Are the wheels coming off at Channel 4?

It promises to be this summer's reality-TV sensation: 1,100 Channel 4 staff locked in a modernist building on Horseferry Road, knowing that any day now up to 200 of them will be voted out. Faced with mounting losses and falling ratings, the channel's new boss admitted this week that only radical surgery - from huge job cuts to abandoned film ventures - offers the channel any long-term hope of survival. What has gone wrong at Channel 4?

Under its last chief executive, Michael Jackson, Channel 4 jumped recklessly on the digital bandwagon, investing heavily in websites and digital TV channels that soaked up millions at the expense of programme budgets. Meanwhile, as the company's headcount rose from 650 to 1,100, the channel's advertising and sponsorship income fell away - dropping by £33 million last year alone. And while expensive star signings such as Richard and Judy have won lacklustre ratings, the channel's film arm has produced a string of critical and commercial bombs.

As the new chief executive, Mark Thompson, admitted this week: "If we don't change the schedules, the way we work, the structure and scale of the organisation very radically indeed, we are not going to succeed."

On Monday, Thompson called staff together to warn of "radical change" that would cost a significant number their jobs - between 100 and 200, according to insiders. "We need an organisation which is as lean as it possibly can be, but which is also based around clear tasks, teamwork and a spirit of co-operation," he said, in a speech many present interpreted as an attack on his predecessor's regime. "Creating a leaner, less hierarchical Channel 4 will mean employing fewer people," he warned. "It's going to be a bumpy time."

The bumps began last night, when the 59 staff at FilmFour learned that all but 10 would lose their jobs as its commissioning budget was slashed from £31 million to £10 million. Famous for such British hits as Four Weddings and a Funeral, the filmmaking unit will now become a small in-house department (the FilmFour digital channel will continue as before).

The decision shocked the film world, which accuses Thompson of short-term thinking. "It's a real blow," one film executive said. "FilmFour hasn't failed, but is simply going through the lean period in the seven-year cycle that affects all studios outside the Hollywood system. Channel 4 is only thinking about short-term profits."

All round, profits have been in short supply of late. Last year, the channel made an operating loss of £28 million, as opposed to a £34 million profit the previous year. The film company lost more than £5 million, while the FilmFour digital channel lost a further £11 million, and the E4 entertainment channel lost £37 million. Last week, further pressure was placed on its digital pay channels when a BBC/Sky consortium beat a rival bid from Channel 4 and ITV to secure the former ITV Digital platform. There is no space on the platform for either of its subscription channels.

Liz Forgan, former director of programmes at Channel 4, believes the cutbacks are overdue. "I'm very sorry for all those people now worried about their jobs, but my immediate thought on hearing this was, 'Hooray!'" she said. "Channel 4 has grown far too big and too hands-on - it's ridiculous that it has more than 1,000 staff. It was inevitable that these cutbacks would happen, and Mark's done the right thing. What's really important is to bring it back to a tiny commissioning centre."

The main terrestrial channel continues to face its own problems, not least a falling audience share: as Channel 5 has risen from a 2.3 per cent share to 5.8 per cent over the past five years, Channel 4 has dropped from 10.6 per cent to 10. More recently, audiences have fallen away from RI:SE, the Big Breakfast's replacement, and critics have questioned whether excessive spending - such as £700,000 for each Simpsons episode - is enough to restore the channel's reputation for popular innovation. They argue that, by becoming a top-heavy organisation, Channel 4 has allowed its commissioning process to become unfocused. Thompson responded this week by slashing the number of commissioning departments from 13 to eight.

The channel insists this week's changes do not result from panic. "Mark Thompson made it clear when he joined in March that he'd take a few months to look at what needed to go," a spokesman said. "It's not panic, but a manifesto for radical change to ensure our long-term growth continues."

Perhaps, but the industry is in no doubt that the channel over-expanded under Michael Jackson. Chris Hayward, head of TV at the Zenith media-buying agency, blames the "dotcom madness" which led the channel to "make investments at the wrong time, when dotcoms were spending millions on TV. Now there's a balance coming back. I don't see this week's changes as a sign of ill-health, just C4 getting its house back in order." Michael Jackson was unavailable to respond.

"All credit to Mark for doing this right at the beginning," Liz Forgan said. "Everyone except Rupert Murdoch has got digital wrong. It was a brave and completely understandable thing to get into, and the channel has obviously lost a lot of money. But it's unavoidable, utterly inescapable that broadcasters will need to get into multi-channel digital operations. What's happened is no great disgrace."