Examination of Witnesses (Questions 220
- 239)
WEDNESDAY 7 FEBRUARY 2001
MR STUART
PREBBLE, MS
JESSICA MANN
AND MR
SIMON DORE
220. Do you feel that with your own company
you have enough bandwidth? Do you have enough programming really
to sell yourself across the country?
(Mr Prebble) Yes, we do. Everybody would like to have
more bandwidth, but the average family watches six or seven channels.
We have 53 on our platform. If you cannot find the right six or
seven out of 53, then we are doing something wrong. The people
who have not chosen digital television are not saying, "I'm
not doing it, I'm not going there because there are not enough
channels." There are other issues. In our case the biggest
barrier is that people are not living in an area that has digital
terrestrial coverage.
221. What sort of percentage are not in that
area?
(Mr Prebble) Today probably still the best part of
40 per cent. So we have got to our million by addressing an average
of 50 per cent of the nation over the last two years.
222. What are the technical barriers?
(Mr Prebble) They are all about the digital signal
living alongside the existing analogue signal. We have the power
to be much more aggressive and ambitious in rolling out digital
terrestrial coverage than we are.
223. So you would like, from a commercial point
of view, for it to be switched off as fast as possible.
(Mr Prebble) Yes. Absolutely that is our commercial
motivation, and I think there are lots of other reasons as well.
224. Just on OFCOM, switching to OFCOM, the
FCC in Washington does not have a content provider at all. That
is left to the law. Why do you think the British are so obsessed
with content and regulation when you cannot regulate the Internet?
Why is it that we are like that culturally. Does it bug you?
(Mr Prebble) Maybe it is because we have a bit more
to protect. I do think that there is a responsibility on all of
us to try to protect, as best we can, what is best about British
broadcasting in an environment where it is inevitably going to
be harder to maintain standards. The fact of the matter is that
as you get more plurality and people get less revenue to produce
their services, they are in a more competitive environment, there
is more pressure on them, and, historically, this does not tend
to support quality. So I do believe that there needs to be a regulatory
framework that ensures quality of programming.
Chairman
225. Let me, before I call Mr Maxton, look again
at some of the issues that Mr Wyatt has been talking about and
I put to you a little earlier on. There are a large number of
us, including certainly myself, who advocate the abolition of
the TV licences—and certainly free TV licences for all pensioners—on
the grounds that a licence is a tax. It is imposed by the Government
and the Government can relieve people of that tax by transferring
the costs to the general tax payer—which is what is being
done with several million people aged 75 and over, and I would
like to see it done with large numbers more people. So that is
a tax imposed by the Government and free TV licence transfers
the cost of that tax. It is nearly 80 years since that tax has
existed. On the other hand, if one is looking at the development
of digital TV, it is the opening up—greatly to the credit
of those involved—of the commercial market, which is expanding
and is likely to expand exponentially. For the first time, quite
possibly permanently, in this country television is going to be
commercially market led. That has not brought the terrible, baneful
consequences that many of us, including myself at some point,
anticipated. It is one thing for the Government to relieve large
numbers of people of a tax which the Government itself imposes,
but it does occur to me that it is not incumbent upon a government
to spend money in order to enable you or your colleagues and competitors
to continue to open up the market and to make the profits that
you very justifiably have gone into the market to obtain. I would
be interested if you thought further about the idea—which
you yourself agree relates to what would be a steeply reducing
burden—for the industry to accept the burden of connecting
those who cannot afford the equipment, as a result of subscriptions,
to link them into it.
(Mr Prebble) The Government in this country decided
to implement the digital project by giving to a commercial operator
a commercial opportunity to drive forward digital penetration
and basically gave to the free-to-air broadcasters a free ride
on the coat-tails of that. It is a perfectly sensible thing to
do. As you yourself indicated, pretty much everybody who has the
benefit of seeing the BBC digital channels does so because they
have got a free set-top box from ONdigital. Every time we sell
a new subscription to somebody, we are benefiting the free-to-air
services and that is a perfectly sensible thing to do—and
plainly we would not be in this business unless there was a real
possibility that this was going to be a very attractive business.
However, it is very, very difficult and expensive at the moment.
We have to put a very considerable up-front subsidy into every
new subscriber that we gain—and we hope to get that money
back by keeping that subscriber for two or three years. The burden
of doing that, even when people are willing to pay us £10
or £20 or £30 a month, is still very difficult. Our
shareholders will invest more than £1 billion in this business
before it starts to show a profit. The notion that one could put
an additional burden, certainly at this stage, to provide these
devices to people without the prospect of getting revenue from
them is, I fear, not realistic.
226. You are in business to make money and I
think that is a perfectly creditable thing to do. That is what
business is about: launching a project, doing things which you
hope will find a market, and then making a good profit out of
it. That is the way any efficient economy works. But every new
project has initially very, very heavy launch and build-up costs.
That is the way these things work: you speculate in the hope of
accumulating. Some people lose their nerve. When ITV was launched,
Associated Newspapers were so appalled at what appeared to be
difficulties in being profitable that they indulged in the folly
of getting rid of their shares in an ITV company. When Sky Television,
as it was, was launched, people thought that Mr Murdoch was heading
for a major disaster, instead of having now, as he seems to have
done, an enormous success. So the fact that launch costs and build-up
costs are substantial is common to every speculative business.
I quite understand that that is something that you want to emphasise,
but it is a fact, is it not? And you—and, as I say, I make
no criticism, quite the reverse—are only in there because
you hope that, in return for providing what you regard as a good
service, you—and I do not mean you personally, although
I hope you personally—will make a great deal of money and
therefore there might be certain consequences that will follow.
(Mr Prebble) Quite right. Sometimes we feel like a
charity but we are actually not one. I was not attempting to do
any special pleading. Absolutely, we are in business to make money,
and we entirely expect that that will happen over a period. I
think you will understand why I suggest that it would be very
difficult to accept an additional burden in these very difficult
early years. While taking on board everything you have said, I
think one ought also to take on board that many of the factors
that will determine the success or otherwise of DTT have proven
to be much more difficult than was anticipated in good faith by
anybody. I come back to an example, the issue of coverage. Nobody
believed that it would be as difficult as it has proven to be.
It is a difficult business trying to address only 50 per cent
of an available market.
Mr Maxton
227. Can I come back to this question of the
cost of maybe giving everybody a free box, and give a small illustration.
I was one of the first Members of Parliament to buy a mobile telephone.
It was bulky, the battery lasted for about an hour and a half
before it ran out, and it cost me £2,500. With the last one,
the battery lasts for six days, I got the phone as part of a deal
with BT—not because I am a Member of Parliament but simply
because that was the deal being offered—and it cost me nothing.
That is how technology moves all the time: it starts very expensively
and then it gets cheaper and cheaper and cheaper. We are not talking
about switching off now; we are switching off, hopefully, in four
or five years time. By then, presumably, the cost of these boxes
must have plummeted down to what is something which would be very
reasonable.
(Mr Prebble) We must hope so. Sets or boxes are not
any cheaper today, two and a half years after we launched, than
they were when we launched. There is probably something like $25
or $30 of intellectual property in every box before you start
actually building the thing. When this idea began to be floated—perhaps
it is nine months or so since it reached us—we did a lot
of work because, frankly, if it is possible to produce a box that
provides a lot of these basic services much less expensively than
we currently pay for it, then that is something that we would
be very keen to do. I think it is perfectly possible that in four
or five years you will see a significant reduction. I do not believe
it will be £10. I guess all I can say is that our research
suggests to us that we should not be as optimistic as I think
you are about where this will go to.
228. If it does not happen, is it not the likelihood
that other technologies, which are essentially broadband Internet—providing
rather than digital television in the strict sense, will become
your major competitors and in fact drive you out of the market.
ADSL, cable connections, increasing wireless applications, which
will make all sorts of television on demand, Internet on demand,
when you want it, how you want it, where you want it, will these
not become the way in which people will get their television and
radio services rather than through something like your own company?
(Mr Prebble) Some will. Today, the cost of installing
any of those technologies is still very significantly higher than
ours. The other thing that will happen—and I hope happens
very quickly in the DTT business—is that, because of the
natural replacement cycle of televisions, when people understand—as
we should make them understand as fast as possible—that
the next time they buy a television they should buy a digital
set—which is something which collectively we have done far
less work on than we ought to have done—then at that point
the cost of acquisition of a customer for us will be a tiny fraction
of what it is today or what those other technologies will require.
But the fact that it is now 16/17 months since Chris Smith announced
an intention to move towards analogue switch-off, in that time
something like four or five million television sets have been
sold and maybe only 100,000 of them are digital—even though
lots of people have gone into shops, parted with £1,000 or
£1,500 and gone out thinking that they have bought the latest
technology, only to find out, when they get it home, that it cannot
even receive the BBC free-to-air channels—means that there
is a major consumer issue out there that collectively we ought
to be addressing.
229. Yes, I take your point. Could I, however,
ask you on that. Yes, five million have been bought, but it does
not mean to say that five million have gone out of service, if
you like, in replacement. The old television moves up into the
children's bedroom or somewhere else in the house. How does your
technology work with that? I mean, if someone buys into your technology,
can they use it on more than one television, or do they have to
buy you twice in order to use it on two televisions?
(Mr Prebble) You can move it around. You can move
the set or box around.
230. That is not the question.
(Mr Prebble) No, I know it is not, but I thought I
would give you that. To go to your first point, the point about
these five million televisions is not absolutely that they do
not work, but, if you are going to part with £1,000 for a
television, you probably want to think it is going to last quite
a long time, without having to buy this additional device or subscribe
to pay television for it to work after analogue switch-off. People
are not aware at this moment. They go into a shop, buy a very
impressive looking new television, they are entitled to assume
that it is going to last them many, many years without having
to do something else. In this past 16 months, we have made the
mountain we have got to climb four million sets higher than we
need have done if at the time we had said to people, "Just
be aware that sometime around 2006 we are going to be switching
off analogue, so when you are buying a television buy a digital
one."
231. I have got cable. As far as I understand
it, I can get digital cable, but I have not, it so happens, for
some of the reasons implied in my last question, and yet I have
never been told by the digital company that I have to change my
television.
(Mr Prebble) If you have got cable, you are already
a pay TV subscriber. We are talking about people who go in and
buy with no intention of today buying a pay television service,
just go in and buy a new television. They are buying an analogue
set, which, come analogue switch-off, either will not work or
they will need this additional device. If when they went in it
was clear and they understood, what they should be saying, if
they want the set to last more than four or five years without
buying an additional device, is, "Actually I'd like to buy
a digital television." Then this mountain would be getting
smaller, just because of the natural replacement cycle. It is
rather like the Government introducing catalytic converters and
just saying, "OK, from this point you will not be able to
sell a car without a catalytic converter." What happens is
that over a cycle the market changes and everybody has a catalytic
converter. We have not started that process yet.
232. Of the channels which you provide, have
you done any research into which channels are watched most?
(Mr Prebble) Yes.
233. What is the result?
(Mr Prebble) The most watched channel is ITV.
234. And then?
(Mr Prebble) BBC1.
235. So, when our Chairman says people would
not buy your services to get terrestrial channels, he is correct.
But if in fact you were not offering those channels at all and
people who bought your ONdigital could not get BBC1, ITV, BBC2
and Channel 4 and Channel 5, would they buy it?
(Mr Prebble) If, as a result of buying us, they could
not get the free-to-air channels?
236. Yes.
(Mr Prebble) I am sure they would not, but I can see
no circumstances in which that could happen.
237. No. I am just making the point, however.
So the most watched channels are the terrestrial channels, even
now.
(Mr Prebble) Absolutely.
Mr Maxton: And that is true on Sky as
well, on cable—
Chairman: You cannot get ITV on Sky.
Mr Maxton: No, you cannot get ITV. You
can on Sky digital.
Chairman
238. No, you cannot. I am on Sky digital and
I cannot watch ITV. I am relieved of watching it!
(Mr Prebble) That is right. I mean, obviously that
is partly the function of the fact that two-thirds of the country
do not have pay television at all.
Mr Maxton
239. May I follow on from that. If someone does
get your service, can they still get analogue television?
(Mr Prebble) Yes.
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