Ofcom pushes Channel 4 merger

Ofcom today rejected the idea of "top-slicing" BBC programme funding, but left the way open for a possible merger between Channel 4 and Five.

The regulator made a series of recommendations about the future of Public Service Broadcasting (PSB) to Government and Parliament in its report, Putting Viewers First.

Ofcom's main recommendations include keeping the BBC, funded by the licence fee, at the heart of PSB in the UK, with a role in pioneering the development and take-up of digital content.

Ofcom said: "We reject 'top slicing' the BBC's funding for programmes and services."

Ofcom's blueprint looks at profound structural changes in the commercial broadcasting sector, including the digital switchover and pressures on television advertising.

It estimates this will leave a shortfall in funding of up to £235 million a year by 2012.

Ofcom said the key was not to prop up Channel 4 for its own sake but to ensure there was a viable institution apart from the BBC that would provide public service content that the market would not.

The two options the watchdog proposed for this were the extension of the partnership between Channel 4 and BBC Worldwide and a merger between Channel 4 and Five.

Structural changes to Channel 4 would need to be economically sustainable, competitive, provide a genuine alternative to the BBC and complement the market, Ofcom said.

The alternative would be to give Channel 4 public funding directly, relieve it of its pubic service remit and make it a fully commercial network, or mothball it.

ITV should be an essentially commercial network, Ofcom said, but should retain a "modest but important public service commitment" to news and UK content.

The channel's networking system was probably unsustainable, the report found, and as a result, regional news broadcasts were coming under threat.

The BBC has offered to share some news gathering resources with ITV, but Ofcom said the government needed to create an alternative plan to secure the long term future of local news in Scotland, Wales, Northern Ireland and the English regions.

Ofcom suggested the establishment of independently funded bodies to provide regional news, at a cost of £30 to £50 million.

A number of news organisations have already expressed an interest in bidding for these contracts, Ofcom said.

Ofcom's proposals aim to ensure that programmes such as regional news, current affairs, UK children's programming and some types of drama and documentaries do not end up being available solely on the BBC.

It said it wanted to free up ITV and Five as "strong commercial networks making entertaining, engaging UK content including national and international news, but with limited public service commitments".

Even with a BBC tie-up, the pressure on ITV to cut spending on news could threaten the quality and choice of news output, with serious consequences for local democracy, Ofcom found.

The Government should also consider how to deliver local non-BBC broadcasting beyond news, particularly in Scotland, Wales and Northern Ireland, Ofcom said.

In Wales, S4C should continue to play a role in Welsh-language broadcasting, while there was growing interest in a competitive funding system in Northern Ireland and the Scottish Broadcasting Commission has recommended a dedicated channel for north of the border.

Ofcom said programming for school-age children was a "particular concern" and the Government should look at dedicating funding to it.

While Ofcom rejected the idea of "top slicing", the report did suggest that leftover BBC funds earmarked to help the digital switchover could be used to help bridge the funding shortfall.

About £800 million has been set aside to pay for the costs of the switchover.

It has already been suggested that there might be an under-spend of the licence fee money ring-fenced, although the BBC has said it would have a better idea at the end of the year, when big conurbations such as Granada have switched.

The BBC has said there would be a debate on what happened to any surplus and it was not up to the Corporation to spend the money.

In February last year the National Audit Office also suggested that the money put aside may be £250 million too much.

An alternative to using the digital switchover surplus was a new industry levy, but without additional funding, Ofcom said, the mix of public service content would weaken over time.

The report said: "By acting now, Government and Parliament have the opportunity to secure a future that can be at least as strong for the next decade as it has been for the last.

"The sheer pace of change brought about by new digital technologies makes it increasingly difficult to predict the future with any certainty.

"If the pressures on commercial broadcasting are even greater than expected and the transition to digital more dramatic, it may be that more radical options will be required to secure public service content in the future.

"This might include a more comprehensive approach to the distribution of funding which creates a fundamentally more flexible and accountable system."

Giving ITV's response to the report, a spokesman said: "The whole free-to-air PSB sector is facing unprecedented structural changes and the commercial sector has to contend with the recession as well.

"Ofcom's report today demonstrates that they understand these difficulties and are working with all the players to find short and long-term solutions.

"The status quo is not an option for any of us and it is gratifying that both the Government and Ofcom have grasped the urgency of the need for change.

"So far as ITV is concerned, Ofcom has concluded that ITV regional news is unsustainable in its current form after 2010 and we will now be studying the detail of their progressive proposals for the delivery of a sustainable regional news service from 2011.

"Next week should see the publication of Lord Carter's Digital Britain preliminary report.

"The ITV Board will give both of these documents their full and urgent consideration and we look forward to engaging with Ofcom and Government at the earliest opportunity."

The 18-month review which led to today's report involved consulting a range of stakeholders including broadcasters, trade bodies, consumer groups, public bodies and MPs.

Ofcom said it received 13,000 individually signed postcards in support of Border TV's Lookaround news programme, as well as about 2,500 postcards and 700 emails objecting to sharing the licence fee with non-BBC broadcasters.

Ofcom chief executive Ed Richards said audiences wanted a strong alternative public broadcaster to the BBC.

He told BBC Radio 4's Today programme: "Our preference is to try and secure that through partnerships, joint ventures or even a merger.

"And if we can achieve that then what we will have is a sustainable economic model, a robust footing, but also be able to protect that public service purpose at the heart of a second institution."

Andy Duncan, the chief executive of Channel 4, said: "Overall we were extremely pleased with the report."

He added: "The most important conclusion in the Ofcom document is that audiences want to keep plurality in that (public service broadcasting) system.

"They want the BBC but they don't only want the BBC, and quite clearly Channel 4, in some form, needs to be at the heart or the centre of providing that plurality.

"And that we are delighted about."

Mr Duncan said he strongly favoured a tie-up with BBC Worldwide.

"Where you have got an alignment of interests in two companies - BBC Worldwide and Channel 4 - both generate income commercially to put back into content for the benefit of the public," he told the Today programme.

"The strategic logic of brands, channels and distribution outlets Channel 4 has is very strong, (so) you end up with something fit for purpose for the digital world."

Mr Duncan has previously said a merger with Five would be like "mixing oil and water", and he reiterated his view that the two have fundamentally different agendas.

"We (Channel 4) are there for public purpose, Five is there owned by RTL to maximise profits for their shareholders.

"The other problem is that you would end up with an advertiser-funded model."