Media: Has C5 got ideas above its station?

Channel 5 may be the butt of many jokes, but the fledgling TV station can expect to be laughing all the way to the bank very soon.

Someone at Channel 5 obviously has a sense of humour. At the launch of the channel's autumn programme schedule last week the company introduced its offerings accompanied by the eerie Pink Floyd song "Is there anybody out there?" Jokes are what we associate with C5. Jokes about its lack of viewers. Jokes about its reliance on sex. Jokes about its naff game shows.

But, in reality, C5 is no joke. Much of its output may not be to the taste of Independent readers, but its management probably does not care. In the second quarter of this year the fledgeling channel made an operating profit. This year as a whole it will make a small loss with costs at just over pounds 200m and revenue at around pounds 190m. But next year it expects to take about pounds 230m in revenues while costs stay at pounds 200m. In the following years income is forecast to top pounds 300m, eventually rising to around pounds 400m - all while costs stay relatively static. All this means City analysts are putting a valuation of pounds 600m to pounds 700m on the company.

So how does a channel which most people think of as unwatched, whose programmes are routinely mocked as rubbish, and which seems to need soft porn to help sustain its ratings, come to be such a business success?

"This is not rocket science," says David Elstein, the channel's chief executive. "We've always known our job was to hit a particular audience share with a small programming budget. People said we would either fail or do it with `inferior programmes', whatever that means." In fact, C5 profitability reflects the fact that it has hit its ratings targets. In the past 13 weeks its weekly audience share has averaged at more than 5.5 per cent.

C5's formula of tactically bought-in football matches, films and sex has done what needs to be done. Its ratings may not be spectacular, but they don't need to be: Channel 4 and BBC 2 have double the audience share, but they have four times the programme budget. C5 spends pounds 115m a year, which is around 15 per cent of what ITV and BBC 1 spend. Whether It's a Knockout or UK Raw appeal to the critics is beyond the point. C5 makes what Elstein calls "a lot of middle ranking and some bottom end" programmes because that's what the business plan is based on. To understand why people joke about it is to realise why it is successful.

"We were confident that we could do it simply because TV is massively inefficient," adds Elstein. "There are lots of short runs, one-offs and quirky things on in peak time which cost a lot. What we've done here is build ourselves a model of what every programme costs and what it does to our audience share. That was why we had to re-negotiate our news contract with ITN, because it was costing more than it supplied in share terms."

As audiences rise at C5 the station will take more advertising money and be able to spend more on programmes. If it spends more on programmes it will attract bigger audiences and a virtuous circle will form. Despite the frosty reception from certain commentators and critics C5's failure was never forecast by those who matter most - the media buyers and advertising agencies. It is worth remembering that C5 only exists because of advertisers. In the late Eighties, when ITV was going through one of its periodic bursts of high air-time inflation, big advertisers put pressure on the government to release a frequency that could supply more eyeballs to adverts - known as commercial impacts in the trade. More commercial impacts would relieve the inflation in TV advertising if the channel could attract viewers away from the BBC.

So advertisers started with a welcoming attitude to the station. Media buyers were able to use it to lower the average cost of their campaigns because it offered a discount on ITV's average price of 25 to 30 per cent.

The channel was also canny in hiring one of the industry's most respected air-time salesmen, Nick Milligan, who, as sales director, instituted a system of giving free time to advertisers as well as price discounts. As the channel has done better it has given away less air time rather than battle to cut discounts which advertisers grow to expect.

Apart from cheaper advertising the channel has also supplied an audience with a lucrative male bias. "Commercial television is usually skewed to female viewers," says Adam Smith of Zenith Media. "But C5 has managed to attract middle-market men and some of them are under 35 which, for advertisers, is even better. Advertising to these guys is a very crowded street, all the cars and beers are chasing them on ITV and there's not always enough of them to go around. So they [C5] have a very sellable audience."

But its recent success does bring one problem, as identified by media buyers, that of over-delivering on its air-time deals. Media agencies allocate much of their spending on television channels in annual nego- tiations and C5 has to make sure that deals it signs now will reflect the state of its audiences in a year's time.

This rosy picture was not always an obvious outcome for the channel. "There was a wobble pre-launch," says Elstein. "I am not the company's first chief executive. In the approach to its launch the company had underestimated the cost and difficulty of re-tuning everyone's videos. It meant we had to delay launch for three months."

The first thing Elstein did when he took office was get that extra frequency and negotiate as many carriage deals with satellite and cable companies as possible to raise the channel's coverage to 80 per cent of the country. Despite being incomplete, this coverage is what runs at the heart of C5's success. Sky gets into just 30 per cent of homes after 10 years. C5's coverage, which will be 100 per cent when the nation switches to digital, can only see its most valuable asset - its penetration of homes - grow in the years ahead.

"British commercial TV is no longer a licence to print money," Elstein maintains. "It would have been very easy for us to get it wrong because the margin between success and failure was narrow. And look at GMTV. It over-bid for its licence and it is questionable if the service will ever recover its losses.

"C5 was predicted to be a failure. No one even expected us to launch successfully. What I'm looking at now is a complete turnaround - there is no reason why it should not continue to grow. There are people estimating our worth at pounds 600m. I can double that - this business is unique."

So unique that, even as a success, people will still make jokes about it.