Channel four after the watershed

The future of Channel 4 will be decided this month by management, regulators and the Government. But what kind of vision do they have for the future? Nick Clark reports

Channel 4 is broken, and management, regulators and the Government are locked in talks to secure its future, which should be decided this month. The "radical" decision called for could reshape the entire creative content and broadcasting industries in the UK.

The publicly owned – but supposedly commercially funded – broadcaster has a string of hit shows from Celebrity Big Brother to Shameless and its investment in film was rewarded with six Golden Globes and 20 Bafta nominations last week. But Channel Four also faces funding issues that are spiralling out of control, with predictions that it will be running an annual loss of £150m by 2012.

The Government and Ofcom, the broadcasting regulator, are both due to present proposals on C4's future imminently, but the channel may not like what it hears. Ofcom's job, next Wednesday, is to give its view on the future of public service broadcasting (PSB) – and C4 in particular. It will be followed later this month by the communications minister Lord Carter, who will present his recommendations for bringing Britain into the digital age – C4 is part of that vision.

The two reports are not expected to produce contradictory findings. One source close to the situation said: "This is a political balancing act. Ofcom will throw the ball in the air, and the Government will decide how to proceed."

C4's future ultimately rests with Lord Mandelson and Andy Burnham, the business and culture ministers, who will decide on its fate having heard the recommendations of Lord Carter and Ofcom. But the broadcaster's issues all stem from the seismic shifts in the advertising market over the past decade. Ten years ago, television advertising in the UK was worth £3bn, later peaking at £3.75bn. It is now back at £3bn, and is expected to fall further given the wider economic disintegration which has especially dragged on advertising. A source close to the broadcaster said: "The revenue from television advertising in the UK is shrinking and is no longer sufficient to sustain historic levels of investment in original British content."

C4 had openly admitted that its funding structure was under pressure before Ofcom launched its first review into public service broadcasting in 2004. "It was clear from before then that the funding model was no longer capable of sustaining Channel 4's public service contribution," the source said.

Original British programming is suffering from the change in advertising trends, as much of the spending is now online, C4 chief executive Andy Duncan said.

Online advertising revenue has leapt in the past 10 years from almost nothing to £3bn. In a speech this week, Mr Duncan said: "In the new online world, the bulk of the ad revenue goes straight back to the US." The revenues are going to Google, Microsoft, Yahoo and AOL shareholders, not into developing the next generation of British TV.

The broadcaster makes virtually all of its revenues from advertising. There are some subscription revenues and DVD rights but in 2007 £820m out of £940m in revenues came from advertising. C4 was launched in November 1982 to provide an alternative to the BBC and commercially funded ITV. While it was commercially funded, it also has a statutory duty for a certain amount of public service broadcasting in news, documentaries, religion and the arts. It receives little from the programmes it broadcasts as it is obliged to contract independent producers. There has been some talk of changing the terms of trade to give C4 a higher proportion of the rights, but the idea has been dismissed as raising negligible funds.

The landscape has changed dramatically since 1982, with a proliferation of channels and internet sites competing for advertising revenues. The channel hit severe funding problems in 2007, forcing the Government to pledge £14m before shelving the plan in anticipation of the wider-ranging Digital Britain review. Lord Carter called for a radical solution to the issue last week, adding that it was vital to have an alternative voice to the BBC to provide socially important programming. The Government is unlikely to let C4 die, and it seems to be left with three viable options.

The first is top slicing the licence fee, which currently all goes to the BBC, although this is thought to be the least likely outcome.

Another is to hand control of BBC Worldwide, the corporation's profitable commercial arm, to C4. Despite reports to the contrary, insiders say the option remains on the table.

The BBC itself suggested a third way to try to protect itself. This week, the director-general, Mark Thompson, called for a merger of C4 and Five, the terrestrial broadcaster owned by RTL.

The plan was rejected out of hand by C4, despite interest from RTL. One company source said: "Merging one UK-focused, advertising-funded business with another doesn't solve any of the fundamental issues facing Channel 4. There are always some synergies from a merger but our view is that it will create a bigger company with the same structural issues as before."

The structure of a part-privatised C4 would be dubious. Its current profits are reinvested in programming but a part-private group would divert some of that to shareholders.

ITV fined £220,000 by Ofcom

Ofcom, the media regulator has slapped ITV with a £220,000 fine after it failed to spend enough money on making programmes outside London.

Ofcom yesterday announced it was to fine each of ITV's 11 regional licenses £20,000 "for failing to meet the out-of-London productions quota in 2006 and 2007".

ITV, the largest commercially-funded UK broadcaster, is charged with spending 50 per cent of its budget outside London. It only managed 45.6 per cent in 2006, and 44.3 per cent in 2007.

The regulator said ITV met the other quota of the volume of productions made outside London, hitting 50 per cent in 2006 and 53 per cent in 2007.

Ofcom said it viewed "this failure to be a serious breach of the out-of-London quota". ITV boss Michael Grade said the regulation was "20 years out of date ... Our duty is to invest as efficiently as possible in UK production, not to be an instrument of governmental industrial policy or social engineering".

Ofcom fined Scottish broadcaster STV £10,000 while Channel TV and U TV received £5,000 fines as all broadcast ITV programmes. In a joint statement, they said there were "no greater supporters of 'out of London' production".