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Monday, April 16, 2007

Channel 4 – VooDoo Economics & Scare Tactics

The Great Brains involved in Public Service Broadcasting seem to be at their most creative when justifying their periodic injection of hard earned taxpayer cash. This time around it Channel 4’s turn and the economic report commissioned by OFCOM and prepared by L.E.K. is an absolute beauty, which is nowhere as near as negative as Channel 4 has spun it into the mainstream media. Remember this headline from the Murdoch owned Times “Channel 4 could collapse after 2012, according to research for regulator

I am amazed that the OFCOM & Channel 4 CEO's get away with discussing Channel 4 in such a bad light and get applauded by the mainstream media. I take a contrarian’s stance and believe both should be fired for portraying such a potentially valuable taxpayer asset in such an appalling way.

The basic problem for me with the Channel 4 CEOs performance is that he is in complete in control of its costs – he can reduce the Channel 4 costs if he has the will. Any half decent CEO manages his budgets to match his revenues and forecasts to give a little bit back to shareholders; in the Channel 4 not-for-profit case they can add any excess to “reserves” for later return to taxpayers or even for a rainy day to cover the eventuality of the PSB Apocalypse ever arriving. In the Central Case of the LEK report Channel 4 never run out of cash – they still have around £150m lying around in 2012. To paraphrase the CEO of five – “I would love to have Channel 4’s problems”

The report goes on and on about super-inflation in programming rights – well, there is only super-inflation because Channel 4 is bidding £20m for stuff like Desperate Housewives. Surely, Channel 4 can say to the independent programme makers "I want a series about xyz and I've only got £x million to spend" and someone will make the programme for them? The report also goes on about a zero increase in revenues over this period – I am all for taking the safety first approach in budgeting, but any half decent CEO could do something to avoid Doomsday occurring on a 5-year horizon?

I think the CEO should also look at Channel 4 distribution costs especially on Freeview - why Channel 4 needs 6 channels is just beyond me? C4 definitely needs one; E4, More4 and Film4 are a bit more dubious but seeing I’m feeling generous, I’ll concede their right to exist; but two time shifted channels, E4+1 and Film4+1? – come on this must be a joke.

This is more true when you look at the costs – C4 were gifted four channels from the ever generous taxpayer on the top notch PSB multiplex, but rents two others from National Grid Wireless at an annual "opportunity" cost of around £12.5m each based upon recent DTT spectrum rental deals. That is a potential annual saving of £25m without any lost of content. Channel 4 could even put the time shifted stuff on More4 and Film4 when the channels are not broadcasting. If people had really missed vital must-see content they could then record it for later viewing.

If the contracts with NGW are long and contain onerous early termination clauses, C4 could rent out two of the higher quality four gifted channels on the better multiplex until the NGW contract could be terminated. £25m a year distribution costs for two time shifted channels which hardly anybody watches with no PSB content – welcome to the voodoo world of broadcast economics. All of this is before the duplication distribution on the satellite and cable platforms.

The theoretical economic model for Channel 4 is that “hit” commercial shows such as Big Brother fund the high brow PSB stuff such as Channel 4 news, Dispatches, the religious stuff etc which hardly anybody watches and are therefore uneconomic. The trouble is that Channel 4 has also been losing money on its many digital non-PSB ventures in their various guises and reincarnations since launch and therefore the absolute amount of subsidy used for PSB is nigh on impossible to figure out.

Given past mistakes, I can also almost guarantee the latest greatest money spinning idea in launching a radio multiplex is also going to be a money loser which yet again is ultimately funded by the taxpayer. I can just speculate about the conversations in the Channel 4 boardroom:
“I know we were saps at missing out on the Freeview launch… National Grid Wireless is earning supa-profits on renting out channels on gifted multiplexes… we're paying how much to them for spectrum that's more than the lucifer in the sky charges?…but there is more spectrum coming up… hmmm... I know we know nothing about radio… but if National Grid Wireless can make a tonne of dosh in TV…wirelesses are those things you use to listen to the radio aren't they?... why don’t we lobby for loads of that Digital Dividend spectrum while we’re at it and pretend we need it for High Def TV?… its currently ours anyway and possession is 9/10s of the law”
Instead of playing this ridiculous game any longer, OFCOM should do something really, really brave and tell Channel 4 to bugger off.

In fact, OFCOM should go a step further and look at the Channel 4 PSB remit and decide what, if anything is really necessary in the multi-channel era. What is the point of taxpayers paying for Channel 4 news when BBC News 24 is already on round the clock? OFCOM should get rid of all the PSB Baggage and put the remains of the remit out to tender for the other channels to produce and broadcast. OFCOM can take the Channel 4 spectrum back and auction it off to pay for the remains of the PSB remit.

Channel 4 could then presumably be reborn as a profitable company earning decent returns. OFCOM could then go a step further and privatise Channel 4. In an auction scenario, I am certain that a debt free bunch of channels with around 10% of UK viewership and a higher share of the “youth” eyeballs and no uneconomic PSB remit would attract a tidy sum.