Memorandum submitted by the Independent
Television Commission (ITC)
SUMMARY AND
CONCLUSIONS
1. The Davies Committee did not evaluate
the BBC's request for funds for new digital channels, or comment
on its magnitude. The BBC is proposing an increase of expenditure
at 1998-99 prices of £1,250 million. Of this, £550 million
would be spent on the enhancement of existing services. But well
over half the additional spending, £700 million out of £1,250
million, is apparently intended for new services. This compares
with current expenditure on analogue television (1998-99) of £1,300
million. The BBC's annual expenditure in real terms in 2006 would
be £3,450 million, compared with the present level of £2,200
million. Until the BBC's range of additional digital services
can be demonstrated as representing channels which the private
sector (even under regulation) would not provide, then it is impossible
to form a judgement on additional public funding on this scale
requested by the BBC. This is regardless of how it would be funded,
whether by way of a digital supplement to the existing licence
fee or by some alternative means.
2. The ITC believes that it is wholly unreasonable
for the BBC to embark on such an enormous strategic change without
the fullest public debate on the quantity of public funding involved
and the purpose for which it is required. This debate cannot be
managed by the BBC, which would be a direct beneficiary, but would
have to be carried out by the Secretary of State for Culture,
Media and Sport. Until there has been an open debate on this issue,
we believe that it would be inappropriate to change the current
licence fee formula for the BBC.
3. In addition to commercial services which
the BBC has already launched (ie UK Gold, UK Horizon, UK Arena,
UK Play and UK Style,) it already has a number of "free-to-air"
digital services viz:
— BBC Choice (which it intends to develop
as a third network)
Proposals for new channels to be provided by
a public corporation with its own licence fee funding should be
subject to public scrutiny on terms set by the Secretary of State
rather than by the BBC.
4. Of the current BBC digital channels,
BBC News 24 does not appear to meet the test of public service
broadcasting as defined in the Davies Committee Report. The private
sector already provides high quality, impartial 24-hour national
and international news services (eg Sky News and CNN). As a free-to-air,
licence fee-funded service, there are competition issues as between
BBC News 24 and Sky News since BBC News 24 is provided free whereas
a charge is made by Sky for the wholesale supply of Sky News to
the cable sector.
5. The funding of the BBC's public service
channels must be (and be seen to be) separate from those which
are commercial, and there must be no cross subsidy. This requires
a clear and transparent structure and a defensible allocation
of costs between the two types of activity which must be independently
monitored and controlled.
6. The BBC does have a key role to play
in providing high quality public service channels that will help
to attract the 40-50 per cent of households who, for the foreseeable
future, will not wish or who cannot afford to subscribe to pay
TV. It is partly in this context that any new BBC digital services
need initially to be considered.
7. Given the need, on the basis of the criteria
published by the Secretary of State, to convert 95 per cent of
the population to digital before analogue to digital switch-over
can take place, we believe that the Davies proposal of a digital
supplement would be a retrograde step.
8. We believe that, if the procedures in
paragraphs 2 to 6 above are followed, then any agreed further
funding required for the BBC's digital services should be achieved
by a modest rise in the existing formula for increasing the licence
fee from 2002 onwards rather than through a supplement in respect
of those receiving digital services. Until 2002 the BBC should
use its existing resources (an operating reserve of £539
million and a cash balance of £235 million at 31 March 1999),
growing commercial means, efficiency savings and the proceeds
of the settlements already agreed for 2000 and 2001.
INTRODUCTION
9. The Independent Television Commission
(ITC) is the statutory body responsible for licensing and regulating
commercial television services in the UK. Our fundamental aim
is to serve the interests of viewers in a fast changing television
market by ensuring high programme standards, and diversity in
the range of broadcast programme services. We welcome the Davies
Committee's acknowledgement of the role regulation has played,
and can in future play, in delivering public service outputs from
the private sector of British television broadcasting.
10. We submitted evidence to the Davies
Committee and a copy is attached at Annex 1[37].
We welcome this further opportunity following publication of the
Committee's Report to submit evidence on a matter which is of
such crucial significance to the future shape of television in
the UK, and to the programme services which are made available
to viewers.
PUBLIC SERVICE
BROADCASTING
11. The ITC has a longstanding commitment
to public service broadcasting. We believe that it has a long
future ahead of it—certainly ten years or more. We accept
however, that over this period it will need to evolve, probably
substantially so, not least to adjust to the digital age. Like
the Davies Committee we accept that the term "public service
broadcasting" must be more than a catch phrase. Its rationale
lies in market failure, and its purpose must be to provide services
of a type, or in a way, which left unregulated the private sector
would not do.
12. In relation to the four universal access
analogue terrestrial services (BBC1, BBC2, ITV and Channel 4)
the market failure which underpins the case for public service
broadcasting is the risk of crowding out. That is to say, if all
of these channels were provided on a commercial basis without
regulation the risk would be that, with only four channels available,
revenue and profit could be maximised on the basis of a relatively
narrow range of the most popular programme types of generally
modest quality. It is the purpose of public service broadcasting
to counteract this problem. In the case of the two BBC services
it is achieved through the terms of the Charter and Agreement.
For Channels 3 and 4 the diversity and quality requirements are
set out in legislation—most notably the Broadcasting Act
1990. (The responsibility of Channel 3 licensees to provide regional
programmes is an example of this diversity). For Channel 3 there
was also a quality threshold to be passed as a condition of securing
the broadcasting licences. The proposals which were made as part
of the licence applications became licence requirements and formal
commitments for those who were successful. For Channel 4 there
was a specific remit set out in the 1990 Act which emphasised
the need to innovate and cater for tastes and interests not fulfilled
by the other terrestrial channels.
13. The crowding out argument cannot be
applied to digital television where there is scope for hundreds
of channels. We must look to other interpretations of the test
in the Davies Report, ie public service broadcasting must, "inform,
educate and entertain in a way which the private sector, left
unregulated, would not do" (page 10). So far as the four
universal access channels are concerned their public service responsibility
to achieve diversity protects them from any tendency there might
otherwise be to move towards a form of minority interest or ghetto
broadcasting.
14. In the meantime the BBC is already funding
digital services out of the licence fee which would not, on the
Davies test, qualify as public service broadcasting. BBC News
24 for example does not. Before News 24 came along the private
sector had provided high quality, impartial, 24-hour national
and international news services. Some, like CNN, are of US origin,
but others like Sky News are British. There was no extensive public
debate before DCMS allowed the BBC to embark on News 24.
15. We do not argue that the BBC should
have been prevented from bringing News 24 to the television screen.
We do believe, however, that the BBC should have funded this service
commercially rather than out of the licence fee, as it has with
the Flextech channels. A whole range of commercial possibilities
exist, through joint ventures, advertising, sponsorship and subscription.
Grants from the Department for Education and Employment might
also be considered for the BBC's planned digital educational services.
16. The implications of accepting BBC News
24 (and other digital services) as exercising a legitimate claim
on the licence fee are considerable. First, the sums at stake
are very substantial. The BBC's most recent accounts show that
News 24 alone cost £50 million last year. The Davies Report
notes that this and other digital developments have taken vital
funds away from the analogue services BBC1 and BBC2, available
to every licence payer. But, secondly there is a more important
point of principle and practice at stake. Once we depart from
the Davies test, based on market failure, and what the unregulated
private sector could achieve, there is no obvious boundary or
stopping place to mark the limits of what can be accepted as public
service broadcasting, and thereby a legitimate claim on the licence
fee. Without some form of framework or limit placed upon what
we mean by public service broadcasting in the digital era we cannot
meaningfully address questions of how the BBC is to be funded.
As the Davies Report says, "while the BBC is a public sector
broadcaster, this does not mean that everything it does is public
service broadcasting".
17. We believe that there is an urgent need
for DCMS to review and consult publicly on the criteria which
must be fulfilled before BBC services are accepted as legitimately
exercising a claim on licence fee funding. Thereafter we believe
that the BBC should submit proposals for new services to the Secretary
of State and that before approval is given there should be public
consultation—conducted by DCMS, and not by the BBC.
THE ROLE
OF THE
BBC
18. We fully recognise the BBC's founding
role in the provision of public service broadcasting, and alongside
Channels 3 and 4 (the other two universal access free-to-air terrestrial
broadcasters) the fundamental and indispensable part that the
BBC's services play in the delivery of high quality and diverse
public service broadcasting to viewers. We believe that this role
should continue undiminished in the digital age.
19. We do not believe that the BBC's activities
should be confined to public service broadcasting. That would
be unreasonably restrictive and lead to inefficient under-utilisation
of the skills and assets available to the BBC. The BBC should
therefore be able to provide television services on a commercial
basis in addition to, and alongside, its public service output.
However, we do believe that there must be great clarity about
which services can be treated as public service licence fee funded
broadcasts, and which are commercial. We believe that the funding
of these services should be quite separate, and that there must
be no cross subsidy. This requires a clear and transparent structure
and a defensible allocation of costs between the two types of
activity which must be independently monitored and controlled.
An annual audit certificate is simply not sufficient of itself.
20. The likelihood must be that, for the
foreseeable future, public service broadcasting provided by the
BBC as a public corporation will have to be funded by some form
of taxation. No tax is popular and no system is perfect but the
ITC has always been a strong supporter of the licence fee. We
believe it still has a substantial future ahead of it. So far
as its commercial non licence fee funded services are concerned
we believe that the BBC should have access to the full gamut of
commercial revenues, ie, advertising, sponsorship, subscription,
pay-per-view or whatever.
21. The need for clear and unambiguous separation
between the BBC's public service and commercial services, and
their respective methods of funding rests on two considerations.
First, licence fee payers are entitled to some certainty that
the hypothecated revenues they have provided are being directed
towards the effective and efficient provision of the public service
broadcasts for which they are intended, and are not being used
either to provide or support commercial services, or services
which ought to be commercial because they fall outside the scope
of the market failure upon which public service provision is based.
Secondly, in the provision of commercial services it is vital
for the health of the wider broadcasting system that the BBC competes
fairly, and is seen to do so, with other broadcasters operating
on a wholly commercial basis.
22. Of course, no source of revenue ever
has the potential for unlimited growth, and all organisations
whether households or firms, have to trim their expenditures to
their revenues. They must budget, prioritise and choose, usually
by some form of iterative process. The BBC is no exception. In
the normal course of events much of this prioritisation would
be conducted within the BBC itself, and accountability for it
would take place after the event on the basis of the BBC's Annual
Report setting out its achievements and stewardship of the resources
available to it. All this we accept.
MAJOR STRATEGIC
DECISIONS
23. But where there is a major quantum leap
in aspiration amounting to a major change or development of strategy
and one which stretches over the medium to longer term this ex-post
approach is no longer adequate to the task. The ambitious vision
which the BBC put to the Davies Committee indicates that the BBC
sees the digital age as establishing a watershed of this kind.
24. At 1998-99 prices the Davies Committee
gives the BBC's total spending as £2,200 million. The BBC's
most recent accounts show that spending in this period on BBC1
and 2 together with national and regional TV (ie, the BBC's main
public service television output) was £1,300 million. By
the year 2006, but still in 1998-99 prices, the additional funding
needed to fulfil the BBC's aspirations is put by the Davies Committee
at £1,250 million, ie, just about doubling the existing figure.
Of this, £700 million would apparently be spent on new services,
with another £700 million of expenditure which apparently
could not be specified because of considerations of commercial
confidentiality. Of the additional sum of £1,250 million,
the BBC expects to fund about £600 million by self help,
in the form of efficiency savings and higher commercial revenues,
leaving a funding gap of £650 million.
25. These are enormous figures by any standard.
If the underlying plans were implemented there would be a fundamental
change in the nature and range of the BBC's services, and in its
funding. The vision involved may be an exciting and defensible
one, but what is it? Other than in the broadest terms we are not
yet told. There is very little on all this in the Davies Committee
Report, although apparently the Committee had additional confidential
information which it was not able to divulge.
26. The ITC's position is that it would
be wholly unreasonable for the BBC to embark on a major strategic
change or development of this kind without the fullest public
debate. We are quite clear that this debate must actually be conducted
not by the BBC itself—despite the hugely important role
that it will have in setting out its proposals and arguing its
corner—but by Government through the Secretary of State
and the Department for Culture, Media and Sport. Inevitably, a
process of this kind will take a considerable time to complete.
If for no other reason it should be put in hand immediately.
A HOLDING POSITION
27. But where does that leave the BBC in
the meantime? The digital era is with us now and is developing
rapidly. We wholly accept the Davies Committee's view that the
BBC has a vital role in this formative period. That raises two
issues. First, is there a need—on a temporary, interim basis
pending the Government's conclusions on the BBC's digital strategy—for
some increase in licence fee funding? Secondly, if there is such
a need then what form should the increase take, ie, a general
increase in the licence fee, or a more selective increase applied
only to those viewers with access to digital services?
28. In December 1996 the Secretary of State
(then the Rt Hon Virginia Bottomley) announced a new formula for
increasing the licence fee. (A copy of the Press Release is attached
at Annex 2[38]).
Over a five year period starting in 1997-98 and going through
to 2001-2 the increases were set at RPI; RPI + 3 per cent; RPI
+ 0.5 per cent; RPI minus 1.0 per cent; and RPI minus 2.5 per
cent.
29. The press release made it clear that
the formula took account of the likely proceeds of sale from the
BBC's transmission network and the expected costs of developing
digital broadcasting services. The statement said:
"The non-uniform pattern of annual changes
reflects the need for expenditure on new digital services in the
earlier years. This will be offset in 1997-98 by receipts from
the sale of the BBC transmission system, and in later years by
increased efficiency savings and commercial income".
We now know that the receipts from the sale
of the transmission system were £244 million. In principle
therefore all the relevant issues were in mind when the Government
of the day set the licence fee formula three years ago. Has this
figuring been invalidated since then? We do not know, but we note
from the Annual Accounts that at 31 March 1999 the BBC had an
operating reserve of £593 million and cash balances of £235
million.
THE FORM
OF AN
INTERIM LICENCE
FEE INCREASE
30. But if there is to be an increase in
the licence fee the issue of what form it should take is a matter
upon which the ITC has firm views. The Davies Report recommended
a digital licence supplement of £1.99 a month from 1 April
2000, but falling to 99p a month in 2006. The ITC does not favour
this approach and would have a strong preference for any additional
funding to be obtained by increasing the general licence fee,
though with certain caveats as to the use to which the extra funds
should be put.
31. The reason for the ITC's view is that
we share with the Secretary of State and the broadcasters the
desire to see analogue to digital switch-over achieved as quickly
as possible. The Secretary of State has recently referred to an
indicative timetable within the window of 2006 to 2010. To achieve
switch-over as quickly as this represents a major challenge and
in that context we would be concerned by the disincentive effect
which a digital licence supplement would have on the take up by
viewers of digital equipment and services.
32. We recognise that the approach of charging
a higher licence fee for those adopting new technology is not
a new concept. It has been applied before, most notably in relation
to the introduction of colour television where the licence fee
for receiving the colour services was substantially higher than
for the older black and white services. We do need to bear in
mind however, that despite the very considerable viewer appeal
of colour services over black and white, the switch-over to colour
took 20 years to achieve. (A chronology of the phasing out of
VHF 405-Line Television is attached at Annex 3*.) On this occasion
we must move very much faster. A 20 year timescale is wholly outside
the ambit of current public policy on the switch-over to digital.
33. If the concept of a special (in the
current case digital) supplement has been applied in the past,
so too has the approach of general licence fee increases to pay
for innovations which will not be very widely available to viewers
for some considerable time to come. The licence fee formula introduced
in 1996, and referred to above, is a case in point. We do not
dismiss the equity arguments which favour a digital supplement,
but if the timetable for switch-over is to be achieved it is the
disincentive effect which must be placed at the heart of the matter.
We also note that there is no evidence at present that digital
viewers, who would pay the supplement, are watching BBC digital
services in significant numbers.
34. There is no doubt that a digital licence
supplement will have a disincentive effect on the take up of digital
television. Neither is there doubt that a supplement which declines
over time will have a disincentive effect on early take up. The
issue is whether these effects are likely to be significant. In
the ITC's view they are.
35. Currently the main drivers for the take
up of digital equipment by viewers are BSkyB and ONdigital, to
be followed—quickly we hope—by the cable licensees.
These are broadcasters operating principally in the multi channel
pay TV market. It may well be the case that for viewers of these
services, who are frequently paying £25 a month or more,
a digital licence supplement of £1.99 a month will not act
as a substantial deterrent to digital take up.
36. However, multi channel, pay TV (mostly
in analogue form) has been with us for a decade now, and despite
huge expenditure by BSkyB, cable companies and more recently by
ONdigital it is, sadly, still only available in around 30 per
cent of UK homes. Doubtless this percentage will increase over
time, and we hope very substantially, but within the target timetable
for analogue to digital switch-over the penetration of multi channel
pay television has no realistic prospect of rising to the 95 per
cent of homes which the Secretary of State has indicated as necessary
before switch-over takes place.
37. If the switch-over timetable is to be
achieved, or anything like it, then those viewers not attracted
to multi channel pay television now or for the foreseeable future—including
those who simply cannot afford it—must be persuaded to acquire
digital equipment. In effect what we must do is capture for digital
the whole of the analogue replacement TV market, and indeed accelerate
the rate of replacement. For those viewers who have decided, or
feel compelled by their financial circumstances, not to go beyond
the free-to-air services the attraction of digital equipment is
very much more modest than for those who opt for the pay TV route.
It is against this very modest incentive to switch to digital
that we fear that a digital licence supplement would have a significant
deterrent and delaying effect.
38. For the reasons set out above our preference
would be that if additional licence fee funding were judged necessary
by the Secretary of State then it should take the form of a general
increase in the licence fee, but a modest one sufficient only
to sustain the BBC's move into the digital era pending public
consultation on the twin issues of the definition of public service
broadcasting in the digital era, and the strategy and funding
which the BBC should adopt.
November 1999
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