Report accuses Channel 4 of extravagance

Channel 4 has been branded "extravagant" and some of its more expensive programme deals called into question as it heads towards its first annual loss for nine years.

The £15m spent on buying The Simpsons and the £2m lavished on a new history series fronted by David Starkey are criticised in a report published yesterday by Zenith Media, a leading advertising group.

The study suggests that Channel 4, which is expected to post a £20m loss for 2000, ignored the advertising recession and pressed ahead with expensive buy-ups and investment in new digital channels. In 2001 Channel 4's advertising revenue dropped by £34m.

Adam Smith, from Zenith, said the channel also spent "too much" on generous salaries for its 1,000 staff. But his main criticism was reserved for the broadcaster's investment in new digital channels such as E4, which shows top American series, and FilmFour, which specialises in art-house movies.

"Why do these new channels have to cost so much?" said Mr Smith. "You never get the sense with Channel 4 that there's much hard thinking going on. Mark Thompson [chief executive] now has some hard choices as he's living beyond its means."

Meanwhile David Elstein, the former chief executive of Channel 5, told The Independent that Channel 4 was abusing the fact that it paid no money for the spectrum it broadcasts on – unlike ITV and Channel 5. He added that the publicly owned broadcaster was in effect accountable neither to Parliament nor a regulator, allowing it to set up its digital channels at will.

"It is funding these new channels from that free spectrum," Mr Elstein said. "Channel 4 needs to come under proper economic regulation."

Mr Smith said advertisers wanted to see Channel 4's resources put into its core free-to-air channel. "It doesn't matter whether you have digital channels or not. This is just an obsession with technology. Channel 4's not very clever with spending its money," he said.

E4 and FilmFour are due to break even in 2005, according to Channel 4's business plan. These digital ventures are thought to have cost £68m last year, £40m of which went on E4 – even though it picks up just 1.5 per cent of viewing in homes with satellite TV.

Mr Elstein said that if the costs of setting up E4 were taken into account – as it would be in "normal" businesses– the channel would not break even until 2015. He estimated that Channel 4's free spectrum was worth £100m a year to the broadcaster.

A spokesman for Channel 4, John Newbigin, said the broadcaster was told by the Government in 1997 to set up digital channels. "This was the decision of the Secretary of State [for media] rather than the whim of Channel 4 executives ... All the decline in our profits is due to the advertising recession," he said.

Mr Newbigin said Channel 4 had seen a smaller reduction in advertising revenues last year than Channel 5 or ITV. But he admitted Channel 4 would be cutting costs this year, including bringing down its programming budget.

A common criticism is that under Mr Thompson's predecessor, Michael Jackson, the balance swung away from innovative and cutting-edge programming and too far in favour of populist entertainment.