Channel 4 warns of funding gap as profits plunge

Channel 4's profits plummeted by almost two-thirds last year because of weak advertising revenues and rising costs, chief executive Andy Duncan has told The Independent on Sunday.

In an exclusive interview, he also warned that the state-owned corporation faces making a loss next year. He added that without a new form of public subsidy, he would have no choice but to cut the programming budget to keep the broadcaster in the black.

This week Mr Duncan will address the Oxford Media Convention about the looming funding gap at Channel 4, which is celebrating its 25th birthday this year.

"We're coming into the most important time in Channel 4's history since it was launched. The issues are here and now. This is the year to sort out what possible solutions there might be."

Mr Duncan stressed the "urgency" of securing Channel 4's long-term future by finding a new form of government subsidy to replace the increasingly redundant analogue spectrum it was "gifted" when the corporation was launched.

"There's some real urgency in putting in place some alternative mechanisms by 2008-9. Potentially we're making a loss then," he said.

In 2006, the corporation made a post-tax surplus of around £20m, according to initial internal audits, compared to £48.5m in 2005.

Mr Duncan said that the £600m budget to commission and buy in programmes - by far the corporation's biggest cost - will be frozen this year.

With programming inflation running at around 5 per cent on average, and the cost of acquiring high-profile shows such as Big Brother rising even further, this freeze is equivalent to a £30m cut in real terms.

Mr Duncan said: "You end up cutting high-quality programmes. Ultimately we have no choice. You cut off your nose to spite your face. It gets you into a downward spiral of ratings which in turn takes down advertising revenue."

Media regulator Ofcom is reviewing the future funding of the broadcaster. Unlike the BBC, the corporation receives no direct funding. Instead it was "gifted" free analogue spectrum to broadcast. But the value of this spectrum has shrunk as most households now watch multi-channel digital television instead.

This year, the analogue switch-off will begin, and by 2012 no one will be able to watch television if they don't have digital.

Mr Duncan said: "If existing spectrum is taken away, it has to be replaced by something else. People have assumed we're asking for more. We're asking for replacement. That's the whole point of the review. What is the new mechanism?"

He conceded that pleading poverty may look odd at a time when Channel 4 is outperforming its rivals.

Last year the corporation's audience share rose by a 10th from 11 per cent to 12.1 per cent , when the ratings of its rivals, including ITV, fell.

"On one level, you'd think Channel 4 and the corporation had a fantastic year. What's the problem? Why have this review at all?"

But he insisted Channel 4 was not immune to last year's 6 per cent slump in television advertising spending and the threat from new media. Advertising on the flagship channel fell from £706m in 2005 to around £665m last year. This shortfall was only offset by higher advertising revenues from its digital channels, up from £63m in 2005 to some £110m last year.

Mr Duncan said he did not expect a big recovery in television advertising. "Last year was not just a blip; it was a wake-up call to everyone. It's too early to judge what will happen this year but no one is seeing it bouncing back with huge growth."

Ofcom has hired LEK Consulting to assess Channel 4's future funding and will report its findings in March. Mr Duncan believes it is "indisputable" that the adviser will identify funding issues. Assuming that this is the case, Channel 4 will start to lobby for alternative sources of funding.

One solution put forward by Mr Duncan is for the corporation to be gifted some of the digital spectrum freed up by turning off the analogue signal.

Ofcom has instead suggested auctioning off this spectrum to the highest bidders, but Mr Duncan believes Channel 4 would be outbid.

"There is a general policy issue over whether the entire spectrum is auctioned off, which is Ofcom's position, but this is up for consultation.

"If we want a strong public service broadcasting system going forward, it's essential that some of that analogue spectrum is reallocated back to public service broadcasters [such as Channel 4 and the BBC]. We have to convince Ofcom and the Treasury [of that]."