David Elstein: Channel 4 had too much money – and it blew it

It has squandered resources on Film 4 and E4, wasteful distractions from its core service

Channel 4 will soon be celebrating its 20th birthday, but it seems that it is not in much of a mood to party. Recently it has seen its audiences decline, and it has endured criticism about its programmes, some of it fair, some unfair.

Importing Richard and Judy from ITV and giving them an afternoon slot has not been a success. The breakfast show RI:SE has also been a disappointment, while a resurgent BBC2 has beaten up Channel 4 in the afternoons. The channel is much too dependent on Big Brother for ratings, although it has been a hugely successful show. Indeed it could be said that Channel 4 is a big channel for 10 weeks of the year and a problem channel for 42 weeks of the year. It suffered from a vacuum at the top for nine months between Michael Jackson's announcement that he was quitting as chief executive and the arrival of his successor, Mark Thompson. And all this has happened in the midst of one of the worst advertising recessions that the industry has ever seen.

Mark Thompson said on Tuesday at the launch of the channel's winter schedule that "right now we're in the middle of the biggest creative reinvention of Channel 4 in its history. In such an atmosphere of change, it is understandable if our anniversary feels like a bit of a distraction."

Mark is certainly right about that, but to me the encouraging thing about his remarks was that he seemed to be learning from the bad mistakes Channel 4 has made over the past few years: "From now on we're never going to forget the most important thing we do is Channel 4 itself."

To understand the nature and the scale of the problem at Channel 4, you have to rewind your video of the Channel 4 story to 1996. Back then the channel made a profit of £134m on a turnover of just over £500m. Last year it made a loss of £28m on a turnover of more than £700m. So there has been a deterioration in Channel 4's profitability of a staggering £375m in half a decade.

The underlying reason for this collapse in the commercial performance of the company is not hard to find. Channel 4 has suffered from "too much money" syndrome. For 1996 was the last year in which it paid the full levy to the ITV companies it had been required to fund since 1992, to the tune of £89m. Since then, as a result of much energetic lobbying by Channel 4, the levy was reduced and then abolished. The result was that Channel 4 suddenly had more cash than it sensibly knew how to spend. So it was squandered, principally on Film 4 and E4, both still loss-making and both damaging, wasteful distractions from the core business, something I think Mark recognises. Channel 4 had been a well-run company that employed about 600 staff and commanded a television market share of around 10 per cent. It still has a market share of about that, but instead has 1,200 people working for it.

That complete failure of commercial management would be bad enough at a plc. We saw much the same sort of thing happen at Granada and Carlton during the dotcom boom, when their riches were blown on ITV Digital and a disastrous deal with the Football League. Hence the merger between the two that was announced yesterday. But Channel 4 is not a plc; it is a publicly owned corporation, like the BBC. The money that the management of Channel 4 has wasted was our money. It is not just a few shareholders who are being bruised by this experience, it is every one of us, whether we watch the channel or not.

This monumental waste of money is something that has been too little remarked upon. Indeed, I am still amazed that the executives at Channel 4 managed to get away with it. The Channel 4 board just let them go on a spree. In my opinion, the funding of the Film 4 and E4 ventures was contrary to the terms of the 1990 and 1996 Broadcasting Acts, which governed what Channel 4 could and could not do. Under the Acts, Channel 4 was required to obtain permission from the Secretary of State for Culture if it wanted to fund non-core businesses. But the ITC and the Government didn't hold them to their promises. With hindsight, that was a bad mistake and against the long-term interests of the channel, as well as an abdication of their statutory duties.

So now Channel 4 is left floundering. No business plan has been published for E4 and Film 4, and there is still no sense in which Channel 4 understands the commercial disciplines that apply in the private sector. Channel 4 claims that Film 4 and E4 will break even in 2005. But that is without factoring in any cost of capital, something that all commercial companies have to do routinely. If Channel 4 had to do that and were on a level playing field with the other broadcasters, then I estimate that Film 4 and E4 wouldn't break even before 2015. Those ventures are clearly peripheral and commercially unsustainable, and represent unfair competition.

Mark Thompson has made a good start in cutting the staff numbers by 200, but, unfortunate as it is for the individuals concerned, he has to do much more to get that cost base under control, and he needs to cut another 200 or so jobs. More than that, he needs to sell or close Film 4 and E4.

And that brings me to a much more radical agenda for Channel 4. It could be privatised, and probably should have been a few years ago when the stock market was booming and when it would have raised a huge sum. Only shareholders can really impose the right sort of scrutiny on a commercial concern. It could be taken over, but only by a company that is better equipped to deliver its remit.

An alternative method for bringing some sort of market-driven discipline to the company would be to impose a "spectrum tax" on it, so that it isn't allowed to operate as if the airwaves were free. After all, Channel 5 and ITV have to pay for their airwaves, so why shouldn't Channel 4 (and the BBC)? This would also place it on a more equal footing with the commercial television companies.

Channel 4 still has enormous strengths. It is still targeting the right sort of audience – ABC1s, 16- to 34-year-olds. Its programming has always been dynamic, despite some recent lapses. Channel 5 shouldn't really be posing a threat. But the number of wasted opportunities are depressing. True, it couldn't do that much against the BBC, funded by its iniquitously high licence fee. But the travails of ITV did offer an outstanding chance to expand its market – an opportunity that was not exploited, and that is a pity.

It is early days, but I wonder if Mark fully realises the scale of the difficulties that face him, and whether his instincts are radical enough to impose the necessary change. It is always easier to expand a company than to shrink it. I wonder also whether he is a little too like his director of programmes, Tim Gardam, also a former BBC executive, and whether someone with a different style might work better. But whoever Mark does decide to go into this jungle with, he and his team should remain absolutely clear about what's wrong with Channel 4 – the problem is commercial, not creative.

The author was chief executive of Channel 5 from 1996 to 2001, and is a visiting professor of media at Oxford and Westminster universities