Enhanced redundancy? I would be very passionate about protecting and Ms Bulford: Enhanced redundancy, yes. They were building on. also offered a range of assistance in terms of finding new employment. Absolutely enhanced Q89 Philip Davies: 55% of your employees are redundancy, yes. women and 12% are from ethnic minorities, which compares with 8% of the public at large. Do you Q87 Mr Watson: A quick question on current have a target for how many women and ethnic affairs. If you return to surplus and it is steady is one minorities you think should be working for of the things you are considering bringing back the Channel 4? lunchtime bulletin because you cut that in the Ms Bulford: We do not have a target in relation to cutbacks as well, I think? women because the gender balance across the Mr Abraham: Again, it is one of those things that I channel is in balance and that works well. In terms am still reviewing insofar as what is the return on the of ethnicity, because we are based in Central London investment given the reach of that particular slot. we would expect to see our ethnicity at a higher level One of the things I would commend Dorothy and than the general population at large. In particular at her team for in the last few months is that they have higher, more senior levels of staff across the channel really developed the online proposition around the we want to see the proportion of people from BME Channel 4 News and the social networking aspect of (Black Minority Ethnic) background in particular it and linking into some of the 4iP innovations as increase and have been working hard on that. well. Insofar as there are incremental investments I am very interested to see what the potential of news provision is in an era of greater convergence. Again, Q90 Philip Davies: Increase to what? in a year’s time we will all be sitting here and Ms Bulford: I would have to look for that. I have probably seeing the launch of the Canvas platform that. Processed: 09-12-2010 22:06:37 Page Layout: COENEW [E] PPSysB Job: 005463 Unit: PAG1

Ev 18 Culture, Media and Sport Committee: Evidence

28 July 2010 Lord Burns GCB, Mr David Abraham and Ms Anne Bulford

Mr Abraham: This is a process. We have recently bizarre that an organisation that is over-represented established a monitoring system for recruitment. amongst ethnic minorities is trying to do more of Representation of ethnic minorities amongst the these things. What about white people? Are you not permanent staff is currently 12% and in 2008 it was interested in employing white people at Channel 4? 11%, so it has gone up very slightly. The skill set Ms Bulford: There are two separate tasks. There are figure for the audio visual sector as a whole is 6.7% the people we employ in Horseferry Road and there on the 2009 census. Representation of those with is also the representation of society at large in terms disabilities amongst permanent staff is currently of the overall industry and the production base that around 1%, so that is obviously low, and we will be we draw from. There is widespread under- addressing that both on and off the screen with our representation of those groups in terms of the major initiative around the Paralympics. In the last production community and part of our job in terms three years we have trained over 120 people from of bringing on those bursaries and those training BME or disabled backgrounds. programmes is to help with access to those people who might otherwise not have that opportunity. Q91 Philip Davies: I have read all that in the report. What I am getting at is that you are a national Q95 Philip Davies: On the same page as all of this broadcaster, you are not a London broadcaster. stuff, it says here: “Channel 4 is an equal Your proportion of staff from ethnic minorities is opportunities employer and does not discriminate 12% against the national figure of around 8%, so on grounds of sex, sexual orientation, marital status, nobody could criticise Channel 4, it seems to me, for race, colour, ethnic origin, disability, age or political being under-represented amongst ethnic minorities, or religious belief”. We can all sign up to that, that is yet in your report you talk about Channel 4 offering what I am sure we all wholeheartedly agree with, but bursaries to African, Caribbean, Bangladeshi and on the same page as that you have got all these Pakistani students on a City University diploma. schemes which it seems to me do discriminate on the Was that open only to people who were African, grounds of race and ethnicity. How do you marry Caribbean, Bangladeshi and Pakistani? Are those those two things up? bursaries available to nobody else? Lord Burns: I understand the point you are making, Mr Abraham: I would need to check the detail on but in almost every activity that I have been involved that and come back to you. in when it comes to more creative work, senior work, those issues which are more highly skilled and those Q92 Philip Davies: If you could let me know. Do you things which are more senior, it is actually a problem think it is appropriate for a national broadcaster of under-representation that one gets. By and large with the figures that I have just quoted? If they were programmes are put in place—generally industry- open only to those people do you think that would wide to try to nudge things along not in terms of be appropriate? Do you not think that these things discrimination but to try to give more people a better should be open to everybody based on merit and opportunity. I think the same goes in terms of some ability and inclination? other characteristics as well. This is not a heavy Mr Abraham: I am quite certain that those criteria activity. I have only been there a relatively short time were used. We would certainly want to see society but this is not something which dominates our life. represented in its diversity across our screens and in We do feel, along with other industries, we have got our content. Indeed, that is written into our remit. to try to unblock, in a sense, what are some of those The details of this particular programme we will invisible blocks that do exist in terms of some people indeed come back to you on. getting entry to this type of world. I think the media world is one where there is great opportunity for Q93 Philip Davies: 65% of participants on Channel people from a whole variety of backgrounds to 4’s work-related learning programme were from a engage. I do not think it is surprising that we are diverse ethnic background. 65% against a sharing that attempt with the rest of the industry. population of 8%. Does that strike you as being a You are giving the impression by your line of broadly representative level? questioning that somehow or other we are obsessed Mr Abraham: We are part of an industry initiative at with this issue and dominated by this. a leadership level in seeking to address the general level of under-representation that exists in terms of Q96 Philip Davies: I was quoting what is in your minority interests across the whole industry and in Annual Report. certain instances one obviously needs to make Lord Burns: It is not the case. focused efforts and focused initiatives in these areas. It is part of an overall effort to make sure that we are Q97 Philip Davies: Do you not think there is accountable to the make-up of society overall. something slightly unnerving or not right about the fact that one way or another you seem to be Q94 Philip Davies: There are mentoring potentially depriving white males or whoever it is opportunities for six individuals partnering with who are not entitled to go on these programmes of Operation Black Vote, presumably they were an opportunity that they may be particularly well available for ethnic minority people only. It seems to suited to in order to flex your diversity muscles and me that if you look at your figures the people who enhance your credentials? I have not noticed you or are under-represented in Channel 4 are white people, the chief executive offering to resign your positions not people from ethnic minorities. It seems a bit to allow somebody from an ethnic minority to take Processed: 09-12-2010 22:06:37 Page Layout: COENEW [O] PPSysB Job: 005463 Unit: PAG1

Culture, Media and Sport Committee: Evidence Ev 19

28 July 2010 Lord Burns GCB, Mr David Abraham and Ms Anne Bulford your places. You are quite happy to deny white these programmes so that you are colour blind when people the opportunity to get on the first rung on the you are looking at these things and people get jobs ladder but it appears you are also quite happy for and opportunities based on their merit and you to keep your positions and not hand them over inclinations rather than simply on the colour of to somebody from an ethnic minority. If you are so their skin? committed to this why do you not commit to having Mr Abraham: The variance that you are talking the Chairman of the company from an ethnic about is relatively marginal, let us admit it. The other minority? factor here is that Channel 4 exists to provide Lord Burns: Come on, that is not the process that is plurality in public service broadcasting and there is happening at all. It is not a question of displacing a relationship between the make-up of our team and some people for others. This process, and most of the our quota team in our group and our ability to things you have mentioned, is where one is trying to appeal specifically to those groups in society who develop avenues and tracks to enable people to have feel that perhaps mainstream television is not access who are coming from a background situation appealing to them. I would completely acknowledge where historically access has been very difficult. that there is a balance to be struck here but I would absolutely defend the rich mix of talent and Q98 Philip Davies: I can only repeat that you are over-represented amongst ethnic minorities as a background that we would wish to see in our national broadcaster. Can I just ask you to stick to organisation. As a member of the board of Skillset, your employment policy, which I quoted, which is if that means there are programmes that encourage very good? people who otherwise would not be considering a Lord Burns: We do. career in broadcasting then those should be viewed very, very positively and I am proud to be associated Q99 Philip Davies: I do not see how anyone could with them. argue with your employment policy, but could I just Chair: If we do not have any more questions, can I ask that you keep to that employment policy in all of thank you very much for coming this morning.

Letter from David Abraham, Chief Executive, Channel 4 (C4 01) CHANNEL 4 EVIDENCE SESSION ON 28 JULY 2010 I am writing to you in response to the letter we have received from Andrew Griffiths, Second Clerk of the Committee, dated 4 August 2010, which asked us for follow-up information on some of the issues we discussed in the session. I am very happy to provide more detail on these points.

Out of London Commissioning In response to the Committee’s question on whether Channel 4 had explored the possibility of relocating commissioners away from Horseferry Road, I can confirm that while we have not undertaken a full cost- benefit analysis of this issue, in recent years we have made efforts to increase our commissioning presence outside London.

Scotland is currently the only location outside London with a dedicated Channel 4 office, and the Nations and Regions team based there has recently expanded into a larger integrated ‘Creative Diversity’ division. This division, which is likely to grow again in 2011, includes an additional two posts based in Scotland, including a Media Project Manager position with responsibility for commissioning content across a range of genres. In addition to its activity in Scotland, Channel 4 also has 4iP commissioners working in Yorkshire and the West Midlands who are responsible for engaging with digital companies based outside of London.

I understand that the management of Channel 4 has frequently considered new ways in which it can improve Channel 4’s out of London commissioning, specifically from the nations of the UK. However, Channel 4 is a relatively small organisation compared to other network broadcasters such as the BBC and ITV, with no in-house production facilities. Commissioning departments are made up of only a small number of people, and Channel 4 believes that moving limited numbers across the UK is unlikely to have as much impact as encouraging all Channel 4 commissioners to spend more time with production companies based in the nations and regions. Channel 4 therefore holds regular nation-wide commissioner briefing days, as well as undertaking more targeted initiatives, such as the establishment of a special commissioning team with the objective of increasing contact with independent companies in Northern Ireland. This has resulted in a number of new commissions from the nation.

Nonetheless, this is an issue that I wish to keep under active review and it will be something that will be revisited by the new Chief Creative Officer of Channel 4, as part of a broader consideration of how we can enhance our performance across the UK, when that appointment is made in the near future. Processed: 09-12-2010 22:06:37 Page Layout: COENEW [E] PPSysB Job: 005463 Unit: PAG1

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Bursaries for the Television Journalism MA at City University The Committee also asked for further detail on the criteria used to determine Channel 4 bursaries for the Television Journalism MA at City University. This scheme is open to anyone with an “in-depth knowledge” of the African, Caribbean, Bangladeshi or Pakistani communities. It was put in place to address the low levels of representation of these groups within newsrooms, particularly compared to the number of stories about these groups.1 Recognising that coverage is enhanced if newsrooms can draw upon journalists with specific expertise, the scheme aims to develop journalists with knowledge and understanding of these groups. It is not a requirement that recipients are from the specific ethnic communities; students are eligible as long as they possess detailed knowledge, have sufficient ability, and are not otherwise able to fund themselves. That said, all recipients of the bursary so far have been from these backgrounds.

Channel 4 and Diversity I would also like to take this opportunity to follow up on the broader discussion we had with the Committee on the issue of diversity that was prompted by Philip Davies MP’s question; particularly the implication that Channel 4’s new entrant and development schemes are overly focused on certain minority groups and that this denies opportunities to other groups. We strongly refute that suggestion, and I thought it might be useful for me to explain our policies in the context of stimulating diversity in employment, both within Channel 4 and across the industry. Channel 4 is proud of its record of supporting creative talent from diverse backgrounds, both on- and off- screen. As you know, Channel 4 has a specific remit to “appeal to the tastes and interests of a culturally diverse society”. The Digital Economy Act reaffirms this role and includes a new purpose for Channel 4 to support the development of people with creative talent. In delivering our remit, we therefore strive to ensure that people working at Channel 4 and in the companies we work with come from diverse backgrounds. However, it is important to draw a distinction between raising the aspirations of people from diverse backgrounds to learn more about the media industry as a whole, and the policies we apply to recruitment and employment. Channel 4 is an equal opportunities employer; candidates for employment are selected solely on their experience and ability, using competency based interviews and assessment. To ensure that we attract prospective job candidates from the widest range of backgrounds, Channel 4 uses a variety of networks such as 4Talent schemes, general press advertising and links on partnership websites. As part of our day-to-day practices, we monitor all our recruitment activities, including candidate profiles, to help us better understand the range of people making applications. However, none of this information is used to select candidates. At a headline level, we believe we have a responsibility to do more to make the talent working within the industry more diverse and inclusive of people from a wide range of backgrounds. To help achieve this, Channel 4 runs a number of new entrant schemes with the specific aim of breaking down the barriers to entry for people who want to work in the media, irrespective of age, socio-economic background, qualifications, race, disability or gender. Our schemes are aimed at enabling people from a wide range of backgrounds— who might not otherwise consider a career in the media—to discover the opportunities open to them through short work placements, open days and talent development schemes. This includes people from socially and economically disadvantaged backgrounds and disabled people, as well as people from a range of ethnic communities. Some recent initiatives are outlined below. — Channel 4’s Work Related Learning schemes are offered to school and college students aged between 14 and 25, and include work experience placements with Channel 4 and our independent suppliers. Applications for the work experience placements were open to any student and selected via an open day and written application process—Channel 4 worked with a range of partners to identify schools and colleges across London to participate, and potential candidates were identified by the schools and academies. Through these schemes, to date this year Channel 4 has worked with over 1,000 students from 170 schools across the UK. — The majority of our support initiatives for companies and talent are not aimed specifically at minority ethnic groups, but are open to all applicants. However, in a few instances we have targeted initiatives for groups where under-representation in the industry is particularly marked. This includes a partnership with Operation Black Vote in which six managers from minority ethnic groups undertook nine-day placements within various departments at Channel 4. This scheme recognises that there is under-representation of ethnic minorities at higher levels within the media and across the UK workforce as a whole,2 and is aimed at providing opportunities for those with management and leadership potential to progress their career. — Channel 4 has also developed schemes aimed at improving opportunities for people with disabilities to enter and progress their career within the industry. For example, as part of our commitment to the Paralympics we have launched a major initiative to discover new disabled, on- screen talent—our aim is for disabled presenters to make up 50% of our on-screen talent during the Paralympic Games.

1 See ESRC seminar series, “Widening Ethnic Diversity In The News Media Workforce” 2010; The Guardian “A Job For The Wealthy and Connected”, 7 April 2008. 2 Business in the Community, “Race to the top”, 2009. Processed: 09-12-2010 22:06:37 Page Layout: COENEW [O] PPSysB Job: 005463 Unit: PAG1

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Channel 4’s special remit to nurture new talent and “appeal to the tastes and interests of a culturally diverse society” means it is an important talent pipeline, and all of our work experience schemes have been put in place with the aim of opening up opportunities to those who might not otherwise believe that the media is accessible to them. Rather than this being an issue where Channel 4 and our colleagues across the industry should stand still, we believe there is more to be done to foster a workplace that is open to all, regardless of background. I hope that this information answers the Committee’s questions more fully and helps to put into context the range of work that Channel 4 does to support creative talent, including people from a diverse range of backgrounds as well as those from the different nations and regions of the UK. Do let me know if you would like to discuss this or any other matters further. I look forward to continuing our dialogue with the Committee in due course. 24 August 2010

Letter from Lord Burns GCB, Chairman, Channel 4 (C4 02) RE: CHANNEL 4 EVIDENCE SESSION ON 28 JULY 2010 Thank you for your letter of 14 October 2010, setting out a number of additional questions following our session with the Committee on 28 July 2010. This also follows David Abraham’s letter to you of 24 August 2010 providing further information on Channel 4’s out of London commissioning and diversity policy.

As I stated in the evidence session, Channel 4 regards the Committee’s work as an important part of its accountability arrangements, and is happy to provide the Committee with relevant information. I have therefore enclosed responses to the questions you set out in relation to product placement, CRR, audience reach and share, public service delivery and our digital channels. As with the data provided last year, we are providing some of this to the Committee in confidence, as disclosure could damage our commercial interests. Confidential information is clearly marked as such in the response.

I note the Committee’s continued interest in the role and financing of our digital channel portfolio. On reading your Committee’s report on the Channel 4 Annual Report 2008, I had thought that this matter had been resolved to the satisfaction of the Committee and I am surprised that these follow-up questions again focus heavily on the digital channels. The enclosed response fully answers your questions on these matters, but I thought it would be helpful if I set out here briefly the role played by our entire channel portfolio.

All of Channel 4’s channels play a dual role of i) providing interesting, diverse content which attracts different audiences and ii) generating revenue to fund that content. The main Channel 4 service has always had to strike this balance, and the digital channels are becoming increasingly important not simply as a source of revenue, but also in creative and public service terms, providing valuable opportunities to innovate, experiment and reach diverse audiences.

This role of the Channel 4 portfolio was confirmed in the Digital Economy Act 2010, which broadened Channel 4’s functions to include the provision of content on a range of services, including digital television channels and on-demand services. The Act does not give the digital channels public service status—with commensurate public service obligations and benefits—but it does provide a useful framework for recognising the public service delivery of the entire Channel 4 portfolio. I trust this information will be of assistance to the Committee.

RESPONSE TO QUESTIONS Product Placement 1. How helpful to Channel 4 is Ofcom’s proposal to liberalise product placement rules? — Are the proposed restrictions too limiting? 2. How much additional revenue do you estimate that you will be able to generate from product placement under the new regulations? 3. How much of the additional revenue would you expect to spend on public service broadcasting content? As a commercially-funded public service broadcaster, Channel 4 is committed to the fulfilment of its public purposes and to generating the maximum possible amount of revenue to invest in UK-produced content. As commercial revenues are the primary way of delivering Channel 4’s public purpose end, Channel 4 is interested in exploring new ways of generating revenues—such as product placement—in order to invest in the delivery of its public service remit. Processed: 09-12-2010 22:06:37 Page Layout: COENEW [E] PPSysB Job: 005463 Unit: PAG1

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Channel 4 believes that it is very difficult to predict accurately the true value of product placement, given that the practice is new to the UK and there are few, if any, comparable overseas markets. A range of estimates have been cited by the Government, from £25 million after five years, through to much larger estimates of £140 million per annum. In Channel 4’s view, additional revenues are likely to be at the low end of these estimates. In addition, Channel 4 believes there is a risk that revenue from product placement is substitutional—with advertisers shifting money away from other audiovisual advertising, such as sponsorship, towards product placement.

The introduction of product placement will involve further regulatory and compliance costs for broadcasters. Channel 4 has seen it as a priority to help ensure that product placement is implemented responsibly and therefore welcomes Ofcom’s proposals for a clear regulatory framework in the Broadcasting Code, with industry guidance. Channel 4 has made a full submission to Ofcom on implementation issues in response to its Broadcasting Code consultation, and would be happy to share this with the Committee.

Contract Rights Renewal (CRR) 4. The Competition Commission recently confirmed that ITV’s Contract Rights Renewal scheme—CRR—is still needed to prevent the channel from exploiting its position to the detriment of advertisers and other commercial broadcasters. Do you agree with the decision? The CRR mechanism is an important competition remedy that was volunteered by ITV in 2003 as a condition of the Carlton/Granada merger, in order to address the market power of the merged ITV1.

The Competition Commission found that ITV1 still has continuing strength in the advertising market. The ITV Group still has an extremely strong position in the market (45% share of net advertising revenue in 2009). In addition, ITV1 remains indispensable and unique to advertisers: in 2009, ITV1 had 982 of the top 1000 most watched programmes on commercial TV, and ITV1 remains the only way for advertisers to efficiently deliver any campaign seeking massive coverage. Channel 4 agrees that the broad competitive position remains the same—ITV1 still has dominant market power so there is a need for a competition remedy to constrain ITV1 from exploiting its position.

— What would the consequences be for Channel 4 advertising revenue if the Government were to relax or revoke CRR? The Committee is right to identify the impact of any changes to CRR on investment in high-quality UK programming from the broadcasting sector as a whole, rather than just on ITV.

The nature of the advertising market means that removal or relaxation of CRR is very likely to increase ITV’s revenues as they exercise their market power to increase prices. Gains that ITV might accrue from a relaxation of CRR are likely to mean losses for other commercially-funded broadcasters—with a negative impact on their ability to invest in UK content.

Channel 4 believes that the primary cause of the decline in the TV ad market—and consequent fall in PSB programme budgets—in recent years has been the structural shift towards digital television combined with the economic recession. Progress towards digital switchover has caused a 35% increase in commercial impacts over the past seven years, and this increase in supply has driven prices down. As the primary cause of the reduction in programme budgets has not been CRR, Channel 4 believes it is unlikely that the removal of CRR will boost total TV advertising revenues and therefore content investment across the board.

Removal or relaxation of CRR would therefore potentially reduce content budgets for other players in the market. This would particularly affect Channel 4, whose unique model ensures that all revenues are invested in the delivery of Channel 4’s remit. A decline in Channel 4’s programme budget would have a negative impact on Channel 4’s public service delivery, affecting viewers and resulting in less plurality and less diversity in the UK creative industries.

Audience Share and Reach 5. How do you see your audience share and reach evolving over the next five years both for the core channel and the digital channels? Broadcasters find it is very difficult to predict accurately future audience share or reach. The state of the advertising market, the relative programme budgets of different broadcasters, scheduling decisions, and uncertainty about the rate at which viewers will switch to new technologies mean that broadcasters find it challenging to predict audience share or reach with any degree of accuracy.

In recent years, the commercially-funded public service broadcasters have all seen the audience share of their main channels decrease. This decline has been the inevitable consequence of digital switchover and the proliferation of multi-channel television in a greater number of homes. In Channel 4’s case, share of the main Processed: 09-12-2010 22:06:37 Page Layout: COENEW [O] PPSysB Job: 005463 Unit: PAG1

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Channel 4 service has fallen from 9.7% in 2004 to 7.5% in 2009, but the success of Channel 4’s digital channels has resulted in the audience share of the Channel 4 portfolio growing over the same period, from 10.5% in 2004 to 11.5% in 2009. Going forward, as the UK reaches the completion of digital switchover broadcasters’ audience share should become more stable. In terms of reach, over the last five years Channel 4’s reach has stayed broadly constant and on some measures has increased. For example, 15 minute average monthly reach for the main Channel 4 service has grown from 78% in 2004 to 82% in 2009. Over the same period, 15 minute average monthly reach for the Channel 4 portfolio increased from 81% in 2004 to 89% in 2009. This suggests that the Channel 4 portfolio will continue to reach a high proportion of the population in future, regardless of movements in share.

6. What is the minimum audience share and reach that you require to make a significant public impact? Channel 4’s content continues to reach a significant majority of the population, with reach and share of the Channel 4 portfolio increasing in recent years. Channel 4 believes that the reach and share of its television channels will continue to be important measures for assessing public impact. That said, Channel 4 does not specify “minimum audience share and reach […] required[d] to make a significant public impact”, as Channel 4 believes public impact should be assessed more broadly. For example, Channel 4 News attracts an audience of around only one million viewers each evening, but its impact in public service and democratic terms is much more important than this audience suggests. Channel 4 has therefore recently innovated in this area and developed a new framework—the Public Impact Report—to measure the value and distinctiveness that Channel 4 brings to UK viewers. This report is published alongside Channel 4’s Annual Report and Financial Statements and includes a range of measures to help assess public impact. For example, Channel 4 is increasingly achieving impact through digital media—the rise of on-demand service 4oD was one of the key developments for Channel 4 in 2009, with 218 million full-length programme views on-demand, a 60% rise on 2008 levels. Content on Channel 4’s websites also continues to engage audiences—for example, 230 million visits to channel4.com and e4.com in 2009—and deliver public impact.

Public Service Content on Channel 4 7. Is the total of £145 million invested in key PSB genres on the core channel an adequate return of public service content from a portfolio of channels and services generating over £800 million a year? Channel 4 believes that its public service delivery should be assessed more broadly than by sole reference to total expenditure on first-run originations in “key PSB genres” on the main Channel 4 service. This measure is one of many included in the Public Impact Report, which seek to quantify the scale and impact of Channel 4’s public service delivery. These measures include, for example, Channel 4’s expenditure on originated content across all services—£373 million in 2009—and Channel 4’s investment in the independent sector outside London—£117 million in 2009. Channel 4’s statutory remit is also defined in terms broader than specific “PSB genres”. Channel 4’s pubic service remit is “the provision of a broad range of high quality and diverse programming which, in particular: (a) demonstrates innovation, experiment and creativity in the form and content of programmes; (b) appeals to the tastes and interests of a culturally diverse society; (c) makes a significant contribution to meeting the need for the licensed public service channels to include programmes of an educational nature and other programmes of educative value; and (d) exhibits a distinctive character.” This remit was recently confirmed in the Digital Economy Act 2010, which added requirements for Channel 4 to participate in the making and distribution of: UK film; content for older children and young adults; and digital media content. It also required Channel 4 to promote alternative viewpoints and support and develop new talent. The updated remit recognises the public value provided by Channel 4 beyond the main Channel 4 service. In particular, it endorses the role of Channel 4’s digital channels as not only important sources of revenue, but also their role in creative and public service terms, providing valuable opportunities to innovate and experiment and reach diverse audiences, such as younger viewers. E4, for example, has invested in a range of UK-originated programming, including the award-winning E4 commissions Skins and The Inbetweeners. More4 continues to provide high-quality UK and international factual programming such as the critically- acclaimed True Stories strand. The Digital Economy Act 2010 does not, however, give the digital channels public service status, with commensurate public service obligations and benefits—it simply provides a framework for recognising the Channel 4 Corporation’s public service delivery beyond the main Channel 4 service. Processed: 09-12-2010 22:06:37 Page Layout: COENEW [E] PPSysB Job: 005463 Unit: PAG1

Ev 24 Culture, Media and Sport Committee: Evidence

8. How does Channel 4 decide what is an appropriate level of return of public service content on the core and non-core (E4, More4 and Film4) channels? Channel 4 currently sets out its public service ambitions for the main Channel 4 service each year in its annual statement of programme policy, which provides an overview of Channel 4’s overall programme strategy, its licence commitments, its programme offer in a range of genres, and additional matters such as cultural diversity, media literacy and support for independent and regional production. The statement of programme policy also mentions public service highlights on the digital channels but, as discussed above, these channels do not have public service status or obligations. Investment in individual commissioning areas is determined as part of Channel 4’s annual budget process. From 2011, under the new arrangements in the Digital Economy Act 2010 Channel 4 will adopt an enhanced accountability framework. Building on the measures developed in Channel 4’s Public Impact Report, Channel 4 will publish a statement of media content policy, setting out its public service ambitions across the entire Channel 4 portfolio. It will also review the Channel 4 portfolio’s public service delivery in the preceding year. Channel 4 is working with Ofcom to develop an appropriate framework for the annual statement of media content policy,and believes this will be a useful tool in assessing its public service delivery across all platforms in future.

Digital Channels 9. Further to the additional information that Channel 4 provided to the Committee last year—partly on an in confidence basis—the Committee would now like the following information for 2009: — the individual profitability of its non-core (E4, More4 and Film4) channels, including each channel’s revenues, programme budget and operating surplus. Channel 4’s digital channels generate substantial profits to be reinvested in public service content, and are a vital part of Channel 4’s strategy to address the structural financial pressure caused by digital switchover. As discussed in response to question 7, the digital channels are also making an increasing contribution in creative and public service terms. In total, Channel 4’s digital channels generated operating profits of £54 million in 2009—an increase of £13 million on 2008, which is notable given the economic recession and advertising market downturn. Table 1 below shows the operating surplus of the digital channels in 2009.

Table 1 DIGITAL CHANNEL FINANCIALS—2009 (£M)*

Total Revenues 181 Programme budget (76) Operating surplus 54 * Information for individual digital channels has been redacted. — total investment on each of the non-core channels since their inception, and when Channel 4 expects the start-up costs and total operating losses on each of the non-core channels to have been fully recouped. As discussed with the Committee last year, the financial performance of Channel 4’s digital channels is best considered in two phases. First, the years in which the digital channels were available only on pay TV (“the pay TV years”); and second, the years after Channel 4 took the strategic decision to shift the digital channels to free-to-air TV (“the free-to-air years”). Film4 was launched on pay TV in November 1998 and was moved free-to-air in July 2006; E4 was launched on pay TV in January 2001 and was moved free-to-air in May 2005. More4 has been available free-to-air since its launch in October 2005. During the pay TV years, Channel 4’s digital channels received insufficient revenue from satellite and cable platform operators to generate profits. As a result, Film4 and E4 incurred losses in the years prior to the channels moving free-to-air. Since Channel 4 took the strategic decision to move these channels free-to- air, Film4 and E4 have been more successful than they ever were as pay TV channels and have both generated net profits. [Financial information on digital channels has been redacted.] In 2008, the portfolio of digital channels fully recouped its costs since moving free to air. On an individual basis, each channel has also fully recouped all its costs since moving free to air. [Forecasts of financial performance of digital channels have been redacted.] Processed: 09-12-2010 22:06:37 Page Layout: COENEW [O] PPSysB Job: 005463 Unit: PAG1

Culture, Media and Sport Committee: Evidence Ev 25

10. Given that they are still paying back start-up costs, how much profit have the non-core channels actually delivered to the core channel for reinvestment in public service content? [Financial information on digital channels has been redacted.] In addition to generating profits, the digital channels also play a key role in maintaining the Channel 4 Corporation’s audience share. While audience share of the main Channel 4 service has fallen in recent years as the inevitable consequence of digital switchover, the success of the digital channels has resulted in the audience share of the Channel 4 portfolio growing from 10.5% in 2004 to 11.5% in 2009.

11. How much of the surplus of the non-core channels is returned to fund public service content on the core channel and non-core channels respectively? Collectively, the digital channels have generated surpluses and positive cash flow since 2007. Digital channel profits have grown every year since 2007—from £16 million in 2007 to £54 million in 2009—and Channel 4 expects the digital channels to continue to deliver profits over its current planning horizon. Channel 4’s unique model ensures that surpluses generated by the Channel 4 Corporation are returned for investment in content. Channel 4, as a publicly$owned corporation, does not have shareholders—it therefore re$invests surpluses in content, rather than having to pay them out in dividends to shareholders. In terms of the distribution of expenditure on the main Channel 4 service and individual digital channels, Channel 4 operates its budget and planning process on a portfolio basis. Channel 4’s planning is therefore executed across the entire Channel 4 portfolio, and it does not hypothecate or designate funds from individual digital channels to specific services—rather, budgeting decisions are taken in the round.

12. Were the non-core channels initially funded by prior year profits and reserves of the core Channel 4 service? — If so, how is this compatible with the requirement that Channel 4 operates all of its commercial activities subject to strict arrangements which ensure that public funds are not used to subsidise commercial activities? The Channel 4 Board remains confident that the digital channels were launched in accordance with the relevant regulations. The legislative framework has, at all relevant times, expressly permitted investment in commercial activities outside the main Channel 4 service. Channel 4’s digital channels were launched over a period of seven years: Film4 was launched in November 1998; E4 was launched in January 2001; and More4 was launched in October 2005. The legislative provisions governing Channel 4 at each of those launch dates differ—for Film4 and E4, the regulations were set out in the Broadcasting Act 1990 (“the 1990 Act”), and for More4 the relevant legislation is the Communications Act 2003 (“the 2003 Act”).

The 1990 Act The 1990 Act set out funding arrangements which allowed Channel 4 to sell its own advertising airtime— previously this function had been performed by ITV, which then passed funds onto Channel 4. Under the new arrangements, Channel 4 had to divide its revenue into various pots: “prescribed minimum income”; excess over prescribed minimum income; and a “reserve fund”. Further, as part of the funding arrangements Channel 4 had to make payments to ITV—between 1993 and 1999 Channel 4 paid a total of over £400 million to ITV. The 1990 Act provides in section 24(1) that the function of the Channel 4 Corporation is “to secure the continued provision […] of the television broadcasting service known as Channel 4”. Section 24(5) of the 1990 Act conferred an express power for the Channel 4 Corporation to be involved in the provision of television services other than Channel 4. Finally, under Schedule 3 of the 1990 Act, the Channel 4 Corporation had capacity “to do such things and enter into such transactions as are incidental or conducive to the discharge of their functions”. Accordingly, the Channel 4 Corporation was permitted to invest its income in not only the main Channel 4 service, but also in transactions which were “incidental or conducive” to the same. There were a number of reasons why the Channel 4 Board considered the new services, E4 and Film 4, to be conducive to the Channel 4 service. These included, but were not limited to: enabling Channel 4 to secure bundled offerings of television series from copyright owners consisting of both pay TV and free TV rights to be played across the new services, Channel 4 retaining audiences in the emerging multichannel world, improving and building on the Channel 4 brand, and diversifying revenue streams. The expenditure incurred in respect of the digital channel launches was set out in the Annual Report and Financial Statements. In 2001, David Elstein, the former Chief Executive of Channel 5 Television, questioned whether the Channel 4 Corporation’s powers did in fact extend to the provision of its digital services. Channel 4 obtained legal advice from Leading Counsel which confirmed its position that the establishment of, and expenditure on, its digital services was, at all times, a legitimate exercise of its powers. Channel 4 remains satisfied that this is the case. Processed: 09-12-2010 22:06:37 Page Layout: COENEW [E] PPSysB Job: 005463 Unit: PAG1

Ev 26 Culture, Media and Sport Committee: Evidence

The 2003 Act The 2003 Act updated the provisions relating to Channel 4. It confirmed and endorsed the Channel 4 Corporation’s express powers to do anything which appears to it to be incidental or conducive to the carrying out of its functions (including borrow money subject to a borrowing limit; establishing subsidiary companies to carry out such permitted commercial activities; and participating with others in respect of the same). It also imposed new procedural obligations on Channel 4, providing a clear framework for Channel 4’s permitted commercial activities. These obligations, outlined in Schedule 9 of the 2003 Act, require Channel 4 to: — identify, evaluate and properly manage any permitted commercial activities, so as to protect the primary functions of the channel (ie. the main Channel 4 service); — financially and organisationally separate permitted commercial and primary activities; and — ensure transparent reporting where there is a connection between commercial and primary activities (for example, shared resources). These arrangements continue to ensure that any new services are not launched in a way that jeopardises the delivery of the primary function of Channel 4. In relation to the digital channels, the 4Ventures balance sheet is charged with any interest for funds received from other parts of the Channel 4 Corporation, ensuring no cross$subsidy. The Schedule 9 arrangements, which secure the above objectives, have been approved by Ofcom, and are published on the Channel 4 website.3 Channel 4’s compliance with these arrangements is required to be audited on an annual basis and Deloitte has been appointed for this purpose. Deloitte’s reports are published in Channel 4’s Annual Report and Accounts.

13. How are costs allocated between the core channel and the digital channels with regard to programming that appears across the network, and cross-promotion? As noted above, Schedule 9 of the 2003 Act sets out the oversight framework for Channel 4’s commercial activities. Cost allocation is subject to the Schedule 9 arrangements—programming and cross-promotion costs are allocated between the channels in accordance with Channel 4’s cost allocation policy, which has been audited by Deloitte. The relevant sections of this policy for acquired peak series, the most significant programming cost allocated between channels, and cross-promotion, are summarised below.

Acquired Peak Series Channel 4 acquires the rights to transmit certain acquired series during peak viewing times, to be shown on more than one channel. Channel 4 allocates the costs of “shared” programming by applying a standard percentage cost allocation to each channel. This allocation is based on commercial impact analysis, where commercial impacts act as a measure of the value attributable to the relevant digital service compared to the core channel.

Cross Promotional Airtime Channel 4 cross-charges channels for on-air promotions for programmes that appear on its other channels. The value of promotional airtime is reflected fully, based on the level of impacts generated by the promotions. The cross-charging method is applied across all 4Ventures activities in the Channel 4 portfolio. 12 November 2010

3 http://www.channel4.com/about4/pdf/C4 arrangements.pdf

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