Shareholder Executive

Channel 4

Purpose

Channel Four Television Corporation (C4C)'s core terrestrial channel, Channel 4, fulfils a distinctive public service broadcasting (PSB) remit across the UK. C4C also operates a number of related businesses and services. C4C's public service remit only applies to the Channel 4 television service but all other activities of C4C (including its digital channels) must be appropriate, and connected with the carrying out of C4C's core public service function.

Legal Status and Ownership

C4C is a statutory corporation without shareholders established under the Broadcasting Act 1990.

The Department for Culture Media and Sport (DCMS) is Channel 4's sponsoring Department. Major changes to its legal status and remit are a matter for Parliament. Ofcom, the independent regulator, issues the broadcasting licence, appoints the chair, deputy chair and non-executive directors, subject to approval by the DCMS Secretary of State.

Government Objectives

C4C was established to make a distinctive contribution to PSB. It has a public service remit in relation to its core Channel 4 service to:

• demonstrate innovation, experimentation and creativity
• appeal to tastes and interests of a culturally diverse society
• include programmes of an educational nature
• exhibit a distinctive character.

C4C is also required to assist with the implementation of digital switchover in the UK.

Financial Performance*

£m	2007	2006	2005
Turnover	945	937	894
Operating Profit	(9)	14	57
Profit/(Loss) for the year1	1	15	49
Net Cash flow2	14	13	8
Net Operating Assets	263	278	257
RONA	(3.3)%	5.0%	22.2%
Shareholders' Funds	451	437	414
Dividends	-	-	-

* Channel 4's year end is 31 December
1 Profit/(Loss) for the year is defi ned as earnings post-tax, interest and exceptionals, and before dividends
2 Cash flow adjusted for £56m investment in deposits maturing between 3 and 6 months

Commentary

C4C is operating in a rapidly evolving environment, driven by increased digitalisation and the convergence of broadcasting and telecommunications. These developments pose immediate financial challenges, as well as having implications for C4C's operating model.

During the year C4C commissioned and broadcast programmes that both won critical acclaim and were commercially successful. Channel 4 won eight awards at the 2007 BAFTAs, more than any other single channel, and in early 2008 secured its fifth Oscar in four years.

The C4C group continued to experience demanding trading conditions in 2007, mainly driven by continued fragmentation of the audience base. The core channel's share of audience fell to 8.7% (2006: 9.8%), in a year when all of the main terrestrial channels lost audience share. This decline was offset to some extent by the growth in audience share of C4C's digital channels.

During 2007 turnover increased by around £8m to £945m, with a £48m increase in advertising revenue balancing falling revenues from rights and other sources. Programme and content spend across the C4C group in the year rose 3% to £624m (2006: £608m). The digital TV channels performed well, returning an operating profi t of £16.2m (2006: loss of £17.6m). Overall a combination of flattish revenues and increased costs resulted in a profit after tax of £0.5m (2006: £14.5m).

In 2008 Ofcom published Phase 1 of its Second PSB Review. This recognised that the underlying economics of commercially-funded public service broadcasting are increasingly difficult. A new sustainable model for public service broadcasting is clearly needed, and Ofcom is considering a range of options. Phase 2 of the review will focus on a number of issues, in particular C4C's future. DCMS, in conjunction with BERR, is also addressing the transformation of the broadcasting environment. This is being led by the Convergence Think-Tank, whose work will have implications for C4C's future.

C4C's management set out its response to the opportunities and challenges created by the digital revolution in the Next on 4 review. This exhaustive assessment of C4C's role was based on consultation with staff, audiences and other stakeholders. It outlined C4C's plans to develop its public service role in the digital age, from broadcast into new digital media, in order to remain relevant to audiences and offer effective competition to the BBC.