S4C’s ‘too big to fail’ problem

Gwion Owain explores Welsh broadcasting’s ‘Celtic informational twilight of things that are known but not known’

Gwion Owain is the former chief executive of TAC, the Welsh independent producers association.

The publication of Ian Hargreaves’ review of the support structures in the creative industries (which can be read here) has been welcomed with warm if not glowing praise in policy circles in Wales. One of the review’s most welcome recommendations was a call for better public debate in Wales about S4C.

The extent and quality of public debate in Wales around S4C and its cultural and economic impact do a severe injustice both to the value of the organisation and to Wales as a young democracy. The paucity of the discussion grows out of a nervousness surrounding the funding of the channel and the challenges it would face if disquiet with the service was to be sensed by the UK political establishment. In a devolved Wales this is utterly astonishing. Even if S4C continues to be funded solely from Westminster surely we have both the democratic legitimacy and sophistication as a young polity to debate and defend its value to Wales.

The democratic deficit created by this lack of debate is the biggest threat to the future of the creative industries in Wales since the S4C’s launch. To a sector still almost wholly dependent on the public purse the coming Comprehensive Spending Review will be awaited with a nervous bating of breath. We may indeed hope for the best. However, the reality is that the creative sector including independent television production companies, is likely to face a significant contraction. Questions must be asked about the sector’s fitness to weather the coming storm.

For the past five years S4C’s strategy has been embedded in New Labour’s cultural and economic mindset. This follows a pattern similar to other parts of the economy where a close relationship exists between private companies and publicly funded quangos. The normal rules of inter-industry relationships are sublimated in favour of a cosy cronyism between the semi-state sector and light touch regulatory regimes on the one hand, and their favoured ‘wealth creators’ on the other.

The problems created by this recent economic mindset are discussed by Professor Niall Ferguson, an expert on financial and economic history, in a paper for the Centre for Policy Studies titled Too Big To Live. He argues that it’s not the size of an institution or single company that is damaging, but rather the effects on any sector from concentrating power in a small number of companies or institutions. The implicit assurance then is that that they become too big to be allowed to fail. Choosing winners before the race has created a situation where capitalism’s fundamental principles of competition and the moral hazard of failure, become secondary considerations. This is the basis for S4C’s current predicament.

In a lecture to the IWA in November 2004, S4C’s then chief executive Huw Jones announced that the channel would  offer a limited number of development contracts. These would enable the succesful companies to build structures and invest in talent. According to S4C their open door policy to independent producers was creating a fragmented industry that was unable to compete at an  intenational level, win UK network commissions, or  substantial investment. According to the official vision, this fragmented, unstrategic sector would evolve into a strong industry creating significant wealth for entrepreneurial individuals and a settled sector where talent could flourish.

The logic was clear. If a company failed to win a development contract they would  have to appoach a winning company for development funding. S4C’s own commisionong team was re-structured to centralize power in the position of Director Of Commissioning. Meanwhile, the traditional role of commissioning editor was downgraded to ‘Content Editor’. This was a structure more akin to that of a command economy than an enlightened and pluralist vision of market success.

It is important here not to underestimate the effects of a provision of the Communications Act 2003 which changed the basis of the commercial relationship between producers and broadcasters. Previously all the intellectual property rights were held by the commissioning broadcaster in all but the most exceptional instances. Any revenue flowing from the exploitation of these rights was usually retained by the broadcaster. Following the 2003 Act this bias was removed in favour of a presumption in commissioning agreements that the commercial rights resided with the producer.

It is fair to say that this revolutionised the commercial prospects of the independent production sector. One prominent UK producer declared that “a wall of cash” was entering the sector from the City and financial institutions. There was a flurry of merger and acquisitions activity as companies vied for position. It is fair to say that the new Terms of Trade stand as a beacon of enlightened regulatory intervention and policy making in the creative industries. But, of course, there is a huge difference in scale between the Welsh and UK markets. While the UK television content market is large enough to accomodate consolidation and allow for a plural mix of competing companies, the market governed by S4C is not.

According to Adam Smith a market economy is ruled by a “hidden hand” which directs the small and unruly elements of the economy along the most profitable path by appealing to enlightened self-interest. If it was obvious that success would come to the sector through consolidation, then the hidden hand would be there to bless the union. If an incentive was needed, the hidden hand would point the way. If the hidden hand was weak then S4C and the Welsh Government’s money would offer strength, as well as vision. If you accepted the medicine the hidden hand would nurture you.

On the other hand, if you questioned the hidden hand, then you were lacking in vision, old fashioned and ignorant. If anyone dared stand up to the invisible hand, it would react with an obscene gesture before slamming the door closed on any future funding. To many of us involved in the creative industries at the time there seemed to be no end to the ability of the hidden hand to conjure the ‘correct’ result.

The question which needs to be asked is whether a thorough analysis of the production sector within the context of this wider strategy has ever been undertaken? If it has, very few have seen it. Serious questions ought to be asked of the S4C management and Authority on these issues. Was it appropriate that public money was used in this manner to force consolidation on a sector? On the basis of what legal advice did S4C deem this an appropriate strategy? Furthermore, how can it be explained that in six years not one new company has been formed to serve S4C’s needs? Can this be explained by the fact that there has been a tacit recognition that S4C is not ‘open’ to new entrants? If this is the case, has S4C been acting beyond its powers as a publicly funded body in suppressing competition and entrepreneurship.

In an industry where the technological and financial barriers to entry have almost been eliminated, conventional  economic theory would suggest a regular turnover of suppliers with the succesful ones growing sustainable businesses. Despite a positive regulatory environment and microeconomics which seemed to strongly favour market entry, the fact that in six years not one new company has been formed to serve S4C begs further enquiry. Indeed, it suggests a deliberate  distortion of the market to deter new entrants.

For some years this phenomenon was the stuff of late night bar room conversations. People were uneasy, both with its efficacy as a policy and with the legal basis on which it was considered an appropriate intervention by a public authority. However, many were too scared for their livelihoods to ask questions openly. In summary, probably the best that can be said about the many curious effects of this policy is that it was mired in what the Irish Times columnist Fintan O’Toole called “the Celtic informational twilight of things that are known but not known”.

Five years after awarding the development contracts, very little economic added value has been created as a result of this strategy. Network and internationally funded production in Wales is even lower now than when the strategy was launched. Why? It’s a difficult question to answer but the removal of many of the competitive forces in the sector and the implicit guarantee to the surviving producers that S4C are now dependent on them would be one way of explaining it. Another might be to question the manner in which the companies that have been allowed to survive were selected? Was it on the basis of the quality of programming produced? Was it on the basis of entrepreneurial vision? Or was it something else entirely?

In the context of this policy as an ‘industrial strategy’, it is also fair to say that the financial performance of the production houses selected as these ‘pathfinder’ companies has, with exception, been anaemic. That notable exception is Tinopolis which has been successful in wresting control of a major UK production company and subsequently growing a substantial group. In contrast to Tinopolis’s more conventional but highly audacious, commercial approach, the fortunes of the Boomerang Plus group – the only publicly quoted production house in Wales and arguably the most lauded of the producers selected as exemplar companies by S4C – demonstrates the failure of S4C’s vision

Tinopolis has shown consistent growth and profitability as evidenced in the recent Times list of the most profitable privately owned companies. Yet, despite significant equity investment by Finance Wales, Boomerang has posted profit warnings for two successive years. It has failed to pay its investors a dividend whilst its share price languishes at around half it’s placing value.

Tinopolis has delisted in favour of private equity financing – an astute strategy which should allow the funding of future growth in difficult  times. Meanwhile, Boomerang has languished on a market that promises to become increasingly difficult for small to mid capitalised companies, with a flight from riskier equities as further economic difficulties loom. Needless to say that while Tinopolis has a significant business outside of S4C, Boomerang is still vastly dependent  on its home market.

The other companies favoured at the outset were Green Bay Media, Presentable, and Cwmni Da. Green Bay received £800,000 in equity funding through Finance Wales and Presentable was sold to the super indie RDF on the basis of it’s ownership of Poker formats. Cwmni Da still produces a considerable output for S4C. Each of these companies have their respective merits as do several other in the sector but none can be said to have succeeded in the broader aims of the strategy which was to grow companies that could compete creatively and commercially outside of their home market.

This can mean only one of two things.  Either S4C’s strategy was guaranteed to fail in its aim of creating a more competitive sector. Or, it means that S4C has an understanding of the nature of capitalism that the rest of the Western world has yet to grasp.

This strategy could not work, and has not worked. On the 29th of October 2007, when current S4C Chief Executive Iona Jones wrote in Broadcast magazine –  “They are the five we identified at that time as being very forward thinking and progressive. The others are becoming less of a feature of our commissions” – it was already apparent that the promised gains were unlikely to be realised. A strategy which ignored so many of the basic tenets of capitalism in attempting to create sustainable successes in new markets was bound to fail.

So where now for S4C? A new vision is required urgently. Before questioning the value of the organisation we should have an informed debate on what is needed to serve the audience and our nation in terms of content. We should acknowledge S4C’s important role in our culture and democracy as well as the attendant economic value created. However, it may be wise in the first instance to remember that the history of every organisation is in essence a history of successve management regimes. Serious questions should be asked of the current one.

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