Select Committee on Culture, Media and Sport Minutes of Evidence

Examination of Witnesses (Questions 181 - 199)



  Chairman: Welcome, gentlemen, it is a great pleasure to see you here this morning; and Mr Faber will start the questioning.

Mr Faber

  181. Good morning. If you have been listening to the proceedings earlier this morning, you will know that virtually everything comes back to the BBC in this Committee, at some stage or another. And when, as a Committee, we carried out our review last year on the proposed increase in licence fee, the digital licence fee, for the first time, really, we got into the detail of the BBC's web site and their online plans. And now, for the first time, really, we have before us you, today, who are, if you like, the independent sector, the equivalent in broadcasting of the independent companies. So I am very interested by what you have written, and I would like to start with your paragraph 5, where I would like to come back to some of the details about the BBC's web site, but you say: "The mere announcement of such plans" which are plans which the BBC have to extend and to augment their web site and their Online plans, "can be sufficient to deter competition." Can you give us any examples of how that competition might be deterred, or, indeed, if there is any significant reticence in this country to invest, because of what the BBC is doing?

  (Mr Hersov) I think, in this environment right now, where markets are very tough, where funding is scarce, and where funding sources are being much more diligent about the business plans they look at and which ones they fund, from an independent perspective, and the existing media companies, publishing companies, are being much more wary about extending their existing brands onto the Internet, or a little more careful, budget-wise, there is clearly a lot of concern about what competition exists already in the market, and what the larger players are doing. And it is enough for the BBC to hint that they may consider extending their activities into a certain area to deter a start-up company from seeking funding and a venture capitalist from providing that funding.

  182. Your own area, for instance, that of sport, they have greatly increased, augmented the sports section, it now has its own dedicated Online sport. Has that affected you and similar businesses like yours?
  (Mr Hersov) Much of the impact is not visible. The BBC is not taking advertising on its web sites, and nor should it. In the sports area, in particular, a lot of the traffic will go to the BBC sports web site when it could come to the sites like our own, and we survive on the scratchings of a very small, online advertising market, and we survive with those monies, so any traffic that is taken away from us and our comparables does damage to our sector.

  183. Does anyone else have any examples that might be able to help us?
  (Mr Drayton) Certainly, the Telegraph, for example, is thinking about launching a new channel; the fact that the BBC announces that it is about to take advertising on overseas audiences, where 50 per cent of our online is outside of the UK, and, as Robert has said, our revenues come primarily from advertising, that is a big inhibiting factor, if we are to decide on launching a new channel. So; absolutely.

  184. We had another of your members in front of us last week, News International, and their spokesman, as I understood it, she very much played down the significance to them, certainly in commercial terms, of their web site; she denied that it was a loss-leader. But it was very much a question of building their brand, The Times, and The Sunday Times, all their newspapers, online, but that perhaps commercially it was not as significant to them; clearly, not as significant as their bread and butter of publishing newspapers. Would you agree with that?
  (Mr Drayton) Yes, although they have a slightly different model, and I think that they have explored less branded options, with some of their web sites, so maybe they do not see themselves as going head-to-head with the BBC's news and sports services.

  185. One of the things we recommended, in the course of our inquiry last year, was that the BBC should consider incorporating Online into BBC Worldwide, how would you react to that, really, to say that it was free to act commercially within BBC Worldwide?
  (Mr Drayton) I think it would be disastrous, absolutely disastrous, for the whole sector.


  186. Why?
  (Mr Drayton) Because it would distort totally the market-place that we are acting in, it would inhibit even further what we are currently doing, and I think it would put a dampener, if not a stop, to a lot of the-commercially-driven activities.
  (Mr Withey) In fact, I have some parallels to draw on this one, because this is not new ground we are treading on, we have gone through this in the telecom sector, and a number of years ago, when I was at News International, I did a lot of work with Rupert Gavin, in his then role as head of new media at BT, setting up Line One together, and it was clear to us, quite clear, and made very clear, that BT was carefully regulated, its then four operating divisions could not cross-subsidise their activities, and, therefore, the parts of BT that were responsible for the pipe-laying and the public access could not cross-subsidise their commercial ventures, such as Line One. And, to a large extent, I think that worked, and it certainly created, I do not think anyone would argue that we do not have a very diverse and strong telecoms sector in the UK, it is suffering a bit at the moment, as all telecom sectors are, but it certainly released a lot of competition into that market, putting those controls on BT from 1984 onwards. So we have some evidence that careful regulation, through, if you like, Chinese walls, of a business's interests, as it moves into commercial sectors, does work, and we do not see that happening with the BBC.
  (Mr Hersov) Also, if I may, it sets a terrible and very dangerous precedent, where the BBC can incubate new services, funded by the licence fee, and then, when they are mature enough, transfer them to the commercial side.

Mr Faber

  187. That is what you accuse them of doing already, in your document, basically, you suggest that that is what they have been doing, and you are almost implying that the White Paper is closing the stable door after the horse has bolted, the Government is only now taking an interest in how this money is being spent. Would you say that, in some ways, the BBC have been quite crafty, that they have been building up like this, and now, really, in your eyes, anyway, they have achieved what they wanted to achieve?
  (Mr Brown) From the point of view of broadcasters, they were extremely skilful in the way they referred to the Internet as being the `third arm of broadcasting', when, actually, it is not, it is partly that, it is partly publishing, it is more complicated than that. You asked earlier on about specific examples. Let me give you an example from radio, which is excellent, and which is happening now. There is a Classic FM web site, as you would expect, it is becoming increasingly successful, I am able to report that it has two million monthly hits, it has an extraordinarily high retention rate, people stay with that site, on average, 20 minutes a month, which, in Internet terms, is high. We are aware that the BBC are thinking very seriously not only of launching its own classical web site but also making that a commercial venture; there is nothing to stop them doing that, and that is one of the things that causes us concern.

  188. That is very interesting. You also say in your document that, understandably, not surprisingly, you think that OFCOM would be a fairer basis for regulating the BBC and its commercial interests. We will have the broadcasters before us probably next week, or the week after, and, obviously, the independent sector will be saying exactly the same thing. Given the overtly, as you see it, commercial nature of BBC Online, would you, as an organisation, be prepared, say, to break ranks with the broadcasters and say that you would be happy for OFCOM to deal, for the online aspect of the BBC to come under OFCOM, even if the Government were to decide that the Governors should continue to regulate the television output?
  (Mr Hersov) I think the answer is, yes. We must stand for the British Internet publishers, and I believe that the horse really has bolted and the Internet side really must be scrutinised as quickly as possible, there must be transparency, and the regulatory framework put in place, as quickly as possible.

  189. What do you think that OFCOM can do that the Governors, under the auspices of the Secretary of State, cannot do, at the moment?
  (Mr Withey) I think it can scrutinise impartially the activities of the BBC, and comment on them and steer them, in the light of what is happening elsewhere in the market, which the BBC Governors just are not able to do.

Derek Wyatt

  190. Good morning. Can I also compliment you on the nature of your report that you have sent us; it is very stimulating to read it. Can I just ask for clarification, as I am a bit stupid: when you said the BBC might take advertising on its news service from people who access it overseas, do you mean that a BBC server in America, that will deliver advertising, as opposed to something in the United Kingdom, physically, or do you mean something else?
  (Mr Drayton) You are right to raise the question. The announcement that was put out was unclear, it was ambiguous, but, technically, of course, there is nothing to distinguish between those two services; anything which is published on the Internet is accessible anywhere in the world, so it would be an artificial separation, it would not be clear. They are suggesting they provide a channel which would be, as it were, expat. world, and effectively a World Service type, directed at people who are outside of the UK, but there is no way technically to stop people within the UK accessing that channel.

  191. And 85 per cent of the servers are in America anyway, although there is a growing server community in Europe?
  (Mr Drayton) Yes, but that is not really relevant to the consumer.

  192. It is not, but it is just, in law, if the BBC are deciding that, "The servers are in America, we'll come under American law," it is how far they are stretching what are public services. Can I ask a separate question. What was disappointing about the White Paper to me was, there is no definition of what a public service, online service, should be, and you have not actually stretched this either, so you have got a chance now to tell us what it might be?
  (Mr Withey) In terms of a free-to-air?

  193. What should it be then, a free-to-air, online service, what should its constituency be?
  (Mr Withey) Of course, one of the difficulties of answering that question is, the way the Internet has developed, everything is free-to-air, virtually, that is one of the difficulties that the online industry faces in carving up revenues for the services that we all very expensively provide. Particularly, I come from a newspaper background and providing the content that we put online is not merely a question of getting a few journalists to hack it out, we translate into online all of the resources that we have produced for print, which is a very expensive process. Getting people to pay for that has not seemed to be a possibility, so far, some people have tried it, with varying degrees of success. So the model that has developed, in fact, is an advertising- or sponsorship-supported model, and, of course, that plays very much into the BBC's interest, because they are already operating in that market and in that way. For them then to announce that they are going to use, essentially, news as a key driver for advertising commerce, globally, competes head-on with what we are all trying to do, because news is very much a commodity that we produce, as I say, expensively, that brings people to our sites, for other purposes, too, and that then attracts advertisers, sponsors and people who want to sell things to those people. So there is not an easy answer to your question, Mr Wyatt, it is difficult to define what a public service Internet broadcast should be. It is easier, therefore, I think, to say that anyone operating in this territory should operate on the same level playing-field, for example, not be able to use publicly-funded content to drive advertising revenue, because we have to pay expensively for our content, either directly or to third parties.

  194. But if I were a citizen, sitting at home, what would I ask of a public service web site; it would be all the things the Consumers' Association publishes, if we are allowed to use that information, it would be everything the Government does, because I need access, it would probably need some educational material, because that is very important, I would not mind Whitaker's Almanack and Pears Encyclopaedia, a bit of the Stationery Office, and, frankly, that is enough. But that is not what we have got. Actually, they have slipped out, as you say, they have slipped out very carefully; now they just want to take the world. So should not the Government, any Government, perhaps Mr Faber might want to privatise it, I actually wonder if the best thing would be to say no Online from the BBC, it is all private, put it out into the market. You probably would not like that, but then you might be able to bid for the sport bit, or whatever. What should we do?
  (Mr Drayton) My understanding is that one of the prime purposes of a public service broadcaster is to provide quality to the consumer, where the commercial sector is unable to do so, and, clearly, this is where we are most aggrieved that the BBC has trodden into areas where it simply did not need to. In the area of education, that you mentioned, with the last session, that is one area, for example, where we could see the BBC providing a very useful, valid service. I think the other areas you mentioned are absolutely right.
  (Mr Brown) I think it also boils down to being a matter of public funding, rather than public service, and whether, under OFCOM's aegis, supposing they have the power to look at this, OFCOM can decide whether it is worth the money that is being planned on being spent on it, and if, on spending that public money, on whatever venture it is, it is going to have an adverse effect on the market-place. Those are a few judgements, it would seem to me, that OFCOM, for example, could take.

  195. I have argued, and I am arguing, in fact I wrote to the Secretary of State yesterday about this, if the BBC does not want to accept there should be an educational channel, conventionally, on digital television, or a sports channel, or an ethnic television channel, then we, as citizens, should have the right to go to OFCOM, to say, "Well, we'd like to run it," and they should annex some of the money from the licence fee. So, in other words, not 100 per cent of the licence fee would go to the BBC, it would first go to OFCOM, and there would be a discussion about what public service was for the next two or three years, and if the BBC said no, there would be perhaps as much as 10 per cent available, available for you lot, because you could say, "Classic FM fulfils, it's absolutely a brilliant web site, what it does for school-kids is so exciting," and it seems wrong that the BBC should now come and just take it. So are you arguing, in your own submissions elsewhere, that the licence fee should not go necessarily to the BBC, per se?
  (Mr Brown) I think we are probably arguing in the realms of the possible.
  (Mr Hersov) It is very difficult for the BBC, having launched its Internet services already, to roll them back, and that is not what we are saying, right now. But what we are asking for is a regulator that looks at the whole converged world, and all players fall under that regulator, OFCOM; and I think where the White Paper has really disappointed us is that the BBC, once again, has escaped that net.


  196. What you and Mr Wyatt, between you, have disclosed is an insoluble muddle, and it will get more insoluble and more of a muddle as time goes on, because of technological developments. I can see no conceivable reason why, if there is a BBC, it should not have online services, and I believe it would be an intolerable limitation for the BBC not to have online services; on the other hand, by having such services, it competes on extremely unfair terms with you, and that is the dilemma. BBC terrestrial services, funded by the licence, basically are available only to people living in this country, okay, you can get them in the Republic of Ireland, you can get them on the western European littoral area, as it were, by chance, but they are not directed to them, anybody in the world can get any BBC Online services. And that is why we recommended, and why Mr Faber mentioned it, that the Online services be hived off into a commercial segment not funded by the licence. But the question of the existence of the licence is always going to cause controversy, is it not, because, unless the BBC is totally transparent, what is funded by the licence and what is not really is never going to be clear? And, therefore, it seems to me that there are only two solutions for this, neither of which is on the agenda at the moment, but I believe both of them will come forward. One is the abolition of the licence, and two is the privatisation of the BBC; and, in that way, the BBC would be competing with you on fair terms, though, of course, it would have a heritage, which would give it some advantage? There is a question-mark at the end of that, really.
  (Mr Hersov) The answer is, yes.
  (Mr Withey) Yes. You have described the nub of the question though, in that, yes, the BBC is a powerful brand and a powerful set of content, and, indeed, a great service, whatever it does, and it should be; but, the fact is, it is in the market and we need to deal with that problem. One hesitates to use this word, but the subterfuge the BBC might have employed, were it up to such things, is, as Paul said, to describe this as the third arm of broadcasting, and it seemed to get away with that. It is not broadcasting, it is more like publishing than broadcasting, but, in fact, it is a fusion of both, it is a fusion of media, and therefore has different sets of criteria attached to it. I described earlier how it has developed basically as a free service; my view is, it will continue to be largely free-to-air, and so I think the Government has to deal with the problem of the BBC, in this market, in the way it is, and not neglect it.

  Chairman: I think, from your point of view, you are pessimistic, because I believe that the Government, inadvertently, has blundered into starting the solution of this. The free television licence for 75-year-olds is going to lead, in my view, inevitably, inexorably, to free television licences for millions of other people, because they will demand it and it will be politically appropriate to provide it. And once you have got many millions of people getting a free licence, the case for the BBC being funded by a licence, which a very high proportion of the population is not paying, will collapse, and the day cannot come too soon for me.

Mr Fearn

  197. Your main contention, listening so far, is that the Internet should be regarded as a publishing medium rather than a broadcasting medium. Do you not accept that, in the end, the Internet will be used increasingly as a broadcasting medium?
  (Mr Hersov) Not in the medium term; it is much more akin to publishing than it is to broadcasting, there is no spectrum scarcity, barriers to entry are very low, it is very much a many-to-many situation, with numerous inputs and numerous outputs, which is very much like the publishing world. The broadcasting world, there is spectrum scarcity, there is territorial separation, where a licence extends to a certain geographic boundary, and it is very much few-to-many. So, at this point in time, and for the foreseeable future, it is much more akin to publishing.
  (Mr Drayton) The underlying view, and it was underlined in your discussion with ntl at the beginning of the day, is that broadcasting is becoming less like broadcasting, that what we have known as broadcasting, over the last ten, 20 years, is actually disappearing, and the opportunities to diversify and to do many different things, through what were broadcasting channels, now means that we are all in a much more complex game, but that we are not in a simple broadcast mode, whichever of the technologies we are using.
  (Mr Brown) And I think, also, as a broadcaster, I would say it does not matter, what you are saying does not matter; if it transpires eventually that people watch television, or watch the programmes they have selected and listen to the audio they have selected, via the Internet, it does not really matter, and it is not really relevant to the case we are trying to make for what we are trying to do on the Internet.

  198. Thank you. Can I come to a specific point on a group of people now; those that are deaf and hard of hearing mainly use the Internet, 29 per cent of them at the moment use it anyway, and that is increasing, obviously. What is BIPA doing to promote accessibility for this particular group? It does not appear, at the moment, that you are doing the right thing; audio-only is a barrier to them, rather than a help?
  (Mr Hersov) Much of the use of the Internet, right now, remains-text-based, and, as an extension of the publishing world, it remains so, at least for the foreseeable future. Audio and video is growing, but slowly, on the Internet.
  (Mr Withey) We have all been waiting for bandwidth, and still are, basically; when bandwidth does emerge and becomes not a problem, in other words, ubiquitous, always on broadband access to the Internet, then, believe me, there will be a good number of players who want to take advantage of that, new players and existing ones, to provide services to people, and indeed to make money out of it. One of the difficulties we have now is that, the way the market is emerging and with the role of the BBC, to some extent, we are stifling that competition coming through. Mr Faber asked the question earlier about whether we have any practical examples, and mentioned that News International see this as a loss-leader; well that may be true for the bigger players, but there are many, many small players out there in the market, struggling to make an existence, or start an existence, on the Internet. And who knows how many of those are being prevented from entering this market, and what long-term effect that is going to have on the diversity and provision of services in it when we do have broadband.

  199. So you say we are all waiting; when do you expect it to happen then?
  (Mr Withey) One sees different prognostications. I have seen BT say that ADSL will be in 75 per cent of UK homes in five years. I have heard other people say that in five years only 20 per cent, or 28 per cent, of homes will have ADSL. It will come, it will take longer than we all anticipate, it always has done, but when it comes we need a diverse, commercially-driven market sector to exploit it.

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