WEDNESDAY 7 DECEMBER 2005

Mr Andy Duncan and Mr David Scott

  Q1125  Chairman: Good morning. Thank you very much for coming again. You know where we are up to in this inquiry; we have done our first part and I am going to come back to that, if I may, just on a few points. We are now moving on to other areas which we did not have time to consider properly in the first part; I suppose notably sport in this session because we have already taken evidence on religious broadcasting. Just on the first inquiry, we were unable to find a figure for how much the Government stood to make from the sale of the analogue spectrum and I wondered whether you could help us in any way about this. Obviously, it will not be known until it has been sold, but has Channel 4 made any estimate as to the value of its own allocation of analogue spectrum?

  Mr Duncan: Not in terms of what it might be worth at the point of going to switchover, because it is a very hard figure to predict. Clearly various estimates are kicking around the place which other people have come up with. Our view is that it depends partly on what the spectrum is used for. For example, up to 14 channels will be released and one of the things we think would be a very good idea would be to reinvest a chunk of that capacity into building a seventh multiplex which is going to be crucial in order to keep DTT up to date and technologically robust. It is also going to be crucial if we are ever going to see high-definition television properly available on DTT. If that sort of policy decision were taken, clearly that would not really generate any money at all, in fact quite the opposite, whereas if it were sold off for other uses, potentially mobile phone companies or things along those lines, it could generate a significant amount of money. It obviously depends heavily on the economic cycle at the time and, to some extent, how some of the current activities that are taking place on developing 3G technology, on broadcasting on mobiles and so on, takes off over the next few years as well. Our view on the value of what we have is that historically it has obviously been incredibly valuable. When it was one of only four channels initially and latterly one of five it has clearly been the main public subsidy or mechanism by which Channel 4 has been allowed to operate. Any surplus we generate through commercial revenue we keep and reinvest, but it has been a crucial part of the whole model of Channel 4. It is reducing in value over time, so if you were to value it now, it would clearly be less than it was at its peak and our benchmark for that would be the lowering of licence payments which both ITV and Channel 5 are making for their spectrum. To be honest, by the time we get towards the end of the switchover process, it will clearly be worth significantly less again, unless it is used in some major different way. Our feeling is that it is more about trying to find a replacement for us for that indirect subsidy and possibly using some of the spectrum at the end of switchover for new issues like high-definition, but it is very hard to put an exact value on it.

  Q1126  Chairman: But if you were the Government, you might look at it slightly differently and wonder what the value to you, the Government, would be if you sold this?

  Mr Duncan: Yes. There is quite a wide range of views. There are some people who believe there is potentially quite a bonanza in store and potentially the economic windfall could be one of the reasons for going for switchover. Others are more sceptical as to whether there will be any real value in terms of cost benefit and even the report which was done a year or two ago indicated £1 to £2 billion maximum.

  Q1127  Chairman: That is not an inconsiderable figure. I do not know what your feelings are, but £1 billion to £2 billion seems to me rather a lot of money.

  Mr Duncan: It is a lot for Channel 4. The point is that it is predicated on a few key assumptions and those assumptions do not have to change much to wipe that £1 billion to £2 billion out. Our feeling is that the purpose of switchover is not really around the economic windfall: it is more about citizen benefits, consumer benefits, choice and some of those sorts of things.

  Q1128  Lord Maxton: I must say that I am not very clear on this. The switchover to digital starts next year in some areas, but presumably the sell-off does not come until the final in 2012, is that right? So that means there is going to be quite a lot of expense between 2006 and 2012, which presumably is going to reduce the benefits from selling off in 2012, particularly if by 2012 the technology is such that there will be practically no value at all in it. Would that be right?

  Mr Duncan: The marketing campaign has effectively started already and the first area Border is switching off in 2008. You are right that there is going to be a significant period of investment and a lot of effort and upfront cost to drive the switchover through before potentially the whole spectrum becomes available nationally. I am slightly repeating what I said when I came to the Committee before. From a Channel 4 point of view, it is an easier life if switchover never happens; the old analogue world suits us rather well. With a broader hat on, we support the purposes behind it and think it is broadly a good thing to do, but I do not think the major arguments are economic. The major arguments are other arguments.

  Q1129  Lord Maxton: But in fact, the way the Government are doing it actually suits you best really, does it not? It suits the terrestrial broadcasters to keep digital terrestrial rather than going to some other form, some other way reaching every household.

  Mr Duncan: What would suit us best is not to have switchover at all.

  Lord Maxton: Given that, the next best is . . . ?

  Q1130  Chairman: As a working assumption, we can take it, can we not, that the Government are going to have some receipts from the sale of analogue? There has been a slight assumption up to now that once we have gone to digital, analogue will simply fall to the ground and that will be that, but that really is not the case.

  Mr Scott: That is a correct assumption and it will depend on the use that public policy puts this spectrum to. There will be a process, which Ofcom will manage, of allocating the spectrum in due course and of course it is the Government which will get any receipt which comes from that.

  Q1131  Chairman: May I just ask you a second question? Given that, what is your view on the costs of digital switchover? Should those be met by the Government out of the receipts of general taxation, or should it all be placed on the licence fee?

  Mr Duncan: It is a decision for Government. Their current thinking that it will be done via the BBC seems to us perfectly appropriate. The BBC have historically taken on the responsibility for driving through some of the broadcasting changes that we have seen. In particular, the BBC have this imperative of universality, so they are putting hundreds of millions of pounds a year into their various digital services and up to this point there are licence fee payers paying who still cannot get those services or certainly cannot get them free-to-air. So the BBC seem perfectly appropriate to us and clearly you have different chunks of cost. You have the transmission build-up which they absolutely have to do simply to deliver their services to their audiences. Taking on a key role in the marketing and communications campaign is perfectly sensible and they have air time availability to do those sorts of training type campaigns and so on. There are clearly other options, but it seems to us a perfectly reasonable way to go.

  Q1132  Chairman: It does not trouble you that it is a regressive form of taxation?

  Mr Duncan: You get into the whole issue of how the BBC are funded. Our feeling is that it is appropriate, although there clearly are other options.

  Q1133  Baroness Bonham-Carter of Yarnbury: I think they may need a little help from Channel 4 on the marketing, but that is just a personal opinion. I should like to ask you a question about the Window of Creative Competition which you, in your previous evidence, supported but you did say it had to be managed very carefully in order not to, to quote you, "feed big fat indies". Do you think that the way this Committee have recommended that the BBC should set indicative targets within WOCC satisfies your concerns?

  Mr Duncan: I first of all welcome the fact that the Committee have picked up on the issue. I guess my honest view is that I do not think indicative targets are strong enough. Having spent three years at the BBC, if there is not an absolute requirement, it will get lost in the wash. Even since we last spoke about this issue our feelings on this have strengthened, because it is really clear now that within the independent sector a few very big independents are merging, buying up other independents; you have probably seen some of the deals yourselves, the likes of Shed, who recently bought Ricochet, RDF who have just bought IWC and so on. They are very good, very strong companies and in most cases Channel 4 is their biggest customer still, but it is getting harder and harder in fact to secure quality programming from some of the small- and medium-sized independents and that is a particular issue outside of London. It is almost inevitable that the BBC, unless they are forced to do otherwise, will put a disproportionate amount of extra spend into the big, strong, London-based independents. In some cases—groups which have bought up one or two regional offices to satisfy round the back door—a real opportunity would be missed. If an appropriate amount of that money—in our case it would be 30 per cent and something similar for the BBC would work very well—had to be spent properly to help drive regional development, it would be a fantastic thing for the independent sector and it would also strengthen the available supply base outside of London for other broadcasters including ourselves. My sense is that it has to be an absolute requirement on the BBC, otherwise, if it is just a good intention and they are given some indicative targets, it will get lost.

  Q1134  Baroness Bonham-Carter of Yarnbury: Picking up on what you were saying about the regional companies, we were up in Manchester recently and they were saying that a lot of the big London-based independents have opened offices up there. Now those offices will obviously employ local people. Does that not satisfy your desire for the BBC to invest in the region?

  Mr Duncan: That is part of the answer. It is perfectly reasonable for some of the regional spend to be with major groups which happen to have a regional office; that is perfectly legitimate. There are also mechanisms which could be put in place. In our case, we source programmes from over 300 independent suppliers, substantially more than anybody else does, and quite a few of those are one- or two-person operations which literally make perhaps one or two programmes in a year. Out of that breeding ground you get some very innovative new companies emerging and it is a real struggle regionally. Being very specific, it would be fine for the BBC to put some money into the Manchester branch of Endemol or the Manchester branch of RDF, but you also want BBC money going into the little independent in Newcastle or in Bristol or in North Wales or wherever it might happen to be. A regional quota could work with some sort of guidelines around spreading it across a mix of different sized companies as well.

  Q1135  Baroness Bonham-Carter of Yarnbury: And that regional quota would be operated through . . . ?

  Mr Duncan: There are several ways of doing it, but in the same way that the 25 per cent to 50 per cent WOCC has to be managed and, prior to that, the old 25 per cent quota had to be managed and reported on by the BBC, you would simply put in place within that, that a minimum of 30 per cent has to be spent outside London.

  Q1136  Chairman: May I ask just one other question. Do you think there is a case for Channel 4 as a not-for-profit broadcaster and, for that matter, the BBC as a licence fee funded body, to be allocated free digital spectrum by Ofcom?

  Mr Duncan: Yes.

  Q1137  Chairman: And have you put that case to Ofcom?

  Mr Duncan: Yes, we have. It is a very current and live debate for us at the moment, which is back to the conversation that we had before. We are doing very well in the short term, but we are increasingly anxious about the pressures in the medium to long term and, almost by the week, life is moving on. We saw the Virgin/NTL deal, we have the cable merger which is taking place, Sky have bought EasyNet and so on and so forth. Our own sense is that some of the competitive developments which are emerging mean that we are perhaps two to three years away from when some of the pressures really start to bite, not least with the switchover process coming in as well. Capacity has historically been a very good way of helping drive the public service model, both in our case and the BBC's case and, going forward, we think it is one of the best ways in which you could underpin Channel 4. We are pushing quite hard on some opportunities, which we are discussing both with DCMS and with Ofcom, which exist specifically at the moment around possible use of some of the BBC capacity and the possible windfall that will come through if 64 QAM is adopted through switchover. In both cases we think it is a very good way of giving Channel 4 more head space through capacity.

  Q1138  Chairman: That would mean Government giving up potential revenue, would it?

  Mr Duncan: There are two quite distinct options: one of which is complicated and I suspect will take some years to resolve and one of which could be done very quickly. The complicated longer-term option is what you do with the released analogue spectrum. Do you sell it off and maximise income or do you reinvest it to create the chance to do high-definition, those sorts of issues. I am sure that would be a process of some years of debate and there is the big International Spectrum Conference next year which will be part of that. The very specific short-term opportunity that we see, that we are currently discussing, is that the BBC has a commitment to run Five and S4C and S4C2 on their BBC multiplexes, one of which is controlled by Ofcom and one of which is licensed directly by Government. Capacity will be available outside Wales, because S4C will run just in Wales on DTT, and Scotland in the other case because of the Gaelic service. It is very, very unlikely that the Treasury or Government will take a decision to take that capacity out of public service broadcasting and there is a very simple opportunity to rebalance how that is allocated. We are using our spectrum very efficiently. We have run out of spectrum actually and are having to buy it on the open market at a very expensive price. The BBC are using theirs very inefficiently. There is a very simple opportunity which could be taken literally in the next six months or so, alongside the White Paper and the licence fee. We are trying to differentiate between a very specific short-term opportunity to reallocate some capacity from the longer-term policy decision about whether more capacity in total is put into PSB.

  Q1139  Chairman: Is there any estimate of how much it would actually cost you if you were not allocated free digital spectrum?

  Mr Duncan: Yes. We have acquired two sources of capacity this year, two slots from National Grid Wireless, and although the figures are actually confidential in terms of how much we paid, the press has speculated that the last one was in the region of £12 million. We have certainly had to pay a very significant amount of money which we have decided to do as a premium for certainty now. The market is obviously developing very rapidly and if we are going to get on and launch things like More4—and we are looking at other channel ideas including Film Four going free next year—we have to do them now while the market is developing. Our assumption is that we will not have to continue to pay those very high prices indefinitely and at some point it will be a clear way to underpin us by providing capacity in some other way.

  Mr Scott: Certainly going forward there is the idea of spectrum charging, which I know the BBC have written into their licence bid. The concept of spectrum charging was trying to look for efficiency in the use of the spectrum and the allocation of the spectrum, but the way the forecast spectrum is allocated it is money which will just come straight from the programmes, so it does not actually lead to any behavioural change.