Is Channel 4 heading towards oblivion?

One indication of how life has changed for Channel 4 since its launch in 1982 is in its name. Back then, TV channels weren't called Dave, or Smile, or UKTV History: they had a number. And there were three of them. Four was hardly even a brand. It was just a designated spot on the spectrum.

Things could hardly be more different now. Instead of enjoying a preferential place as one of a select group of universally available broadcasters, Channel 4 has to compete with an unruly mob of digital upstarts. And instead of being the hip young gunslinger with nothing to lose, Four's prestigious position as the provider of an edgier public service alternative to the BBC is under severe threat. Commercial revenues are predicted to fall between five and 10 per cent next year, and Channel 4's own predictions put the annual deficit at £150m by 2012.

That shortfall is the cause of great concern for both Channel 4 and the Government, which sees the broadcaster as a crucial balance to the BBC's establishment voice. Accordingly, in January, reports from Ofcom and Communications Minister Lord Carter will lay out options for how the future might look. The Government is considering four main options: privatising Four; sanctioning a merger with Channel Five; giving the organisation greater public subsidy; and a commercial arrangement with BBC Worldwide, Auntie's highly successful commercial subsidiary which sells programmes and spin-offs abroad.

In the last few days, though, leaks from the discussions have indicated that the BBC Worldwide connection has become the most likely answer. It is thought that the proposals would see Channel 4 selling off its headquarters on Horseferry Road, central London, and using its cash reserves to buy a share of Worldwide, thereafter taking a share in the outfit's profits. (This year, they stood at £118m, a rise of 17 per cent year on year.)

For Channel 4, the deal has obvious appeal. It would provide a reliable source of revenue without resorting to the kinds of strictures that would come from more direct government subsidy; neither would such an arrangement require legislation. But the BBC guards Worldwide's revenue stream jealously, arguing that the close connection between the programme-makers and the overseas sales unit is a great strength, and that Channel 4 would bring little to the table since it owns very few rights itself. In that context, some have also characterised as premature Channel 4 chief executive Andy Duncan's decision to reject the BBC's recent offer of sharing resources including iPlayer.

Those critics would also point out that not all of Four's problems are the fault of the economy, nor attributed to the advent of digital. A recent attempt to diversify into radio ended up an expensive failure, and the channel's heavy reliance on Big Brother as a ratings war horse leaves it looking bereft now that the franchise is on the wane.

But Channel Four rejects that claim. It argues that no one can ignore its impressive record both in television awards like the Baftas and its successes at the Oscars, where it has won five in the last three years. And it makes the point that, in order to put out the kind of public service programmes that don't win tremendous audiences – drama projects like Britz, or Niall Ferguson's current series The Ascent of Money, for instance – it is obliged to maximise whatever money it can make from its more populist offerings.

That these are difficult times for the nation's oldest upstart is confirmed by its decision last week to expand layoffs from 150 staff to 200, which, by bringing the total size of the firm below 800, will make it a smaller operation than it has been at any point since 1998. But, says Channel 4, this is the final round of efficiency savings it can make before fatally compromising its core purpose. It points out that it has long received a major public subsidy, in the form of free access to the analogue spectrum; one way of seeing the proposed tie-up with BBC Worldwide is as a direct substitute, since the advent of digital television renders that access worthless.

There are other ways of looking at the figures that seem a little rosier. If its digital sibling channels are included, for instance, the 12 per cent audience share the network has commanded in 2008 is up from the 10 per cent share it held 10 years ago. There is little doubt that the redundancies the channel has suffered will soon be felt in programming. The question now is whether the proposed solutions can staunch the wound before it becomes mortal.

The future of four: What the experts think

Jon Snow

Journalist and presenter of Channel 4 News

Everyone is tightening up because of the financial crisis, and of course if they don't come up with a formula Channel 4 is going to be hit. What happened to the radio plans is an absolute tragedy, for instance, and an direct consequence of the credit crunch. Radio needs competitors to the BBC, and there will be none. I'm really sorry about that.

So far, news has been ring-fenced. Channel Four is making more now than it's ever made in its history. But we're very aware of what's going on, and if there's not a solution soon inevitably news and current affairs will suffer – it's the single most expensive entity on Four. We have, for instance, an independent fund that lets us do things with freelance contributors around the world. I'm not aware of work like that on any other news.

But if you publicly fund Channel 4, you just have two BBCs. You're bound to operate by different standards. And our remit is to have attitude, to appeal more to minorities. So I think the BBC World option is a good one. It's a serious generator of income and Channel 4 could clearly impact with more quality on what is already a very successful entity – and it would be enough money to solve the problem. It's an attractive option. I recognise it may be less attractive to the BBC.

Andy Duncan

Chief executive, Channel 4

On one level we're in very good health. We've grown our share in ads and in viewing figures, we've won five Oscars in the last four years, more Baftas and more RTF awards than anyone else, and we swept the boards at the British Film Awards. The range of output on Channel 4 is fantastic, and there's no commercially-funded company that gets anywhere near it. The simple fact is that Five and ITV and the others have done less and less in terms of public service broadcasting, and we've won the argument that plurality in public service is a good thing, that we don't just want good programmes from the BBC.

But those programmes don't pay for themselves, and the new platforms are less attractive than the old ones. We've always had a mix of 85 per cent commercially self-funding to 15 per cent that underpins our loss-making activity, and we just want to maintain that mix. We would prefer indirect solutions... because we want to be entrepreneurial. But [we must] solve the issue, and we've got an open mind. We're hoping for some clear decisions in January. As for the idea that I don't get on with our chairman – that's competitors trying to cause mischief. We've got a united board here.

Peter Bazalgette

Former board member of Channel 4 and founder of Endemol

Four is faced with this double-whammy – its share declining, and the downturn meaning advertising is in decline anyway. It has a good share of TV advertising, but the cake is shrinking. Some people are predicting a decline of eight per cent next year. I think it will be double figures. That's savage. One way it might have helped itself was through diversification. But it's never managed it successfully.

Now, Channel 4 isn't making a loss yet. It has £200m of cash on its balance sheet and it owns its own freehold. So it's about what you do from 2012. You couldn't privatise a gold bar at the moment. Five has its own problems, so merging seems unlikely, and it would take so long to put legislation through that I wouldn't be surprised if RTL got fed up and walked away. The BBC worldwide thing has some potential, but it could be a bugger's muddle. If you're going to get a proposal with the agreement within a few weeks – well, I'd be very surprised. One solution I like simply says, BBC Worldwide's annual surplus is £120m, so from 2012 give half of it to C4.

Will Wyatt

Media consultant and former deputy director-general of the BBC

How many mass market channels can this country sustain? We've got three plus the BBC, and that's one too many. There's no simple solution. It's a pity Channel 4 hasn't been able to make programmes of its own and I would have sought to change that rather earlier, but it's probably a bit late to be getting into that now.

The trouble with Four is that it doesn't own many rights of its own, and so it doesn't have a lot to bring to the party with BBC Worldwide – which is completely tied to BBC creative production. I just don't think that's a sensible option. It makes you feel that they've been looking for something that just fits the bill, and the profits of Worldwide do. When the BBC offered partnerships on things like iPlayer recently, on the other hand, Channel 4 dismissed them, which didn't seem terribly clever. There may be things there that would be of real value.

It's crucial that Channel 4 is there as a different sort of broadcaster in public service. They do make very good programmes. We need to protect it. But it's increasingly hard to see how.

Peter Kosminsky

Programme-maker and director of Britz

Four is the best home for a programme-maker who wants to make challenging programmes. Making Britz with them was one of the best experiences of my life. Channel 4 seek out that material. They want to make mischief, to attract attention, and they want to make life difficult for people in power. That, to me, is public service broadcasting. But recently there's been a change. These shows are very expensive and they're hard to sell overseas and they don't attract a huge audience, and there's a nervousness in the channel because their ability to do this kind of thing is being fatally undermined by the collapse in their advertising revenue. The fact that the BBC has completely deserted the troublemaking field means we desperately need Four to fill the gap.

Jeremy Hunt

Shadow Culture Secretary

There has to be a public service broadcaster other than the BBC: it drives up quality all around. Channel 4 has had some tremendous critical successes recently. But I do think we need to review the business model. Things are very, very different to when it was founded in 1982 as one of four channels, and it would be very surprising if it continued to work in such a massively changed environment.

No one could have predicted the financial crisis, which made things a lot worse, but there was a recognition before that that the formula was failing. I'd just point to one of the issues: Channel 4 doesn't actually benefit financially when one of the programmes it commissions is a huge hit around the world, because of its terms of trade, it doesn't own the intellectual property. And if you're a broadcaster surviving on the back of your creative ability, you need to be able to monetise that. The real test will be if the Government comes out with a clear strategy. I'm confused by the number of reviews going on, and we want to avoid the danger of conflicting messages coming from Ofcom and the Government. We don't want too many cooks spoiling the broth.

John Smith

Chief executive of BBC Worldwide

Channel 4 is not the only broadcaster having trouble. The situation for Five and ITV is also problematic. Whatever solution is finally decided on needs to help them as well. BBC Worldwide has doubled in size and tripled in profits over the past few years. We've got a substantial, highly profitable, global distribution machine that could benefit all the public service broadcasters. But this [proposal that Channel 4 link up with Worldwide] does nothing for them. And the BBC has made plain that at the moment all of Worldwide's profits are created for licence fee payers. That's worth about £9 per licence – so taking away any of that is taking value away from the licence fee payer.

There is value to be found. We and Channel 4 had a team of consultants working together to find synergies, and we found a list of perfectly sensible win-win ideas. Those come by us working together, not by Channel 4 trying to fight the public service for ownership of a company. They come from working together, not from one company trying to nick things that already exist from another.