Media Analysis: Channel 4 faces tough decisions

Chief executive Mark Thompson's defection from Channel 4 to the director-general's job at the BBC gives former Pizza Express entrepreneur Luke Johnson - just four months into his chairmanship at Channel 4 - an unwanted headache. It has also revived familiar questions over the brand's future in a multi-channel age, and what is likely to be a much-consolidated TV landscape.

With a reputation as a visionary, Thompson's exit means that Channel 4 is likely to feel the loss of his ability to read the writing on the wall.

These are early days for multi-channel, but its effects on Channel 4's size in the TV market are already being felt. Its 14% share of commercial audiences in terrestrial homes falls to 11.9% in multi-channel homes.

Although not a serious concern now, it will become more pressing for a broadcaster whose business model is based on delivering large numbers of upmarket, but light, TV viewers - the very ones most likely to migrate to multi-channel - to hungry advertisers.

Furthermore, the relaxing of ownership rules in last year's Communications Bill raises the spectre of a TV industry dominated by three giants - the BBC, ITV and a merged Sky/Five - further reducing Channel 4's power and size in the market. Recognising these threats, Thompson has mooted several models for a future Channel 4 in recent months. One was privatisation of the channel from government ownership, which would see it re-emerge as a trust, allowing it to generate development capital in the financial markets.

Merger option

More radical and interesting was the proposal to beat Sky to the punch and merge with Five. This would provide the scale to bid jointly for Hollywood blockbuster films and TV series as well as for UK sports rights. It would also allow the co-ordination of scheduling across Channel 4 and Five.

In theory, a merger would also provide a bigger audience to sell to advertisers, going some way to counter ITV's post-merger muscle. But until there is greater congruence between Channel Four and Five's audience demographics, the value of merged ad selling is limited.

Nonetheless, there are sufficient benefits for the merger proposal to be taken seriously. Thompson had led early merger discussions with Five, but with his departure, there is now a question mark over the future of the strategy.

Some believe Thompson's departure after just two years in the job has left Channel 4 strategically exposed. 'It is up the creek without a paddle,' says David Elstein, former Five chief executive.

'Luke Johnson is talented, but new to the industry and has a lot to learn,' he adds. 'But Channel 4 doesn't have a lot of time. It needs to decide what strategic alliances it needs to make and to get in there quickly before somebody else does. Even if it finds an experienced chief executive, such a person won't be available immediately.'

A possible solution is to promote managing director David Scott, a 22-year Channel 4 veteran, who would provide continuity. His chances of getting the job appear to have been enhanced by the news that Johnson intends to have a chief executive in place by the end of next month.

Johnson dismisses the notion that momentum toward change will be lost in the interim. 'Mark may have led the initiatives, but it was by no means a one-man band,' he says. 'Other Channel 4 executives have been involved in the discussions and since I don't have any other full-time job I will be spending more time on the day-to-day business.'

As for which strategies and alliances the channel might pursue, Johnson outlines a compendium, which might include a merger with Five, alliances with other media partners, a conversion to trust status and lobbying the government to carve off some of the licence fee to fund Channel 4's public service remit. 'Undoubtedly Channel 4 needs to evolve, which is why Ofcom was bold enough to appoint someone with my commercial background as chairman,' adds Johnson.

But, lest we think that Channel 4 is desperate for any sort of marriage, Johnson stresses that the channel is entering negotiations from a position of strength.

Turning a profit

During Thompson's tenure, a £28m loss was transformed into a £45.3m profit after unprofitable operations and 200 jobs were axed. Aided by the success of E4, the audience share in all TV homes has held up at 10.2%, and the channel still takes 20% of all TV advertising.

More4, a channel targeting viewers in their 30s, will debut next year, and last July's recruitment of Kevin Lygo as head of programming from Five is considered a coup. Lygo's challenge is to develop homegrown programmes to fill the holes in the schedule caused by the end of three high-rating US series - Friends, Sex And The City and Frasier. There are high hopes for recent drama series Shameless and No Angels.

There are also pressing challenges ahead for a new chief executive that are not just about developing long-term strategies. Foremost among these is the need to find a brand identity, according to Simon Downing, head of marketing at Five. 'The brand used to be identified with innovative and compelling public-service programming. But these days I wonder what it stands for,' he says. 'The next 12 months are crucial For Channel 4. It really is at a crossroads.'

DATA FILE

Viewing share

BBC One 25.5%

ITV1 24.2%

BBC2 10.9%

Channel 4 9.8%

Five 6.9%

IDS channels 3.8%

Sky Sports 2.4%

Sky One 1.7%

Sky Movies 1.7%

Viacom channels 1.3%

ITV2 0.9%

E4 0.4%

Other 10.5%

Source: BARB Jan-Apr 2004, share of all TV homes

This article was first published on Marketing