CHANNEL 4 TROUBLED AT 20?

Against a backdrop of its £28m loss, more than 200 job cuts and aggressive competition, can C4 recapture its edge?

'I watch Channel 4' has always been shorthand for 'I'm youthful, culturally aware, anti-establishment, cool'. From Ali G to Big Brother to the Brass Eye Special on paedophiles, the funniest, most compelling, most cutting-edge television could be found on Channel 4.

But as the channel reaches its 20th birthday this Saturday, it appears to be entering a period of post-adolescent angst.

A change in leadership, from cool, laid-back Michael Jackson to tough, businesslike chief executive Mark Thompson, and the channel's first loss - £28m for 2001 - against the backdrop of a severe advertising recession have prompted serious soul-searching over its central purpose and future direction.

This month's announcement of 200 job cuts, on top of the 48 axed earlier this year following the disbanding of FilmFour productions, has compounded the gloom.

In addition, despite a generally stable year in ratings terms, there have been signs of drift. "Overall, C4's impacts (the number of people watching ads) for younger viewers are down 7.2% year to date," says Adam Pace, group head Optimedia I-trade. "Take out Big Brother 3 and it would be a lot worse."

To exacerbate C4's difficulties, Five has embarked on an aggressive PR strategy and for one week this month the channel's audience share came within a whisker of C4's.

"In the early days C4 was associated with the bold, the experimental, doing things that other broadcasters wouldn't dream of," says Nick Manning, chief executive, Manning Gottlieb OMD. "Now it does anything but experiment. It is settled into a rather rigid regime of relying on the same shows; Sex in the City is now in it's umpteenth series; Graham Norton is in danger of overexposure. It's all a bit formulaic - it doesn't surprise or shock."

So where has C4 gone wrong? Manning, who says C4 remains a very strong brand believes a key problem lies with its central purpose. "C4's remit is to be distinctive, but it's difficult to keep that going," he says.

For David Elstein, a former chief executive of Five and now a senior adviser to consultants Arthur D Little, there are more commercial reasons for C4's recent difficulties.

Expanding too fast

He maintains that under Jackson's leadership the organisation made the mistake of expanding into digital services at the expense of the core channel. "C4 expanded far too fast for its own good - it launched ventures that had no strong business basis," says Elstein. "As a result it squandered the bonus from the end of the ITV funding formula that it spent so many years campaigning for."

Not surprisingly, Thompson rejects the doom-mongering. "Many of the press reports are overdone, it has not been a bad year for C4. Our peak share is growing slightly. For the year to date it's at 9.8% between 5.30pm and midnight, as is our share of all-hours viewing, which is up 10.2% from 10.1% last year. And our share of advertising revenues is forecast to increase by 4% year on year."

Thompson also vehemently denies that there is a problem with C4's younger audiences. "This year's profile of 16 to 34s is the same as last year," he says. "We had a slow start to the year, but look at the ratings now. We haven't lost those audiences this year."

But he does concede that the start of the advertising downturn last year took the channel by surprise and that in the excitement over digital expansion it "slightly took its eye off the ball" in terms of the main channel.

"In key genres such as entertainment, there wasn't enough development or fresh ideas," says Thompson. "As a whole, the schedule didn't have quite enough risk and too many ageing properties."

While Thompson refuses to be drawn on specifics, this month's axing of Brookside from peak-time, ratings for which slipped from the one-time high of more than eight million viewers to 1.6million, gives a welcome indication that he is prepared to make tough decisions.

Thompson also admits to the need for C4 to deliver a more consistent performance across the year. "One thing I want to try to do is to deliver the channel's profile and key audiences to advertisers more consistently, and that is an issue for C4."

But he strongly disagrees with Elstein's analysis that the foray into digital services such as E4 and FilmFour proved a costly mistake. "I'm absolutely clear that C4 has been doing what the government has asked us to do in terms of playing its part in digital switchover by launching channels, by investing in feature films, digital education and interactivity."

Thompson insists the organisation's £180m investment in 4Ventures (the division that houses C4's digital services) over a five-year period was and is affordable, amounting to a small percentage of total turnover over that time. Problems only arose in 2001, when the year marked for maximum investment in 4Ventures coincided with an unforeseen advertising downturn.

"Had advertising done what it was supposed to, Channel 4 would have made its maximum investment in 4Ventures and still remained profitable," says Thompson.

Despite his defence of past decisions, Thompson is aiming to make C4 "as lean and competitive as possible". While he remains committed to Jackson's view of a multi-channel, multi-media future for the brand, including the launch of more digital channels", there will be reduced investment in 4Ventures as existing services such as E4 move toward profitability.

Instead, the top priorities are returning the organisation to profit, which Thompson says will happen this year, and refocusing attention and spend back on the main C4 service. One of C4's major shows this season is the terrestrial debut of The Osbournes, previously shown on MTV earlier this year.

"By far the most important thing for me to do as chief executive is to make sure the core C4 programme budget is large enough and that we find ways of growing it," he says.

Programming budget

This mission arises from Thompson's view of C4 as the "anchor" of the brand's relationship with its viewers. "I believe C4 is a brand that stands for the courage to do new things in TV and to make trouble," he says.

Because of that mission, which has remained fundamentally unchanged over 20 years, I think we have a unique ability to reach and develop certain kinds of audience - young and upmarket audiences and any audience that wants to try something interesting and strongly flavoured. That relationship is fantastically valuable for C4 and for advertisers."

But Thompson's mission comes at a cost - 200 jobs will go - 122 from the main channel and the remainder from 4Ventures. While painful, the cuts will result in an additional £17m for the programming budget for 2003, taking it to £430m, an increase of 4% on 2002.

The restructure also provides Thompson with the chance to strengthen the role of marketing within C4.

While individual campaigns such as that for the Indian Summer season, Big Brother 3 and Faking It have been highly praised, critics say that, to date, marketing within C4 has not been sufficiently empowered. It is too answerable, they say, to the whims of the programme-makers, with the result that it has to fight hard to get things done.

Then there is the problem that C4's marketing techniques - such as its use of permanent sites for its posters to promote programmes - have been imitated by better-funded competitors such as the BBC, robbing the channel of a crucial point of difference.

Thompson says he understands and supports the need to empower marketing within C4. "I believe marketing should have an upstream influence," says Thompson. "In television, there has always been a potential tension between commissioners and marketers. I think marketing has been a real strength in C4 and I'm very keen to bring marketing and commissioning closer together. I absolutely want to make marketing more empowered."

While details have still to be worked out, the plan is for Polly Cochrane to head a newly centralised marketing division across the C4 corporation with overall responsibility for marketing C4 channels and interactive as well as 4Creative, press, publicity and marketing.

Despite rumours that C4's marketing budget was set to be cut, Thompson says he has made no final decisions about the marketing budget for 2003.

"The marketing task will become easier once we've got a programming line-up that delivers on the brilliant promise of the C4 brand," he says.

The pace of change within the TV market suggests that Thompson's refocusing of C4 comes not a minute too soon. Although lacking C4's remit for distinctive programming, or its youth profile, Five has already shown itself only too willing to chase C4's share of audiences and is eyeing up its share of revenues.

Longer term, if Sky were to take a stake in Five it could become a formidable opponent. With its own renewed focus on ITV1 and a declared intent to deliver increased 16- to 34-year-old audiences, backed by an extra £100m programming budget, ITV is also set to park its tanks on Channel 4's lawn.

Then there is Mr Thompson's former employer. Now that youth channel BBC Three has the go-ahead, the BBC will have both C4 and E4 within its sights next year.

While not underestimating the scale of the challenge ahead, Thompson is convinced C4 has a unique and enduring part to play in the UK broadcasting mix.

"At a time when so much of British television feels vacuum-packed and controlled, C4 should feel like it's fresh and unpredictable. I think the need for that is going to grow. I don't see who else is going to do what we do.

"Our fundamental offer will strengthen. But 20 years from now it will be across multiple channels, it will be about interactivity, about text messaging and all the other forms of communication we don't yet know about. But the spirit of C4 will remain."

E4 MAKES DIGITAL IMPACT

Launched on January 18, 2001, and backed by an investment of £58m, the strategy behind E4 was to reinforce C4's presence in the multi-channel world, to increase C4's share of viewing in digital homes and to act as a nursery slope for new entertainment talent.

E4 quickly attracted plaudits for its clever launch marketing campaign, which together with innovative programming, positioned it as a cool, cutting-edge entertainment brand for the 16- to 34-year-olds market.

Ten E4-originated programmes, including Banzai and Big Brother's Little Brother, have transferred to the main channel. C4 chief executive Mark Thompson says E4 has helped extend C4's overall reach among 16 to 34s in multi-channel homes to 11.9%, up 16.6% year on year.

The channel has also benefited from exclusive first runs of US shows such as Friends, ER, The West Wing and Six Feet Under, all repeated in a segment branded Second Chance Sunday.

With a year-to-date share of 3.36% among 16 to 34s in multi-channel homes (compared with 5.2% for Sky One) agencies say the channel has earned its place on advertisers' schedules.

"In a multi-channel environment it offers some real options," says MindShare head of investment Nick Theakstone.

FILMFOUR SURVIVES DESPITE SETBACKS

Launched in 1998, FilmFour was C4's first foray into pay-TV with the aim of building on the channel's reputation for producing and screening feature films such as Trainspotting. It was joined in 2001 by FF+1, repeating the schedule one hour later; FilmFour World, which gives the best of non-English language cinema and FilmFour Extreme, which offers cutting-edge controversial cinema.

But with 4Ventures reporting a loss of £65m in 2001 and the advertising recession leading to C4 reporting a loss of £28m, the pressure was on to cut costs.

Earlier this year, C4's film production arm FilmFour Ltd was folded back into the main channel, following the failure of titles such as Charlotte Gray to generate the same box office success as earlier hits, such as Sexy Beast. The FilmFour channels escaped the axe.

Despite competition from DVD and other channels, and the end of ITV Digital, the main FilmFour channel is anticipating 440,000 subscribers at the end of this year and is on track to break even in 2005.

CHANNEL 4 FINANCIALS

Year Audience Programming Turnover Staff

share % spend (pounds m)

(pounds m)

1997 10.6 336 553 606

1998 10.3 362 590.5 723

1999 10.3 396 642 769

2000 10.5 410 716 934

2001 10.0 425 731 1081

Source: Channel 4

TOP TEN C4 ADVERTISERS JAN-AUG 2002

Rank Advertiser Spend

(pounds m)

1 P&G 18.5

2 COI 10.7

3 Coca-Cola 8.7

4 Ford 8.7

5 BT 6.9

6 McDonald's 6.4

7 L'Oreal 6.3

8 Toyota 6.2

9 Nestle 6.2

10 Renault 6.2

Source: Channel 4/MMS

TIMELINE

C4

1982

C4 goes on air with Countdown on November 2. Vauxhall is its first

advertiser.

1985

A Woman of Substance secures C4's highest-ever audience of 13.8m.

1988

Michael Grade replaces Jeremy Isaacs as chief executive.

1992

Breaks through 10% audience share barrier. The Big Breakfast launches.

1993

Channel 4 TV Corporation is born. Starts selling its own airtime and

makes payment of £38m to ITV companies under funding formula

arrangement.

1996

C4 wins battle against privatisation in 1996 Broadcasting Act.

1998

FilmFour channel launched. C4 wins rights to test-match cricket from

BBC. Stella Artois links with C4 Film.

1997

Michael Jackson appointed chief executive.

1999

C4 acquires terrestrial and pay-TV rights to next three series of

Friends and ER. Nescafe signs up to sponsor Friends, while Volvo backs

ER. Volkswagen links with Sport on 4.

2000

First series of Big Brother aired, sponsored by Southern Comfort.

2001

Launch of E4. Go Racing consortium secures deal to acquire media and

related rights to UK horseracing. Brass Eye Special prompts culture

secretary Tessa Jowell to consult ITC on pre-vetting.

2002

Mark Thompson joins as fourth chief executive. Nescafe sponsors

Hollyoaks.

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