House of Commons - Culture, Media and Sport

Select Committee on Culture, Media and Sport Second Report

III. COMPETITION, ACCESS AND ECONOMIC REGULATION

Economic objectives

19. One of the starting points for the White Paper is the Government's ambition to make the United Kingdom "home to the most dynamic and competitive communications and media market in the world".[57] We have observed before that the United Kingdom has important advantages in the new communications and media market, including the English language and strong creative industries.[58] The media and communications sectors are of increasing importance to the British economy. They are growing 11 per cent faster than the rest of the economy.[59] They are important components in the knowledge-based sector of the economy by which increasing store is set.[60] Judged by criteria such as availability of narrowband Internet services, particularly in the home, mobile telephone penetration and take-up of digital television, the United Kingdom appears well-placed compared with other major European countries as a consumer market for new technology.[61]

20. The production sector is vital not only as a source of employment, but also in providing the innovative content that can drive the spread of new technologies.[62] The continuing vitality of more established technologies was also demonstrated in the 1990s by the striking success of commercial radio, a sector that greatly increased its turnover, its income, its audience and the range of services it offered.[63] Broadcast radio employs nearly as many people as broadcast television.[64] The latter production sector is also strong and growing.[65] Through investment in production, such as that by Channel 4, television also contributes to the health of the British film industry, a vital element of the creative communications industries, even though the film industry is understandably not central to the regulatory concerns of the White Paper.[66]

21. It is hard to disagree with the economic ambition set by the Government to make the United Kingdom "home to the most dynamic and competitive communications and media market in the world". It is important, however, that that ambition does not become a platitude, asserted by the Government in the face of inconvenient evidence to the contrary. Performance in relation to that ambition must be subject to proper audit and bench-marking.[67] It is appropriate for the new regulator to conduct such an audit, both because its own regulatory activities will affect the development of a competitive market and because the audit will encourage the regulator to examine other restrictions upon competition for which the regulator is not directly responsible. We recommend that a statutory duty be imposed on the new regulator to conduct and lay before Parliament an annual audit of performance in relation to the stated Government objective of making the United Kingdom "home to the most dynamic and competitive communications and media market in the world". We envisage that this audit would look beyond sectors subject to direct oversight by the new regulator, to the film industry, for example, to broaden understanding of relations between the sectors.

22. One example of a specific intervention in competitive markets by means of legislative action is the independent production quota imposed by the Broadcasting Act 1990 that requires the BBC, ITV companies, Channel 4 and Channel 5 to devote at least 25 per cent of the time allocated to qualifying programmes (broadly excluding news, acquired programmes and repeats) to the broadcasting of a range and diversity of independent productions.[68] It is widely accepted that the quota has contributed both to the health of the thriving independent sector and to the quality of television.[69] The White Paper's position that the quota remained desirable for the moment, but might require adjustments to reflect the changing nature of the independent sector, was broadly supported in evidence.[70]

23. Many new technologies in communications and the media are labour intensive and thus create new employment opportunities.[71] These opportunities are dependent upon a skilled and trained workforce. Trends in the industry, particularly the television production sector, have created a workforce with many freelance employees, making it less possible to rely on in-house training.[72] The White Paper states that "there is a case for OFCOM to have a general responsibility to promote support for training across the wider broadcasting industry", including a power for the regulator to require broadcasters to set out training plans as a licensing requirement.[73] This proposal was welcomed by BECTU and by Skillset, the national training organisation for broadcast, film, video and interactive media.[74] Channel 4 argued that the Government should go further and set for other broadcasters the statutory targets for training expenditure that are already in place for Channel 4.[75] We are not convinced that inflexible legislative provisions relating to training expenditure by all licensed broadcasters are desirable, but we support the granting of a power to the new regulator to promote training activities, where appropriate with specified universities, that are proportionate to the public service obligations and privileges of particular licensed broadcasters.

The priority of competition regulation

24. The White Paper proposes that OFCOM's central regulatory objectives should be:

"· protecting the interests of consumers in terms of choice, price, quality of service and value for money, in particular through promoting open and competitive markets;

· maintaining high quality of content, a wide range of programming, and plurality of public expression;

· protecting the interests of citizens by maintaining accepted community standards in content, balancing freedom of speech against the need to protect against potentially offensive or harmful material, and ensuring appropriate protection of fairness and privacy".[76]

The White Paper acknowledges that, "in the context of any particular decision falling to the regulator, these objectives may pull in different directions, and it will then be for the regulator to strike the right balance".[77] The Government envisages the governing body of the regulator resolving "any conflicts between the regulator's different objectives in a clear and transparent way".[78]

25. The Green Paper that preceded the firmer proposals of the new document stated:

"The regulatory process starts with Government. Regulators must have a clear legislative framework within which to operate. With greater clarity of duties and objectives comes improved accountability for their delivery—to Parliament, to Ministers and to consumers."[79]

Some evidence called into question whether the greater clarity envisaged by the Green Paper had been provided in the White Paper. The ITC considered that there was "an inherent tension in OFCOM's prospective duties" and that it would be wrong to leave the resolution of such tensions entirely to OFCOM, suggesting instead that Parliament provide guidance on the matter.[80] A similar point was made by ntl: "There is no indication of how OFCOM should attempt to balance these objectives, which risks lack of clarity, inconsistency of rules and compromising all three objectives".[81]

26. BT suggested that there was a tension within the first objective, combining as it did the distinct issues of consumer protection and of the promotion of open and competitive markets.[82] Consumer protection is a desirable objective, but it is distinct from the promotion of markets, which is a means to other ends as well. The favoured solution of both the ITC and ntl was to establish the promotion of open and competitive markets or competition as the primary objective of OFCOM.[83]

27. We are not convinced that such an approach is desirable. Nevertheless, we are concerned at the lack of clarity both in the phrasing of the objectives and in their intended priority. At one stage, the White Paper refers to consumer protection as "a principal duty" of the regulator and the apparent primacy of this duty is reinforced by its placement as the first of the three objectives.[84] We would not wish to see the new regulator perceived simply as a consumer watchdog. We recommend that the new regulator be given distinct objectives relating to consumer protection and to the promotion of open and competitive markets. We further recommend that the Government prepare policy guidelines for the new regulator on matters affecting the priority of its different objectives to be debated as part of the legislation giving effect to the proposals in the White Paper.

Access and sector-specific regulation

28. In 1998 we considered the impact of growing competition and of enhanced powers for competition regulators such as the Office of Fair Trading upon future economic regulation of broadcasting and communications. We heard suggestions that sector-specific economic regulation of these sectors was no longer necessary.[85] We rejected this view. We concluded that there would be a need for "swift, coherent and effective regulation of infrastructure and gateways" and that this regulation would "require sector-specific skills and focus".[86]

29. The White Paper indicates that the Government is of the same view. The document states that OFCOM will have concurrent powers with the Office of Fair Trading to exercise Competition Act powers for the communications sector and that OFCOM may rely increasingly upon such powers, but that OFCOM will also have "additional sector-specific powers" to "ensure that there is fair access to dominant network systems for both content providers and infrastructure competitors".[87] The ITC, ntl and Video Networks Limited all indicated that progress in opening up networks to new services would be a key factor in determining OFCOM's success.[88]

30. The importance and sensitivity of these regulatory issues were illustrated by the concerns evinced by witnesses about the operation of current and future obligations to provide certain channels on all networks. Doubts were expressed both about the fairness of charges levied and costs incurred by networks for carriage of certain free-to-air channels and about the possible burdens associated with additional channels with "must carry" obligations.[89] BSkyB contended that apparent differentials in charging policies between satellite and other networks reflected a fundamental difference that costs were incurred for satellite operations to ensure that British channels were not available abroad whereas there were no equivalent costs for terrestrial or cable transmission.[90] The White Paper proposes that responsibility for the regulation of such matters be transferred from the Office of Fair Trading to OFCOM.[91]

31. We support the proposals in the White Paper to grant sector-specific powers to the new regulator. The exercise of these powers will have a vital role to play in the continued development of accessible networks and fair and competitive markets. It is appropriate that such powers be exercised by the new regulator.

Media ownership

32. In addition to the economic benefits that flow from a competitive, regulated market in communications, competition also produces plurality. However, while the White Paper accepts that "fostering competition is the first step to promoting plurality in the media", the Government considers that there may be a continuing need for "backstop powers to underpin plurality of ownership and a plurality of views in the media".[92] The White Paper is not clear about what form such backstop powers might take. When the Government embarked upon consultation on communications reform in 1998, no reference was made to possible changes to the restrictions on media ownership in the Broadcasting Acts 1990 and 1996. Accordingly, the Government has only recently embarked upon consultation on media ownership controls.[93]

33. As an exception to the generally tentative approach, the White Paper makes specific proposals relating to ownership of certain ITV licences.[94] Some of these changes were proposed by the ITC and they were supported by both Granada plc and Carlton Communications plc in evidence.[95] Mr Stuart Butterfield, Managing Director, Granada Broadcasting, looked forward to a possible move from "the rather hobbled federal system which has existed for the past 40 years to a unitary structure which we believe is the only way to compete both domestically and internationally".[96] He thought that such a move would enable there to be "a strong British player on the worldwide scene, which does not exist at the moment".[97] The White Paper refers to the possible benefits of "streamlining the strategic decision-making process within ITV, and promoting the international standing of ITV companies", but Mr Smith emphasised that further amalgamation of ITV companies would remain subject to the normal provisions of competition law.[98]

34. The White Paper proposes that the increased possibilities for the further consolidation of ITV should be balanced by continued regional obligations in licences for ITV companies, with particular provisions to review regional obligations when ownership changes.[99] BECTU emphasised the need to ensure such obligations were maintained in practice, with particular regard to regional news and the contribution of regional production to network programming.[100] ITV and its component companies saw the regional commitment as crucial to ITV's continuing public service identity in the digital era and showed no wish to see regional obligations reduced.[101] The ITC told us that discussions were already taking place about whether there should be legislative provision for a single ITV licence with regional requirements or whether separate regional licences should be retained. The ITC saw merits in the retention of regional licences.[102] So do we. We recommend that, notwithstanding the proposed removal of specific legislative barriers to further ITV consolidation above and beyond the general provisions of competition law, separate licences be retained for each ITV region, including provisions relating to regional production and the contribution of each region to network programming. We further recommend that there be a legislative obligation upon the new regulator to maintain a network of offices in the nations and regions of the United Kingdom to facilitate effective monitoring of compliance with regional obligations by broadcasters.

35. While the Secretary of State appeared to view competition law and licensing obligations as providing sufficient safeguards with regard to ITV, he was not convinced that this was the case in other sectors. In the White Paper and in his oral evidence, a distinction was drawn between "diversity"—defined as the range of different programmes and services available to viewers and listeners—and "plurality"—viewed as being about the choices viewers and listeners were able to make between different providers of such services.[103] The value of this distinction was noted in evidence,[104] but it does not, of course, necessarily follow that there is a clear public interest in specific protection of both in all cases. It was suggested by SMG plc that the stability available to larger media owners was crucial to the investment in content and new products that produced diversity in output.[105] Lord Gordon of Strathblane made a related point in the context of radio ownership:

"From the point of view of the listener, I would suggest that plurality of ownership, far from producing diversity of output, may in fact reduce it for reasons both of motivation and availability of resources. It is, perhaps, obvious that if a single owner has several radio stations in the one marketplace, it is in his own self-interest that different services will be provided and listener choice enhanced."[106]

36. Radio ownership is currently controlled by a points system, whereby licences are awarded points according to the size of the population covered by the service and no organisation can control licences accounting for more than 15 per cent of the total number of points.[107] We received evidence that these restrictions were limiting investment in the radio market and providing a perverse incentive to take such investment overseas.[108] It was suggested that failure to revoke the rules would jeopardise the development of this small sector.[109] The Radio Authority considered that the existing ownership rules for radio were "becoming anachronistic".[110] Despite the apparent unanimity in the radio industry that no special restrictions on radio ownership nationally were required beyond the provisions of competition law, the White Paper speaks vaguely of the possibility of replacing "the current system with one that is simpler and fairer whilst still protecting the objectives of plurality and diversity".[111] We do not believe that the case for specific restrictions on radio ownership at national level has been made and we recommend accordingly that legislation giving effect to the White Paper proposals should remove all such restrictions.

37. While there are specific provisions on television and radio ownership in the Broadcasting Acts 1990 and 1996, the most complex and contentious rules relate to cross-media ownership. Even the White Paper's concise summary of the voluminous legislation lists 13 separate provisions, of which the most significant is the prohibition on a proprietor of national newspapers with a national market share of 20 per cent or more having more than a 20 per cent stake in a regional or national Channel 3 service or Channel 5 or a national or local radio service.[112]

38. We received some evidence supporting the status quo.[113] BECTU argued that there would continue to be only a few "big players" in the marketplace and that this justified continuing controls on cross-media ownership.[114] The BBC contended that existing restrictions "are appropriate and proportionate, have worked well in the public interest, and should be maintained".[115] Granada plc was also concerned at the possible extension of "cross-media consolidation involving newspapers and the broadcast media, where two very different cultures, of impartiality and partisanship, collide".[116]

39. Others suggested that existing restrictions had failed to keep pace with a more diverse and internationally competitive market. The growth in the number of channels and the number of media outlets was viewed as having changed the market in ways that existing legislation did not reflect.[117] This case was made by Mr Charles Sinclair, Chief Executive of Daily Mail and General Trust plc:

"The historic approach to regulating cross-media ownership is out-dated and irrelevant, and may even be counter-productive ... Competitive activity in most media markets is a stimulant to the quality, and that is what attracts people to use media; and it stimulates the providers of media to be better. We see that time and time again. Cross-media restrictions help none of these things."[118]

40. Both SMG plc and Daily Mail and General Trust plc argued that cross-media ownership brought positive advantages to viewers, listeners and readers and to the creative and journalistic communities.[119] Accordingly, Mr Don Cruickshank, Chairman of SMG plc, considered that "the cross-media ownership rules are now more of a cost to society and economy than they are of benefit".[120] Both organisations adamantly rejected the notion that involvement in ownership of newspapers that are not subject to public sector content regulation somehow reduced an organisation's capacity or willingness to comply with standards of impartiality imposed upon the broadcast media.[121]

41. As the White Paper notes, there is support from some quarters for restrictions based on overall "share of voice".[122] Controls based on a definition of a single media market and the differing levels of influence of different media were canvassed by the last Government, but eventually rejected by it, in part because of the problem of measuring shares in individual media and determining how those shares ought to be aggregated across different media markets.[123] Regulation by "share of voice" was advocated by GWR Group plc and the Broadcasting Standards Commission, although neither explained how such a system might work in practice.[124] Daily Mail and General Trust plc have argued that subjective judgements about impact can be avoided if "share of voice" is calculated according to profitability and turnover.[125]

42. We remain to be convinced that "share of voice" regulation is practical. Proposals for such an approach fail to take account of the fundamentally different regulatory environments of different media.[126] Such proposals either involve a whole range of unproven assumptions about the relative impact of different media or rely on economic indicators that may bear little relation to actual influence.[127] Even more fundamentally, all arguments for "share of voice" regulation that we have heard take no account of the impact of the Internet. The new media have had the effect of ensuring that newspapers compete in a more diverse market, for example, regardless of circulation, readership, turnover and profit.[128]

43. News International plc contended that all present rules relating to cross-media ownership "are discriminatory, penalise success and are increasingly obsolete".[129] Dr Irwin Stelzer, a consultant to that organisation, suggested that normal competition law was sufficient to prevent the danger of excessive concentration of economic power.[130]

44. Even from those who advocated retention of detailed sector-specific ownership controls, there was a recognition that limits set out in primary legislation could rapidly become counter-productive. For this reason, there was support for the idea that specific limits should be contained in secondary legislation rather than on the face of a new bill, or at least amendable by subsequent secondary legislation.[131] The White Paper hints at such an approach, stating that "our new legislation will ... build in flexibility for further liberalisation as and when the market permits this without compromising plurality objectives".[132]

45. We consider existing rules on cross-media ownership contained in the Broadcasting Acts 1990 and 1996 to be increasingly unnecessary in a more diverse and competitive media market in which general competition law, sector-specific regulatory powers and content regulation by licensing all apply. We view restrictions based on "share of voice" as quite impractical even if they were desirable. We consider that matters of such parliamentary and public importance as media ownership and control should not be open to significant amendment by means of secondary legislation. A certain inflexibility is inherent in primary legislation, but this is a price worth paying for full scrutiny. The inflexibility inherent in such controls in primary legislation is a compelling reason why specific controls should be maintained in forthcoming legislation only if the case for such controls is overwhelming and enduring.

The BBC and the competitive market

46. The White Paper aims to consider the main issues that affect the development of the United Kingdom as the home of "the most dynamic and competitive communications and media market in the world".[133] Yet one matter that fundamentally affects that development is largely ignored—the role of the BBC in the competitive market.

47. During our inquiry we heard a number of allegations that BBC activities acted contrary to the interest of developing a competitive market.[134] The British Internet Publishers' Alliance was particularly concerned that the range of activities of the licence fee-funded BBC Online went beyond what could be viewed as "the legitimate extension of broadcasting".[135] It was argued that the BBC was providing services that competed directly with commercial providers. These elements of BBC provision were said to have no clear public service rationale; they did not provide services that were not available from the market; indeed, they actually prevented the growth of commercial competitors.[136] According to Mr Robert Hersov of Sportal, "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".[137]

48. Similar arguments were advanced about other markets. The commercial radio sector was said to be particularly vulnerable to proposed new BBC services.[138] It was suggested that some new services were not compensating for market failure, but undermining successful commercial provision: "What they are doing now is they are watching the market and seeing where they can attack us"—the words of a commercial radio manager who worked for the Corporation for 25 years.[139] The Publishers Association argued that the BBC's proposals for free electronic learning material were stifling the development of a commercial market, resulting in "less choice and plurality for teachers and schools in the range of resources that they can use in the classroom".[140] Artsworld Channels Limited also argued that the BBC was transferring its behaviour formed in the era of spectrum scarcity to fields more akin to publishing where diversity was likely to develop otherwise.[141] In consequence, it was considered that the BBC was in danger of creating rather than remedying market deficiencies "by using its dominant power to crush new initiatives".[142]

49. Criticism of new BBC services is not confined to commercial competitors. Sir Michael Checkland, a former Director-General of the BBC and now a member of the ITC, was concerned that the BBC commitment to some new ventures might be premature.[143] He went on to say:

"The consensus, which used to be in support of the BBC, has slowly been eroded because people have been worried about the BBC trying to get involved in everything and I think that has caused concern. When I was Director-General the first speech I gave to the BBC staff was to say the BBC should stop its imperial march. I am afraid it is on a bigger march than was ever done in the 1980s ... The BBC should not be allowed to run riot in every area because I think it is destroying the consensus which I think has been very important for British broadcasting."[144]

50. Sir Christopher Bland, the Chairman of the BBC, denied that the BBC undertook activities that imitated or replicated what was already provided in the commercial sector.[145] In defence of its proposed new publicly-funded television and radio channels, the BBC pointed to their distinctive elements, including the high level of domestic originated content and the fact that they would be "without advertising".[146] Mr Greg Dyke, the Director-General of the BBC, was also comforted by "overwhelming support" for one of these new services.[147] The BBC's brand identity may perhaps make proposed new services popular in principle, even if BBC Choice and BBC Knowledge have, by the BBC's own admission, hardly enhanced the strength of that brand.[148] The BBC's reference to the absence of advertising as an argument in favour of its introduction of new services is a dangerous and circular argument: there is almost no market in which the BBC will not be comparing itself with commercial rivals that necessarily rely on advertising.

51. Our concern in this Report is not with the merits of particular proposed new BBC services. Rather it is with the adequacy of regulation relating to such services and their impact on a dynamic and competitive market. Responsibility for giving approval to new BBC licence fee-funded services and material changes to existing services lies with the Secretary of State for Culture, Media and Sport.[149] We have previously recommended that this responsibility be transferred to the independent regulator.[150] The White Paper rejects this recommendation, proposing that the power remain with the Secretary of State, while envisaging an advisory role for OFCOM.[151]

52. Some evidence supported our earlier recommendation, arguing that OFCOM was far better placed than the Secretary of State to understand the market as a whole.[152] The British Internet Publishers' Alliance argued that the Department for Culture, Media and Sport "seems focused on the narrow issue of ensuring that licence fee money is not used on clearly commercial activities".[153] Mr Cruickshank thought that decisions on new BBC services "should be central to the [work of the] communications regulator".[154] The Radio Authority also considered that the Secretary of State's powers of approval and review should pass to OFCOM at the time of Charter renewal "or ideally earlier".[155]

53. One reason why we have proposed a switch in responsibility previously is the potential political dimension to the exercise of the powers of approval and review. We stated in 1999 that "the proposal to grant to a politician a general power of review of individual BBC services seems to us to jeopardise the independence of the BBC and to tend towards direct ministerial control of broadcasting".[156] This concern was illustrated by Mr Smith's statement that a review of News 24 would not take place just yet in part because "the immediate run-up to a General Election ... would not be a right and appropriate time to review a new service".[157] It is hard to understand why it will be acceptable for a politician to conduct a review that might be open to a perception of political influence after a General Election when it is not acceptable to do so before a General Election.

54. Mr Smith claimed in oral evidence that "economic regulation" of the BBC will be the responsibility of OFCOM and the competition authorities.[158] This statement appears to equate economic regulation with oversight of the commercially-funded activities of the BBC. In fact, new BBC services funded from the licence fee have the potential to make a profound impact on the development of open and competitive markets. The new regulator is best placed to judge this impact, and also to weigh that impact in the balance against the regulatory objective of "maintaining high quality of content, a wide range of programming, and plurality of public expression".[159] The new regulator should be able to reach such decisions transparently and in a manner that is free from any imputation of political interference. The decisions relate precisely to the type of issues that the new regulator is being established to regulate. We recommend that, from the time of its establishment, the new regulator assume the powers to approve and to review new BBC licence fee-funded services currently held by the Secretary of State for Culture, Media and Sport. We expect that the new regulator would be given powers to ensure that, while the BBC retained the right and the ability to continue with services and to launch new services funded from the licence fee, such services would be conducted on the basis of fair competition.

57 Cm 5010, para 1.2.1. Back

58 HC (1997-98) 520-I, paras 65-67. Back

59 Cm 5010, para 1.1.18. Back

60 Opportunity for all in a world of change: a white paper on enterprise, skills and innovation, Cm 5052, February 2001, para 1.18; Evidence, p 75. Back

61 "UBS Warburg e-index", Connectis, February 2001, pp 6-7. Back

62 Cm 5010, para 1.2.2. Back

63 QQ 256, 337, 483; Evidence, p 171. Back

64 Evidence, p 65. Back

65 Out of the Box, p 11; Q 167. Back

66 QQ 420-421. Back

67 See Evidence, p 221. Back

68 Cm 5010, p 108. Back