Select Committee on Culture, Media and Sport Minutes of Evidence

Examination of Witnesses (Questions 505 - 519)




  505. Thank you for coming to see us this morning. Again, like your predecessors, your appearance at these inquiries has become something of a feature of our proceedings. It has been indicated to me, Mr Flanagan, that you would like to make a brief opening statement.

  (Andrew Flanagan) Briefly, may I thank you for inviting us back to give evidence to the Committee on what we consider to be a very important subject. I understand that your interest with SMG is principally in the area of cross-media ownership and therefore I will concentrate my remarks in that area. Media ownership rules in the UK have simply not kept up with developments in the industry; they are outdated and they are inconsistent across different sectors. Like almost everyone who has declared an interest in this area, we think they need to be radically reformed. The question, of course, is how to do this. Allowing UK media companies to build sufficient scale to compete on the one hand and protect plurality and diversity on the other is the key issue. Let me say up-front that we believe a conventional market, in which media owners who are free to compete with each other for the attention of viewers, listeners and readers and of course advertisers, would offer more than sufficient protection for consumers. Services failing to meeting the needs of consumers would simply be replaced by those that did. Where a point of view or a special interests was not being catered for, the astute media owner would of course soon fill that gap. This is essentially what happens in the magazine sector, an unregulated sector, but there is sufficient plurality and diversity; in fact so much, you cannot actually get some of the magazines on the shelves of W H Smith. The government does not agree with this position and wants safeguards in place to restrict how much media power can rest with one owner. We have devoted a considerable amount of time to this and, drawing on our own cross-media experience, we have arrived at a proposal which I think has been well received by many commentators. In essence, it is based on the principle that media power equates to media revenue. If you want to measure, and indeed control, media power across all regulated media, then the only appropriate common currency is revenue. Indeed, there probably is no other measure since one cannot objectively measure a television viewer against the reader of a newspaper or a listener of a radio station. Shares of revenue from advertising, subscription and, yes, even a licence fee are directly indicative of the power that any media owner has because of his ability to invest in content and infrastructure. It can be measured both within an individual medium but also across media segments, allowing a common system for the measurement. Our basic proposal, however, still leaves the potential for one owner to focus on only the most influential media. To tackle this we have proposed a list of what we have termed prime media assets to be compiled, almost like protected buildings or the crown jewels of the media industry, including the most influential of our national newspaper, television and radio assets. But Parliament will ultimately determine what comprises that list of prime media assets. Limit ownership of these to, say, five, combined with a maximum limit on revenues across all media of, say, 25 per cent, then we have a lightly regulated media sector but with clear, simple and understandable ownership rules which importantly can stand the test of time. These rules would deliver a minimum of seven major media players and most of the existing players will have significant headroom from their current position. We believe our proposals meet the government's concern for the need to protect plurality and diversity, while at the same time providing an opportunity through growth of creating world class British media companies. Before I finish, for this proposal to operate at its most effective, then the licence revenue of the BBC must be taken into account when examining each individual market. Of course, the most effective way in which the BBC could be included within this brave new media world is for them to be regulated by OFCOM, along with the rest of the media sector. Thank you very much. We are now happy to answer any of your questions.

  Chairman: Thank you, Mr Flanagan. Could I make clear that any of your colleagues as well as yourself are very welcome to answer any questions when they feel it appropriate to do so.

Mr Doran

  506. Your proposals are very interesting. I am interested to know how they have been perceived by the rest of the industry. I should say why I am asking that question. One of the observations that certainly I have made on the evidence that has been submitted to us so far and the oral evidence we have had is that everyone seems to be concentrating on their immediate problems and nobody is looking very carefully at the principles. You are the first people who have come to us with at least an attempt at clear principles.
  (Andrew Flanagan) I think that perhaps it is because the SMG is further developed in terms of the area of cross-media, operating, as we do, across TV, newspapers, radio and indeed outdoor advertising. I think that has given us a greater degree of urgency to look at the specific aspects of cross-media ownership. Many other owners have come at it from the position of their single medium, like radio or TV business, whereas we have addressed ourselves across the whole issue of cross-media.

  507. In practice, you said earlier that you would see seven major players in this new regime or seven major players at the moment. Would you be able to enlarge a little on this new regime? Is SMG one of these players?
  (Andrew Flanagan) We would like to think so but I think we have set out a set of rules that is really for illustrative purposes in terms of the 31 prime media assets we listed and with, a maximum of five, I just gave the number of seven. If Parliament decided that the number should be 40, or whatever, you could create a number of other players. I think from our point of view we are constrained by the current rules and we would like to grow, particularly outside of Scotland. I think that therefore we would want to be building the industry rather than just being buoyed up by somebody else.

  508. You mentioned your Scottish roots and obviously that is an issue for me as a Scottish MP. How would your proposals work in terms of a regional competition because you are obviously a much larger player in Scotland than you are in the UK?
  (Andrew Flanagan) Clearly I think you have to look at the industry in a UK-wide context, although regionality is very important in terms of relating to and building loyalty with your audience. When you look at, say, television, regional television is very popular in the local area because it caters for the needs of the local population but 85 per cent of this revenue comes from national advertisers. There is one dimension which is how you build up loyalty and service needs for your viewers; another is how you make sure that you have a sufficient share of the advertising cake. For us, we believe you can serve both if you are bigger but also are still very local where you need to be, then that is the best of both worlds.

  509. Could you say a little bit more about how you see the BBC fitting into this? You have made it clear that you see them being regulated by OFCOM. How would that share of the local market be assessed or the UK market be assessed?
  (Andrew Flanagan) Again, the basis of our proposals is that, in terms of assessing any market, the BBC's revenue position is included in the calculation and, therefore, a share of the licence fee gives a proportion to each part of the market.

  510. That would make them the biggest player virtually everywhere, would it not?
  (Andrew Flanagan) In reality they are the biggest player in the UK area. The only difference is that they are state owned.

  511. Tell us how that would actually work in practice.
  (Andrew Flanagan) I think, if you take, say within the radio sector, a proportion of the licence fee would be allocated to radio and that would be then compared with the commercial revenue and the advertising revenue of the radio sector and then our 30 per cent limit for that sector would be calculated on that basis and the commercial players would then be allowed to build up in size until they represented 30 per cent of the marketplace.

  512. So the BBC would basically be the base line?
  (Andrew Flanagan) No. It would just be part of the total computation.

  513. You are measuring everything else against that?

  514. No, you are measuring it against part of the pie. It would be including that share of the revenue in the total calculation and then it would be in that 30 per cent of it. That just allows radio companies in this example to enlarge themselves and be more effective competitors against the BBC because clearly the BBC still dominates 50 per cent of listening hours in the UK.

  515. You made the point in your opening remarks that current legislation has not kept up with the progress that the industry has made, particularly with the major changes in the industry over the last few years. What makes you think that this proposal you are putting forward will stand the test of time?
  (Andrew Flanagan) I think our proposal is not as detailed as previous legislation, so there are a number of very intricate rules in previous legislation which now, because of the way industry has moved, are actually quite difficult and inhibiting. An example would be that in terms of being an owner of TV in Scotland, we are not allowed to own more than 20 per cent of a digital radio licence. There are probably less than 1,000 digital radio receivers in Scotland; it is a very small marketplace. But we are allowed to have one hundred per cent of internet radio services and 25 per cent of the Scottish population already has access to the internet through PCs and they own that. That just seems to us to be completely inconsistent. I think this is because, when the original legislation was drafted, it did not really envisage what the internet would eventually become. Some of these details need to be taken out of the legislation so that the industry can evolve as technology and consumer tastes allow.

  516. What about the lifespan of your own ideas? Do you think those can keep pace with the progress of the industry?
  (Andrew Flanagan) We believe so because they are a revenue-based measurement and, in a sense, for the prime media assets we are recommending that from time to time, probably on a two-year time frame, OFCOM would come forward with revision to the list of prime media assets and so assets could be removed from the list or new assets could be added to it. We think it does have a very long view.

  Mr Doran: I would like to move to another area.

  Chairman: I will call on Derek Wyatt to ask questions and, if there is time, perhaps I will come back to you.

Derek Wyatt

  517. May I congratulate you on the paper. It is very interesting and stimulating. May I ask you about broadband? If, and it is a big "if" for Scotland because of the rural constituency of much of Scotland, broadband happens in Scotland, how do you regulate it?
  (Andrew Flanagan) I think it is very difficult to regulate the content of broadband. I do not know in that sense if there should be any difference between Scotland and the rest of the UK. There are issues about the rural community in Scotland and how they can actually participate in this new technology. If broadband becomes commercially successful and viable, then in the urban areas of Scotland it will follow the consumers demand and it will evolve there quite easily. There is a danger that, unless there were some other initiatives, the rural communities would not be serviced by this. You can take it back to the principle of universality within televison where there really is an obligation on ITV and the BBC to ensure that 97 per cent of the UK population can receive the signals. It may be that for rural areas for broadband there needs to be some policy of government initiative which would address the way that these services are provided in areas where it might not be economic for the provider of the service.

  518. I am sure you understand that I have an English constituency and so Scotland is not my regular remit. I do not get the same Scottish listeners as my colleagues here. Is the Scottish debate about broadband being led by the Scottish Parliament or is there no debate about public service broadband at the moment in Scotland?
  (Andrew Flanagan) There is an initiative being operated by the Scottish Parliament.

  519. Coming back to the regulation side, surely if broadband does happen and 80 per cent of our population live in towns, 65 per cent look as though they will get broadband by the BBC in one way or the other. We have some issues about rural areas. Let us assume that is quite a large number. Does not media ownership just go out of the window if you can deliver BBC by broadband? They cannot know whether you are paying a licence fee or not. Radio is the same. Whatever you do can be delivered by broadband, so surely the whole media thing is irrelevant really as we go forward? Are we therefore playing catch-up with the legislation when actually it is irrelevant anyway in the near future?
  (Andrew Flanagan) I think any media service provider, whether that is the BBC or Sky, if it is delivering its services across broadband would still want to see some form of encryption to ensure that they were earning money that they were entitled to for that service. I am not sure necessarily that broadband changes that compared to, say, satellite delivery or anything else. It just makes access through a different platform. The same rules and economics would apply regardless of the method of delivery.

  Derek Wyatt: On the encryption side, when the Home Office decided on 405 lines in 1936, it had a competition and then it told the TV manufacturers that if they wanted to produce televisions sets, they had to take 405 lines. Do you think it is time we did that again in a sense to hasten the digital environment by telling TV manufacturers, "Look, digital televisions have got to be out by January 2003 or January 2004"? Do you think they are faffing about over this?

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