The Upside of a downturn by Luke Johnson (Chairman Channel 4) [kwiqq]

Posted on | June 1, 2009 | No Comments

Luke Johnson

I was at The 2nd Annual  iMedia UK Agency Summit conference three weeks back. One of the most inspiring speech was from Luke Johnson, Chairman of Channel4. I think he hit the nail on the head by openly discussing where the television industry and Channel4 is in regards to the current economic crises.

Special thank to iMedia for sending Luke Johnson’s speech. Apologies for missing some bits of his speech from the blog post.

Luke Johnson

Recently I bought an add-on business called Baker and Spice to add to Patisserie Valerie, and we have probably bought it for a year’s profit out of insolvency, so there are bargains to be had.  When people businesses get into trouble the diminution in value is massive, so the bargains are greater if you know what you are doing.  A lot of successful undertakings have been made out of tough times, like war.
During these challenging times, when I start feeling sorry for myself, I think of my wife’s favourite aunt, Daisy.  She is Lebanese and an entrepreneur in the pharmaceutical industry.  In the 1970s she found a supplier of pharmacy supplies in Beirut.  Unfortunately civil war broke out in 1975, so for years she coped with difficult circumstances.  She had borrowed in US$ to start the business, and the Lebanese dollar collapsed against the US$, and interest rates were sky high, so she was under incredible pressures, but she succeeded after 15 years.  She then started a successful business in Kuwait, but had to flee with nothing when Saddam Hussein invaded.  She was an amazingly resilient entrepreneur and has endured challenges in
life and business.

Cost Cutting

Tough times can toughen you up, and companies can be fitter for enduring rigours.  Some companies I have invested in have gone through aggressive cost cutting, but realised afterwards that what went was excess.  Only the lean and efficient will survive, and now is the time to dump unprofitable customers, stop taking unnecessary journeys, finish unproductive working habits, and sell unprofitable parts of the business.  This is genuinely the era of frugality, and survivors will adapt and emerge stronger than ever.
Carrying out changes is very difficult during the good times, but now is the moment, because we all know that no company can sit still, and businesses have to constantly evolve.  Certain large corporates enjoy such huge scale; they have a lot of senior executives who spend their lives engaged in office politics.  No part of our economy is unscathed, and even the public sector is not going to be safe for long, they will also face cutbacks within 18 months.  The overriding priority in most businesses that I know right now is cash, but that simplicity can be refreshing.

Taking Risks

I hope we do no get so scared that we forget to experiment, because then we will not make progress.  In risk adverse times the downsides of a flop can always seem worse than the advantages of a winner, but that can lead to stagnation.  All risk takers have experienced problems of one sort or another, because taking risks is the process of accepting that something might not work, but giving it a go anyhow.  It is right to be daring and original where it makes sense, because you get the rewards if it works, and if it goes wrong, at least you have made an attempt.   We find it comforting to believe that things are infallible, but we know that ultimately the universe is random and unpredictable.  Politicians and commentators can go on about  regulation and governance as cures to risks of life, but trial and error, proactive perspective, and personal responsibility are much more likely to lead to sensible decision-making.  Intelligent managers and entrepreneurs know that taking risks involves setbacks, and hiding failures means you are less likely to learn from them.  If you have the energy and ambition it is up to you to take the plunge in life, it is up to you to take the plunge in life, rather than live a life of regrets.

Conclusion

In my experience, those who take no risks take low expectations; they live in fear of the unpredictable and achieve little.  Life is a series of experiences, and our setbacks help us to march onwards.  We need to rationally analyse risk and put our securities into context.  The digital revolution will continue, and you are at the cutting edge.  Super growth may be stalled, but behavioural changes continue as the country goes fully broadband.  The industry will get more technical and you may have to work harder to justify your commissions, but your knowledge and experience can only become more valuable to clients.  We must remember that we are more disappointed by the things that we did not do in life than the things that we
did.

Questions and Answers

Gavin Sutcliffe, iMedia
You mentioned in a speech that you saw organisations such as Google, Yahoo and MSN as parasitical, because they spend virtually nothing on online content.  What is going to help Channel 4 grab more revenue from the content you currently generate for free?

Luke Johnson
That is our single biggest challenge. The UK TV industry invests £5 or £6 billion a year in content; companies like Google and others invest negligible amounts. Google has higher revenues than the entire commercial television industry, and all that revenues goes to California, so none of it is reinvested in the creative economy here.  That is serious news for us, because Britain punches well above our weight relative to other industries in the arts and creative industries.  We have always had the world’s most creative ad industry, and if the size of our overall creative economy shrinks, then that industry will also suffer.
We are pitching to Government that we should work with the BBC on the £3.6 billion that the license fee gives them, but that is not my preferred solution.  Self help would be the best solution, and if video on demand and revenue generated from our websites were sufficient to replace the £900 million that we get from TV advertising, that would be brilliant, but in the transition from legacy to online the collapse in revenues is not just material, it is dramatic.  In the online world we compete globally, and we are vulnerable because of the English language, making us the first targets for Google etc.  Long-form content is important, and the UK needs to preserve it to preserve jobs; we do not want Italian television.

Participant
We have been talking about how an industry works together when people are mostly looking after their own interested, so I would be interested to hear your view on the Kangaroo project, because it seemed like an innovative collective solution.

Luke Johnson
It was blocked by the Competition Commission, and that was an error; it was against consumer best interests and bad for the economy.  Historically the TV industry has been arrogant and industry, and now Channel 4, ITV, and BBC are all too obsessed about each other.  The TV industry has not recruited anybody from the outside, and the commercial TV sector has been an oligopoly, which that has hindered it.  Analogue terrestrial TV stations are now seeing the ferocity of true global competition, and one hopes they come out of it the other side.  I hope Channel 4 survives, because it produces important programming that matters.  It depresses me that the TV, radio and magazine world are not more engaged.  I have tried my best at Channel 4, but it is not able to give options or give staff ownership, because it is a public sector organisation, albeit generates its own revenues.  Many of the most enterprising people go off to found an independent production or ad business, and they make a fortune.

Chris Nuenar, Acceleration
What are some of the conversations you are having with media executives in the media field?

Luke Johnson
Certain businesses, like automotive and financial services, are still in meltdown, so big chunks of business have temporarily disappeared.   Few of us have seen such as dramatic cutback as has gone on there.  There are one or two categories that have been filling the void, like Government, but that is a short-term win.  It is confidence, and at the moment retailers, distributors, manufacturers, or whatever, you are feeling pretty desperate, and the digital world is one of the few bright spots in the entire economy.  Ad spend is still more vulnerable than some spend categories; we have cut our ad spend also.  You are in a good position in
that you can offer clever, lower cost, and more trackable solutions than bigger traditional advertisers.
There is a great opportunity for small, flexible and informed agencies to take business from big groups who do not have some of the focus and ingenuity that you can offer.  You can take share in these awkward times, because even WPP are starting to feel the harsh affect of conditions, and it is even more so for other giant ad conglomerates.  Those in small, obsessively run, ownership-type organisation have great opportunities.

Participant
What are you doing in terms of bringing together the media sale between TV and digital in Channel 4, because that does involve changing structures and challenging people internally? 

Luke Johnson
Up until recently Channel 4 have not taken the possibilities seriously enough, but we do have some people who bang on about it at every opportunity, and some things are being done.  Spot TV advertising is delivering £850 million a year, and digital is delivering a tiny fraction of that.  It is difficult to see how we can double or treble that, even in the shorter term.  At Channel 4 we are not doing enough of integrating websites with each programme, and the interaction that that can generate and follow through. Despite the pressure on our budgets, we have allocated more relatively to that sort of thing, because every programme should have a websites, and then there are cross-selling opportunities to advertisers.
The current set up for TV advertising suits the big players, but that cannot last.  It suits the big agencies, the marketing departments of big brands, the media, and everyone is going to carry on until they cannot any longer.  At some point that system may start to break down, and then the opportunities for people like you to pick pieces off, will be very significant.

Dave King, Digitalis
Do you think that TV companies should be able to evade the market forces that affect our other businesses?  Consumers begrudge high paid footballers, and yet they spend on big ticket prices, because the content is worth it; do you not think TV companies should be influenced by the same market factors, and it should be about what it is worth to consumers?

Luke Johnson
We are currently completely in the market, and are not subsidised at all.  We will find out next month whether we do get some subsidy, and if we do not we will have to carry on.  We produce some programmes that produce a profit, which cross-subsidise other programmes.   We believe that what we do in terms of public service television matters, which might be campaigning or dramas.  TV is a big spend business, in that it costs the same to make a programme for one person as for a billion, and therefore budgets are not fixed.   A positive for us in the downturn is that we are in conversations with talent and production companies to do things for less, and we are renegotiating all contracts you can, but there comes a limit
where you cannot make quality long-form drama for much less than several hundred thousand pounds an hour.
If the model collapses such that no advertisers will pay enough to justify that, then those programmes will not be made any more, and that will be a great shame.  The industry has to speed up its evolution, and the executives at Channel 4 are focused on reinventing ourselves to cope with this changing world all the time.  I cannot pretend we have come up with a breakthrough, but I do not know any giant legacy media player that has.  However, it is part of our cultural life, and if we were to lose it that would be a great shame.

Alastair Duncan, Alternative Genius
Regarding the Digital Britain Report, do you think the potential intervention by the Government into the whole industry will be a help or a hindrance?

Luke Johnson
It is going to be a close run thing; it is probably an imperfect solution in an imperfect world. I do not know what the report is going to propose, but there are a range of solutions ranging from nothing to giving us a direct piece of the license fee.  None of them are ideal, but we live in tough times.  We should have moved faster, but ultimately the internet was always devised as a free medium, and that is what it has stayed.  Live performance is still very strong, music, comedy and theatre are all doing surprisingly well despite the recession, which shows consumers want certain experiences and are willing to pay for them.  We, as a TV network, do not want to be a loser, but we have a fight on our hands to reinvent ourselves.
The media industry since the Second World War, until a few years ago, got higher returns with les capital investment, higher cash flow and higher margins than virtually any other industry bar pharmaceutical.  Those margins, profits and returns are over, and you can argue the industries are complacent, but they matter more than that, and I hope they are successful at transitioning to a new world.

Participant
Do you think £92,000 is a fair price for a news presenter?

Luke Johnson
It is not too bad; personally I think we underpay our MPs.  We should get rid of a third and let them be paid £150,000 a year, but they can only serve two terms.

Comments