TV regulator says C4 should merge in order to survive

C4 prefers tie-up with BBC, but Ofcom looks to Five

The UK media watchdog has outlined recommendations to salvage Channel 4, highlighting a tie up with the BBC's commercial arm or the broadcaster Five, as it calls for a public service rival to the BBC. The possibility of diverting some of the licence fee to C4 also remains on the table.

Ofcom outlined its "broadcasting blueprint for the digital decade" yesterday, which also proposed that ITV and Five could reduce their public service commitments; it included a radical shake-up of local news funding.

Ed Richards, Ofcom's chief executive, said: "The choices facing C4 are pretty stark. It has been hit by a combination of structural change and cyclical downturn." C4 has said it could be running an annual loss of £150m a year by 2012.

The final recommendations to government were published yesterday after a 16-month review in a document called "Putting Viewers First". Among the proposals were those relating to C4, and Ofcom called for an overhaul of the broadcaster to create a rival to the BBC. "A new organisation, with public purposes at its heart, should be established; Channel 4 is well placed to be central to this," it said.

It proposed a remit of public service broadcasting content including news, current affairs, older children's programmes, shows made outside London and a range of digital media content.

Ofcom also proposed that C4 could potentially be handed money related to the BBC's digital switchover. The regulator said the surplus already earned in the build up to 2012 could help fund C4, although the BBC has previously suggested the sum could be used to reduce the licence fee.

The annual switchover fee, which is ring-fenced from investment in BBC content, could then be diverted to Channel 4 after 2012 rather than back to the corporation, the regulator said. Ofcom is not looking to topslice the licence fee, which would mean a reduction of the sum invested in content. To secure its future as a larger entity, C4 could look at forming partnerships, joint ventures or mergers, Ofcom added. Specifically options include "a new relationship" with BBC Worldwide, the Beeb's commercial arm. This is C4's preferred option, but the BBC's director-general, Mark Thompson, has been opposed to such a plan. Pact, the independent producer trade body, had also backed this solution.

While it would not rule out other candidates, Ofcom highlighted Five as the commercial organisation that could merge with C4. Andy Duncan, C4's boss, has opposed this idea in recent weeks as making "no sense whatsoever" although Five's parent, RTL, reaffirmed its interest yesterday. C4 claims that the cost savings brought by such a merger would not solve the fundamental issues still facing advertising-funded businesses. Mr Duncan also raised that concern that in a part-privatisation of the channel profits would be given to shareholders rather than being reinvested in content. He said: "We welcome Ofcom's very thorough report, which makes the recommendations needed to respond to the 'huge changes brought about by the transition to the digital era'."

Separately, the regulator proposes to allow ITV and Five limited public service, so they can concentrate on commercial programmes which generate more money.