Channel 4 is at 'tipping point' after operational loss

Channel 4's main channel made an operating loss last year for the first time since 1992, according to the broadcaster's annual report published today. The channel was hit by falling ratings for Big Brother and the loss of phone-in revenue as a result of the premium-rate TV competition scandal.

Channel 4's chairman, Luke Johnson, warned that the broadcaster had reached a "tipping point" with a new public funding solution now "urgently required" if it is to continue to compete with the BBC. The core Channel 4 service recorded an operating loss of £7.8m after programme costs grew faster than advertising, according to the report. Overall group turnover was marginally up, with increased advertising revenue helping offset the loss of revenue from premium-rate telephone services.

Ratings for the core Channel 4 service fell 11% in 2007 but there was an increase in audience for its digital channels, E4, More4 and Film4. Channel 4's new media division recorded an operating loss of £15.4m, up from £6m in 2006, because of the start-up costs of its video-on-demand service, 4oD. Group turnover was £944.9m in 2007, fractionally up on a record £937m in 2006m. Overall, the Channel 4 group returned a pre-tax surplus of £1.6m against a surplus of £21.3m the previous year.

Johnson said: "2007 will be the last year in which Channel 4, under its current funding model, manages the difficult balance between increased creative investment and financial break-even. The tipping point we have been warning about has been reached, with the core channel now in deficit and being supported by profits from secondary activities. In response to market conditions, we are already having to cut editorial budgets and a new public funding solution is now urgently required if we are to maintain such impressive levels of public service plurality in competition with the BBC."

Channel 4 chief executive Andy Duncan said: "Channel 4's key objective each year is successful delivery of its public service remit, not maximising profit. In a difficult year for television, it was a significant achievement to be able to make our highest ever investment in award-winning UK content while still managing to break-even. We recorded the second highest annual share of viewing and the highest share of total TV advertising revenue in our history."

Channel 4's share of the audience fell to 8.7% in 2007 from 9.8% the previous year. The broadcaster attributed the decline to the fall in ratings for Big Brother and ITV1's decision to move its children strand out of its weekday schedule. It said the decline had been offset by a 35% increase in all TV viewing for its digital TV channels, E4, More4 and Film4, with Channel 4's total share across all its channels reaching 11.9%, down from 12.1% in 2006.

Time-shifted channel Channel 4+1, launched last year, now accounts for 6% of all monthly viewing to the main channel. Channel 4 increased its share of the total TV advertising market to 24.1%, its highest ever share. The core Channel 4 service grew advertising revenues by £12.4 m or 1.9% to £676.8m. But programme costs for the main channel grew faster than revenues, up £20.8m or 4% to £536.5m, resulting in an operating loss of £7.8m, its first annual deficit since 1992. Its digital TV channels were collectively in the black for the first time, returning an operating profit of £16.2m against a loss of £17.6m in 2006.

Channel 4 said programme and content spend across its entire network of channels rose 3% to a record high of £624m. More than £400m was invested in original UK content.

Elsewhere, the television guru synonymous with the success of Big Brother has called for the privatisation of Channel 4, BBC Radio 1 and Radio 2 to fund new public service content from arts institutions, museums, galleries and individuals. Peter Bazalgette, an influential broadcasting figure thanks to his decade-long association with Big Brother and Deal or No Deal producer Endemol, said the debate about the future of public service broadcasting was too narrow and rooted in the vested interests of existing players.

He proposed a wholesale shake up of British broadcasting to preserve public service aims in the digital age, raising money from four existing sources:

• A programme of "modest privatisation" at the BBC, selling off Radio 1, Radio 2 and BBC Worldwide

• A structured sell off of Channel 4 that forced it to retain certain public service aims

• Releasing ITV and Five from public service obligations but charging them for spectrum following digital switchover

• Redistributing the £150m in "excess licence fee", currently being used by the BBC to fund digital switchover, that will be released in 2012

The money raised could then be spent on a new idea, which he dubbed Boggle, that contains echoes of Ofcom's earlier public service publisher concept.

Bazalgette, who sits on the board of English National Opera and has been helping develop its website, said the new body could link the existing online offerings of museums, galleries, theatre companies, opera houses and concert halls and fund content from them. "Why shouldn't Nicholas Hytner at the National Theatre commission and distribute video drama? Why shouldn't Nicholas Serota at the Tate make art programmes? Why shouldn't the Imperial War Museum produce history documentaries? At last some genuine plurality in the supply of PSB programming, with the added bonus of a search engine to market it all."

Taking its cue from YouTube and the democratisation of distribution facilitated by the internet, he said individuals could also post music, comedy, or programme ideas, with the most popular or interesting attracting funding from Boggle. Ofcom chief executive Ed Richards has also said he was also looking at ways of better joining up the money spent by existing arts institutions, museums and government departments on public service content.

In a speech last night to the Royal Television Society, Bazalgette, who stepped down as chief creative officer of Endemol last year, said the existing debate about whether Channel 4 should get a share of the licence fee "resembles the first class passengers in the bar of the Titanic arguing furiously over who should pay the bill". He said the championing of the concept of "plurality" also required further thought, pointing out that some of the BBC's best and most distinctive programmes – for example Radio 4's Today – had little competition.

Media regulator Ofcom recently delivered the first stage of its wholesale public service broadcasting review, which will feed into a government green paper and lead to a new Communications Act before 2011. Increased competition in the digital age, changing consumption habits and emerging new technology have all made the status quo unsustainable, resulting in a vigorous debate over the future of the licence fee, how to fund Channel 4 and whether ITV and Five can be held to their existing obligations.

The BBC will shortly stage a series of set piece speeches from the likes of David Attenborough, Stephen Fry and Will Hutton on the role of public service broadcasting in the digital age. Bazalgette, who created programmes including Changing Rooms and Ground Force before selling his independent production company to Endemol in 1998 and going on to oversee the Big Brother phenomenon, said giving Channel 4 public money would blunt its risk-taking edge.

Instead, the option of privatising it while retaining its character, culture and public service output should be explored more fully, he said. "I can assure you there are several buyers out there who are interested in signing up to this proposition. They think they can make it pay," he said. Channel 4 chairman Luke Johnson and chief executive Andy Duncan recently came out against the option of privatisation, saying they would prefer indirect public money to plug a claimed £150m funding gap.

The Conservatives have proposed "top slicing" the licence fee to pay for public service content from the BBC's rivals, while culture secretary Andy Burnham has floated a number of possibilities, including allowing rival broadcasters access to the BBC's facilities in the regions. But Bazalgette said: "We've all been facing in the wrong direction and obsessing with the institutions of the old world. Let's turn around, face the new world and start to imagine the possibilities."