Select Committee on Culture, Media and Sport Minutes of Evidence

Memorandum submitted by SMG plc



Ownership Regulation

  Cross-media ownership regulations should be replaced by competition rules alone, if the vision of making the UK "home to the most dynamic and competitive communications market in the world" is to be realised in the foreseeable future. Existing regulations hamper the growth and development of UK media owners, create instability within the media sector and ultimately threaten choice for viewers, listeners and readers in the UK.

Transitionary Proposals

  Should this move to competition rules be felt premature, we propose a transitionary system, based on financial turnover, that would allow for the development of UK media owners across separate media sectors, while ensuring continued plurality of ownership within each regulated sector (television, radio and newspapers). This system would also allow for the smooth transition to competition rules based regulation in the future.

Competition and Consumer Choice

  Competition in the UK media sector is increasing dramatically, both among traditional media and with the introduction of new media. This has been accompanied by a diverse range of content for UK viewers, listeners and readers on both a national and a regional level. However, this further heightens the need for UK media owners to invest in the creation of new content and the development of new and existing products. The existing UK media ownership regulations undermine the ability of media owners to gain sufficient scale to be able to invest in the future.


  We acknowledge the Government's proposals to create a single regulator in OFCOM, and hope that this will serve to provide much-needed consistency in approach to content regulation. However, we believe that OFCOM should report to only one Government department and that a regional presence should be included in its architecture. Furthermore, we recommend that due prominence is given to all media that fall within its remit and that this remit should be extended to include the BBC.


  1.0.1  SMG plc (SMG) welcomes the opportunity to respond to A New Future for Communications. The pace of change in the communications industry in the last 10 years has been remarkable, and new legislation to take account of the changes is both overdue and necessary. The environment is competitive, dynamic and pluralistic: the aim to "make sure that the UK is home to the most dynamic and competitive communications market in the world" is laudable and, with the appropriate approach to communications regulation, achievable. The introduction of digital technology has led to convergence, blurring the boundaries between broadcasting, publishing, telecommunications, the Internet and other previously distinct branches of the media, and we note the Government's proposals to create a single regulator in OFCOM.

  While we acknowledge the convergence of media and telecommunications, our submission focuses on what is generally regarded as conventional "media" and, for the purposes of clarity, our use of this collective term is intended to indicate television, radio, newspapers, magazines, outdoor and cinema advertising.

  1.0.2  SMG is a successful, ambitious and growing media company providing information and entertainment services to audiences across the UK. SMG's operations include television, radio, newspapers, magazines, an Internet business and cinema and outdoor advertising. These are as follows:

    —  Scottish Television and Grampian Television—the ITV franchises that broadcast to 95 per cent of the Scottish public;

    —  S2—a pan-Scotland digital terrestrial television service;

    —  SMG Network Productions—which makes network television programmes for ITV, BBC, Channel 4, Sky and overseas broadcasters and is the sixth largest television programme producer in the UK;

    —  Virgin Radio—the national AM and London FM broadcaster of pop and rock music;

    —  The Herald, Sunday Herald and Evening Times—three high quality Scottish newspapers;

    —  SMG Magazines—a stable of consumer and business titles;

    —  Primesight—a national outdoor advertising business;

    —  Pearl & Dean—a national cinema advertising business; and

    —  S1—a recently launched suite of web-sites aimed at Scottish audiences.

  1.0.3  As such, we are perhaps uniquely placed to offer a view on cross-media ownership in the UK. Consequently, this section of our submission focuses principally on the issue of cross-media ownership rules. (4.0 Maintaining Diversity and Plurality)

  1.0.4  Having established a stable base from which to expand, SMG's strategy has been to grow, on a national basis, into the fastest developing sectors of UK media. We are committed to cross-media ownership and we believes that a less constrained regulatory approach to media ownership in the UK will enable the creation of UK media companies with sufficient scale to invest further in their businesses, to the advantage of viewers, listeners and readers and the creative and journalistic communities alike. We further take the view that the current regulatory environment, based as it is on primary legislation, is cumbersome and has resulted in UK media companies being hampered in their ability to develop.

  1.0.5  Separately, SMG's Television, Radio and Publishing Divisions outline our responses to matters relating specifically to those media sectors.

  1.0.6  Further background information on SMG is attached in Appendix A.


  2.0.1  The Government's stated aim is to make the UK "home to the most dynamic and competitive communications market in the world". To achieve this requires scale. We believe that this can best be achieved through the liberation of media companies in the UK to develop responsibly across different areas of media and at a pace that reflects the fast-changing world that is media in the 21st century.

  2.0.2  Regulation that allows one company or group to own media across a number of media sectors, as opposed to dominating a single sector, enables such companies to achieve the necessary scale to invest in products and services to compete effectively with large international groups, whilst, importantly, maintaining plurality within each media sector.

  2.0.3  Cross-media ownership creates stability. Economic changes affecting one media sector can be offset by the performance of other sectors, thereby ensuring that new product development and investment can continue. For this reason, some of the most successful media companies worldwide have built their businesses on the basis of a cross-media platform.

  2.0.4  For the Government's vision to be realised, UK media-owners must be allowed to develop and grow so that they can compete in what is an increasingly European and global marketplace. Even the largest UK media companies lag behind their European and US counterparts by a considerable margin, as the following three examples show:

Approximate Market Capitalisation
AOL Time Warner, (US)
£140.0 billion
Vivendi Universal, (France)
£47.0 billion
Granada Media Group, (UK)
£4.0 billion

  2.0.5  We agree that diversity and plurality are desirable and beneficial, to society in general and the consumer in particular, however it is our view that UK media-ownership rules must ultimately be based on competition rules alone, if the Government's vision is to be realised. We believe that the safeguards provided by competition law, consumer choice and the protection of regionality under the watchful eye of a new single regulator are sufficient and that a move to competition rules is both timely and necessary.

  2.0.6  In addition, the move to competition-based regulation would obviate the need to continually re-visit primary legislation in an effort to keep the UK communications industry at the forefront of development.

  2.0.7  Furthermore, we believe that to continue to restrict cross-media ownership is counter-productive as it undermines the stability of all but the largest media owners and could ultimately reduce choice for consumers, thereby threatening the very diversity and plurality that the Government seeks to protect.

  2.0.8  We would therefore propose that the Government creates the optimum conditions for the development of UK companies, by creating a cross-media regulatory framework that enables growth, thereby allowing UK media owners to achieve sufficient scale to compete effectively on a world stage.

  Lest it be viewed that this proposal would work solely in our own interests, it should be noted that while this would enable the growth of such media owners, it would also create the opportunity for them to be acquired by larger companies.


  3.0.1  Competition is intense and increasing across all media sectors; there is a wealth of consumer choice, a strong appetite for the provision and consumption of regional content and the promise of a powerful, consistent and comprehensive communications regulator. There is a need for a new regulatory framework which must be sufficiently flexible and robust to reflect not only the current environment but that of the future, taking into account the potential explosion in the range and volume of media, enabled by the development of new technology.

  3.0.2  Against this background, where content regulation on appropriate media is the responsibility of a single regulator, we believe UK media-ownership regulations should move from the current system to one based on competition rules alone.

  3.0.3  We recognise that this proposal must stand the test of diversity, plurality, and regionality and believe that this is best addressed by tackling each of these issues under the broad headings of: Competition; Consumer Choice and Regionality, as detailed in the following three sections of our submission.


  4.0.1  We concur with the view expressed in the Communications White Paper that, in the short term, most people will continue to rely on terrestrial television, radio and newspapers for their information and entertainment needs. However, the availability of other media, both traditional and new, is accelerating at a dramatic pace.

  4.0.2  Currently, UK analogue terrestrial television channels must compete with a multitude of channels, both analogue and digital, available through digital terrestrial, cable and satellite platforms; for example, 7.8 million UK homes now receive cable or satellite television. In addition, the BBC have proposals for a further three terrestrial channels.

  4.0.3  UK radio stations compete with an increasingly diverse range of radio offerings, either new analogue licences, Internet radio, digital radio, digital satellite radio and, in time, services through other digital developments.

  4.0.4  Similarly UK newspapers, regional and national, must stand comparison with the best newspapers from around the globe, also available instantly over the Internet every day.

  4.0.5  Notwithstanding the development of new media competitors enabled by technology, competition within the traditional media markets is not only healthy, but growing. In the UK, newspapers readers can select from no less than five national daily broadsheets and five tabloids (not including weekly, free or evening titles). In Scotland, competition is even more intense with nine daily broadsheets and seven tabloids. Additionally, within the last two years, Scotland has also seen the launch of two new titles, one daily and one Sunday. This latter point is noteworthy in that this activity has taken place amidst ongoing price wars as large UK players price discount only in Scotland to squeeze indigenous players.

  4.0.6  Furthermore, commercial television and radio broadcasters in the UK must contend with the increasingly competitive and cross promotional power of the publicly funded BBC.

  4.0.7  As new technologies become available and develop, competitive pressures will only increase, with a more sophisticated range of services available over a wider range of media, not only from the Internet, but also through mobile telephony.

  4.0.8  Against this background, competition within UK media can be seen to be strong, and intensifying, resulting in a diverse range of views and opinions being voiced to UK viewers, listeners and readers. A regulatory system which promotes such competition would protect and enhance this position.


  5.0.1  The significant increase in consumer choice in the UK media sector has led to viewers, listeners and readers becoming more selective in the media that they consume and increasingly sophisticated in their judgement of the quality of content. This in turn requires the providers of media products and services to enhance and improve the range and quality of that which they offer, whilst maintaining pace with the changing needs of those consumers.

  5.0.2  For example, television sports coverage has developed dramatically in recent years through technological enhancements, such as those enjoyed by cricket viewers, and broadcasters now deploy as many as 18 cameras to cover a football match. Entertainment channels too now provide Hollywood quality films on a 24 hours a day basis.

  5.0.3  This requires a level of investment in rights and infrastructure, that can only be supported and sustained by strong, financially viable, dynamic companies with sufficient scale.

  5.0.4  A more liberal market, subject to competition rules that prevent undue dominance of any single sector, will enable UK media companies to continue to produce compelling content for UK consumers whilst also competing on a world stage.

  5.0.5  Conversely, if UK media-owners are prevented from growing and creating a stable base from which to operate, they will consequently be unable to invest in content and new products, resulting in either a diminution of content quality or the disappearance of regional media, which, in turn, would impact on regionality, diversity and plurality.

  5.0.6  The move to a competition rules-based cross-media ownership system would only enhance the range and quality of media made available to them by media owners able to invest in content and product development.


  6.0.1  The existence of strong domestic media players, with a thorough understanding of the needs and aspirations of the viewers, listeners and readers in the geographic regions in which they operate, is in itself a safeguard for the regionality that the Government wishes to protect.

  6.0.2  Indeed, it is this very regionality that serves to differentiate such media from their national and international counterparts. Consumers demand content that they can identify with, that is relevant to them and that reflects their tastes and aspirations. The need to offer something different to a consumer base bombarded with offerings from both domestic and international media ensures that the regional nature of such content is protected. For example, there can be no doubt that regional television news satisfies a demand that would otherwise not be met by national broadcasters. Similarly, regional newspapers present a perspective on events, local, national and international, that reflects the viewpoint of their distinct readerships. Regionality makes a significant contribution culturally and economically. Creating content in and about the regions is important to local economies and promotes and protects the creative industries across the UK.


  7.0.1  However, we recognise that the Government may not wish to move immediately to a competition-based cross-media ownership system and may prefer to put in place, for a period of a few years, measures which, while liberalising the current regime, would apply a measure of control over cross-media ownership beyond that provided by normal competition rules.

  7.0.2  Should this be so, we believe it is possible to introduce a transitional framework that, while applying a lighter touch to ownership control, would also allow for the ultimate move to competition rules alone, if and when the Government felt this to be appropriate, without the need to re-visit primary legislation.

  7.0.3  A number of regulatory schemes have been suggested, based on share of voice, audience reach etc, with weightings according to the relative influence of various media on the public. The implementation of such schemes has proved problematic, due principally to the complexity and the degree of subjectivity inherent in aggregating ownership levels within and across different media.

  7.0.4  Outdoor and cinema advertising, magazines and Internet advertising have survived and thrived without the need for regulation. While these sectors of the market are, and should be, subject to conventional competition regulations, they should remain outwith the scope of any ownership regulation.

  7.0.5  The important issue in formulating such a system is the identification of the relative "media power" of individual media owners. It is our view that the most effective indicator of individual media owners' "media power" within specific segments of the UK media sector is financial turnover.

  7.0.6  Turnover in commercial media equates to advertising revenues; income from newspaper sales; subscription sales and pay-per-view income (in the case of pay television). For the BBC, turnover would be the licence fee. The level of such income dictates the funding available to invest in content, which, in turn, leads directly to a media owner's ability to attract an audience. The size of their audiences reflects the relative positions of individual players within any single sector. This correlates directly to a media owner's "media power". For example, it is ITV's investment in high quality content that results in the network attracting the highest peak-time audiences and, therefore, correlates directly to its "media power".

  7.0.7  Applying financial turnover as a measure, has the following benefits:

    —  It provides a finite, comparable and transparent measure of each media owner's position within a sector.

    —  It embraces the totality of each sector (eg all television—including BBC, ITV, Channel 4, Channel 5, Sky and all other channels).

    —  It takes into account the volume and, where relevant, demographics of audiences.

    —  It accommodates shifts in balance within sectors without the requirement to re-assess the measurement criteria.

    —  It includes all relevant sources of income.

    —  Importantly, it enables the logical transition from sectoral to competition rules, as this is a concept already enshrined within existing competition law.

  7.0.8  We believe these limits should be set at a level that prevents one single media owner gaining significant market power by enabling a minimum of, say, five media owners to operate within each of the relevant sectors of UK media, ie 20 per cent of each market. The specific definition of these sectors would be a matter for the Government to define, however adopting this model, would ensure that no two media owners acting in concert could control any individual sector or market. This is consistent with other sectors, such as banking, where the Government has accepted similar levels of plurality of ownership.

  7.0.9  This level of regulation would ensure plurality of ownership, while allowing sufficient flexibility and scope for media owners to develop across different sectors should they wish to do so.

  This system of sectoral limits relies on two key assumptions:

    —  Sectoral limits are applied only on a UK-wide basis.

    —  Individual sectors are accepted as not generally substitutable.

  These assumptions are expanded upon below.

7.1.0  UK National Market

  7.1.1  So that such a system of regulation can operate fairly and effectively, it is a pre-requisite that sectoral limits can only be viewed on a UK-wide basis. This is a wholly logical and reasonable assumption as the substantial majority of advertising spend in the UK is by national advertisers, out of the London advertising market; while regional media may have geographical limits in terms of audience reach, its advertising revenues must be generated in competition not only with other regional media but with national media also.

  7.1.2  Additionally, it should be recognised that consumers of media have freedom of choice across both regional and national media and, as such, regional media owners must also compete with national media to attract an audience.

  7.1.3  The relative power of media owners in the regions is most appropriately dealt with by conventional competition rules criteria.

7.2  Media are not substitutable

  7.2.1  Consumers want to be informed and entertained how, when and where they choose and often their specific circumstances at any given time dictate the appropriate medium. For example, they cannot substitute television for radio when they are driving their cars. Advertisers also need to have access to consumers when they are most receptive to advertising and in a format that is most appropriate to carry their message. Therefore the laws of supply and demand, and the distinctive characteristics of each medium, preclude the substitutability of individual media.

  7.2.2  It is acknowledged that different media are appropriate for specific types of advertiser and product. For example, financial services companies have not traditionally used radio or television as a main advertising medium for complex financial products due to the requirement to include financial "health warnings" on all advertising. However, radio has proved popular with companies, due to the demographics of the radio audience and because radio can be consumed while accessing the Internet.

  7.2.3  Further evidence that media are not generally substitutable is that little or no cross-selling exists across different media, even where there is common ownership. Indeed, the structure of advertising agencies generally works against anything other than a strictly sectoral approach to advertising sales.

  7.2.4  It is also worth noting that rulings in recent media merger investigations referred to the Competition Commission have recognised that different media sectors are not generally substitutable.

8.0  OFCOM

  8.0.1  We note that the Government proposes to establish a single regulator, OFCOM, to replace the multiplicity of regulators that currently exist. One consideration in this development is that it should provide a much-needed consistency of approach across appropriate media in areas such as taste and decency, where consistent standards must be set and maintained, and the role of such a regulator is clear. We understand that OFCOM will replace the current group of regulators but we do not believe it would be beneficial for regulation to encroach on sectors that are currently thriving without such controls.

  8.0.2  Standards in content quality for television and radio are, of course, subject to regulation also and we would anticipate that responsibility for ensuring such standards are maintained, and that broadcasting licence conditions are observed, should rest with OFCOM. This would provide a safeguard for content diversity.

  8.0.3  However, it is unclear from the proposals contained within the White Paper to which Government department OFCOM will be responsible. DCMS' acknowledged lack of experience in economic regulation and the DTI's corresponding lack in terms of content regulation, leads us to the view that neither of these departments is the appropriate point of reference for OFCOM and that the Government should give consideration to the creation of a new Department of Communications. A single, clear reporting line from OFCOM to one Government department will help to ensure that regulation is interpreted and implemented in a consistent comprehensive and transparent manner.

  8.0.4  OFCOM's role in the maintenance of regional content provision creates the need for a regional presence of its own. The White Paper clearly states that there should be links with relevant policy committees and the devolved assembles (ref 8.7). We would therefore strongly urge that there should be representation from across the UK on the executive and that there should be a network of regional offices, such as currently exists with the ITC.

  8.0.5  Furthermore, while we recognise that the convergence of media and telecommunications technologies has prompted the Government to propose the establishment of a single regulator, there remain issues which are specific to sectors within OFCOM's proposed area of responsibility and we would advocate the involvement of individual sector "experts" to ensure that issues that affect only one or more sectors are given due attention.

  8.0.6  The White Paper proposes the creation of "a more level playing field that is fair between different broadcasters taking account of their differing missions and funding sources" (5.4.1). Under the proposals for OFCOM the BBC is still regulated through its Governors and reports to the Secretary of State for Culture, Media and Sport (5.4.1, 5.8.6 and 5.8.7 Securing Quality).

  8.0.7  The White Paper states in section 5.8.7 that OFCOM will. . . "give formal advice to the Secretary of State on the, often important, market impact of both proposals for new BBC public services and for material changes to existing ones, before he reaches a final decision". This is not independent regulation and it is not compatible with the "more level playing field" to which the paper refers.

  8.0.8  The exclusion of the BBC from OFCOM's regulatory power is, in our view, in conflict with the Government's aim to create a more equitable, transparent and coherent regulatory system. We strongly recommend that OFCOM's backstop powers should apply to the BBC. This does not threaten the regulatory functions of the Governors, nor does it affect the BBC's editorial independence.

  8.0.9  We believe that the existing Governors could continue their role in interpreting the BBC Charter and report to OFCOM, which would also take on the responsibility of approving new licence-funded, or subsidised radio or television services and changes to the existing services.


  9.0.1  We wish to express our concern, along with that of others, at the increasingly, commercial activities of the state-owned public service broadcasters, the BBC and Channel 4. It is not that these broadcasters are commercial per se, but that they use their privileged and protected positions to cross-subsidise these commercial activities which, in our view, represents unfair competition for the commercial sector, whose sole sources of revenue are commercial.

  9.0.2  This practice is particularly unacceptable where these services are not truly universally available or if such services are already, or will be, provided by the commercial sector. Furthermore, this, crucially, diminishes the diversity of public service broadcasting on offer—the core remit of these broadcasters—by diverting funding away from their principal operations. By way of example, the BBC has launched News 24, available only to viewers with access to multi-channel television, in an environment already served by Sky News and more recently by ITN's 24-hour news service. Channel 4, whose remit does not allow it to make a profit, has already launched two subscription-based channels (Film Four and E4), effectively subsidised by the terrestrial channel.

  9.0.3  Not only is such activity unfair, but it also hinders investment in the development of new technologies by commercial media owners who are unable, or reluctant, to compete with their publicly subsidised counterparts. We would urge that all UK broadcasters should be included within the remit of OFCOM to ensure equitable regulation and to guard against an erosion of public service broadcasting.

  9.0.4  Separately, we recognise that it may be the case that the Government wishes to review the current rules on foreign ownership of UK media. The original rationale for such regulations was based on protecting national interests and the need for regulation to provide protection may have receded, however we believe that until such time as UK media owners have been able to develop to the same extent as their foreign counterparts, and until reciprocal ownership opportunities are made available by foreign governments, that the current rules should remain in place.


  10.0.1  The communications industry worldwide is changing at an ever-increasing pace. Competition has never been greater and consumer choice is varied and extensive. UK media owners are seriously off the pace being set by their international counterparts and must be enabled to grow and develop scale, to support and sustain investment in products and services. Cross-media development allows the creation of such scale whilst protecting plurality of ownership within individual media sectors.

  10.0.2  UK cross-media ownership regulation must move to a competition rules-based system at the earliest opportunity if UK media owners are to be enabled to rise to the challenges of the 21st century.

  10.0.3  We urge the Government to grasp this opportunity to liberate the UK communications industry and deliver its own vision of creating the most dynamic and competitive communications market in the world.

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