HOUSE OF LORDS Select Committee on Communications 1st Report of Session 2016–17 A privatised future for Channel 4? Ordered to be printed 4 July 2016 and published 11 July 2016 Published by the Authority of the House of Lords HL Paper 17 Select Committee on Communications The Select Committee on Communications is appointed by the House of Lords in each session “to investigate public policy areas related to the media, communications and the creative industries”. Membership The Members of the Select Committee on Communications are: Lord Allen of Kensington Lord Hart of Chilton Baroness Benjamin Baroness Kidron Lord Best (Chairman) Baroness McIntosh of Hudnall Baroness Bonham-Carter of Yarnbury Baroness Quin The Earl of Caithness Lord Sheikh Bishop of Chelmsford Lord Sherborne of Didsbury Baroness Goldie Declaration of interests See Appendix 1. A full list of Members’ interests can be found in the Register of Lords’ Interests: http://www.parliament.uk/mps-lords-and-offices/standards-and-interests/register-of-lords- interests Publications All publications of the Committee are available at: http://www.parliament.uk/hlcommunications Parliament Live Live coverage of debates and public sessions of the Committee’s meetings are available at: http://www.parliamentlive.tv Further information Further information about the House of Lords and its Committees, including guidance to witnesses, details of current inquiries and forthcoming meetings is available at: http://www.parliament.uk/business/lords Committee staff The staff who worked on this inquiry were Anna Murphy (Clerk), Helena Peacock (Policy Analyst) and Rita Logan (Committee Assistant). Contact details All correspondence should be addressed to the Select Committee on Communications, Committee Office, House of Lords, London SW1A 0PW. Telephone 020 7219 2922/8662. Email [email protected] CONTENTS Page Summary 3 Summary of conclusions and recommendations 5 Chapter 1: Background 9 Acknowledgements 15 Chapter 2: Government position and ownership models 16 Box 1: Ownership options for C4C 16 Chapter 3: Economic sustainability 21 Current business model 21 Figure 1: Percentage viewing share: all individuals 23 C4C 2015 financial results 23 Box 2: Channel 4 Corporation results for 2015 at a glance 23 Figure 2: Total TV NAR at constant prices, 2010–2025f 24 Figure 3: Indicative TV advertising forecast to 2025 25 Market and technological developments 25 Figure 4: Total Channel 4 NAR and digital video revenues, 2010– 2025f (£m) 27 Chapter 4: Impact of privatisation on content 31 Current remit 31 Box 3: C4C statutory remit 31 Box 4: Current licence obligations for C4C 32 Is the current remit specific enough? 32 Current regulation of C4C 34 Would privatisation have an impact on the culture of C4C? 35 Protected areas of remit 36 News and Current Affairs 36 Figure 5: Share of viewing to ‘national and international news’ on television by UK adults (per cent) 37 Figure 6: News programmes by audience share 2015 38 Figure 7: Share of viewing to national and international news on television UK adults (16–24) (per cent) 39 Older children and young adults 40 Film 42 Diversity 42 Nations/Regions 44 Would a commercial operator be incentivised to maintain the quality? 45 Impact of commercial realities 46 Could a privatised or part privatised C4C deliver its current remit? 46 Could C4C be a profitable investment with the current remit? 47 What changes to the remit would be necessary for profitability? 48 Could a protected remit withstand future commercial pressures? 48 Box 5: Sanctions available to Ofcom in event of a breach of broadcast licence 49 Could Ofcom at present regulate a privatised remit for Channel 4? 52 What changes would be needed to the current regulatory system in order to hold a privatised or part-privatised C4C to account? 52 Chapter 5: Impact of privatisation on creative landscape 55 Role as innovator 55 Independent Production 56 Terms of trade 56 Vertical integration 58 Instability 59 How much might C4C be worth? 60 Ownership 61 Table 1: Ownership of media brands 61 Ownership restrictions 61 Box 6: Competition and Markets Authority guidance 62 Who are the likely buyers if Channel 4 were to be privatised? 64 Safeguards/processes 67 Chapter 6: Alternative ownership options 69 Status quo with support from regulatory reform 69 Mutualisation 70 Partnership/Merger 71 Minority private investment 71 Appendix 1: List of Members and Declarations of Interest 72 Appendix 2: List of Witnesses 74 Appendix 3: Call for Evidence 76 Appendix 4: Communications Act 2003 79 Appendix 5: Digital Economy Act 2010 81 Appendix 6: C4C Licence Agreement: Annex: Part 1 Requirements for the provision and content of the Channel 4 service 83 Appendix 7: Communications Act 2003 85 Evidence is published online at www.parliament.uk/hlcomms-future-of- Channel4 and available for inspection at the Parliamentary Archives (020 7219 3074). Q in footnotes refers to a question in oral evidence A PRIVATISED FUTURE FOR CHANNEL 4? 3 SUMMARY Channel 4 Corporation (C4C) plays a key role in British broadcasting and the wider creative industry of the UK. It commissions all of its British programmes from UK independent production companies. Its primary source of income is advertising and any surplus generated is put back into funding content. It has a unique remit which includes championing an alternative point of view and being innovative and distinctive. C4C is a creative success, has had a positive social impact through programming including the Paralympics and initiatives such as the 360 Diversity Charter and plays an essential role in news plurality in the UK. BBC Charter Review, Ofcom’s Third Review of Public Service Broadcasting, a review of the Terms of Trade and a consultation on retransmission fees and the electronic programme guide have made for a turbulent 12 months for the broadcasting industry. The emergence 11 months ago of the first reports that the Government was looking at options for C4C, including privatisation, have added to this sense of flux. We are concerned about the cumulative impact and uncertainty this additional appraisal is having on the wider creative industries. The Secretary of State has told the Committee that he has maintained the position that the Government is looking at all ownership options for the broadcaster. He has made clear his view that with the media landscape changing faster than at any other time, the future for C4C is very uncertain. He is concerned that there are significant risks for a publicly owned but commercially funded broadcaster which is almost wholly dependent on advertising revenue. Sustainability of C4C Broadcasting is a fast-moving industry and the way in which content is consumed has changed in the last 10 years to include mobile devices and new distributors. This is seen most markedly amongst the younger viewers who make up C4C’s key demographic. However, C4C has demonstrated its resilience in the face of these changes, diversifying its content supply and its revenue streams in order to meet the challenge. C4C’s Annual Report for 2015 demonstrates that the share of viewing to the main channel increased last year as did the share of viewing across its portfolio in peak-time across all individuals, including 16–34-year-olds. It received nearly £1 billion from advertising revenue and currently maintains significant reserves. The Committee believes the evidence shows that, as far as it is possible to predict the future, C4C is sustainable for at least the remaining eight years of its licence term. We believe it is well positioned to withstand possible market volatility following the result of the EU Referendum. Ofcom renewed C4C’s licence for a further 10 year term in 2014. We consider that major change should be considered principally at the point of licence renewal and not on a constant basis between renewals. C4C’s remit is drawn from the Communications Act 2003, the Digital Economy Act 2010 and its licence. There has been criticism of the robustness of the conditions of this remit and, whilst the Committee recognised the complications of assessing qualitative goals, we do not think that a perfect system could be created. 4 A PRIVATISED FUTURE FOR CHANNEL 4? Privatisation The Committee considers that some of the important content that C4C produces in news, current affairs and film would be at risk if the organisation was privatised and had to operate in a more commercially focussed environment. C4C’s roles in commissioning programmes from smaller production companies and from outside London would both be threatened by a privatisation deal. We are concerned that, notwithstanding assurances given at the point of sale, a private owner may seek to dilute C4C’s public service remit in future, in order to maximise profit. We draw attention to the risk involved in a sale: once a company has passed into private ownership—particularly, as is likely, with a C4C sale, into overseas’ ownership—there is no mechanism to control or influence its fate. We heard little evidence to suggest that C4C itself or the creative industries would benefit from full or part privatisation. The risks appear to outweigh any potential benefits. Key questions about the future of C4C remain unanswered. If privatisation in any part is proposed by the Government we would expect to see a full, public consultation on the evidence for a change in the ownership model of C4C. However it is our clear preference that the status quo be maintained as there are many more risks than benefits involved in privatisation. A PRIVATISED FUTURE FOR CHANNEL 4? 5 SUMMARY OF CONCLUSIONS AND RECOMMENDATIONS Economic sustainability 1. As C4C’s Annual Report shows, 2015 was a successful year for the broadcaster and this indicates that the issues of economic sustainability of previous years have now been addressed.