Channel 4 Privatisation

Love watching The Great British Bake-off or Derry Girls? Have you ever thought about the money their producers make off them and how they sustain those series? In this explanation, you will learn more about the economic side of Channel 4, and how it maintains its series, shows, and news programs. In other words, the side we as watchers never think of.

What is Channel 4?

Channel 4 is one of the most popular broadcasting companies in the UK. It is also known for purchasing and supporting small independent programmes instead of making its own shows.

Channel 4 was established by Margaret Thatcher's government as a cultural challenge to BBC One, BBC Two, and ITV. It is a public-owned but commercially funded broadcasting company. This means that similar to BBC One and BBC Two, the government owns it, while it gets funded from its own commercial activities. In other words, government funding doesn’t support Channel 4.

The main source of income for Channel 4 is from TV advertising.

How does Channel 4 make a profit?

According to a report from the UK parliament, Channel 4 is a publicly-owned, non-profit corporation without shareholders. Its income surplus is retained and invested back into commissioning content.¹

The corporation itself was in deficit for years. However, thanks to the reduction in programme production due to the Covid-19 pandemic restrictions and the surge in spending on TV advertising, Channel 4 made a surplus of £74 million by the end of 2020.² This money isn’t going to be a surplus. It will be reinvested in the production of content.

Statistics have shown that despite Channel 4 being the fourth most popular broadcasting service in the UK, its annual revenues have had a slight decline by the end of 2020 since its peak in 2016.

Figure 1. Total revenue of Channel 4 from 2005–2020, StudySmarter Originals. Source: statista.com

As we mentioned before, more than 90% of Channel 4's income comes from advertising. As you can see in Figure 1, Channel 4 received £934 million in revenue in 2020. The remaining 9% of Channel 4's income comes from its operations, like 4Studios.²

Privatisation of Channel 4

Privatisation is shifting ownership from state-owned assets to the private sector.

Generally, governments might opt to privatise a firm because of these benefits:

• More capital for projects.
• Improving competitiveness in the market.
• Improving efficiency.

In addition, the private sector has some advantages over the public sector:

• Better pay for its workers.
• More room for innovation.

In the case of Channel 4, the government claimed Channel 4 needed more money if it wanted to grow. This extra capital could come from taxpayers or private investment.³ The government argued that without this capital, Channel 4 would struggle to invest in the technology and programmes it needed to compete with other streaming giants like Netflix and Disney+.

However, the discussion around the channel’s privatisation was met with a lot of criticism. Critics were concerned about the type of content the channel would need to produce to satisfy the shareholders rather than the audience.

In the end, due to such criticism and other factors that we will explore, Channel 4 hasn't been privatised, remaining state-owned.

Economic Factors that Affect the Privatisation of Channel 4

There are many economic factors that affect the privatisation of Channel 4. Some of these are:

• Government policies. The possible tightening regulations on video-on-demand services may encourage viewers to switch back to TV.
• Taxes. Changes in taxes could affect the willingness of stakeholders in the private sector to invest.
• Wages. Changes in wages could lead to higher costs in human resources. This would cause higher demand for capital.
• Exchange rates. Changes in exchange rates can influence the willingness of foreign investors to invest.
• Demand and supply. Changes in demand can have direct effects on the viewing rates as well as on the income from ads. Businesses may switch to more popular channels for higher exposure rates. Changes in the supply of small programmes can influence Channel 4's selection, thereby affecting the viewing rates.

Unlike the privatisation of the Royal Mail, which was funded by the government, Channel 4 is not backed by government funding. Since taxes finance government spending, we know that Channel 4's privatisation wouldn't be affected by taxes.

The demand and supply could be driving the government to privatise Channel 4 as it implies a further need for capital to create more programmes for the audiences.

Also, the demand for video-on-demand services (VODs) has increased substantially, and the government believes that improving creativity is the best way to capture the audiences for Channel 4. To ensure creativity, private capital is required.

Economic Advantages of the Privatisation of Channel 4

There are some benefits that would come from privatising Channel 4. Some of these benefits include:

• Wider sources of capital. The private sector is known for its unlimited source of finance, so privatising the channel would allow Channel 4 to have access to more capital. This capital could be used to improve the channel’s technology and programme selection. In turn, this would allow the channel to compete with popular streaming services.

• Attract more audiences. Channel 4 could use the capital injection to develop and film more shows that attract a wider range of audiences.

• Greater efficiency. In the hands of the private sector, there is a large profit incentive. This incentive can benefit Channel 4 by becoming more efficient and cost-effective. This will also help increase Channel 4's profits and help the firm to become more competitive.

Economic Disadvantages of the Privatisation of Channel 4

There are also some drawbacks that come from privatising Channel 4. Some of these are:

• Job losses. Channel 4 works with many smaller production firms. The privatisation of Channel 4 could result in a halt in collaboration with these firms. These firms might struggle to raise capital and produce films and TV shows without the help of Channel 4, which would cause them to face financial difficulties. This would no doubt have an impact on jobs as it is estimated that 1,300 jobs could be lost from Channel 4’s privatisation.⁴
• A slowdown in the creative economy. An independent report from EY shows that the privatisation of Channel 4 could result in around £2 billion being transferred to private owners from the creative economy.⁵ With less output and productivity occurring in the creative economy, its impact is bound to have an effect on the wider national economy. A slowdown in the creative industry will impact thousands of individuals who work in this industry.

The Future of Channel 4

As the use of online tv services continues to increase, the modernisation of broadcasting services is more important for the industry.

The government, however, has not come to a conclusive decision regarding the future of Channel 4. As we mentioned before, there are still disagreements concerning the risks over the benefits of privatisation and ensuring that broadcasting services are sustainable.

Sources

1. Parliament report, ‘The future of Channel 4’, 2021.

2. Mark Sweney, ‘Channel 4 privatisation - how will it work and who will buy it?’, The Guardian, 2021.

3. Alexa Phillips, ‘Channel 4's privatisation 'needed' to compete with streaming services, culture secretary to announce’, Sky News, 2021.

4. Mark Sweney, "Channel 4 privatisation ‘could shut up to 60 production companies’", The Guardian, 2021.

5. Ernst and Young, ‘Assessing the impact of a change of ownership of Channel 4’, 2021.