Examination of Witnesses (Questions 283
TUESDAY 5 FEBRUARY 2002
283. Ladies and gentlemen, thank you very much,
indeed, for coming. We are delighted to see you. We still have
memories of the excellent session with you during our last inquiry.
If you have an opening statement you would like to make we would
be glad to hear it, otherwise we will move straight into questioning.
(Ms Thomson) I think we will be very
brief in our opening remarks. We have been very interested in
the sessions that preceded us. I would just like to recite the
fact that AOL Time Warner was founded on convergence, and was
founded on the idea that the communication industry is converging
and that that will bring about amazing consumer services in the
future. We are uniquely positioned to bring, perhaps, a consumer
perspective and would like to simply assert that there is substantial
demand for broadband currently in the consumer market in the United
Kingdom. There is, we believe, an over-focus on content issues
at present and we would like to assert that there is still a major
issue round access to infrastructure and the competition and price
points that are all in broadband in the United Kingdom today,
which are standing in the way of broadband Britain as we all hope
to see it in the future.
284. Our job here is to look after the consumer,
it is not always to look at the small side of things but to look
to the future. You just heard us asking questions about competition,
and I would like to continue that, if I may. We have two very
powerful companies, Sky who achieved that situation in the industry
by investing a lot of money where others did not, and we have
BT, for historical reasons. We have also heard in the last few
minutes that possibly ministers, not because they are not intelligent
enough but because all politicians are driven along by demands
on a day-by-day basis, and there is little time for politicians
to look far enough ahead. Do you think we need a more powerful
OFCOM, in that we really need the experts in technology and industry
to get together to look forward to plan for competition? It is
difficult to dismantle what BT already have. We have heard about
the share holding in Cable & Wireless, there may be shareholders
in BT who find their investment going down by 75 per cent if suddenly
we came along and demolished the partial monopoly they have. Do
you think we need a more powerful body than OFCOM looks like being?
(Ms Thomson) I would just say a couple of things on
that. In general we are looking for a Regulator that can respond
to a very changeable and very complex market in a timely way.
Many of the issues that we address in the industry we are finding
for the first time are major issues emerging and essentially moving
forward and we really need to be able to address those quickly
within commercial time scales. Whether that is stronger than currently,
there certainly is a more specific emphasis on the infrastructure
component of our industry, which is really the gateway to other
things that regulation is about or that the Bill is about in terms
of content, et cetera.
(Ms Gilbert) From the public policy and regulatory
perspective when we think about how we would like OFCOM to look
we tend to draw on our experience in the narrowband world, which
is where there were long battles with BT using the Regulator for
narrowband flat rates, which I think prior to their introduction
many of us felt would revolutionise the way consumers use the
internet. A lot of what we are hearing from BT now is really the
same arguments that we heard then, there is no demand for broadband,
and there is no demand for narrowband flat rate. The issue is
with the competitors who are not competitive enough and are not
investing. We have heard all of those arguments before and I think
the lesson that we have learned is it took us 18 months of struggle
and regulatory process to bring about narrowband flat rate. We
have seen what has happened with the local loop unbundling. With
OFCOM it is a question not only of preserving a well qualified
expert group of regulators or a part of OFCOM that is focused
on infrastructure but also to look at what has happened in the
past and learn from those mistakes. How is it that we could have
made the local loop on the bundling process more effective and
more timely so that BT competitors would not have found themselves
in the position that they are in now? Those are the focus and
questions we think need to be answered when looking at how to
285. Karen Thomson, you said that we need OFCOM
to be able to respond quickly to what happens. The point I was
really trying to make was with technology changing and people
having great difficulty, even the experts in the industry, in
anticipating really what is going to happen, I am talking more
about looking ahead, do we not need a technical body that can
look at what is going to happen to stop this monopoly situation
occurring as we have now for two different reasons?
(Ms Thomson) I think it is tremendously difficult
to look ahead and predict what is going to happen. I can pull
out lots of different quotes from a few years ago which show that
very few people get it right. There is certainly an element of
having to look at what the technologies emerging may well be and
tapping into that.
(Mr Hampton) If you look forward you are likely, if
you are remotely optimistic, to come to the conclusion that competition
is down the road and we will get there. The difficulty is that
in due course we may find that we do not get that competition
and then you are looking to take the wrong decisions. To a certain
extent you have to play it by ear. There is a decision to be made
almost at the moment, BT have announced they are going to lower
their wholesale prices. Cable & Wireless, just a minute ago,
said an earlier reduction in those prices helped them to pull
out of unbundling. It does not look like unbundling was ever set
to succeed. The response now and the way forward now is via a
further reduction in BT's price, which we welcome. You have to
recognise that the choice that is being made, even in acknowledging
that, is that this is the potential sacrifice of longer term competition.
We think actually if you create an open ISP market now and allow
people to come in and start ramping-up that market that it actually
creates a second chance for people to come in and start using
unbundling services. There are a certain number of premise that
have to be postulated here. This is quite a critical moment. One
of the ways that Germany has got a lot further ahead in broadband
is simply because they decided to hand the whole market to the
incumbent. I do not think anyone wants to do that, but that is
something to bear in mind.
(Ms Thomson) One other point is that when you have
issues here and now that affect the short and medium-term future,
introducing too much complexity about what might happen really
does play to the status quo and, therefore, I think it
sometimes distracts us from dealing with the key issues we need
to deal with now as an industry. It is all very well to talk about
satellite etcetera, but, for example, DSL is a technology which
is the most widely available and is the most likely to serve the
mass audience in the UK. Those are the issues we have to deal
with now rather than getting distracted sometimes by predicting
what the future is going to be.
286. What is your experience of the cable companies?
As a subscriber I have been so disappointed that it has taken
so much time for them to start advertising services for the internet
and yet the heavy investment was in laying the cable in the first
place. They still seem terribly slow to even advertise those services.
What is your experience with the cable companies?
(Ms Thomson) I can talk generally, something that
happened over the last few years in the UK is that many companies
saw the internet as a pure pipe, it is a connection to the internet
and internet service, that is all that it is. We come from a very
different perspective, which is that consumers are really interested
in value added services, they are interested in broad based content
etcetera, and that access is going to be a piece of that. That
also relates to the broadband debate, which is you go to consumers
and say, "Broadband, it is so exciting, there are so many
things going to happen", and they look at you and say, "I
have no idea what it is, I have no idea how it will get to me
and what it will deliver to me but it is very, very expensive".
People have underestimated what consumers want and what they want
in terms of packages. For consumers and businesswe speak
more to the consumer side because we are a pure consumer businessit
is really about much more than putting a pipe in and saying, "There
is your access" because people really do not necessarily
value simply pure access to the web. We certainly find that people
are much more likely to be interested and responsive if they are
seeing much broader opposition. On the cable side they have really
concentrated purely on that pure access component, which I do
not think is as fundamentally interesting to consumers as was,
perhaps, thought a couple of years ago.
287. You have direct competition. There are
no restraints on the competition that you have. There are other
problems of delivery, but you are competing mainly with other
people providing the services that you want to provide, is that
(Ms Thomson) Essentially our competition comes from
everyone providing entertainment services or anything that calls
on people's disposable time. One of the reasons that television
audiences are falling is because people are spending more time
on-line and accessing different services. We would see ourselves
being in the entertainment industry as much as the internet business,
288. Can I ask for an overview of how quickly
and what developments you see coming in your own business over
the next three years?
(Ms Thomson) Three years, that is quite a long time
scale! Certainly over the next year or so we think that development
of flat rate internet access is still very powerful. We are still
seeing huge numbers of people coming on-line for the first time,
a very large part of people joining us each month comes from people
who are new to the internet and new to the on-line world. We are
building out services which are becoming much more market-orientated,
whereas, perhaps, a couple of years ago they were specialists,
they were more vertical content sectors. We are really seeing
now the content is expanding across the mass market audience and
the challenge, I think, over the next couple of years is to build
into that experience a utility that consumers in the US currently
experience so that as people build the experience into their daily
lives, whether it is narrowband or broadband, they get more and
more value out of the experience. They can do their shopping,
they can bank, and those things should be very simple and easy
and they should make people's lives better and should free up
more of their time to do things that they want to do.
289. Can I just check something first. You are
(Ms Thomson) Yes
290. And you are AOL (Europe)?
(Mr Hampton) Yes.
291. But AOL (UK) is part of AOL Time Warner,
so you do not do Time Warner?
(Ms Thomson) We are a division of AOL (Europe) which
is a division of America On-Line which is then in turn a division
of AOL Time Warner. However there are very close ties between
292. It is the close ties I wanted to ask you
about because Time Warner has movie making, television programme
making, television distribution, movie distribution, CDs, videos,
all the rest. That is quite a lot of the value chain sewn up into
one organisation. Is that not a competitive problem?
(Ms Thomson) I think there are a number of distribution
methods. In actual fact, if you look at AOL versus Time Warner,
AOL is a direct consumer service whereas many of the Time Warner
businesses are distribution to business. I think it would be an
issue if, for example, you saw everything Time Warner did only
available on AOL. That simply would not happen because it is not
economic for a start. You need the broadest based distribution
you can get. No Time Warner properties would be interested in
purely distributing across AOL and also the talent and the people
who create these properties would not be interested in that proposition.
AOL Time Warner will only exist and be successful if it gets its
artists out to the widest possible audience. I think the market
itself demands the broadest based distribution of which AOL may
be a part. But it is very much more broad based and the economics
of the business demand as broad a based distribution strategy
as you can.
Mr Bryant: As I understand it, following
the Napster legal decision, in terms of CDs and MP3s downloadable
on web sites, the line is going to be that there will be two different
sites which stick to the label that they have. I have never consciously
wanted to listen to an EMI artist
Chairman: As such, I take it?
Mr Bryant: Indeed, nor indeed have I
ever wanted to read particularly a Faber book.
Chairman: That is very bad!
Mr Bryant: I am being heckled by my own
Chairman: You are being heckled by a
293. The reasons for not reading Faber books
have just grown! Is this not a bizarre route to go down?
(Ms Thomson) I think if it existed in quite the way
you are describing but Clare has a perspective on that.
(Ms Gilbert) I think you have almost answered the
question yourself which is that you do not want to access content
in that way and that is the way that the vast majority of consumers
feel. I am not aware of the issue being as polarised as you are
294. As I understand it, that is the proposition
that is being put forward. People have signed up the rights and
that is the way they want to go in that sense.
(Ms Gilbert) There are various different technologies
which are in negotiation with the music companies but you would
have to speak to the Warner people to get more detail about that.
My understanding is that it is an open and competitive market
and there are various platforms and technologies being developed
and those entities are in discussions with the rights' holders.
It is obviously in the consumers' interests to get access to as
much of this great content on music and video as they can on-line
through whichever brand or product they choose.
295. Indeed, this is one of my slight concerns
about all the internet providers. When you go to yours or Virgin's
or whoever's home page there might be a section on shopping and
then you go to the shopping section and there is a section on
white goods, and you have 50 different companies which you can
buy from. Who decides who is number one on that list? Is that
a commercial agreement between you and them, because you are guiding
consumers towards that company rather than any other?
(Ms Thomson) If you look at something like shopping,
for example, it is very specific but there is a combination of
services. First of all, people buy space in a particular shopping
channel, as you would in a retail mall, for example. But there
is also complete and open access to the web and there are also
tools like shopping search tools, etcetera, which allow people
to go out and search. In terms of the retail opportunities that
is quite specific. There are placements which are available. However,
if you take the editorial content that wraps around something
like a shopping service, then that is an editorial decision as
to what the great offers this week are, etcetera, and that is
driven by the editorial team. So I would put a real separation
between the placement of the commercial opportunities and any
editorial that sits around those types of services.
296. I did PhD research on the British magazine
industry and its use of advertising and the economic structure
and how the advertising actually impacted on the editorial structure.
I would disagree with what you have just said in that the editorial
decisions are massively driven by the advertising decisions and
commercial decisions and, in fact, virtually nothing that appears
in the magazine industry is not commercially led. It is brave,
brave editors who do something that is not commercially-led and
the wrap around stuff is actually a vehicle for advertising all
the time, and products being placed, and freebies, and you name
it. There are so many different sorts of ways of doing it but
virtually every line of editorial is driven by commercial decision-making.
(Ms Thomson) I understand the analogy to the magazine
market but if you are on-line and you look at a service like AOL,
on the retail, on the side pure shopping channel side that is
probably the commercially driven bit of it. However, the decisions
about what is promoted are purely an editorial decision and they
are not driven by the placement of particular partners.
Mr Bryant: Can I push you on that. When
there is a filmand it is not Lord of the Rings,
that is what it was last week, it is a different film this weekand
AOL is encouraging you to go to that web site, no money will have
gone from potentially Time Warner to AOL to encourage you to put
that advertisement there?
297. Or freebies?
(Ms Thomson) If it is an advertisement then certainly
there may be a commercial agreement, the banner advert for example
for a film.
298. It looks editorialised, you see.
(Ms Thomson) In general we promote an across-the-board
range of film titles, for example, and music, and in both the
on-line and the off-line world we will participate in promotions
for both Warner Music artists and for other artists that are broadly
appealing to our membership base. That is just something that
we do. We look at what is interesting to our members and we test
what is appealing to them. In the on-line world we have a slightly
different scenario to the magazine world where you have to decide
what goes into print and then you have to see what people like.
In the on-line world it is perfectly possible to run different
promotions, see what is most appealing and then promote them more
extensively so more people get access to content or whatever.
It is misleading to look at it in that sense. We will always work
across a broad range of film titles and music titles and products,
for example, and what we seek to do is to engage our members in
the on-line experience. If we were to exploit that in a commercial
sense where we simply promoted what we were being paid to promote,
members would not spend time within our service. The proof of
the pudding for us is whether people are interested and responsive
to the content we provide to them. If they are not responsive
then we do not run those promotions because we can see on a minute-by-minute
basis what is appealing to our members.
299. On a different bundling issue, most people
when they buy a PC do not just want it to be a typewriter, they
want some kind of internet and e-mail activity. So normally in
the computer that you buy there is already some kind of ISP programme
bundled in. In fact, if there was not, people might not buy it
and life might be far too complicated. Obviously there is a danger
that then you buy your way into a particular PC and that restricts
people's access to the whole range of different internet service
providers out there.
(Ms Thomson) The vast majority of PCs sold will have
a number of different providers on the desk-top ready for use.
In our case I have to say the vast majority of people signing
up to our service come from channels other than pre-loaded bundling
onto computers. That is not necessarily the case with some other
providers who have much closer links with retailers and computer
manufacturers. For us we are an independent company looking for
lots of different ways to market.