Lessons for Channel 4 from Royal Mail’s privatisation

“Modernise or decline”. A service under threat from “the explosion of digital media”. A company in need of “commercial confidence, capital and corporate experience”.

Those were warnings not about Channel 4, though they chime with the tone of last year’s not exactly open-minded consultation about its future. They were instead made almost 14 years ago in the review that paved the way for Royal Mail’s privatisation.

The broadcaster and the postal service are clearly different propositions, even if they do share a regulator and a history of uncomfortable public ownership. Channel 4 is a corporation that has washed its face for years without public support. Royal Mail had a problematic pension deficit and a long-running tussle with its public-sector owners about who would fund a modernisation programme that almost everyone agreed was needed.

Still, in the consultation last year the government held out Royal Mail as proof of its successful record on privatisation. As the culture department put it: “Privatisation has improved access to private sector capital and reduced taxpayer risk without compromising the Universal Service Obligation [the requirement for a six-day a week, single price UK-wide service] placed on the postal service.”

Put aside the economic case for Channel 4’s privatisation: unlike Royal Mail, it doesn’t stack up. Here are some lessons that the UK’s last large privatisation offers for the likely next one.

It need not take that long (but it might). The government wants to sell-off Channel 4 before the 2024 election. Yes, privatisation is a slow process, and yes, it took five years after Richard Hooper recommended the part-privatisation of Royal Mail for the state to sell a stake. But the Labour government came reasonably close to doing it in mid-2009, less than a year after Hooper’s report. The attempt failed in part because of the failure to draw interest at a sufficiently attractive price to overcome the considerable political opposition, something that should resonate this time with a lack of enthusiastic buyers and a potentially hostile House of Lords.

Pressure to dilute public service obligations is inevitable . . . This is obvious from the experience of Channel 5, which recently agreed with Ofcom that it could show less news during prime time slots. But it’s also clear from Royal Mail and the Universal Service Obligation (USO). Eight years after privatisation, the USO survives — and despite findings from a 2020 review by the regulator that reducing it to five days would make little difference, Royal Mail has yet to push for the burden to be eased. Still with an estimated cost benefit of up to £225mn a year, that is merely a matter of time.

Cultural tensions are also likely. Research by Davide Ravasi and Mislav Radic of the UCL School of Management found that the change in Royal Mail’s organisational identity from being a public service to a business triggered tensions about “who we are” that persisted seven years after privatisation. Postal workers continued to think of themselves as public servants — and that meant a higher status than they might otherwise have had. Arguably being part of a public sector broadcaster carries a similar status bump compared with working for one of the many private sector competitors, and with it challenges for Channel 4’s own identity.

Privatisation need not mean the private sector wins out at the expense of the public. Though there was an initial furore about the government underpricing Royal Mail’s float, the shares are now roughly back where they started.

Freedom from a reluctant owner really does have benefits. Despite having the government as its lender pre-privatisation, Royal Mail actually cut its debt financing costs once it moved to the private sector. It has spent £2.7bn on capital expenditure in the seven full years since privatisation without having to wrangle with the Treasury or the business department. And there hasn’t been a strike since privatisation.

But privatisation is not a quick fix for competitive issues. Channel 4 faces competition from the streamers; Royal Mail from the parcel delivery groups FedEx, UPS, Deutsche Post DHL — and Amazon. Longtime sector analyst Robin Byde of Zeus Capital argues that, ironically, Royal Mail’s privatisation almost came too late: a decade or so after European operators had made the move, leaving the UK’s operator subscale. Progress in meeting the competitive threat has been slow. An Ofcom review published in December noted, somewhat damningly, that Royal Mail had “made some (albeit limited) progress on modernising its business for the digital age”. Royal Mail was talking about its “transformation” a decade ago. It’s still transforming now.