Memorandum submitted by ITV
INTRODUCTION
This submission is made on behalf of the ITV
companies operating the 15 Channel 3 licences, namely ITV plc,
Scottish Media Group, Ulster Television and Channel.
DCMS COMMITTEE QUESTIONS
1. Given expected growth in digital
TV and likely developments in the Internet and other new media,
what scope and remit should the BBC have?
1.1 With the development of new technologies
and the eradication of spectrum scarcity consumers of media are
becoming much more used to paying for what they want when they
want it. The historic reliance on a handful of channels to deliver
key media content free at the point of consumption is gradually
being eroded.
1.2 These changes, and the rapid moves towards
digital switchover, are transforming the UK's media landscape
and placing particular pressure on the foundation stone of UK
broadcast media, the BBC. In a world of enormous and increasing
consumer choice the notion of a compulsory levy (the Licence Fee)
that must be paid by all those wishing to watch television is
looking increasingly outdated.
1.3 However, there remains strong support
for the BBC and a counter view that in a world where the market
will happily deliver content that viewers are prepared to pay
for as individual consumers (ie movies and premium sports events)
there will continue to be a role for a publicly funded broadcaster
dedicated to bringing a comprehensive range of content including
much that the market would not make to the widest possible audience.
1.4 This is a view that ITV broadly shares.
We believe the UK has benefited from public investment in the
BBC as a standard-bearer and public service innovator. However,
we also believe that in recent years the BBC has been going in
the wrong direction, seeking to respond to the dramatic change
taking place around it by rolling its tanks on to every battlefield
and seeking to expand its scope and remit far beyond its initial
role.
1.5 The BBC has been assisted in this by
the exceptionally generous licence fee settlement awarded to it
by the Government when it reopened the 1996-97 settlement in 1999.
The DCMS Committee argued at that time that the BBC had known
the profile of its external income from 1997 to 2002 for several
years and should have "cut its coat according to the cloth".[1]
1.6 Unfortunately the Secretary of State
took a different view, in spite of the fact that at the time of
the 1996-97 settlement the BBC had described it as an "historic
breakthrough" that would "fund the transition to the
age of digital services". Consequently the BBC has found
itself the beneficiary of a significant financial windfall since
1999. Had the original 1996-97 settlement been maintained the
BBC would be enjoying a substantial annual income from the Licence
Fee of £2.25 billion by the end of the current Charter period.
As a result of the 1999 revision it will be enjoying an income
of circa £3.1 billion.
1.7 At the time of its application for extra
funds the BBC made much of the need for it to compete with a buoyant
ad-funded sector. Unfortunately for the commercial sector the
BBC's much enhanced financial position has also coincided with
the worst advertising recession in the TV advertising industry
for 20 years.
1.8 As a result of the Licence Fee settlement
of 1999 and the downturn in the advertising market the BBC has,
in recent years, found itself in an exceptionally strong financial
position. Combined with the appointment of a Director General
who had spent his entire career in the commercial sector this
resulted in an expansionist and commercially aggressive mindset
at the BBC that has undermined its public purposes.
1.9 At the time of the Committee's 1999
inquiry ITV argued that no additional funds should be granted
to the BBC until there was clear public agreement about a new
role for the BBC in the digital age. The Committee asserted that
"The BBC has, in our view, singularly failed to make the
case for a much expanded role in the digital era and consequently
for additional funding." This Charter Review provides the
first real opportunity to assess whether the BBC has deployed
those extra resources in the wider public interest or in the pursuit
of its own corporate interest.
1.10 In ITV's view there is much evidence
that in recent years the BBC has too often pursued the latter
course. The BBC's digital distractions have raised major complaints
from competitors in new media areas that have felt the BBC has
crowded out. However, even within its traditional core competencies,
in particular the provision of television services, the BBC has
strayed from its traditional approach to public service values
in favour of an approach characterised by determination to win
the ratings war at all costs.
1.11 ITV has never argued the BBC should
be a "market failure" PSB. We recognise that as everyone
pays the licence fee the BBC should provide something for all—Eastenders
should be as much a part of the BBC as Panorama. Unfortunately
in recent years the BBC has increasingly changed the mix—taking
the opportunity to move important public service content from
BBC1 and BBC2 to BBC3 and BBC4.
1.12 Whilst the BBC denies it has used its
new digital channels in this way comments by its senior executives
suggest otherwise. Quoted in a recent Financial Times interview
BBC2 controller Jane Root suggested that the channel had previously
suffered from "attempting to be a Jack of all trades for
the BBC, taking everything that didn't fit on BBC1—current
affairs, science and a series on garage music. BBC2 additionally
had to do all those jobs that are now done by different channels
[ie BBC3 and BBC4]."[2]
1.13 The BBC has also adopted an approach
to scheduling its main channel that has been markedly more aggressive
and commercial in style. Scheduling Fame Academy head to
head against Pop Idol; shunting Panorama to the
margins of the BBC1 schedule; abandoning arts programming on BBC1
for several years; scheduling a one-off extra episode of hospital
soap Holby City against new ITV drama Othello as
a spoiler; moving the 9 o'clock news to free up the schedule for
post watershed drama.
1.14 With Charter Review now under-way we
have, unsurprisingly, seen something of a reversal in this behaviour—the
recently announced major investment in arts programming on BBC1
and BBC2 is just one example. In ITV's view we cannot rely on
the periodic process of Charter Review to bring the BBC back into
line. As we argued back in 1999 and during the passage of the
Communications Act 2003 what is needed is a level regulatory playing
field in which the scope and remit of the BBC's service as a whole
and each of its channels individually are clearly set out and
agreed with an independent external regulator.
1.15 This would also appear to be a requirement
of EU State Aid law. A 2001 Communication from the European Commission
on the application of State Aid rules to public service broadcasting
stresses that, "Without a clear and precise definition of
the obligations imposed upon the public service broadcaster, the
Commission would not be able to carry out its tasks under Article
86(2) and, therefore, could not grant any exemption under that
provision;" ie the Commission would not be able to conclude
that any public money granted to a public service broadcaster
was compatible with EU State Aid law. On the issue of independent
regulation, the Communication goes on to say that, "It is
within the competence of the Member State to choose the mechanism
to ensure effective supervision of the public service obligations.
The role of such a body would seem to be effective only if the
authority is independent from the entrusted undertaking."[3]
1.16 In 1999 the Committee argued "for
a single regulator of the market as a whole."[4]
We now have a single regulator, Ofcom, which has responsibility
for regulating certain areas of the BBC. Unfortunately the gaps
in regulation that remain will permit the BBC to continue playing
fast and loose with interpretations of its remit.
1.17 The opportunity afforded at this Charter
Review should be taken to set out clearly the scope and remit
of each of the BBC's services. The peculiar "risk free"
nature of the BBC's funding means that its services should be
demonstrably more risk-taking, different and innovative than those
provided by broadcasters reliant on the commercial marketplace.
1.18 The remits of the BBC's services should
be agreed with Ofcom. "Significant changes" to any of
these services, ie a decision to abandon the arts on BBC1, should
require prior approval of Ofcom, which has a statutory obligation
to "maintain and strengthen" PSB. This is the approach
that applies to the commercial public service broadcasters (ITV1,
Channel 4 and Five) and the same rules should apply to the BBC.
1.19 In terms of the scope and remit of
the BBC in the wider marketplace and in particular in new media
areas clear parameters need to be drawn outside which the BBC
should not be expected to stray. Crucially any attempt by the
BBC to further expand its services should require the approval
of Ofcom and should be permitted only after there has been extensive
and independent analysis of the likely market impact.
2. In the context of scope and remit
how should the BBC be funded?
2.1 If the BBC is to be expected to do something
different to those players that are reliant on commercial revenues
to fund their activities then it will continue to need a secure
funding base that is not subject to the vagaries of the market.
ITV believes that for the period of the forthcoming Charter the
Licence Fee, whilst imperfect, remains the best way of funding
the BBC's activities.
2.2 For obvious reasons we do not support
the idea of the BBC carrying advertising. Advertising on the BBC
would have a very negative impact on the rest of the free-to-air
advertising funded sector. All previous inquiries, from Peacock
in the 1980s to the Davies Review in 1999, have concluded that
allowing advertising on the BBC at a level necessary to make a
major contribution to its funding would result in a significant
increase in the amount of advertising impacts available to advertisers
but not in a significant increase in overall advertising spend.
As such the BBC would simply cannibalise revenues currently available
to the commercial sector and UK plc would lose the benefits afforded
from a system that currently offers three good, strong sources
of programme investment—the Licence Fee (approx £3
billon), advertising (approx £3 billion) and subscription
(approx £4 billion).
2.3 At the extreme we estimate that were
BBC1 and BBC2 allowed to show as much advertising as their commercial
rivals this would result in a 50% increase in Total TV Impacts
but only a 5% rise in Total TV Net Advertising Revenue (NAR).[5]
Based on an implementation date of 2007 forecasts suggest this
would result in ITV1's revenues collapsing by circa £600
million and Channel 4's by circa £300 million. This is money
that would simply be taken out of the broadcasting system, decimating
investment in original UK production.
2.4 Subscription might provide a more acceptable
alternative funding model for the BBC in the future but will not
become practically possible at the very earliest until digital
switchover. Even then major technical and legacy issues will remain
to be resolved.
2.5 However, whilst it is ITV's view that
the Licence Fee should remain the primary source of funding for
the BBC's public services for the next Charter period the RPI
plus 1.5% annual formula should be brought to an end when the
current Charter period expires. The continued substantial growth
in the number of licence fee-paying households over the period
of the current Charter,[6]
the RPI plus year on year rises the BBC has received every year
since 1998, the BBC's consistent over performance in the delivery
of internal savings[7]and
the collapse in the revenues of the advertising funded sector
since 2000[8]have
all combined to create a "super funded" BBC.
2.6 As stated in answer to Question (1)
by 2007 the BBC will enjoy annual Licence Fee revenues of £3.1
billion.[9]
Had the 1996-97 Licence Fee settlement been maintained the BBC
would be enjoying annual licence fee revenues of £2.25 billion
in 2007.
2.7 This super-funding of the BBC has created
an expansionist mindset within the organisation. The number of
full-time employees rose between 1995-96 and 2002-03 from 24,103
to 27,148. The cost of employment almost doubled over that period
from £700.1 million to £1,265.7 million.
2.8 ITV believes that an RPI minus X formula
should be reintroduced for the BBC when the present settlement
expires. Given that the BBC's level of funding from the Licence
Fee by 2007 will be almost £1 billion higher than was originally
anticipated in 1996-97 the imposition of an RPI minus X formula
will not devastate the BBC's finances. It will, however, restore
some equilibrium to the funding of the UK broadcasting sector
and encourage the BBC to (a) concentrate its resources on the
delivery of its core public purposes (as agreed during this Charter
process) and (b) concentrate on generating greater efficiency
savings.
2.9 In the wider context of the general
review of public service broadcasting being conducted by Ofcom
it is also ITV's view that the Government should take the opportunity
of this Charter Review to stop viewing the Licence Fee as the
sole birthright of the BBC. It is clear that major changes in
the broadcasting market lie ahead as we approach digital switchover
and it may be necessary for the Licence Fee to be used to support
public service content on channels other than the BBC if we continue
to believe that a plurality of supply in PSB is important. The
Charter and Agreement should, therefore, be amended to permit
the use of the Licence Fee by other broadcasters, where appropriate,
to support PSB subject to a recommendation by Ofcom and approval
by the Secretary of State and Parliament.
3. How should the BBC be governed and/or
regulated and what role should be played by Ofcom?
3.1 In 1999 the Committee concluded "The
BBC's self-regulatory position separate from the rest of broadcasting
is no longer sustainable. The case for a single regulator of the
market as a whole, which we made last year, has been reinforced
by the rapid development of the market. We reiterate our recommendation
that regulation of the broadcast content and commercial activities
of the BBC should be the duty of a Communications Regulation Commission."[10]
3.2 It is ITV's view that this conclusion
was right then and has since been proven to be so. The current
arrangements for governance and regulation of the BBC are inadequate.
They are not serving the public interest, nor are they serving
the BBC's best interests.
3.3 The Hutton Inquiry has comprehensively
exposed the central flaw in the BBC Governors' role and remit.
The Governors have a crippling conflict of interest when it comes
to adjudicating on allegations of serious editorial failings because
they are charged both with defending the BBC's values and independence,
and with regulating its editorial output. When the two are in
conflict, the defensive role will always take precedence. This
conflict extends beyond editorial matters to every area of the
Corporation's many activities. The Governors are not equipped
to take an objective arm's length approach to evaluating performance
or strategy outcomes, since they played such an integral part.
3.4 The Governors should be maintained as
a strong body of people appointed to represent the public interest
and champion the BBC. The regulation of the BBC should be the
responsibility of the independent regulator Ofcom, which is already
responsible for regulating the BBC at Tiers 1 and 2 of the new
regime created by the Communications Act.
3.5 Ofcom is not, as some have sought to
suggest simply a "commercial regulator". One of its
main objectives is the maintenance and strengthening of PSB and
it is the most appropriate body to have full regulatory responsibility
for the BBC. Passing this role to Ofcom would make more sense
than yet another half hearted attempt at creating an artificial
distance between the Governors and the BBC management.
4. In a changing communications environment
does a 10-year Royal Charter and Agreement with the Secretary
of State provide the most appropriate regime for the BBC?
4.1 The anachronism of the BBC operating
under a Royal Charter, whilst the rest of the industry operates
under clear statute is not ideal. However, all of the major changes
that need to occur at the BBC in this Charter Review, such as
the granting of full regulatory authority to Ofcom, can be done
without changing the Royal Charter status of the BBC. Getting
these changes right, rather than seeking to find limited parliamentary
time to alter the BBC's status, is the priority as far as ITV
is concerned. We also believe that this Charter ought to be renewed
for a 10-year period in order to provide the BBC with sufficient
time and certainty to implement the changes to its funding, regulation,
governance and remit that we hope will result from this Charter
Review process.
Annex
THE EFFECT OF ADVERTISING ON THE BBC
KEY ASSUMPTIONS
We have used Market NAR and viewing & impact
shares in line with projections for audience and advertising revenues
based on third party forecasts. It is assumed that advertising
is allowed (in whichever form) on the BBC from Jan 2007 onwards.
TOTAL IMPACTS
If advertising was allowed on the BBC (Case
A) then Total TV Impacts rise by 50%. This is based on the fact
that in 2007 our estimate of Total BBC Viewing (BBC1, BBC2 and
BBC Digital Channels) is 37.2% of individuals viewing. This would
suggest that as the non-commercial sector is 60% of the commercial
sector, when the BBC becomes commercial it would provide an extra
60% of impacts to the TV marketplace. We have downweighted this
number to 50% to reflect the fact that part of the BBC's strength
is made up of ardent ad-avoiders who would probably watch less
television as a result of advertising on the BBC.
TOTAL REVENUE
However, despite this 50% rise in Impacts only
5% more TV revenue is generated as a result. The justification
for this is as follows:
— History shows that incremental increases
in impacts generated by new channels (eg C5, TV3 in Ireland) or
extra minutage, do not engender a commensurate increase in NAR
— This is supported by a recent Mindshare
report which estimated that any increase in impacts from advertising
on the BBC would be absorbed within 18 months.
At first glance it seems counterintuitive that
such a large increase in supply would stimulate a relatively small
increase in demand (Revenue) but in reality, while costs would
come down—which would allow advertisers previously priced
out of TV to advertise—existing advertisers would achieve
the same targets for less and would, in fact, scale back investment.
Indeed the existence of EastEnders as a rival to the coverage
powerhouse that is Coronation Street and the fact that
they have many mutually exclusive viewers means that advertisers
might reach coverage targets more efficiently (the BBC's attractive
demographic profile would further aid this) which would also allow
them to reduce expenditure.
In short we believe that the 50% increase in
Total Impacts would only generate a 5% incremental increase in
Total TV NAR. It is worth noting that in the base case for 2007
this is an extra £183 million on top of the currently forecast
£3,653 million for Total TV NAR. This money would come from
other media and is roughly equivalent to the current size of Cinema
advertising or a third of all Radio advertising.
SCHEDULE INVESTMENT
It is assumed that all channels continue to
invest in schedules at their current rate. This is true of the
2007 year as well.
SCENARIOS
For the purposes of this document, we will concentrate
on 2007—the first year that any changes to BBC's non-commercial
basis would take effect. Seeing the effects of this one-year is
sufficient to demonstrate the effects on the TV marketplace that
would result from such a change.
BASE CASE—2007
| Individuals Viewing %
| Adult
Impacts % | Premium
| NAR % | NAR £ms
|
BBC1 | 24.6 |
| | | |
| BBC2 | 10.0 |
| | | |
| ITV1 | 21.2 | 40.8
| 118.1 | 48.2 | 1,760.2
|
| GMTV | 1.5 | 2.5
| 60.0 | 1.5 | 54.8
|
| C4/S4C | 8.8 | 15.0
| 118.7 | 17.8 | 650.3
|
| Five | 6.1 | 10.3
| 79.8 | 8.2 | 300.3
|
| Other BBC | 2.6 |
| | | |
| Sat/Cab | 25.2 | 31.4
| 77.4 | 24.3 | 887.8
|
Total | 100.0 |
100.0 | | 100.0 |
3,653.4 |
| |
| | | |
Case A
ADVERTISING ON THE BBC
BBC1 and BBC2 allowed to advertise in the same manner as
other commercial channels.
| Individuals Viewing %
| Adult
Impacts % | Premium
| NAR % | NAR £ms
| Base £ms |
BBC1 | 24.6
| 28.2 | 116.9 | 32.9
| 1,263.0 | +1,263.0 |
| BBC2 | 10.0 | 9.8
| 111.9 | 11.0 | 420.9
| +420.9 |
| ITV1 | 21.2 | 24.5
| 103.8 | 25.3 | 971.4
| -788.8 |
| GMTV | 1.5 | 1.5
| 54.7 | 0.8 | 31.4
| -23.4 |
| C4/S4C | 8.8 | 9.0
| 100.1 | 9.0 | 344.4
| -305.9 |
| Five | 6.1 | 6.2
| 85.0 | 5.2 | 200.8
| -99.5 |
| Other BBC | 2.6 | 2.0
| 76.8 | 1.5 | 58.1
| +58.1 |
| Sat/Cab | 25.2 | 18.8
| 75.8 | 14.2 | 545.9
| -341.8 |
Total | 100.0 |
100.0 | | 100.0 |
3,836.1 | |
| |
| | | |
|
Assumptions: BBC 1 would supersede ITV1 as the preferred
route for advertisers by dint of its greater size, better profile
and breadth of programming. BBC 2 would "out niche"
C4 for the same reasons. ITV1 and C4 would lose their USPs (fast
coverage and efficient targeting of sub demographics) and the
BBC would command a substantial premium due to profile.
Case B
LIMITED MINUTAGE
PER CLOCK
HOUR
If limited to half commercial minutage of clock hour then
BBC revenues = 50% of Case A
Case C
PEAK ONLY
Peak accounts for 70-80% of revenues, assume BBC revenues
70-80% of Case A
Case D
OFF-PEAK
ONLY
Off-Peak accounts for 20-30% of revenues, assume BBC revenues
20-30% of Case A.
IMPLICATIONS FOR
UK BROADCASTING ECOLOGY
Currently UK television programming is paid for via Subscription
(BBC & Sky etc.) and Advertising (Sky, ITV, C4, C5 etc.).
Below is set out the approximate revenues of the major players
(excluding Sky) and the cost of their programme budgets giving
their Gross Margin for 2003. Please note that the Programme Budget
does not represent the full costs with PQR levies, sales costs
and transmission costs among many assorted costs that also apply.
2003 | Programme Budget
| Revenue | Gross Margin
|
BBC | 1,900.0
| Licence Fee | |
| ITV | 1,000.0 | 1,592.4
| 592.4 |
| C4 | 345.0 | 635.1
| 290.1 |
| Five | 157.0 | 252.3
| 95.3 |
| |
| |
Below is set out the same table for 2007 with an advertising
funded BBC
2007 | Programme Budget
| Revenue | Gross Margin
|
BBC | 2,056.6
| 1,742.1 | -314.5 |
| ITV | 1,082.4 | 971.4
| -111.0 |
| C4 | 373.4 | 344.4
| -29.0 |
| Five | 169.9 | 200.8
| +30.9 |
| |
| |
Sky are absent from these tables as they would be relatively
unaffected by these changes—only 9% of their income is from
Advertising the remainder from Subscriptions and channel sales.
Arguably, with each household £10 a month better off after
the removal of the licence fee, Sky could well increase their
subscriptions and ARPU to offset any losses to advertising revenues
CONCLUSION
Clearly this means that current budgets for BBC, ITV, C4
and Five would become untenable. ITV's Gross Margin for example
would go from +600 million to -£300 million. Expensive original
commissions would be less and less viable and the only player
left with any sort of cash for commissions & acquisition would
be BSkyB.
In effect, unless the ex-licence fee money from each household
found its way to Sky and Sky spent it all on programming, there
would be a massive loss in revenues to UK programme producers.
For this reason this analysis ends at 2007. Without agreement
on how we model future programme budgets it is impossible to look
at revenues in the longer term.
15 April 2004
1
Paragraph (xi), 3rd Report of DCMS Committee, 1999. Back
2
Interview with Jane Root in Creative Business section of the FT,
16 September 2003. Back
3
See EC 320/11, Communication from the Commission on the application
of State Aid rules to public service broadcasting, paragraphs
37 and 42. Back
4
Paragraph (xx), 3rd Report of DCMS Committee, 1999. Back
5
See Annex. Back
6
In 2003 there were 23.8 million full licence fee-payers, compared
to just 20.5 million in 1996-97. Back
7
In 2000 the BBC promised to cut its overheads from 24% to 15%
by 2004. In fact it had already managed to cut them to 13% by
2002-03. Back
8
ITV revenues have fallen from a high of £2 billion in 2000
to £1.6 billion in 2003. Back
9
This excludes revenues generated via BBC Worldwide and the BBC's
other commercial ventures, which by 2006-07 are expected to give
the BBC a total income of near £4 billion. Back
10
Paragraph (xx), 3rd Report of DCMS Committee, 1999. Back
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