For Broadcast June 21, 2007

Maybe it was the reported £40m budget for the new channel? In fact, the figure may be quite a bit lower. According to sources in advertising, more like £27m in year one. Virgin Media may like the sound of the higher figure because rival Sky One has a budget of around £100m.

Whatever the budget, one thing is clear. Since Sky put the squeeze on Virgin's channels the case for pay TV has become even thinner. It is receiving a paltry £5m (down from £35m) from Sky for Living, Bravo, Trouble and Challenge. And Sky has taken its own channels off Virgin because the two can't reach an agreement over fees. UBS says 400,000 subs could leave. So pay TV just isn't paying for Virgin.

Maybe free-to-air is the answer. Virgin will certainly not increase revenues via crumbs from Sky subscriptions because the two companies will probably always be at loggerheads. The answer could be to get Virgin 1 onto every platform - Freeview, Sky and its own - and go and chase those advertising pounds by providing a male-skewed entertainment channel that can beat Sky at its own game.

If Sky is going after Virgin's core business of residential phone and broadband, with its own triple play of "see, speak and surf", then Virgin might as well undermine the pay-TV money model by launching a free-to-air channel. But if I can get a really good channel called Virgin 1 for free then why am I going to subscribe to a cable TV package? And can Virgin 1 make up its £30m revenue gap in ad money? Perhaps, but let's hope its not in two minds about its decision in 12 months' time.

What's happening at Channel 4?

Ofcom reported last week on C4's finances. Let's be clear, Ofcom is considering future funding mechanisms. But let's see if I can advance the debate about the channel's future by figuring out what it's worth should it be privatised.

On the plus side, C4 has 25 years' broadcasting experience and a brand that is one of British television's strongest; it captured about £800m in advertising revenues last year and is renowned for pushing the envelope of TV production. On the minus side - at least from a valuation perspective - C4 has no library of programmes.

With all that in mind, look at same sector valuations. Five has a value of around £740m (based on the sale in 2005 of United Business Media's 35% stake for £247m) and ITV is worth about £3.5bn once you strip out its content assets (based on a rough enterprise value of £5bn for ITV of which about £1.5bn is in content). Then compare ITV's advertising pull of £1.5bn (£1.3bn by ITV1 alone versus C4's £800m).

Reaching for the back of an envelope, you could take all the C4 plusses and argue its value is around £2bn, particularly if new rules allow RTL and Bertelsmann to start a bidding war. If you think C4 is less than the sum of its parts, then the figure might be closer to £1bn.

But privatisation only becomes more than a banker's fantasy if the new Brown government decides to change current policy, re-directing Ofcom's energies away from asking "how can we fix it?" to how can we make the most for the Treasury?

It's difficult, even naughty, to talk about a sale of C4 and not mention public service broadcasting. This is the crux of the matter. What would a privatised C4's PSB commitments cost? And what would be the cost to the British public of losing a competitor to the BBC? That cost is much harder to estimate because it boils down to creativity and diversity in local production and broadcasting.