Chris Smith, Secretary of State for Culture, Media and Sport, wrote to the Independent Television Commission (ITC) yesterday to outline how the funding formula would be wound down.
In 1998 the ITV companies will receive a third, rather than a half, of all of Channel 4's advertising sales revenue that are over and above a benchmark of 14 per cent of the total television advertising cake. And in the following year the levy will be reduced to nil.
City analysts had been expecting the ending of the formula and shares in the ITV companies held steady. Indeed Carlton, which receives more from Channel 4 than any other broadcaster, saw its shares rise 4p to 481.5p.
Since Channel 4 started selling its own airtime in 1993 it has had to give 50 per cent of all revenue above the 14 per cent limit to ITV and has already paid out pounds 257m. It is expected to pay ITV around pounds 85m this year from total advertising revenue forecast to be around pounds 495m this year.
Mr Smith said that he had not given Channel 4 an immediate end to the formula in order to soften the blow to ITV companies.
The transitional year in 1998 was also included because ITV companies would renegotiate their licences with the Independent Television Commission in 1999 and should see the amount they pay to the treasury fall.
Mr Smith has told the Independent Television Commission that he wants ITV to spend half of the money it receives from Channel 4 on its digital terrestrial television service.
He also placed conditions on Channel 4, in return for having the funding formula removed, that should boost the UK's film and television production industry.
He has instructed the Independent Television Commission to change the terms of the channel's licence obliging it to spend the extra pounds 100m it should receive in 1998 and 1999 on more UK and European-produced programmes, more programmes made outside of London and to show fewer repeats. He also wants it to invest in the British film industry to an even greater extent than it does now.
He registered concern that the channel had "lost a little bit of the cutting edge that it had at its outset in recent years," but said that the channel had already told him that it wanted to follow the same path as the changes to its licence under new chief executive, Michael Jackson.
Last year, Carlton Communications received pounds 25.7m from Channel 4 through its London and Midlands franchise holders. Granada received pounds 18.8m and United News & Media pounds 15.2m.
Because of Carlton Communications' acquisition of Westcountry, United's takeover of HTV and Granada's planned takeover of Yorkshire Tyne- Tees the big three owners of ITV stations are set to take even more this year.
For more marginal companies such as GMTV the Channel 4 funds have in the past made the difference between being in profit rather than loss.
The Secretary of State said that Channel 4 would now have to shoulder all the risk of the commercial television market, but advertising industry buyers foresaw no dangers for the broadcaster.
Zenith Media, the country's largest buyer of television airtime, forecasts the channel will take pounds 516m or 19.2 per cent of commercial revenue in 1998 and pounds 542m (19.2) in 1999.
"The profile of Channel 4's audience is very attractive to advertisers," said Adam Smith, head of forecasting at Zenith. "They are light viewers of television, so using the channel adds coverage of the population to their campaigns. It has held its share of audience at 10 per cent despite the growth of satellite and cable - which is better than ITV's record."Reuse content