The Big Question: Is Channel 4's future now under threat, and if so what might save it?

Why are we asking this now?

This is a crucial month for the future of British broadcasting, and Channel 4 (C4) in particular, which faces "stark choices" according to the media watchdog Ofcom, which published its blueprint yesterday for public services broadcasting for the next decade. The market is waiting on a report from Lord Carter, the Communications minister, on creating a "Digital Britain" next Monday. Saving C4 – which is now struggling – is the cornerstone of each report.

Why is there so much focus on Channel 4?

The channel has come under severe funding pressures in the past four years as it faces what Ofcom calls, "the huge changes brought about by the transition to the digital era". It went cap in hand to the Government in 2007, and the state pledged a £14m cash injection. This has since been shelved as both the broadcaster and the Government wait on Lord Carter's wide-ranging recommendations next week. C4's chief executive Andy Duncan is adamant that an overhaul of the broadcaster's entire structure is needed to battle the prospective annual loss of £150m by 2012.

How has Channel 4's remit changed?

The media industry is very different from when C4 was set up in 1982. It was launched as a publicly owned but commercially funded enterprise to provide an alternative to the BBC and ITV. Its output was designed to be weighted towards public service. However, the proliferation of digital channels, the growth of the internet, and the global downturn means it faces the most competitive market for advertising revenues. Most of its rivals don't have the same onerous public service remit as the channel either.

What is public service broadcasting?

Public service broadcasting (PSB), describes programmes that some have dubbed "dull but worthy". While that is not strictly fair, the broad definition includes niche programming that tends to be less commercial and attracts less advertising. PSB programming also tends to include big-budget factual programming which might be considered too highbrow to receive commercial investment and might include independent news programming, religious and children's shows. C4's PSB content includes the award-winning current affairs documentary series Dispatches, a recent eight-part show on Christianity and Jamie's Ministry of Food. The argument runs that high quality, informative programming is a social necessity and it must be free for all, rather than for those who can afford to pay on an extra subscription basis. PSB programming often garners the most national and international television awards too.

So why is Channel 4 in trouble now?

The problems stem from a huge slump in the advertising markets. C4 makes almost 90 per cent of its revenues from advertising, but this has been hit heavily by the economic downturn. Television advertising in the UK was at £3bn at the turn of this century and peaked at £3.75bn. It has now fallen back to £3bn and is expected to go lower. That's a real-term cut in funding for the broadcaster, which when coupled by the pressures brought about by growing competition, has placed C4 under even more pressure. That pressure is beginning to show: the broadcaster cut £40m from its programming budget last year and £50m this year.

Who cares?

Anyone who values new, high quality UK programming and films, and wants a competitor to the BBC – and Ofcom found that is the vast majority of the population. It is not just unique drama and current affairs programmes, but C4 also invests in films through Film4. This includes backing for Danny Boyle's latest box office hit Slumdog Millionaire.

What about internet advertising?

The revenue from advertising on C4 channels goes straight back into funding original British TV content. However, this revenue has fallen while online advertising has exploded – it's now worth about £3bn. Andy Duncan admitted last week that C4 has gained no benefit since 75 per cent of the money is spent on US corporations, including Microsoft, AOL, and Yahoo.

Can Channel 4 carry on as things stand?

In a word, no. Ed Richards, the chief executive of Ofcom, said yesterday that failing to act was a decision in itself. Lord Carter wants an independent PSB to compete with the BBC – leading to improvements in both – and yesterday Ofcom called for "a second organisation alongside the BBC, with a sustainable economic model and with a strong public service role... with Channel 4 at its heart".

What about sharing the licence fee?

The first of the options is to slice the BBC licence fee to make up C4's funding gap. The BBC is fiercely opposed to this, unsurprisingly, and neither Ofcom nor Lord Carter are likely to back the proposal. Sources at C4 now admit that they don't feel it would be productive to weaken the BBC's output. There is a possibility, however, that the money currently earmarked by the BBC for digital switchover could be handed to C4 after 2012. The channel says that this would be welcome and would cover the immediate funding gap, but would not help the broadcaster fund itself in the medium and long term.

What did the regulator recommend?

Ofcom favours partnerships, jointventures or a full merger to save C4. One option is to give it the BBC's commercial arm BBC Worldwide. Such a partnership is C4's preference. A spokesman for the channel stated that it would, "best meet Ofcom's key criteria of strategic logic, scale of synergies and sustainability", apparently. The BBC's director general Mark Thompson said Worldwide should not have to subsidise a "failing UK business".

Does the BBC suggest an alternative?

The Beeb proposes that Channel 4 ties up with Five, the broadcaster owned by RTL. Ofcom says that alongside the Worldwide option, this merger is among the most likely. RTL is known to favour such a proposal and the companies would hope to make up the funding gap through cost savings and "synergies". Channel 4 has rejected this option in the strongest possible terms. Duncan said the move made "no sense whatsoever" and would not solve the structural problems for either channel. He is also concerned that profits would be given to shareholders not reinvested in content.

Who will decide Channel 4's future, and when?

Ofcom's report is deliberately open-ended as its advice to the Government and Parliament. The broadcaster's future lies with the Department for Business, Enterprise and Regulatory Reform run by Peter Mandelson, and with the Culture Secretary Andy Burnham. Their decisions are likely to be driven by Lord Carter's report. Ofcom said a decision needs to be made within a year but, together with C4, they called for a solution to be agreed as soon as possible.

Is there now a risk that Channel 4 might disappear?

Yes...

* The funding deficit will soon run to £150m a year and each channel has complaints about merger proposals

* Lord Carter has asked for a radical decision to reshape the creative and broadcasting industries

* Channel 4 could be subsumed by a merger with Five, although it's unlikely to be totally dismantled

No...

* The public, the regulator and the Government want a strong BBC competitor. C4 is the obvious candidate

* It is crucial to the UK's creative output, with original drama, documentary and film funding

* The solutions are relatively stark; the decision should be swift and implemented as soon as possible