Examination of Witnesses (Questions 505
TUESDAY 5 MARCH 2002
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
(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with developments in the industry; they are outdated and they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.
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
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
511. Tell us how that would actually work in
(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
(Andrew Flanagan) No. It would just be part of the
513. You are measuring everything else against
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
Chairman: I will call on Derek Wyatt
to ask questions and, if there is time, perhaps I will come back
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?