WPP set to switch off Channel 4 over rates row

The advertising giant has had an almighty bust-up with the broadcaster

Channel 4 bosses are ending 2012 on a bad note after their acclaimed Paralympics coverage did much to restore the broadcaster's reputation for edgy public-service output. They have had an almighty bust-up with their biggest advertising client – Sir Martin Sorrell's WPP – over the cost of TV airtime.

WPP's media-buying arm, Group M, is all but certain to withdraw its advertising from January after talks with Channel 4 collapsed. Insiders said a last-minute truce is unlikely.

Such a dispute is unusual. The last such bust-up saw Carat, a division of Aegis, boycott Channel 5 in 2010. It is thought Group M's British operation has not had such a row with a broadcaster for five or six years, when there was a tussle with ITV.

The sums involved for C4 are serious. Group M, which represents dozens of major clients including FTSE 100 companies, is Channel 4's biggest advertiser, spending £250m a year. That is around 27 per cent of C4's annual ad take, which is close to £1bn.

It is not just C4 and its portfolio of digital channels including E4, More4 and Film4 which are affected. Last year, C4's then new chief executive, David Abraham, also won the contract to represent UKTV's portfolio including the Dave and Good Food channels in a 10-year deal.

So these are high stakes for Mr Abraham, who knows ad land as a founder of the once-hip agency St Luke's, a decade and a half ago.

C4 faces the loss of up to £5m a week in income from January, when its existing two-year deal with Group M runs out.

Those close to C4 insist that the board, led by chairman Lord Burns, the former Treasury mandarin, is supportive.

Group M will also have had to think carefully and consult its clients before taking this radical step of pulling its ads, as C4 is a key way to reach 16 to 34-year-olds through dramas such as Homeland and Black Mirror and comedies such as The In-Betweeners and Two Broke Girls.

The implications of a boycott are dramatic: Group M clients may have to go to other TV channels such as ITV, Channel 5 and Sky to reach certain audiences, which could distort the cost of their TV airtime. Conversely, some non-Group M clients might invest more with C4.

It is sensitive for C4 and Group M. It's in no one's interests for a boycott or public slanging match, and both declined to comment for this article.

The view from C4 is that it has offered improved terms to Group M. They suggest part of the reason that the WPP subsidiary has refused is that it has committed to a number of new business deals with clients and is under pressure to offer cheap prices. They also question whether all of Group M's clients will be happy about not being able to reach 16 to 34-year-olds through C4.

It is certain that Group M doesn't see it like that. After all, agencies are always winning new business, and in the social media age, there are other ways to reach young adults apart from C4 – or indeed TV.

What's more, Group M's great strength is that it can pool all its clients' money to get a better price for advertising than a single advertiser can on its own. With fears about a triple-dip recession, many clients back Group M to get them better value – especially when the TV ad market has been flat this year.

There are industry critics who grumble, usually privately, that Group M uses its dominance as the biggest player to push down prices too far, turning advertising into a commodity. But shrewd observers say that the dispute with C4 is not a straightforward case of a media owner standing up to an advertising Goliath.

Phil Georgiadis, chairman of Walker Media, the media-buying arm of M&C Saatchi, says C4 is in a potentially tricky situation because of its UKTV deal.

As a broadcaster, state-owned C4 has a public-service remit to deliver quality, alternative programming, funded by advertising. But as an ad sales house, C4 now has this deal with a third party, UKTV, to sell advertising at the best possible rates – regardless of the programming content, for which C4 is not responsible.

"I don't know the detail of the discussions, of course, but it is clear that WPP are looking for enhanced terms that could be difficult for C4 to deliver within their deal commitments elsewhere," says Mr Georgiadis, referring to the UKTV relationship.

"As a non-profit-making champion of diversity and quality broadcasting, C4 might just be the company to take a stand against the forces of agency-driven conditional buying. There is, however, an Achilles heel and that is the commitment that they have made to UKTV in a 10-year sales representation deal. This has muddied C4's priorities and perhaps their constitution, and this will have not escaped the notice of WPP's chief negotiators."

Mr Georgiadis adds that C4 will need to ensure the support of UKTV if it is to maintain its hard-line position against Group M. There were rumours last year that C4's relationship with UKTV was strained, as Mr Abraham's team was said to be struggling to deliver what it had promised. C4 denied there were any problems.

There have been other tensions. Earlier this year, C4 had to admit to agencies that its main channel was not reaching as many 16 to 34-year-olds as promised – a legacy of dropping Big Brother.

Both C4 and Group M could yet blink in this row – but Mr Abraham will know that WPP, the world's biggest advertising group, has deep pockets, with a £10bn-a-year turnover.

It doesn't usually pay to pick a fight with Sir Martin.

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