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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 1091-v House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE culture, media and sport committee
new media and the creative industries
TUesday 20 June 2006 MR JOHN MCVAY, MR ALEX GRAHAM and MR MALCOLM BRINKWORTH MR ANDY DUNCAN, MS ANNE BULFORD and MR ANDY TAYLOR MR HAMISH PRINGLE, MR JIM MARSHALL and MR WAYNE ARNOLD Evidence heard in Public Questions 340 - 429
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Culture, Media and Sport Committee on Tuesday 20 June 2006 Members present Mr John Whittingdale, in the Chair Janet Anderson Philip Davies Mr Mike Hall Alan Keen Rosemary McKenna Mr Adrian Sanders Helen Southworth ________________ Memorandum submitted by Producers Alliance for Cinema and Television (Pact)
Examination of Witnesses
Witnesses: Mr John McVay, Chief Executive, Mr Alex Graham, Chief Executive of Wall to Wall, and Mr Malcolm Brinkworth, Managing Director at Touch, Producers Alliance for Cinema and Television (Pact), gave evidence. Q340 Chairman: Good morning. Welcome to the fifth session of our inquiry into New Media and the Creative Industries. We have three sets of witnesses this morning so can I begin by welcoming Pact: John McVay, Chief Executive, Alex Graham, the current Chairman, and Malcolm Brinkworth, Managing Director of Touch. Obviously, since we started this inquiry there have been developments and you have now successfully reached an agreement with the BBC and with Channel 4 over new media rights. Can I ask first, looking at your agreement with the BBC, how do you see it working in the future, what do you see Pact as having achieved from that and what differences will it make to your members, in terms of exploitation of rights, firstly, during the course of the series, and, secondly, after the final programme has been transmitted? Mr Graham: Thank you. The BBC, as it happens, and I would like to say we have now actually reached an agreement with ITV as well, just in the last couple of days, so Channel Five remains the outstanding agreement and we are hoping to get there soon with them. Obviously, the BBC's needs were different from the commercial broadcasters', in the sense that they were looking to extend their free, seven-day catch‑up window. The nub of the agreement is that we have given the BBC what we describe jointly as an enhanced seven days, so we have given additional rights to the BBC which will allow licence-payers to download programming within the seven days but they will then have an additional three months in which to watch the programme. The BBC was concerned that in the original terms you would have to not only download the programme within seven days of its transmission but also you would have to watch it within those seven days, and we agreed that was rather tough on the licence-payer so we have given them the extra three months. We have also allowed what is called series stacking, a sort of jargon in all of this, which will allow you, basically, if you have missed the first couple of episodes of a series, so you come in on episode three and you decide to download it, you will have the option, again within a three-month window, to go back and catch up on episodes one and two of a series. In return, we have several significant gains. The independent producer will now be able to offer the programme digitally for sale on the eighth day, after the seven-day, free catch-up window. We did have this right before, but it was restricted only to sales made through independent producers' own websites. We argued that this was discriminatory against a smaller independent producer, who simply would not have the resources to set up their own sales operation, so the BBC has now agreed that independent producers can offer that digital sale via a third party website. We have also agreed a much more simplified mechanism for releasing programming into the secondary UK market. We had already agreed a shorter hold-back period, programming released after six months, in the case of BBC1 and BBC2, after 18 months in the case of Three and Four. We have maintained those shorter hold-backs but we have now agreed a much more simplified mechanism for releasing them, so that the approvals that the BBC need over that will now be done much more simply. I know this is a source of aggravation for both independent producers and for some of the secondary channels. I guess the third significant thing is that we have agreed, in return for the enhanced services at the front end, that independent producers will now get, within the period of the BBC licence, an enhanced revenue share, so that instead of a 50/50 split on revenues between the release of the programme into the secondary market and the end of the five-year licence that will now be 75/25 in the independent producer's favour. There is an exception and this is across all the broadcasters. Returning series are a source of concern for all the broadcasters protecting the brand, so where a series is a returning series, so it comes back every year, or every six months, we have a mechanism which we have called the rolling release mechanism, whereby - it is slightly complicated - series one of a returning series would be released into the UK market after the transmission of series three, and so on, series two after series four, so it is a two-series hold-back. We feel this strikes a balance between the desire of the incumbent broadcaster to protect their original investment but actually ensures that the returning series are released into the secondary UK market more quickly. Mr McVay: Previously, just to be clear about it, the returning series were normally never released; they were always under a five-year licence and then subsequent hold-back. Another significant thing we have changed, in both the Channel 4 and BBC terms, is those broadcasters sought to define a programme as a landmark, which was not a scientific definition, it was basically that they could call any programme a landmark and therefore withhold it indefinitely from any source in the secondary market. Those clauses have now been removed as well. Q341 Chairman: This arrangement applies presumably purely to independent productions made for the BBC, does it? Mr McVay: Yes, that is what we have been negotiating for; if the BBC wants to apply it to anyone else... Q342 Chairman: The BBC in-house productions, as far as you know, would the BBC intend to make available in-house productions for broadcast on other channels, perhaps, under similar terms? Mr McVay: We already do, through the joint venture with Worldwide and UK TV. We have made the point to the BBC that we would seek parity, whereby, if the BBC were releasing their programmes even earlier then, the hold-backs we have agreed, we would seek the same parity. We think, otherwise, if the BBC effectively dumps programming into the secondary market, the value of our programmes would be diminished because there would be other markets. Q343 Chairman: This is fairly complicated. Mr McVay: Yes. Mr Graham: We have had five minutes and we have not even started yet. Mr Brinkworth: We will issue a glossary of terms. Q344 Chairman: In order perhaps to make it a little simpler, let us take something like Spooks, a very successful, independent production for the BBC; we are now on about series three, I think. Just using Spooks as an example, let us say Spooks was going out now, the BBC would make that available for download for seven days, so this week's episode would be available for seven days after transmission and I could watch that any time within three months, after which it would mysteriously self-destruct, like Mission Impossible? Mr McVay: Yes; we would get a little bit of music for it as well. Q345 Chairman: How does the hold-back arrangement work? Mr Graham: Let us assume it was the third episode of the new series of Spooks; you could download that episode and you would be able to watch it at any time in the next three months. Indeed, once you decided to watch it, or I should say open it, you then have a further seven days in which to watch it. It can sit on your little box and you can have it for up to three months; as soon as you decide to watch it, so if you started to watch it and then got interrupted you would still have seven days, but if you start to watch it then after seven days it self-destructs. If you had not discovered the joys of Spooks before and you downloaded it and watched it, you would now be able to go back and download programmes one and two from that series, even though they had run out of their seven-day window. Under the series stacking arrangement you can go back and catch up, and you can do that for a series of up to 13 episodes, in other words, within a three-month period you can go back and catch up on that. From the point of view of the independent producer, let us assume that show goes out tonight, then in a week's time the independent producer could offer it. Then, if you really loved Spooks and you wanted to own the episode for ever, you could go and buy that episode either directly from the independent producer or via an iTunes-style website, you could pay a price which is yet to be determined by the market, but you could go and spend 99p or 49p or £1.49p and then you would own the digital version of that programme for ever, like a DVD but downloaded digitally. From the independent producer's point of view, because Spooks is a returning series, the producer would not be able to sell this particular series, series three, until series five had been transmitted. It depends slightly on how quickly programmes come back, but if we assume, say, in the case of a series like Spooks, it comes back every year, more or less, it would be another two years before the independent producer could sell that series into the market. As John said, that is a significant shift, because in the past the rule of thumb was that returning series remained held back from exploitation for the life of the series, so if a series ran for ten years then you would not be able to sell it into the secondary market at all, so it is a significant move forward for us. Q346 Chairman: Does this cover all types of distribution? If Spooks went on mobile TV, would the same arrangement apply? Mr McVay: The broadcasters, rightly, I think, have sought what we call simulcast rights on mobiles, so basically that means when they transmit their linear signal out on Freeview or on analogue they can also provide that to mobile TV as well, and that is a broadcast right. At the end of the day, we want to be able to watch television and watch art content and we want to give broadcasters the opportunity to market their wares to the paying public or the licence fee‑payers. Q347 Chairman: Lastly on the BBC, the argument has always been made by the BBC that the licence fee-payer has financed the production and therefore should have the right; is there any geographic constraint, so if I live in North America am I able to have access? Mr Graham: No. Mr McVay: DRM is geographically restricted. Q348 Chairman: It is restricted to the UK? Mr McVay: Absolutely; that is a primary condition for us in all the new media rights we have been negotiating, that it has to be restricted to UK territory. Mr Brinkworth: For all broadcasters. Mr McVay: : Just one point on what we have tried to do, particularly when the details come in a bit more and people have a chance to pour over it, in all the deals, we have tried to make sure that at no point were rights restrained from the British public. Even if you cannot get pay-per-view or you hire or rent an episode, you can still buy it within eight days. We worked it out, one, because we think consumers and citizens want choice, but also it is the way to combat piracy as well, that by making more content more freely available, or more widely available, that is the way to address piracy issues as well. Q349 Rosemary McKenna: Can I ask you a question that we were discussing before we started, because you were involved in the discussions last year, can you remind us of the percentage of independent production that the BBC must put out to outside the London M25 area? Mr McVay: The nations and regions overall percentage is 33 per cent, it is under the old 'Hatch' figures, as it was called. Within that, there is a specific quota for independent producers; there is no sub-quota. The quota applies for the whole of the BBC. Obviously, we have been working hard to encourage the BBC to do a lot more out of London and we are in quite involved discussions about how they can do that. Our view has always been that the way you do that is by building up production capacity, and the way you build up production capacity is by giving people work, making productions, and that is the way you sustain production outside of London. Q350 Rosemary McKenna: Can we move on to Channel 4 and the differences. It seems to me that the BBC agreement was key in allowing them to make the agreements with the other broadcasters. In the Channel 4 agreement, where exactly will the broadcaster still control the new media rights and share the revenue with you and where will you control the exploitation rights and the revenue? Mr McVay: With the commercial broadcasters, we started from the position that these should be commercial services and we want to see broadcasters building up commercial services in the new on-demand space, and we think there are opportunities there not only to satisfy their desire to protect their linear revenues but also to build up new opportunities. We actually went into the negotiations, from day one, saying that we wanted to give them a commercial right to use our programmes on new commercial services. The question was for how long and we had a lot of to'ing and fro'ing on that. Channel 4's original position was it was 30 days and they would give it away for free; we found that a bit hard to swallow, it is our programming and our revenues they are talking about as well. We have now agreed with Channel 4 that they have a primary commercial window for pay-per-view and subscription VOD for 30 days and we will share in the revenues from the exploitations of those programmes for 30 days, and this is where things get even more complicated. We were very conscious about concerns from other players in the market and new entrants, about issues around warehousing, so within the commercial deals we have a number of pinch-points, which we call 'use or lose' clauses. Basically, if Channel 4 chooses not to use a programme on the commercial service then the programme reverts exclusively to the producer, from day one. At the end of the initial 30-day period, if they have not negotiated on commercial terms to retain the programme on their service then the programme will go exclusively to the producer. If they have started negotiation but there has been no deal agreed then that programme, in effect, will be blacked out for five months, so for a total of six months from transmission the programme would not be available on the Channel 4 service, on pay-per-view or SVOD, or on any competing service. That way we try to protect the value of the programme, so if someone, at the end of the six months, wants to buy it from us on a competing service then it has still got some value in it. Also it forces the broadcasters to make clear decisions about what they want to put up on the service, what is the commercial proposition they are seeking to develop but which did not automatically bundle the programmes into a catch‑all. Alex put it well, a debate we were having at Westminster Media Forum is, if someone pays for something they tend to try to get their money back and exploit it and do it properly; if they do not pay then effectively that can often be warehousing because they are not actually looking to derive value from that programme. That damages us, but also potentially it damages new entrants, who are seeking to build new offerings as well. Q351 Rosemary McKenna: Could you talk us through a typical BBC 4 series, say, The Thick of It; how could that be exploited under the new arrangements? Mr Graham: Let us say, Green Line; so Channel 4, on any episode of Green Line, for 30 days after transmission, they would be able to offer Green Line on a commercial basis, so if you wanted to go and catch up with Green Line, you could for 30 days. Unlike the BBC, it would not be for free and there are different kinds of pricing models. To be honest, we felt strongly that we did not want to be in a position where we were dictating Channel 4's business models. We felt that we wanted to try to reach a simplified solution whereby we would give Channel 4 this window and agree a revenue-sharing model with them, but, essentially, we expect there to be several potential business models. The two most obvious ones are, one, that you will have a sort of 'all you can eat' model, a sort of Pizza Hut model, where you would pay, say, £5, £10 a month and be able to download pretty much as many programmes as you wanted in that month, or you could go for an à la carte model, where you might decide to pay simply by download. It depends on the kind of user you are, if you expected to download a lot of programmes in the course of a month you would go for the monthly subscription, if you thought, "Well, maybe I'll want to download only two or three," you would go for the pay-per-view option. Within those 30 days Channel 4 can offer the on-demand service; that will be offered either via digital television services, such as Sky or BT or Home Choice, and it will also be offered via the Channel 4 website on broadband, so you would be able to access it from a number of different points. It will always be a Channel 4 branded service, we have made it very clear to Channel 4 that this 30-day exclusive window applies only to the Channel 4's own brand, so Channel 4 cannot take our programme and, as it were, give it to another service provider and let them sell it within the 30 days, it has to be part of the Channel 4 service. Within those 30 days, Channel 4 and the producer can negotiate, so Channel 4 and Talkback would sit down and talk about deal terms to extend Channel 4's exclusive licence beyond the 30 days, assuming that Channel 4 wanted to. Channel 4 might decide they do not want to, in which case, after 30 days it comes back to the producer. If Channel 4 wants to extend it, the producer has to offer it to Channel 4, but the producer does not have to accept the deal that Channel 4 offers, just to avoid them simply low-balling the deal. If the producer decides not to accept a deal then the producer cannot immediately go and sell it to someone else, they have to wait for six months, so it is a kind of mechanism. Actually, we have this mechanism already in relation to Channel 4's secondary channel E4, and we have kind of borrowed that mechanism from the E4 deal. It is a mechanism which forces both sides to reach an agreement but it does not force the producer to take what is an uneconomic deal. Q352 Rosemary McKenna: Does that apply to repeats; is the new agreement about a new production, or does it apply to a production that has already been used? Mr McVay: We have yet to discuss that with Channel 4, how existing contracts for programming then appear on their service. We have held discussions with the BBC about that, but the implementation of transitional periods has yet to be worked out. I am sure Channel 4 will tell you more later today about their plans, so they are looking towards a service that will probably carry programming which has already been contracted under broad arrangements and we will have to discuss how to resolve that. Mr Graham: It is worth saying, just as a bit of context, I think it is important to understand that all the broadcasters, and particularly commercial broadcasters, came to the table with a strong desire to try to have quite extensive hold-backs against new media exploitation. I think, to be fair, they were concerned about the impacts of new media on their business models. We came to the table trying, on the one hand, to understand those concerns and to try to recognise the importance, after all, the incumbent broadcasters are still the major investor in UK content, so it would not be in our interests to undermine their business model, but, at the same time, trying to strike a balance between what we regarded as their legitimate needs and the needs of the market. I think, in the end, we feel, although it has taken three months of pretty tough negotiations, what we have is a deal with all the broadcasters which manages to strike that balance between their desire to protect their initial investment but provides a real shot in the arm, both to the existing UK secondary channels, in terms of much earlier access to content, and to new entrants into the market, the BTs and Yahoo!s, who are going to want to come in and, hopefully, devise yet more innovative ways of bringing content to people. Q353 Mr Sanders: I want to go back to warehousing. Would a deadline for how long a show can be warehoused help the industry as a whole, and what would be an appropriate warehousing period? Mr McVay: Our original submission to Ofcom was that we felt seven days was the longest period, indeed, many of our members felt one day was too long, but through the negotiations we have arrived at commercial use for 30 days, so it is not warehouse that is actually available. I think, any warehousing at all, i.e. if the programme is withheld from any sort of access by the public, is absolutely damaging to the public interest and also to the commercial interests of the producers and indeed the broadcasters. We have never liked the word 'warehouse', producers do not like warehousing; we want to see our programmes in as many shop windows as possible, as quickly as possible. Mr Graham: Just to be clear, because these definitions are a bit slippery and even in the negotiations there were times when we were trying to clarify them. If I understand you to mean what I understand by warehousing, the deliberate removal of a programme from the market-place in order to protect the person who owns the rights, to be fair, there is no warehousing in that sense of the word in any of these agreements. There are hold-backs against exploitation in other markets, but the broadcaster, in order to enforce these hold-backs, must agree to make that programme available in the market-place. Mr Brinkworth: One of the key things is trying to balance very clearly the huge investment in programming and regional programming that goes into the UK market and genuinely allowing that to see out, in terms of the revenue that can be derived from secondary use, in growing a secondary market. It is balancing those two that has been uppermost in our minds in the whole negotiation process. Mr McVay: Not in everyone's mind. Mr Brinkworth: In our mind. Q354 Mr Hall: In terms of the secondary agreements, the Satellite and Cable Broadcasters Group criticised Ofcom because they said it actually favoured terrestrial broadcasters at the expense of everybody else in the business. Last week, at the Committee, we were told by John Hambley that the latest agreements would do little to improve the situation for their sector. Have you got anything to say about that? Mr Graham: I read the joint evidence. I think he did preface his statement by saying that he had not seen the detail of the agreements. Q355 Mr Hall: He still did not think it was any good? Mr Graham: I am slightly surprised. It is certainly true, I think, that the incumbent broadcasters set out to try to impose quite severe hold-backs on secondary exploitation but the deals we have achieved seem to me to be very, very good news indeed for the satellite and cable broadcasters. Just across the board, three headline points; one is a hugely simplified release mechanism from the BBC. Q356 Mr Hall: Is that what you have just explained to the Committee, the hugely simplified release mechanism? Mr McVay: That is the sort of non-linear that we have explained, but the recent linear programmes basically, for the vast bulk of BBC programmes, it is six months, it is a lot more straightforward. That means that the cabsat guys will have many more products come to the market sooner. Mr Graham: In the case of ITV, until now ITV has imposed a pretty rigid five-year hold-back against everything that ITV has commissioned. We have now reduced that, in the case of non-returning programming, to six months, and to returning series to two and a half years, so that is a dramatic impact on the secondary UK market. The third thing is that part of the Channel 4 deal is a reduction in the Channel 4 overall licence from five years to three years, which means that all programming will now be released completely into the market-place after three years. I find it difficult to understand why the cable and satellite broadcasters think this is a bad deal for them. I would have thought that this is going to be a huge shot in the arm for the UK distribution business, and for them particularly. Q357 Mr Hall: Can I put the question to you in another way then. Do you think this new deal will actually enhance competitiveness and plurality within a multi-channel phase? Mr McVay: We hope so, yes. Mr Graham: Yes; that is our intention, because we reckon that our members benefit hugely from the opening up of the market. That has been a huge benefit of the impact of the codes of practice; you see the impact of the original codes of practice. There has been a huge growth in the amount of programming available in the UK secondary market and we expect that, combined with the new media delivery systems, to give a further shot in the arm. We hope so, and we expect so. Mr Brinkworth: It would be very nice to see the cable and satellite industries also putting similar amounts of money into original programming, which would have a very beneficial effect on the industry. Q358 Mr Hall: What about the impact on independent producers, because they produce the primary broadcasts; are they fearful that they might lose out if they do not do deals on secondary rights? You have got the primary broadcasters which produce commissions; are they fearful that they might lose those commissions if they do not accept the deals that they have been offered on secondary rights? Mr Graham: We have been very clear that one of the issues which have been on the table with the major broadcasters has been the question of the availability or otherwise to bundle their own secondary channels into the deals that they commission. We have been very clear, and have won this argument, that we have resisted any kind of bundling, in fact we have actually managed to unbundled More4, which is Channel 4's other secondary channel, so that Channel 4 will now pay separately for that. Right across the board, ITV and Channel 4, and indeed we are negotiating currently with Five, but we are taking the same position with them, the commission for a primary channel does not depend on them acquiring rights. They cannot acquire rights in any guarantee, they can negotiate to acquire those rights and price them separately but they cannot guarantee to acquire those rights for their secondary channels. Mr McVay: That is one of the things that Parliament sorted out in the Communications Act, that there has to be a separation of rights under the codes of practice, and that has been enforced through Ofcom approving those codes of practice. Broadcasters may seek it but we felt that was not consistent with the legislation, or indeed the commercial interests of our members. Q359 Mr Sanders: Can I look at unauthorised reproduction of creative content and the fact that illegal downloading is a factor of everyday life. It has been suggested that worldwide release dates for shows would combat illegal downloading. Do you think this would help? Mr McVay: It could do, in terms of movies, and indeed Hollywood is experimenting with that just now, and I know our friends in MPA are looking at it carefully, in terms of how that works. Q360 Mr Sanders: The US 2D series that are shown on UK television, the example of Lost, for example; it is not just movies, is it? Mr McVay: If you had British programming which was original programming, which was acquired for US release, it may be that you might want to look to synchronise those releases. Most of the work for the UK independent producers is in formats, so they make it for the American market based on a UK format. That might not synchronise so well, because you have actually got two different products, one a UK product and one a US product. Mr Graham: It is a difficult one, because I think the problem with that argument is that it depends on the nature of the film, or the content that you are talking about, so global synchronised release for Lord of the Rings or Harry Potter might work where you have powerful global brands, where everybody is going to want to go and see it on that first weekend. For a lot of independently-produced movies, and actually for a lot of television, they need the success in their home market to build any kind of success overseas. Indeed, the many independent British films and many successful British television programmes which go on to be successful around the world, the success has been built, first of all, by building and nurturing those programmes in their home market and then gradually rolling them out. I can see the argument; my concern is that it is going to work only for a very narrow and blockbuster-type project, either a blockbuster TV series, like Lost, or 24, or a blockbuster movie, like Harry Potter. I think, for a lot of television and a lot of movies, that is not going to be an option, just because of the way the market works. Q361 Mr Sanders: Were you aware, for example, that in 2005 Top Gear and, believe it or not, Tellytubbies were in the top ten illegally downloaded programmes? It is not just about series. Mr Graham: I think what it does illustrate is, absolutely, I think, and John explained it earlier, that in a new media world holding back material from the market increasingly does not work. I think the music business learned the hard way the dangers of not giving consumers what they want, and for me the lessons of the music industry are that, by and large, I think there will always be a certain number of people who want just to steal, or just want to download it for free because it is there. I am not sure we will ever eliminate that, but there is quite a lot of evidence now that for the vast majority of people, if you provide them with a decent download service and decent quality at a price that they want to pay then, by and large, people will pay. The growth of illegal downloads in the last few years has illustrated that and I think that television production companies, television broadcasters, need to learn the lessons of the music industry. Q362 Alan Keen: I am sorry to go back to the beginning again. I am always fascinated by what I call the theatre effect. I watch television, I want to sit there, old-fashioned, and what must be one end of the spectrum. I have never watched anything that I have recorded, and I do not often record anything. I would not watch a recorded football match. What I am interested in, because I do not understand this, and this is very, very complicated, and everybody else, I think, if they do not understand what you have been telling us, will have to watch it, like I do, the first time it comes out, but what research have you done and can you give me a picture of how people are viewing since the change and the easier recording? Mr McVay: There have always been a number of impacts of technology which have been proved to be more convenient for how people live. It is a hackneyed phrase, time poor, cash rich. I think you have got a number of devices already in the home, PVRs and SkyPlus boxes, and probably more PVRs coming in the next generation of Freeview, which will allow people to shift their viewing to suit how they live their lives. I think people see it just as that is what you get, whether you record it or not, a PVR does it automatically. The new broadband services, when you move on to broadband TV and subscription VOD, will give you huge choice, so you do not have to record it, but what you have is a huge, if you want, Amazon effect, where there will be a lot more choice, a lot more content. I am a keen fisherman. I can go home tonight and, instead of watching what a broadcaster wants to give me, I can watch what I want, when the kids are not bothering me and I have got half an hour to myself. Q363 Alan Keen: What percentage of people, because a lot of research must have been done? Mr McVay: Most of the research, unfortunately, is coming out of the States, in terms of how people are using broadband there to watch the television, and that seems to be increasing, if you look at HBO. HBO's experience is that they are offering subscription broadband, and if you want a linear schedule it is increasing the take-up, they are increasing their viewers by offering choice, basically. Q364 Alan Keen: You are saying that no research is being done here before these decisions are being made? Mr McVay: That is absolutely one of the difficulties that Ofcom, ourselves and the broadcasters face, that these services are not to the market yet. We have agreed with the broadcasters that we will review these arrangements in two years' time, so that when we do have the data and some knowledge and we do see it run commercially, how it is operating, or how audiences are using it, we will be in a better position. Mr Graham: There has been some consumer behaviour research, not a great deal but there has been some. Of course, one of the difficulties with consumer behaviour research is knowing whether or not to believe what people tell you. I have always felt that if you believed most surveys about what people watch on television then Panorama would regularly have 20 million viewers, because everybody says that they like to watch it. Whenever anyone asks in a survey, "What do you watch on television?" it is always "I really like documentaries and current affairs," so you are left wondering, if that is the case, why documentaries and current affairs are not watched much more. I think that there has been a certain amount, and we have done some of our own research, and that seems to suggest, for example, that there is quite a lot of appetite for both catch‑up television, on-demand television and, indeed, commercial downloads. Although, interestingly, and perhaps you are an example of this, not necessarily at the expense of good, old-fashioned, linear TV; and, if it is of any comfort to you, I suspect there will be, for the foreseeable future, when you get home at night, good, old‑fashioned, linear television. You will not necessarily have to go down this on‑demand route if you do not want to, it will still be there. Q365 Alan Keen: I am asking the question because there is a tremendous peak in viewing when a film is first released at the cinema, and lots of people go; once it is past that first week, or so, the viewing figures drop off. We seem to be going the opposite way with television and yet there still must be the theatre effect left there. That is why I am interested in what research has been done? Mr Graham: I think it is very complicated. Everyone predicted that the growth of DVD, for example, even with video before that and then DVD, was going to destroy the cinema. Actually, quite the opposite happened; people rediscovered cinema and rediscovered it through DVD, and people started going back to the cinema. It is a curious fact that, at the time that we are discussing all this broadband, on-demand, different ways of delivering, nonetheless, the BBC brings back Dr Who and regularly ten million people sit down to watch. Actually, with Dr Who and Strictly Come Dancing, the BBC seems to have discovered the trick of family viewing, people all sitting around watching television. This is what we were all told, every survey told you that family viewing was there, that everybody was going to be watching television in rooms in different parts of the house. The truth is, and I understand completely what you are saying, actually, as John says, it has been one of the most difficult things, trying to negotiate these deals, which are predicated on certain assumptions about consumer behaviour, and none of us really knows. Who would have guessed that texting would become the most powerful driver of mobile 'phone use; nobody saw that coming. It is one of the joys and sorrows of this business, nobody really knows how people are going to use this in the future. Q366 Alan Keen: Coming now to the BBC's creative future, like some people, are you horrified about the prospect, or will it give your members wonderful, new opportunities? That is a very extreme view of the question I am putting; it must be somewhere right across the spectrum, presumably. What is going to happen? Mr McVay: With the Creative Future, the arrangements we have reached with the BBC allows them to use our programming, effectively, in the Creative Future; i.e. it is an enhanced window, it gives licence fee-payers more use in their access to BBC programmes. I think there is a broader issue around the public value test and the market impact assessment will have to be done on basically the BBC going into a broadband delivery market and offering programme for free, and I think that is a legitimate question there which should be answered through the public value test and the market impact assessment. When the BBC moves into any area of business it does have a distorting effect, particularly because it is going to give away content for free. Indeed, because it gives away content for free, it may drive the other, commercial broadcasters into more free models as well, where basically free VOD models are funded through advertising rather than through commercial revenues, and that is something we would want to have further discussions about when they move to that. I think there are real issues around that. At this point, we really do not know exactly how WIMP is going to be rolled out, at what point, over what services. I think the Trust has got some tricky questions to answer. Q367 Helen Southworth: What is your view of the state of the industry at the moment, the state of the health of the industry; are there opportunities to develop creative skills? What does the Government need to do, what does the industry itself need to do to develop a really vibrant economy in the industry? Mr McVay: I can answer a little bit about the skills and maybe Alex and Malcolm, as entrepreneurs working in the industry, can answer a bit more about what they feel are the business opportunities. In terms of the skills, through Skillset, we have just been working on a new TV Skills Strategy, which will be launched later this year, with the Secretary of State, Tessa Jowell, which is a combined strategy which involves all the broadcasters, and includes cable and satellite, Sky, the trade shows, the producers. That is an integrated Skills Strategy, which will look to address not only the existing needs in the labour market but also new entrants coming to that, with a particular focus on all the new issues about multipart form, digital technologies, they do impact on production there, so bringing the opportunities in production. HD is going to be launched in the next 12 to 18 months in the UK; again, that has impacts, skills for existing craft personnel and also new entrants. I think the industry, through Skillset, thankfully we have got a Sector Skills Council for our industry, I think through having that strategic body, to bring us all together, to say what we need to do, how we are going to fund it, and there is a funding formula in place now for the industry to make contributions. Pact does not come under that legislation, we make our own voluntary contributions to a fund, which Skillset administers and which I chair, and we have been doing that for 15 years, we have been taking a voluntary levy from producers and putting that into skills for particularly freelance employees. Mr Graham: I think John is right. The way I see it is, I think the context in the UK, in terms of content creation, I have been an independent television producer for just under 20 years and I cannot recall a more exciting and stimulating time to be an independent producer. First of all, within the UK, in terms of digital penetration, in terms of digital television, two‑thirds of households have digital television and more than half of adults now buy goods online. I think there are legitimate concerns about the digital divide but, nonetheless, the combination of those technologies in the UK I think is a unique spread. I think the growth of the independent sector has meant that, internationally, we now lead the way, in terms of international programme sales. We are a long way ahead of any competitors, other than the US, we are second only to the US in terms of international sales, our share is 10% compared with, I think, Canada, which is next, with 4%. On formats, the UK producers have 45% of the international formats market, compared with 20% for the US producers. We are incredibly well placed, I think. The lesson for me, as a producer, is that all of these debates we are having, all these painful negotiations around new media rights, all the agonising that we are doing here, about jargon and VOD and SVOD and pay-per-view, and so on, is pretty meaningless unless there is really great content to drive it. I think the significance of the codes of practice actually in giving independent producers the chance to build real businesses, to deliver to a UK market but also internationally. I do think John is right, that the challenge now, for all of us, is to make sure that the opportunities are there for us to bring on the next generation of really great, innovative, exciting, programme-makers, and I guess that is our job really, together with the broadcasters, that is a challenge we have to meet. Mr Brinkworth: I think also, if I can take that one stage further, the codes of practice have made a fundamental difference to your ability to build a business, a fundamental difference, and that transformation has opened up a distribution market worldwide, also within the secondary market here in the UK. It has allowed us to export our programmes and gain genuine revenue so you can build a business there. I think there are issues which we need to face, in terms of the geography of production being still in the UK, which I think is a real issue, and I think that is a key one which will happen over the next 12 months. I think the overall settlement that we have got, in terms of the new media rights, actually, for the first time, strikes a very good balance between getting new programmes into the market and allowing independent producers genuinely to exploit them in a new media space. That has not existed before. Q368 Helen Southworth: As I am a Member of Parliament for Warrington, you will not be surprised that I am particularly interested in the BBC moving out of London and up to Greater Manchester. Mr McVay: Salford; yes. Q369 Helen Southworth: Absolutely. The BBC sometimes likes to keep us hanging on threads over these sorts of things, and we are not particularly keen to see that happen. To the industry, how important is it that these sorts of development opportunities are spread out, geographically, across the nation? Mr McVay: As I said earlier on, our view has always been that the BBC particularly should make sure that it commissions a broad range of production from across the UK. Whether it needs a big facility to do that, or not, is a question for Parliament, I think, in terms of the Charter settlement. We want to see sustainable production centres across the UK, in Belfast, Glasgow, Manchester, Bristol, because that gives an opportunity for people to build up their businesses but also gives cultural diversity, it gives different views. We think it is actually through commissioning that you build up a diversity of programming on the BBC, maybe not always through just a large facility. Mr Graham: I think you can tell from our accents that we are not solely metropolitan in our consensus. I think it is really important, and, to be honest, this is not the first time we have been here with the BBC. My sense is that the BBC is more genuine about opening up to independent voices rather more and it is committed to its regional production, but we have had these debates before about significant shifts into the regions and we need to be convinced that this is genuine. Mr Brinkworth: To have a genuinely creative industry in the UK, it is a vital part of any strategy that the BBC commits a substantial amount of its production outside of London. Geography is no barrier to creativity, it never should be and never will be, and the point is that independent producers outside of London are still producing some of the most innovative shows outside, and the BBC, as part of its responsibility, needs to keep up to the plate and step up to it. Q370 Helen Southworth: Are you content with the current ratio? Mr McVay: No. Mr Brinkworth: No. Q371 Helen Southworth: What do you think it should be? Mr McVay: We would like to see the BBC moving towards 50% of production outside of London. That was in our submission to the Charter Review. Q372 Philip Davies: Can I ask you about advertising; do you think that traditional television advertising will decline and therefore that commercial broadcasters increasingly will have to rely on other streams of revenue? Mr Graham: I think it is difficult to tell right now. There is evidence that advertising is shifting out of television and towards the internet. I think there are genuine grounds for broadcasters to be concerned. Indeed, one of the reasons why we were anxious to press the commercial broadcasters into a commercial approach to new media was not just because we felt it in our own members' interests but also because we felt that actually it was in their interests too, that actually they need to be moving towards broadening the revenue base, that their systems cannot continue to rely solely on advertising revenue. Having said that, the evidence is that the decline is not necessarily precipitous and there is quite a lot of evidence there. Ofcom were fairly clear, when they set us the task of negotiating this, that they did not believe that new media was a zero sum game in that way. We talk about advertising solely, but if you look at the figures in relation to what people are spending now on media, spending on television, those numbers have increased dramatically. Obviously, there has been a huge shift towards subscription, which is now the largest source of funding. My sense is that probably there will be a long-term decline in advertising revenue, although I think the broadcasters are very innovative and I think probably they will work hard to find ways, and we have just seen the launch of Thinkbox. Tess Alps is one of the more dynamic and outspoken people in the advertising industry, who has taken the job of Chief Executive of Thinkbox, which is an organisation designed specifically to tackle this. Broadcasters are not just sitting there watching this happen and I think they have shown in the past innovative ways of attracting advertising. I do not think it is going to be a precipitous decline, but I do think that, over time, we will see a shift, a gradual shift probably, less advertising going into television and more advertising going into the internet, and more people paying directly for television in the form of subscription, in the form of downloads and several of the ways that we are seeing it happen now. Mr McVay: We do not think it is terminal. Q373 Philip Davies: You do not think that any reduction in advertising revenue is going to lead to a reduction in the amount of money that they have to commission people like you to produce programmes then? Mr Graham: No, I do not. I am not convinced; broadcasters historically have operated on very healthy margins and the work that we have done shows that we do not see any immediate threat to that business model. In fact, I think, if they are clever about it, actually there are probably new opportunities for them. Such evidence as there is, from America, suggests that actually quite a lot of the on‑demand revenue is incremental rather than entirely substitutional. This is part of the debate we were having earlier about it; no‑one really knows until actually we see these markets. One of the things that we did as part of our agreement with the broadcasters, we have agreed to sit down with Channel 4 and ITV within 12 months jointly to assess where we think the market has gone, so nobody knows. The evidence that I have seen suggests that actually there is new money to be found out there, provided the content is really good. I think people will pay for premium content and I think they will pay good money. Q374 Philip Davies: Can I ask you about the Television Without Frontiers Directive and the proposed changes to it; perhaps you would like to tell us what you think generally about the proposed revisions to it? Specifically, there is a proposal to liberalise and also allow product placement, and I was wondering if you thought there would be a direct benefit to independent producers if product placement was allowed? Mr McVay: Pact is the Chairman of SEPE, which is the pan-European trade association for TV producers, and we have been very active in Brussels on TVWF. There are a number of issues around revision which we would like to see addressed. The first one is, we would like all the Member States to remove the definition of 'where practicable', i.e. there is a 10% quota; we would like that to be rigorously enforced, which the Commissioners have failed to do since it was introduced. That means, not so much in the UK but certainly across the rest of Europe, that a lot of Member States basically snubbed their nose at that, meaning that the independent production sector elsewhere is marginal, to say the least. We support the liberalisation of sponsorship and product placement, and we agree with Ofcom, and our submission to the Commission, and indeed to Ofcom, on this is that we would like to see some degree of liberalisation but we think how that will then be interpreted should be down to the Member States as well. Certainly there should be a role for Ofcom, so how does that happen and in what way does that happen. We do think that the Commission, under this, actually should allow it to be a lot more liberal. I think that goes back to your earlier point about ad revenue; if you do allow a degree of liberalisation then that will help protect ad revenue to the broadcasters, which then will be invested in content, and so on, and hopefully there is a more virtuous circle there. The way we have got to do it, from talking to friends in Italy, where Italian broadcasters have got a more liberal regime, basically what happens there is that the broadcaster does a deal with Fiat and then goes to the producer and says, "Right, you have got to have ten Fiat cars in this drama." That is completely the wrong way to do it. I think this should be done creatively, to make sure that the content is still fantastic content. There are some good examples, 24 and some of the American examples are quite good examples of how to have a more liberal regime but to make sure, creatively, in terms of rewarding an audience for giving up their time to view this, that it is not just a coke can rammed in their face, but actually there is something in there which it is possible to do. I do think that has got to be negotiated within each Member State, in terms of the cultural issues that you have and other issues as well. Mr Graham: Also, I think the reason it has to be culturally specific in that way is because there needs to be a degree of sensitivity with genre as well. It is clearly the case that there are certain genres of television - sport, entertainment, and so on - where product placement is easier to achieve without getting in the way of the content; whereas with drama and documentary it is much more difficult, so I think it is important that it is done creatively and sensitively. Mr McVay: Our point is that we think producers are best placed, because they are the ones who are creating the content, and they are the ones who should be able to have relationships with sponsors and advertisers to bring that to the broadcasters, in order to deliver great content but probably at less cost to the broadcaster. Broadcasters have a role but we think producers and creators should have a role now as well. Q375 Mr Hall: Just one question about product placement: what about branded cigarettes? Mr McVay: Again, our view is that this is a matter for Member States, in terms of what the regulator would think would be reasonable, in terms of what products and brands should be included, if you do liberalise it. I think it is a matter for Ofcom, in terms of what they would allow to be in the programme. Q376 Mr Hall: What would be your view? Mr McVay: We would always want to work within the regulatory framework that is set down by the regulator. Chairman: I do not think we have any more questions. Thank you very much. Memorandum submitted by Channel 4 Examination of Witnesses
Witnesses: Mr Andy Duncan, Chief Executive, Ms Anne Bulford, Finance Director, and Mr Andy Taylor, Managing Director of New Media, Channel 4, gave evidence. Q377 Chairman: Can I welcome our next set of witnesses, from Channel 4, Andy Duncan, the Chief Executive, Anne Bulford, the Finance Director, and Andy Taylor, the Managing Director of New Media. I will not ask you to go through the agreement that you have just reached with Pact, since I think we have heard in some detail about it, but perhaps you could start off by saying to the Committee what you see as the benefits of the agreement and what additional revenue you believe can be generated as a result of the new arrangements? Mr Duncan: I think the biggest benefit of the arrangement is that it allows us to get on with the launch of our video-on-demand service. I think the Committee is aware of the broad, strategic direction in which Channel 4 is trying to go, in terms of the core channel, developing further channels, E4, More4, FilmFour, going to 'free to air' very shortly, and the new media platforms is really the third major area strategically for us to develop onto. That includes the bid for the DAB spectrum for radio, it includes a lot of our web-based and mobile-based activities, and video-on-demand is the other major piece of activity that we want to do. Unquestionably, the biggest benefit of the deal which has been brokered with Pact is that we can now get on and make that launch this year and we believe, hopefully, it will be a very positive development, in terms of having access to our programmes by audiences. Whether it brings extra revenue, I think, is much in debate. The jury is out, I think probably it is fair to say, but typically people are watching 25, 26 hours of television a week in this country, depending on what survey you believe; the vast majority of that is the linear broadcast schedule. My own belief is, over the next five or ten years, that level of viewing may well hold up, I think it is unlikely to increase substantially, and therefore I think video-on-demand, if it really does take up, rather like PVRs, we will simply be time-shifting current viewing. My own personal view is, probably somewhere between a third and a half of TV viewing, if you jump ten years from now, might be time-shifted, either by TVRs or video-on-demand, but the total amount of viewing will not increase, necessarily. Therefore, the financial revenues and models that come through in the new world may be needed simply to replace what will probably be a reduction in the advertising revenues from traditional linear viewing. Q378 Chairman: Will all of your content begin life on your channels and then migrate to video-on-demand? Mr Duncan: Yes. The way we see it working is, the vast majority of our programming will start with the linear schedule, usually on Channel 4, occasionally we preview something on a digital channel, like E4. We have made a commitment that all the programming will then appear subsequently on the PC open access video-on-demand service. There is a capacity constraint on cable, so there is a limit to how much can go onto the cable closed-board system, but again we will try to get a good selection over a period of time. The one thing that we might do is a marketing preview, on occasion, so we did that, for example, earlier this year with the IT Crowd, a comedy series, where we had something like 400,000 downloads ahead of the main series going out. That sort of sampling-type thing, particularly for a new show, we think may work but, for the vast majority of programming, that will come in a windowing arrangement, after the channels are broadcasting. Q379 Chairman: In the past you have said that, because Channel 4 is essentially a publishing house, you have no in-house production, it puts you at a disadvantage, in terms of control over rights, compared with, for instance, the BBC, which has a large in-house production sector. Is that still going to be the case, do you think, as a result of the new arrangement, or will this mitigate it? Mr Duncan: I think we are comfortable with the deal as it has been struck now. I think at certain points along the way we were extremely worried that we would be very vulnerable. The fact that all of our programming comes externally meant that the risk for us was much greater than it would have been for the BBC or ITV, for example. I think, with the deal which has been struck, the major things that we were concerned about have been kept in place. Obviously, we heard the comments that Pact made earlier on, but I think genuinely it is a win‑win arrangement that can work for both sides. Time will tell whether we have got it exactly right and adjustments might be needed, but I think, broadly, we are reasonably comfortable. Ms Bulford: I think the key thing that we wanted to be able to secure was access to new media rights at the point of commission. The agreement that was reached with Pact gives us that security, which enables us to get on and launch the service with the complete range of Channel 4 UK commissioned programming there, which is something that was very important to us. We did not simply want to have those which had the most commercial value cherry-picked out, we wanted the whole range of our programming there. Also it was very important to us to secure through a window, or a hold-back period, an appropriate level of protection for the Channel 4 brand and the investment that we had put through, which is, of course, much less of an issue for our colleagues at the BBC and ITV, where 60% to 70% of their programming is in-house and automatically is with them and stays with them. I think Andy expressed our position very well, which is that we are satisfied with the outcome of this negotiation. It remains our view that being a publisher broadcaster has huge advantages; we are able to follow the best ideas, commission the most exciting, innovative programmes that we can find, and we have a huge commitment to developing the independent sector, particularly outside of London, and that remains, and that brings us huge advantages. Over time, the balance of that advantage versus the disadvantage of being in a market for rights all the time we have to keep under review, but we are happy with the outcome of this negotiation at this stage. Q380 Chairman: Are you intending to make specific agreements with individual ISPs or providers, or are you going to be platform-neutral, in terms of making available your content? Mr Duncan: Our ambition, which, in a sense, broadly follows what we have tried to do in the multi-channel area, is to try to make our channels' content, programmes, available to everybody, wherever they want to access it. This is now the subject of more detailed negotiations. In principle, there are two broad ways in which we will make video-on-demand available. One is an open access PC, which will be on our own website but also it links from other entry points on the web, and obviously, in terms of cable, there is now one main company to do a negotiation and a deal with. It is similar, for example, in the mobile telephony area, where we try to avoid exclusive deals with individual providers and try to make sure our content is available across, whether it is Vodafone, or O2, or whatever, and I think that is something we want to continue with, going forward, Andy, is it not? Mr Taylor: Yes. The thing with belonging to the internet is that it is very difficult to build your own platform and create a walled garden around that platform. The internet is about freely-available content, so the strategy has always been to work closely with the other ISPs, Yahoo!, NTL, and in terms of our video-on-demand service that will be the case as well, to get the content out to as many places as possible. Q381 Chairman: This agreement you have described as win-win, yet it has taken a huge amount of time to reach. You had a gun held to your head by Ofcom, essentially who threatened to come in and impose if you could not get to it. Did somebody blink, at the end, or, if not, why did it take so long to reach what appears to be a sensible agreement benefiting both parties? Mr Duncan: I think the reality is that there was a lot of concern on both sides, and valid concerns. Pact were very good at understanding the concerns that we had and I think we tried very hard to make sure we understood the concerns they had. In terms of the principles, in some ways we got some of those ironed out relatively early on, but then, when you got into the detail of exactly how it would work, partly, as we said earlier on, there is so much uncertainty about the reality of what will happen that I think both parties were concerned about making commitments which subsequently could end up being a problem. I think the two things which definitely helped were, one, that both parties wanted to get on with it. Certainly we announced we were going to launch VOD this year, we did a demonstration of our plans to Pact, which I think they were impressed with, and there was a sense that, if we could not reach agreement, going back to Ofcom, there could be further delay and that, in turn, would be a problem for us, for Pact, their members, and indeed the UK economy, in a sense, might lose out from a chance to get on with this very quickly. To be honest, we have given a lot of ground. There is a lot of ground that Channel 4 has given, both in linear rights and in terms of new media, in order to pull off this achievement, which is not ideal, I have to say. Back to the earlier point, I think because we are 100% reliant on programming from outside we are probably more vulnerable, going forward, than the other broadcasters, with probably the exception of Five. Time will tell whether we have got the balance right, but I think, in principle, getting on and getting a deal done so we could get into the market and, as was said earlier, I think there is an opportunity to review this over the next two or three years and make changes as necessary. Q382 Chairman: You do not see this necessarily as being a permanent, long-term solution? Mr Duncan: I hope, on the issues of principle, yes. On the specific detail of who gets what and how money is split and some of the nitty-gritty, I suspect we will have to make adjustments. Q383 Mr Hall: Piracy: it is not something we have associated particularly with terrestrial television, mainly the music industry, and probably films, but, with the way that this media is developing now, piracy is going to become a bigger problem. Can you say something about the Piracy Group, which has just been set up, and the way it is going to work? Mr Duncan: Yes. I will make a general comment and then ask Andy to respond more specifically. I think the general point would be, we are extremely concerned about piracy and illegal downloading, I would say, particularly with American content. We have got first-hand experience of a show like Lost, which we launched very successfully and promoted over here. It has done very well, it is now on its second series, it is continuing to do well, but there is quite a significant gap between when it broadcasts in the States and when it comes out over here, and it is something of a cult show, particularly among teenage boys. There are certainly very high numbers of illegal downloads taking place, which in turn substantially diminishes the number of people watching it on our channel, which in turn diminishes the advertising revenue we get, so I think we are very worried about it. I think our broad, philosophical point is that we want to get on and actually get ourselves up and running quickly and try to make the shows available as quickly as possible. Certainly, in the recent discussions we have had with the music industry, their strong piece of advice to us was that they made the mistake in not getting out there and making legal services available early and now regret that, and we have the opportunity in television to avoid that. It remains to be seen whether people will pay though. We are vulnerable, even with legal pay models up there; if people relatively easily can download it for free, with the sorts of behaviours that already have grown up in the music area, there is a vulnerability around there. We are very concerned and we think the industry has to look at these issues very responsibly. Mr Taylor: I think that is where the agreement with Pact is so important. We have done some research especially around Lost, in fact we have done two pieces of research, of claimed behaviour of the illegal downloading of Lost. The first claimed that 3.3 million people had illegally downloaded series two of Lost, and the second piece of research claimed that 2.2 million people had illegally downloaded the second series of Lost. Q384 Chairman: Was that in the UK? Mr Taylor: That was in the UK and that was before Lost had been shown on Channel 4 or Channel 4.com, so we know there is evidence there. It has to be said that it is at the moment predominantly around large US acquisition-type content, but, having said that, the internet is really only just moving from a phase where the first phase of broadband was about audio, you could listen to music on the internet and the quality was still good. In that first phase of broadband, video was still a little bit patchy, and I think we are just moving into a new phase now where, with ten million broadband homes, not only are there more people with broadband but they have got faster connections and video is a much better experience on the web. It is early days, in terms of video on the web, and the fact there has already been quite a large amount of illegal downloading, I think, is something we must be very wary of. The other point, just to reinforce what Andy said, is that the music industry has definitely taught us that we need to make our content available as soon as possible. I think, in terms of the commercial model, we need to be extremely flexible, because we can bring products to market which give a great, engaging experience of viewing video on the internet, but illegal is free, so we need to make sure, if we are charging at a sensible price point and we are offering maybe added value but also need to be flexible, that if we need to move to an ad model then we can do so. Ms Bulford: Just to go back to the Piracy Group, which as you know includes the major broadcasters, Pact, the BPI, Sky, Warner Bros and Sony, I think the role of that group is very much to think about the things which the industry needs to encourage to help combat piracy. I think there are two broad areas, perhaps three, that we think more work needs to be done on; the first is greater harmonisation around definitions of copyright and much more clarity around what we mean by illegal download, and clearly there is a big job to be done in terms of bringing the public on that journey and helping them understand what is meant there. There is also a lot of work to be done around digital rights, management systems and interoperability across borders and between different technology platforms. I think there are three areas, in terms of incentives towards good behaviour, where the industry has a big job to do. Firstly, clear guidelines around when material will be removed, and that material will be removed. Secondly, consistent application of putting out warnings to avoid illegal download, and I think, increasingly, there will be a role to play in looking specifically at technologies designed to get round DRM systems that have been put in place. I think that group will come together as quite an important industry voice. Q385 Mr Hall: I do not want to put words into anybody's mouth, but it occurred to me that the vacuum which is created by hold-backs is one of the reasons why piracy can prosper. Would you concur with that view? Ms Bulford: The difficulty is the windowing, in that if you have a window to put material in, in one form, in one place, in one territory, that is the window that you have negotiated and that is what you have, which is a positive way of looking at hold-backs. I think none of us likes hold-backs; we would like to see the material on the Channel 4 services and we would be delighted to pre-agree commercial terms with producers at any point. The way in which the two-stage negotiation, introduced to protect independent producers against bundling from a broadcaster, works means that there has to be a second-stage opportunity for producers to say, "No, we don't want to do that deal; we're not comfortable with those terms. Those are the principles that were introduced last time." The compromise which has been agreed, which has worked very well with our digital channels, which is that we offer an amount of money for the rights for the period and if the producer does not want to take that then those rights go into hold-back for a period, gives an incentive for both sides to reach a sensible deal, and that seems to work quite well. Broadly, that is where we are similarly with new media, but for a much shorter period, for the five-month period. That seems to us to be a sensible compromise between the need for us to properly recoup the investment in those programmes which we have commissioned and funded and nurtured and distributed and taken to the audiences, and the need for producers to have an opportunity to get out, and drives both of us towards reaching a sensible deal which means the content will get out there. Q386 Mr Hall: With the expertise and genius that is out there, with all that which is around, that is actually just going to invite continued piracy, is it not, because people will not want to wait? Ms Bulford: We are talking about material which has been on Channel 4, which has been available through new media for the period of 30 days, and then we are talking about a period where we very much hope that we will reach a commercial agreement with producers so that material continues to be available, and those issues around illegal download, and all the rest of it, are a further spur for both parties to reach agreement. In the event that we do not reach agreement then they will be in hold-back for that period, although the material would still be available in a normal repeat pattern on the linear services which Channel 4 has across all platforms. Mr Duncan: It is worth saying, we will definitely have everything up on the PC version of the VOD service from the 30-day period, and I think we will expect to do commercial deals, in the vast majority of cases. I think what you are pointing to is unlikely to be a problem. Q387 Mr Hall: It is just a fall-back position, are you saying, it is there for negotiation? Mr Duncan: Because it has got to a two-stage negotiation it cannot happen to it, but, in principle, our expectation is that we will end up doing deals and getting the product out there, as we do with the digital channels. Q388 Mr Hall: I am just astonished by the number of people who have illegally downloaded Lost: 2.2 million. Mr Duncan: Claimed to have. Q389 Chairman: I am astonished by this too. Lost can pull in an audience of about five or six million, can it not? What is your view of this for Lost? Mr Duncan: When it first opened it had between six and seven million, which was partly an Opening Night, big marketing campaign, etc. It settled down at something like four million in the first series and it has dropped to about three million now, so it is still doing pretty well. Q390 Chairman: Seventy-five per cent of people have downloaded Lost? Mr Duncan: I suspect that this is a claimed figure and it might mean once, not necessarily every episode. I think our guesstimate would be that probably somewhere between a quarter of a million and three-quarters of a million of potential viewers on an ongoing basis have already downloaded it. It is remarkable the number of particularly teenagers you talk to who have already seen the whole series. Mr Taylor: The problem is, of course, that the illegal peer-to-peer sites, where people are downloading music, are where video is appearing, so it is not as if people are having to go to a new site, it is just appearing where they are actually doing this already with music. Q391 Mr Hall: I am just thinking that, the lessons which could have been learned from the music industry, the TV industry has been very slow to learn them in this respect. Is that a fair criticism? Mr Duncan: I think we feel we are moving very quickly in this area, to be honest with you. I think we have gone from a standing start, we will be the first to get a VOD service up and running, we did a very significant deal with Lost and Desperate Housewives, the first one outside the States with Disney, to make that available on a video-on-demand service a couple of months ago, which we also marketed very aggressively. I think we are genuinely pushing very hard and leading in this area. I think we have been held back slightly by the delay in having a new media rights negotiation, but, in principle, we are moving very quickly. I do agree with you though that the lessons from music are very clear for all to see. The big difference is that people are used to getting television for free, in most cases, and therefore it is not exactly the same as music. In the case of music, you buy it and you keep it and you play it again and again and again; in terms of a programme, typically you watch it once and that is it. You might watch Friends a number of times and children watch programmes over and over, but for most people they want to watch the programme just once, so there are some differences. I think we have tried very hard to move quickly in this area. Q392 Mr Hall: What about simultaneous broadcasts, broadcasting for the first time in the States and broadcasting for the first time in the UK? That would solve the problem, would it not: broadcast simultaneously, instead of being delayed? Mr Duncan: We are hoping to be in a position to announce something about that reasonably soon. I think, again, we are more in control of our own destiny on commission programming than we are with acquired programming, where some of the studios are much more reticent to come and do deals, similarly with some of the sports rights holders, but we are hoping potentially to make announcements on that quite soon. Q393 Philip Davies: Can I ask you about advertising. I know you have got some concerns about the future revenue you might generate from advertising. Given that, according to Thompson Intermedia, TV advertising was at 4% in 2005, compared with 2004, which seem to be figures borne out by Ofcom, are you overstating the threat to revenue from advertising? Mr Duncan: I have to say, I think it is the single cause of most concern, at the moment, at Channel 4. We think the market was at about 2% last year, so certainly that is the sort of typical figure that we have been working to. So far this year, if you take January through to about August, it will have declined by about 4% possibly, or 5%, and, in particular, June, July and it looks like August as well, have shown more substantial decline, so there has been a double-digit decline going on in June and July and it look like it will carry on into August. The market is not good, and certainly a number of people involved in the market, or commentating on the market, think the conditions are the worst they have been for a long, long time. Q394 Mr Sanders: How much of that is the World Cup though? Mr Duncan: This is a very good question. I think there is a debate, first of all, about to what extent is this structural versus cyclical, and at best this is a summer blip, perhaps possibly triggered by some advertisers' concerns about the World Cup in June, and maybe thinking, "Well, we'll sit the summer out and come back in the autumn." I hope they will not, so I hope in September the market bounces back and money returns. There is increasingly the more pessimistic view, which is actually this is something of a structural decline and that clients effectively are taking a policy decision to say "We'll take money out of television advertising and put more into the internet," where there is huge growth. So the TV advertising market, £31/2 billion, or so, the internet advertising has come from virtually nowhere to now an estimated £1.4 billion, some of that is search, some of that is display, some of that is classified, but it is growing very rapidly, I think now it is bigger than newspaper advertising. At a client level, people are simply saying, "Well, we'll take some out of TV and put more into the internet," and certainly I think that the perceptions around the current performance of ITV as the market leader are not helping. I think, for a lot of people, they are looking at market leaders' performance and saying that somehow television on the whole level is struggling. I think, to take a step back from this summer, because we will all know in a few months' time how the autumn is unfolding, over the next few years very few people think we will be seeing very strong growth and a lot of people think probably it will decline. Our worries are primarily, back to my earlier point about the nature of television viewing, that if people move away from linear viewing to either PVRs or video-on-demand, the ability to skip ads or to have as many ads certainly gets significantly reduced, and time will tell, but I am not particularly optimistic about how television advertising might do over the years ahead. I think the earlier point about Thinkbox is a good one. Tess Alps is a very good appointment to run Thinkbox. I think there are lots of positive messages that the industry can and should be getting out about television advertising, but I think it is the biggest piece of uncertainty we face over the next few years, I would say. Q395 Philip Davies: What proportion of your revenue do you expect to come from More4, E4, or whatever, digital channels? Mr Duncan: I think there are a couple of points there. The first point is a structural point, which is that Channel 4 operates, as does ITV1, at a very significant premium to digital channels, so advertisers pay a big premium to get to big audiences in all homes. What we are doing pretty successfully in Channel 4, as multi-channel development takes up and switchover starts to kick in, is we have developed a portfolio of channels, with E4 and More4 and, as was mentioned earlier, FilmFour. On an index, they get less than half the revenue, in terms of advertising pulling power, than the main channel, so a preview of Lost, for example, you could be watching Lost a week early, or Shameless a week early, on E4, but, in advertising terms, we get less money per viewer than we do for Channel 4. It is not like the BBC, where if they keep it in the portfolio it makes no difference financially; for us, it is financially much worse. We have got a big issue around mix, which is causing us a problem, which as the switchover process unfolds will actually get worse for us. Q396 Philip Davies: If one of the problems is the fragmentation, of broadcasting more and more channels, presumably you are causing yourself your own problem by launching more and more channels because you are actually increasing the fragmentation? Mr Duncan: I do not agree with that, in the sense that we would be like King Canute, to sit there and say, "Let's try to hold the sea back." The world is changing around us; we have to move with the times and try to build the best position we can. I think the other issue is a structural one, which is that we have got something like 23%, 24% of the television advertising market. We are actually quite a significant player, in terms of website. I think, over the summer, Big Brother probably will be the most visited entertainment website in Europe; certainly, in a typical week, we get more than MySpace or Youchy, for example, during the summer months. Our ability to get similar advertising revenue from new media is so fragmented; we are one of so many players. To put it into context, we get the best part of £800 million in advertising and sponsorship and we get about £6 million in terms of new media advertising. Though it is growing, and growing very fast, it is tiny, compared with the traditional revenue source. Q397 Philip Davies: You mentioned ad-skipping. Obviously, it is difficult to predict what effect that is going to have. Have you made any 'back of a fag packet' calculations as to what impact that might have, or is it again this sort of white elephant that you might have raised that will not have any impact at all on revenue? Mr Duncan: There are several studies; some are more optimistic than others. Some suggest that actually even people with PVRs do not time-shift that much of their programming, and when they do they have still got some of the ads and they notice some of the ads. Other studies are rather more pessimistic and suggest there is a lot of ad-skipping. I have to say, most people I have spoken to face to face, who have got SkyPlus or Freeview PVR, skip most of the ads most of the time. I do think it will take a period of years for this to unfold. BARB do not measure these things straightaway; that takes time to come through. Media agencies and advertising agencies are quite conservative in the way they do things, so again that will take time to come through, but over a period of years I think that plus the switchover impact will be very, very difficult for us. Q398 Philip Davies: To ask one more question on ads, what impact will any sort of ban on advertising, I do not know, fatty foods, and Burger King, and all this kind of stuff, actually have potentially on your advertising revenues, and is that a particularly big concern for you? Mr Duncan: I think it would be a very big concern. I think Ofcom have put forward three, well thought through, albeit, from our point of view, difficult proposals; all of them would have a negative financial impact, but I think they are done in quite a measured way. I think the idea of a blanket ban would be nonsense, actually; there is something like £140 million of advertising revenue which would be at threat, which in turn would come straight out of investment in programming, and I think there is very little evidence it would make much of a difference. The truth is that people watching Coronation Street or watching The Simpsons, or watching children's programming, if you look into the detail of who is watching which sorts of programmes at which times and which sorts of ads, I think they have come up with some, as I say, sensible proposals which would be pretty unpalatable, but if something has to be done I guess we will have to go along with it. A blanket ban we think would be very worrying and unnecessary and would not achieve the impact that they want anyway. Q399 Mr Sanders: This is a fascinating debate because, at the end of the day, the advertising money is going to drive the future of what is available to the viewer. I have written two things. It seems odd that you are withdrawing from a subscription service, FilmFour, to make it free-to-view, at a time when you say the advertising income is going down. What is happening to the other FilmFour channels; will they remain? Mr Duncan: No. Basically, we are relaunching as FilmFour. There will be a time-shifted FilmFour+1 version available on satellite and cable; on Freeview it will be just the FilmFour channel. The economics are very straightforward. Despite what I have been saying about television advertising revenue, FilmFour has been available in only 300,000 or 400,000 homes, we have not had control of the customer list, that has been done indirectly by Sky, and therefore making FilmFour available on an advertising free-to-air basis takes in 17 million homes. We will get more money in the short term via advertising than we have been able to historically via subscription, which, in turn, will allow us to invest in films and more on the channel. It is rather like with E4, that it is the right decision economically but it does not take away the macro picture of overall decline in time. Typically, we do not get much share of the subs; what tends to happen with subscription is that the platform owner gets the lion's share and the rights holders get a big chunk, particularly sport and film and Hollywood studios. The channels that do best are the ones that got there very early but the channels that came rather later, and that included Channel 4, even in the late nineties with FilmFour and early 2001 with E4, typically we have not had much of a share of the subs. Q400 Mr Sanders: The second part is we keep hearing about this shift with advertising revenue going to the internet. Studies must have been done on the effectiveness of that advertising. I just get the impression that going on to the internet is more about reach, putting a product in front of people, rather than sales; it seems to me that the tradition of the television advert is to encourage people to buy a product, although obviously there are people there who want to identify with a product. Is there a difference in where advertisers are coming from? Mr Duncan: There are lots of points of view on this. If you look structurally at how internet advertising breaks down, roughly half is search, paid-for search, something like 20% is classified advertising and only about 30% is so-called display advertising. Certainly one of the points the television industry would make is that television advertising remains by some distance the best brand-building mechanism so, if you are really trying to build a brand, that is really what TV advertising is brilliant at and you can get a high impact and get to big audiences. The internet is more akin, in some ways, to direct marketing, or sales promotion, where you get more of a direct response mechanism. You used to get, you still do, lots of envelopes delivered to your doormat, well now you can do it electronically. I do think, in that confusion, some clients are taking decisions to take money out of brand-building television advertising and putting it into the internet, and the jury is still out as to how effective the internet is on that side of things. My own experience is that it is very effective at things like pay-for search and micro-targeted detailed information, but I do not particularly get what I call brand-building messages from the internet that I pay much attention to; but that is a sample of one. Q401 Helen Southworth: We have had quite a bit of evidence that was not very happy with the BBC's Creative Future initiative, the digital land-grab concept. How are you going to ensure that your own new media initiatives, which build on your own privileged public service position, do not distort competition? Mr Duncan: To start with the BBC, if you have been hearing concerns, we would share those concerns. I think it is entirely appropriate that the BBC does things in new media; they have done a lot of very innovative new things. I think our concerns are that, we have coined the phrase, some of their creative futures already are the creative present. There is a BBC philosophy that they have got to do everything all the time, everywhere, which would worry us, and I think it is incredibly important that any new service, even before the formal new Charter comes in, goes through a public value test and a market impact test, and it is essential. That should not be just for big, high profile services, like the iPlayer, which I think the BBC have now said they will do, but there is quite a lot of new services and new activities that are going up slightly under the radar. We are not suggesting that a new website, for example, should go through that sort of onerous process. To give you two examples, the BBC are planning to extend their education activities, they do a lot for pre-school and younger teenagers, they are looking to extend their education up to older teenagers, which directly overlaps with our public service provision of education, where we particularly prioritise 14 to 19 year olds. That is a good example; if the BBC want to do that, again, that should be treated as a new service. There has also been talk of a new BBC team brand on the web, which again is effectively a new service. Of course they need to do things, but they should be properly assessed in a public value test and market impact test, and I do not think they should do everything, is the truth. They have got finite resources, the licence fee debate is a live one at the moment, but they have got to pick and choose priorities and I think, in particular, they should not feel they have to do things which other people, including ourselves, are doing. I think, in terms of our activities, the danger of us distorting the market is nil; quite the opposite. Our challenge is can we get into this big new space where you have got Google, Yahoo!, Sky, BT, BBC; our real challenge is can we get out there and make an impact. We need to get our brand out there, we need to get to our audiences out there, and I am passionately of the view that we need to deliver public service plurality on a range of channels and platforms where the audiences are going to be. I would have the opposite worry, can we make a big enough impact, but we are not going to distort the market. Mr Taylor: I do agree with that. We will replicate the Channel 4 model in new media, in that we will fulfil our remit through commercial means, so if we do not benefit from any gifted spectrum online and we are competing with other new media players I think the chance of us distorting the market is really nil. Q402 Helen Southworth: Can I ask you about the state of the creative industry in the UK. You have got a responsibility to commission outside the M25, which you are taking extremely seriously, I think, is it, 30%? Mr Duncan: Yes. Q403 Helen Southworth: What do you think the creative skills needs are outside the M25, what do you think the creative skills opportunities are for the UK creative, new media industry? Mr Duncan: I think Channel 4 has an extremely good track record of its contribution to the creative economy. We actually invest a huge amount of money into original programming and, as you say, over 30% of that is invested regionally. This year we are spending something like £625 million in total, across all the channels and on new media activities, and the vast bulk of that is original commission programming. We have always hit our regional target; we have actually invested heavily in a Creative Cities strategy, which is Birmingham, Bristol, Newcastle, Leeds and Manchester, and so on, some of our best programmes, Shameless is a good example, Hollyoaks daily comes up, on Mersey TV, and so on, all three media now. I think it is something we have always played a key role in, and a lot of our training activities and wider contribution to the industry that Channel 4 makes is based outside London and I think new media activities will follow that. We are doing a lot, we have always done a lot historically and we would want to carry on with that going forward. Mr Taylor: I think it is very early days in new media. Most of the conversations, the Pact negotiations, are all around distribution, so it is taking content that has been made and how you distribute it on new media platforms. We are very interested in how you take Channel 4's brand and commission content that is bespoke to new media platforms, which means we find ourselves talking to a whole new creative community which is new media developers. That is really a new and emerging market, because, apart from Channel 4 and, to a certain extent, the BBC, there has not been a huge demand for those creative skills yet. The large ISPs predominantly have been around looking for, again, television programming that has been made and then distributing it, so we are really keen to replicate the Channel 4 model. We have stimulated since the eighties the TV production community; how can we stimulate, in the new media space, a whole new production community, and there are not many companies out there doing that at the moment. For example, we have FourDocs, with our broadband documentary channel which we launched last year, and again we used the commissioning model so we worked with the company Magic Lantern. We are aiming to launch For Laughs, which is a comedy version of a user-generated comedy channel online. Again, we have outsourced that using Conker, which is affiliated to Mersey TV, and Baby Cow, which is a north-west production company, so, again, it is taking the Channel 4 model that we have had on TV and how you replicate that in new media. Q404 Helen Southworth: We have been getting international evidence that content is the driver for new media developments. What opportunities have we got in the UK creative industries, from your perspective, to boost development and then export within the sector, and what do you think Government needs to do in order to drive that along? Mr Duncan: We are trying very hard to put a lot of investment in this whole area. The truth is, at the moment there is very little coming back into us as revenue stream, so whether it is spin-offs of programming that appears on the television channels, whether it is original, generated content of our own, or whether it is user-generated content that we are facilitating, with the sorts of things Andy mentioned, we are being very, very proactive in this area, but actually it is a cost rather than an income source, and that is a worry for us. Very specifically, I think that over the next few years, if we are going to carry on with that sort of investment, particularly if carrying advertising comes under pressure, the underpinning of the whole Channel 4 model is a Channel 4 issue. More widely, I think it would be a good idea to encourage the BBC, both in their programme production WOCC system and potentially their new media activities, to do more outside London, because often we find that we are trying to do more regionally but actually the independent company infrastructure is not as strong as it could be. Although the BBC have made a commitment to increase WOCC, then there is some encouragement to make sure enough of that is spent outside London, we do not think that is as robust as it could be. There is no reason why they should not have a kind of regional quota on their indie production, in the same way that they do for their overall production and, to some extent, on new media, because that, I think, would really stimulate the independent sector outside of London, including new media. Q405 Helen Southworth: Could I ask you about the Regional Development Agencies. Within the Creative Cities initiative you referred to relationships with the Regional Development Agencies. Are you confident that they are capable of what is necessary, or are there things which need to be done to improve their performance; what is the position? Mr Duncan: We work very closely with a number of the Regional Development Agencies. Stuart Cosgrove, who is our Director of Nations and Regions, would probably be able to give a better view, but my sense is that some are better than others. Some have been very productive, good partnerships that have actually been going for a number of years and going very well, and others are more patchy. I think it is true to say that generally we feel that direction, doing more to encourage things outside London regionally would be helpful, because we are trying to spend our money there and there is not the infrastructure, and the Regional Development Agencies are trying to do things also to stimulate that. Probably, as I say, the clearest opportunity to do something about this would be to encourage the BBC to do more. Q406 Helen Southworth: You think they should move to Greater Manchester as well? Mr Duncan: I think they should, as long as they do not put in an artificially high bill which then justifies an artificially high licence fee increase; so, based on realistic improvement costs, yes. Q407 Chairman: You mentioned the dreaded subject, and therefore I shall bring it up, Big Brother. How do you react to the charges that, in order to maintain audience interest, you are having to turn this ever more into a sort of freak show and that actually you are exploiting some quite disadvantaged people? Mr Duncan: I do not agree with that, as you might expect. Q408 Mr Hall: With which bit do you not agree? Mr Duncan: Big Brother, right from when it first came on air, in series one, has always been polarised, is the truth, as is much of Channel 4 programming. Much of Channel 4's output upsets one person and somebody else loves it, so that tends to be what we do. I think Big Brother has reinvented itself each series, that it has tended to go in a slightly different direction, with different characters and different things happening, and it tends to be a bit of a 'love it or hate it' show, so there are those people who have hated Big Brother ever since it came on air and still hate it. I have to say, those people particularly, not that it is specifically generational but typically, it is partly generational, the older generation seem to love it and we are getting higher figures now than ever, so we are about another 11% or 12% up year on year and most nights it is peaking at over five million, even when the World Cup is on; it is very compelling. In a sense, it is our soap opera really, it is our equivalent of EastEnders, but it is real people in an everyday setting. It works, it is very polarising, it is something on which, I think, we spend a lot of time and energy and attention to make sure we are putting it out appropriately, in conjunction with Endomil. It is part of the schedule and works well for us, but it is only one part and we have got a lot of other things that are on during the summer months, we had more focus on history last night and there is always a range of things on. Q409 Chairman: Are you not worried by the criticism, particularly from some of the charities? Mr Duncan: It has always drawn criticism, is the truth, and we are always considering carefully have we got the balance right, have we got the pitch right. I think we are very comfortable that the show is working well this year. Q410 Chairman: The fact that mental health charities have expressed concern is not something that causes you any particular worry? Mr Duncan: We are concerned when people express concern but, having looked into it carefully, - - - Q411 Chairman: You just do not agree with them? Mr Duncan: We do not agree with them, no, and we have gone through a very rigorous screening process and we stand by the decisions we are taking. Chairman: Thank you very much. Memorandum submitted by Institute of Practitioners in Advertising (IPA) Examination of Witnesses
Witnesses: Mr Hamish Pringle, Director General, Mr Jim Marshall, Chairman of Starcom UK, and Mr Wayne Arnold, Managing Director and Co-Founder of Profero, Institute of Practitioners in Advertising, gave evidence.
Chairman: Can I welcome the Institute of Practitioners in Advertising and thank you for your patience in waiting; in particular, Hamish Pringle, Director General, Jim Marshall, Chairman of Starcom UK, and Wayne Arnold, Managing Director of Profero. I will ask Rosemary McKenna to start off. Q412 Rosemary McKenna: We have heard a lot this morning about the revenue worries of the television companies, but just how are consumers' media consumption habits changing with the growth of the new media platforms and services? Mr Marshall: I think the simple answer is that historically the media dictated how people used the media, now the consumers are dictating how they are doing it, so the power has shifted from the media to the consumer. Consumers now are becoming increasingly editors of the way they use media, it is as simple as that, and that actually is a seismic shift, in terms of the whole world of media, how it is operating now and how it is going to operate into the future. Mr Arnold: I think what we are seeing is a very dramatic change in how the consumers, particularly the younger generation, are consuming content now, so 88% of 15 to 24 year olds now have access to the internet, and even if we take 25 year olds plus, on average they are about 67%. There has been a big shift of people's time in front of various screens, so now if you take an average working week, if you like, roughly about 24% of their time, of their media consumption, now is happening in front of a computer screen, compared with where it was maybe only three or four years ago, when probably it was about 5%. Obviously, that is a big, dramatic increase and change, in terms of what content people are digesting, from what was a very linear content to now a very interactive content in various forms, from search in Google through to Yahoo! through to watching EastEnders. Q413 Rosemary McKenna: Of course, that generation will take that with them; that is not something that is going to be static, that there is still a generation who are not accessing media in that way. What will be the impact then on the advertising revenues for the various media companies? Mr Arnold: I think one kind of stats which sums it up quite nicely at the moment is that 24% of the average media consumption now is happening online compared with something like 5% in the latest Bellwether Report by the IPA actually is being spent on line, so there is a big gap between what is being spent on advertising and actually what is happening from a consumer point of view, so how that will pan out we will have to see. A logical assumption from that is that there is still a big gap in terms of money shifting from a traditional medium to the more digital media to fill that void between time spent online versus actually money spent. Mr Pringle: If you look at the spending patterns of the top 25 advertisers about a year ago, you will see that on average they spent 2% of their budget online, and if you take out Hewlett‑Packard, which spent 43%, the average of the rest was 1% of their total budget, with Proctor & Gamble at the top. You can see, to reinforce Wayne's point, there could be quite a dramatic shift of money from, if you like, the traditional media into this online environment. Mr Marshall: I think not only could be, I think there would be, undoubtedly. It is very interesting, inasmuch as there has been staggering growth of revenue into the internet, but, as Andy Duncan said earlier, 50% of that has been on search, I calculate, say, 25% in classified. If you look at the FMCG sector, which is the largest sector for television advertising, covering advertisers like Unilever, Procter & Gamble, Kellog, Kraft, they are spending hardly anything on the internet, which says, going forward, that they will increase that, and that will come from other media. Mr Pringle: This point about classified versus display advertising is very, very important and has not been fully grasped yet. I think you can say that advertising breaks down into two broad categories, the advertisements that go to people, which is display advertising, and there are advertisements that people go to, which is classified advertising. Historically, classified advertising has been about one-third of the total business, but what we are seeing now, with online search, paid-for search, is a truly exponential growth in classified advertising, in search, so it may be that the advertising shift is going from display to classified in quite a big way, from traditional media to new media and to online in a big way. I think that raises very big questions for broadcasters and other people who are trying to fund their content through advertising sales, because, as far as I can see, there is not much advertising sale in a pay-for clip right now. If a huge chunk of the market goes that way, it can have big implications, I think. Mr Marshall: It is also changing the dynamics as well of advertising. As Hamish says, we have always categorised the advertising sector as being two sectors, which is classified and display, but what the internet has created is what I would almost describe as informational advertising, where people are going into the internet not necessarily to buy something but to get comparative information about products. What the internet is doing is empowering the consumer, with huge amounts of information, and that is a different form of advertising. Q414 Rosemary McKenna: Reading your CV, what about the pop-ups, which really annoy me, creatively, I have to say. That is a different form of advertising, is it not? Mr Arnold: When you talk about digital advertising, there are multiple formats, there is everything from big brand sponsorship, such as Yahoo! being the official broadcaster for the World Cup this summer, right through to one man and his dog basically selling his pork sausages on Google with the odd keyword. What is happening is that the industry is growing so quickly, pop-ups was just a format that appeared, and I should say, again, ban them as soon as possible, because, quite frankly, they do not add value to the consumer experience. As the market matures, what you will see is basically more mature advertising models appear online, and so we are hopeful the actual advertising is enhancing in some way the content, as having those pages rather than maybe interrupting it, and hence where you are seeing a lot more advertisers taking interactivity a lot further, actually encouraging users to participate with that brand. The example always we like to use is, maybe seeing an advert for Honda on TV for 30 seconds is fine if you are not interested in buying a Honda car, but actually if you are interested in buying that car you are quite happy to watch a ten-minute TV commercial about it. Online enables you to do that with the interaction and the use of websites, the use of video, and the increase of broadband makes the content much richer, so the key really is to make the advertising as interactive as possible so that you are enhancing the experience. Q415 Rosemary McKenna: Is there still a big gap in how the generations view new media? Mr Arnold: If you look at the basic figures, for the 15 to 24 audience, the prime driver is entertainment first and communications second, and entertainment is things like Big Brother, as has already been talked about, and the communications is from SMS through to e‑mail. If you look at the older generations, 45-plus, the primary reason is information-gathering, so again using the car market is a good example. From the latest figures that we have seen, 80% of people have already made a decision about what car they are going to buy when they turn up in the showroom, and that is because they have gone online first; that is the same for automotive, it is the same for health, it is the same for holidays. That has been the major shift, entertainment versus information. Q416 Rosemary McKenna: How do the advertisers get their income from my use of the internet? As you just described there, the 30-second advert for a car, then you go onto the internet, you go into Google and you search for all the different types of car and you make up your mind; how do the car companies get the advertising money? Mr Arnold: Ultimately, as it always has been, it is the number of sales, so how many cars they are shifting. One of the biggest challenges, and it always has been in media advertising, is how you measure the impact, so how you measure the impact of a TV commercial, how you measure the impact of maybe somebody spending five minutes on your website, and there are a number of ways you can do that. The reason why Google has been so successful is because the medium is so accountable, so car manufacturers may measure the number of clips for the website, the number of registrations, the number of people offering test-drives and, ultimately, the number of people buying cars. It is the same measurement matrix as previously, it is just a bit more transparent, maybe. Q417 Chairman: We are seeing fragmentation in terms of a huge growth in the number of channels and then, on top of that, advertising being diverted from television to the net. The consequence of that for the traditional, main, commercially-funded television channels must be very serious. Do you believe that, for instance, they are going to be able to maintain the public service obligation that they are under if they are looking at a pretty bleak future, in terms of revenue? Mr Marshall: I guess the question relates largely to ITV there, and the short answer to that is, on current evidence, no. Their revenue model is still based largely on advertising and a consequence if their audience declines, which is partly to do, clearly, with the increase in the number of channels, I think there is some argument about the quality of their product, and also, on the basis of what overall TV advertising revenue is doing, which is not growing at the moment, I think that is partly cyclical, that is partly to do with some quite difficult economic climates at the moment, in terms of consumer expenditure, but I think it is also structural. We would never foresee particularly dramatic growth in television advertising in the foreseeable future and, on the basis of that, then ITV will either have to suffer a dramatic reduction in profit levels, which I doubt they will be able to justify to their shareholders, or they will have to cut back on their programme investment, which, inevitably, will be their first-run drama and entertainment. I think that is the equation and it is not a difficult equation to calculate. Mr Pringle: The overriding point, of course, is that, if you look at the IPA's Bellwether Report, you do see a very close relationship between GDP and advertising expenditure, and they move pretty much in line with each other. There is a finite amount of money in the market-place, so I think the idea that somehow or other this new media landscape is going to create new funds is fanciful. What you are seeing is a shift, changing brand shares or market shares between different media types, whereas we have said already that shift actually is maybe quite dangerous also, because if classified rises and display suffers then not only have you got money moving into different media channels, away from the traditional broadcasters, you have got it moving into a space where it is very difficult to make money anyway in the traditional advertising model, because of the power of search. Q418 Chairman: When we heard Pact say, a little earlier, that they regarded the future at the moment as being very exciting, it could actually be quite worrying. If the cake remains the same size and is divided up amongst many, many more players, both channels and on the net, the ability of channels to invest in original programming content is going to be considerably reduced? Mr Pringle: I think it is very exciting; there is no doubt that it is exciting, and I think there is still huge potential in the export markets. If UK plc happens to be quite good at this stuff then that is the horizon that we should be looking at, because, as we know, there is a great tendency for the UK to fight itself to death inside its own borders, so I would not be optimistic for them within the UK confines, but I might be optimistic outside. Q419 Chairman: It was also suggested to me recently that, traditionally, advertisers have put commercials on the main broadcasters, which is a relatively untargeted way of reaching people, but with the growth of niche channels and also the net advertisers now have an ability to target specific groups much more closely than they have in the past, will that too damage ITV? Mr Marshall: I think there is an element of that. I think the most damaging thing for ITV is, if you look at a figure, five years ago there were 150 programmes which delivered an audience of 15 million or more; last year there were none. ITV's great USP is its ability to deliver large audiences, and that is being eaten away. ITV has got a lot of competitive issues at the moment, not least of all, of course, what the BBC is likely to be doing in the future. It is under severe threat, I think. Mr Pringle: I think there is another, interesting way of looking at all this, going back to Wayne's point about the amount of time that young people are spending in front of screens, which is a huge proportion of their waking life, and if they carry on those habits into adulthood screen-based media is going to be a very dynamic and fertile area. Those broadcasters which are content providers and can use these new screen-based platforms for their video content, if they could find a way of monetising that, either by subscription or advertising sale or product placement and sponsorship, and so forth, there is a rosy future for those people, but I think the point about ITV in particular is that they do not seem to be heading that way, apart from their purchase of Friends Reunited. They are not really in those subscription games, they are not really in those online markets yet. Mr Marshall: Their strategy of putting together what they describe as a family of ITV channels, which is the launching of ITVs 1 and 2 earlier, 2, 3 and 4, has been successful. I think their business outside of ITV1 has been successful, but ITV1 still constitutes such a huge proportion of their overall revenue, and the way it has been eroded in the last couple of years has been at such a rate that it does constitute a problem. As Hamish says, they do not have the same access to the other revenue sources, such as subscription, that other channels have. Sky, for example; I think over 85% of its revenue is now from pay-per-view and subscription. Mr Pringle: That is why we say, in this media ecology, we are so concerned about the BBC settlement. Most people believe that the BBC is already overfunded, and we have seen all the consequences of that, and if it continues to be overfunded for the next period that is another huge pressure on the likes of ITV and other commercial broadcasters. They have made their pitch at RPI plus, is it, 2.3; that has to be negotiating stance. Mr Marshall: To put it into context, I think Honda was mentioned earlier and Honda's main plank of its advertising is its branding of the power of dreams, and that is all about reaching very large audiences very quickly, and that largely has to be through Channel Five and ITV, and, to some degree, Channel 4. Niche targeting is great but it is still not a substitute for the big branding advertising, and if that gets eroded it starts to impact on what then Honda does through other media, including online. Mr Pringle: Someone said recently that people never type "search" into a search box, they type a brand into a search box, so we are optimistic that in some way brand or display advertising will survive, but there has to be a platform for that. Q420 Mr Hall: You have mentioned the amount of money which is being spent on advertising and the amount of money which is being spent particularly with the written media now, the newspapers, regional, national and local. We see an ever-decreasing amount of money being spent on advertising, and clearly at local and regional level it is the advertising which brings in the revenue to keep the publications going. What is the future for these publications now; and also, in particular, the evidence you have already given about the different age groups and the way that they access media? Mr Marshall: I think, in terms of local and regional newspapers, they have been probably more innovative in terms of developing the business in their products, not only with three sheets, in terms of the quality of their content, but also they have been much more progressive in terms of offering across the line, so they have been offering online facilities as well. That has worked successfully for them. National newspapers are having a tough time of it at the moment and I think what they are recognising is that the revenues are not going to be continuing to flow into the newspapers at the old rate and that they have to develop other services. If you look at all of the newspaper owners, they are all developing their own internet services. Mr Arnold: I think there has been a fundamental shift as well. I think these guys have got big challenges, in terms of content created now. You have only to look at the London bombings as a great example, in terms of how the news is reported; it changed fundamentally in that one day, from being basically Sky News, BBC, ITV telling the news, to the people who were actually on the stations. Then you get to when the second scare came along, basically then the news immediately was people's pictures, they were actually asking people to create content. That is at the very top level; if you take it at a regional level as well, now actually who are the reporters, the reporters are the people in the street, they are people telling their own stories. Because of technology and the ease of technology, with the increase of broadband for people to upload not just the written word but video files and photograph files, it is who is the journalist now, who is the content-maker, is it actually the traditional broadcaster or is it the person in the street. I would argue actually now it is probably pretty much 50/50 and it will not be long before that is going to increase; and you see examples of this time and time again, whether it is MySpace, or whether it is flick, other people taking photographs. The challenge for the traditional channel is how to maximise revenues from that; do you innovate by creating new spaces, like MySpace has done, and charging advertisers to take those areas, do you do what Guardian Unlimited has done and really embrace this whole culture and get people to subscribe. I think it is a huge, new challenge. I think the biggest thing for broadcasters or content-makers, whether it is newspapers, radio stations or TV players, is basically how do you embrace this and really encourage it to happen and then generate revenues back via e-commerce, via search findings, via walk display media. Mr Marshall: The theory that newspapers are dead is patently ridiculous and in ten years' time and a hundred years' time people will still be reading The Guardian, The Times, the Mail and even, dreadfully, the Daily Express. Q421 Mr Hall: Do you mean reading that as a newspaper or reading them online? Mr Marshall: I think they will continue to be reading them as newspapers; in the same way that people said film was dead in the 1950s, in the 1960s it was a television version. Of course, the film industry has never been more vibrant; it has had to adapt and that is exactly what media owners will have to do, inasmuch as they will have to own across platforms and operate on a cross-platform basis, as simple as that. Mr Pringle: There is no reason at all, taking that strong, regional newspaper brand, why they cannot, they probably have already become broadcasters in the locality, broadcasting over the internet. I think one of the issues for the regional local newspapers is, because they have such a huge capital investment in hard copy, it has been very difficult for them to push hard on the online stuff. They were some of the earliest people into the online arena, but because so much of their business is dependent on classified advertising, and currently they are haemorrhaging money on that, because that is all going online, they are in a very difficult situation. It is a bit like the old Midland Bank and First Direct, you set up a separate business to push the new medium, and, generally speaking, I do not think the regionals have done that. I think, the national newspapers, it is interesting, they have not really got into the idea of broadcasting their own version of the news, and there seems to be no reason why they should not be able to do that in an online environment. Q422 Mr Hall: In my constituency we have a publication called Frodsham Life, which is a glossy little thing which comes out once every couple of months, and that is very much sought after, it is very localised and very sought after, but also it goes online, and there are far more hits online than there are actual copies on the street. Where does the revenue come in all of that, how does that work; is it just advertising pays for the stuff online and the number of hits that the web page takes says to advertisers "This is an effective publication"? Mr Arnold: I think the reality is basically the advertisers are trying to work out how to get the revenues in; there is some classified ad money coming in, but there are very, very few examples where traditional print publications have been able to get subscription-based models online. I think that the Wall Street Journal in the US is one example; probably the most recent one is the Guardian Unlimited Ricky Gervais podcast, where the first one they gave away for free, the second one they charged for, but it is a big issue because the online has grown because it was free. When people go online naturally they expect a free service; for them to charge, if you give away the content for free in the first place then you want to charge people afterwards, people can go elsewhere. When you are in your own home constituency maybe it is more difficult to get that content, but as soon as you go online the whole world is your oyster, so you may be able to find similar kinds of content elsewhere at the click of a button or just by typing in a couple of keywords in Google, and that is the challenge. Mr Pringle: One of the things we know - the IPA runs an effectiveness awards competition, we have done it for 25 years - is that multimedia campaigns do seem to work pretty well. On average now about four different media channels are used for an effective campaign, four and a bit more rising, so, for an individual medium, accessing it through different versions may be part of that multimedia experience. That is why some of the big publishing brands have produced exhibitions and why they have produced a magazine, they have produced an online version, and so on, because they are trying to enable their customers to access their brand though all these different channels, so I think your local magazine is doing exactly that. Mr Marshall: Consumers now almost expect it, because the world is information-rich and if you are an advertiser and you are saying something and a consumer is interested, they want then to be able to pursue that and find out more information, and if you do not provide that you go down in the pecking order. Mr Arnold: I think there is a final point too, the level of content, so your glossy magazine will probably feature more features and bigger stories, whereas your online version may just feature the latest news, and so people will start digesting content in different ways. The role of the magazine and newspaper will never die but people will get it in a slightly different format, slightly different content, from that site. Mr Hall: I think you anticipated my next question which is how you attract new readers; but I think you have probably answered that. Q423 Alan Keen: I was not surprised, that was why I asked the question, you heard me earlier with Pact, asking them about what research they had been doing on how many people actually record and watch rather than watch as a theatre version of television. It is your business, you must have some sort of research, or is it just guesswork? Pact did not even seem to have guessed what might happen? Mr Pringle: There is a lot of research. We produced a new piece of research called TouchPoints which was circulated in some of your information packs for this session, so there is a lot of data there about how different age groups are using different media, and so on. The question of this whole business of time-shift viewing and whether or not SkyPlus boxes are changing the pattern and whether people are fast-forwarding and so on, there is some research out, some from Sky, some from the London Business School, and so on, and, Pact were right, it is inconclusive because the results are different from different studies. For example, some people say that the break bumpers are being used as navigation points in fast-forwarding, so that actually the sponsored idents at the beginning and the end of the break are getting incredibly high attention levels because people are using them to fast-forward to. Some people are saying also that is happening with some of the commercials at the beginning and the end of the break, so some of the Sky studies are showing that brand awareness is as high amongst homes that have these boxes as homes that do not have these boxes, so it is unclear. All the talking, chattering classes all say that "We fast-forward though everything and we never watch an ad any longer," but that does not appear to be true of the public, who are behaving in a much more traditional way, as far as we can see, so far. Mr Marshall: In answer to your question about research, there is a lot of research done and the IPA has invested in a study called TouchPoints, which is basically a multimedia, multiplatform study into consumer media behaviour, which does not sound much but I think it was a £11/4 million cost. Although we have a lot of data on individual media, we do not have any standard industry cross-media data, so the Touchpoints study has been designed to fill that gap, so to speak. It has produced a lot of very interesting information about how people behave across media. The issue of PVRs and ad avoidance is a big issue for the ad industry and, I think, as everybody has said so far, the jury is out. All the research to date, and we have done our own research into it, suggests that, yes, there is a reasonably high instance of fast-forwarding, our own study said up to round about 70%. At the same time, I think you have to recognise that people do not stop watching ads for ever, and also, to be honest, people did not start avoiding ads because they suddenly got PVR's, people had other ways of avoiding ads in the past. Mr Pringle: What, making cups of tea? Mr Marshall: Making cups of tea, going to the loo, or just talking amongst themselves; so ad avoidance is not something that the world has suddenly discovered. At the moment, PVR penetration is less than 5% of the total country; there is evidence as well that initial usage and then settling-down usage is a bit different. It is an issue which is of large concern to advertisers, it is an issue which is being researched increasingly and which I think we will understand over a period of time. I think it brings us back to the point though, more and more, that for advertising you need a sort of multimedia, multiplatform approach. Mr Pringle: One possible salvation in this technological era is that if there is a proportion of the market, probably the majority of the market, that likes to get its editorial for free because it is funded by advertising and they do not want to pay a subscription charge, you are probably paying £35, £40 a month for your Sky subscription and then your broadband subscription on top of that, so that is why the amount of money spent on media is going so high. The vast majority of the country do not want to spend that money; they want to carry on with the contract of free editorial in exchange for watching your ads, so there are technological solutions to enable that to continue to happen. I think we will see subscription services which will be cheaper for people who watch the ads and the technology will be there to enable that to happen. I think it is a question of when that technology is deployed, because if you were selling subscriptions right now you would not want to deploy that, would you, just yet? Q424 Alan Keen: Sky have not tempted me to buy a box, as you can probably guess; if you were a betting person, you would bet on that. Sky had a product which, by convincing people to pay a subscription for, adds very much to their income; that was their incentive, they did not do it for any other purpose, presumably. Can you tell us about the balance, with regard to Sky, because, obviously, Sky potentially were going to damage their own advertising income by producing a box which enables people to skip the adverts. What is the scenario there? Mr Marshall: I think we have to recognise that Sky is what is known as an ARPU business, which is average revenue per unit. Their advertising revenue is not inconsiderable but it is not that important, it is less than 15% of their total revenue. They are a business which is all about driving up the average income that they get from the individual household, and consequently they are, I would describe as, catering for the privileged end of the market. What we have seen with Freeview, and Freeview has grown at a far greater rate than Sky over the last 18 months or so and will overtake Sky at some point towards the back end of this year or early next year, there are a lot of people who want a cheaper, less complicated and less comprehensive service; people actually do not want 400 channels. When you look at most people, on average they watch between six and nine channels, they have a repertoire of those and do not go much beyond that. Also, all of the complicated gismos, most people are not terribly sure how they work and are not overly sure they particularly want them. Interestingly, Freeview has seemed to cater for that particular market much more successfully than Sky. Sky is a hugely important business but it is an ARPU business, it is about subscription television, and it is a very different business from certainly the terrestrial broadcasters. Mr Arnold: I bought into Easynet the other day which is a UK ISP, so I am sure, to that point, if Sky could persuade 20% fewer subscribers to take broadband via them and pay £15 or £20 a month, probably they would be far happier doing that than maybe getting some incremental advertising revenue. Mr Marshall: They will drive broadband very aggressively, as a business, because they see its revenue potential in the next three to five years. Q425 Alan Keen: On another issue, your evidence is very valuable, because most of the time we are listening to people in the industry itself; you are slightly detached from it. Hamish mentioned the words that advertising income is finite, so really you do not mind where it comes from as long as it comes through you? Mr Marshall: We are not proud. Mr Pringle: We are absolutely agnostic, as far as the media is concerned; we really do not care. Q426 Alan Keen: The Chairman said, and we are saying it in different words, that the cake is the same size, there is only one-size cake. You are unhappy about the BBC's intentions, presumably not because you will get less money, because it is going to come to you anyway, wherever the advertising is, you are unhappy because you think it will damage the other broadcasters. Do you want to expand on that a little? Mr Pringle: We fear that it will take a bigger share of viewers, because it becomes more commercial, so the audience available to the commercial broadcasters will fall, advertising revenues will fall, and that is when the programmes will fall and that could produce this downward spiral, exacerbated by some of these other effects that we have been talking about. It is a very powerful thing, as everybody keeps saying, but it just needs to be kept in balance. It is not for us to say where that balance should be struck, that is for you to say, but I think all the evidence suggests that they are overpowerful and have been for several years now, and overcommercial as a result, and that is damaging commercial broadcasters and their ability to deliver audiences. As John said, for the branding side of the business, for the display advertising side of the business, big audiences are still very important for companies and we need to be able to deliver those audiences. This is why we have always been opposed to advertising on the BBC, because that would certainly dilute the finite amount of advertising spend, reduce the size of audiences and produce less than critical mass for programme rating. Mr Marshall: Whatever the BBC does, it has a dramatic impact on the commercial sector, both positive and negative, and our concerns are that I think we have huge admiration for the BBC, the BBC often acts more successfully almost from a commercial point of view than the commercial services, but admiration needs to be balanced with a fear for what it can do. When Hamish talks about a balance, we recognise that it has a hugely important role within broadcasting, but that role we think should be more accountable and there should be more checks and balances, in the very parochial level we look at it, and say why do the BBC need to put out an extra episode of EastEnders, why is it transferring Panorama out of peak viewing time. We know why that is, because it is competing with the commercial service, it is as simple as that, and it is gaining audience share by doing that. We do not think that is to the benefit of the public service remit, we do not think that; what we know for certain is that it damages the commercial sector, and particularly I think the problem is ITV. ITV is in the grip of a bit of a pincer movement because it is under a lot of pressure from the other commercial services, the other media, and, of course, its main competitor for large audiences continues to be the BBC. Q427 Rosemary McKenna: On that point, those of us certainly in the nations and regions watched ITV remove the services from the nations and regions, centralise it in London, and actually the BBC are just moving in to fill that gap. It is chicken and egg, is it not, but who is responsible? Mr Marshall: If you talk to ITV, and I am not necessarily an advocate for ITV in everything that it does, I think ITV would argue that it removed a level of services because of the situation of the '92 franchise review and the situation it has found itself in now, the crazy auction system, and the reason the BBC has moved into that particular space is because it has been able to afford to. It is largely an economic consideration. I think that would be ITV's argument and I think probably I would buy that. Q428 Rosemary McKenna: Certainly there is a vacuum and the BBC are moving in to fill that and I think people outside London would be happy about that? Mr Marshall: Yes, I think if there are vacuums then it is fair for the BBC to move into them. I think what the BBC is moving into are areas which are not necessarily vacuums. On a Saturday night, when ITV was running the X Factor, or whatever, then putting up very similar programming to counter it I do not see as moving into a vacuum. I just think it is clear competitiveness, without the same degree of commercial pressures or accountability that the commercial sectors have. Q429 Helen Southworth: Can I ask you about creativity. We were talking before about people wanting to skip the adverts and, I have to say, I have had occasion, when I have been looking at a rather dull programme, when I have wanted to skip and see if the adverts were any better, and quite often some of the adverts are absolutely exceptionally good. You were doing some work to try to develop creative skills and creative recruitment, were you not; can you let us know a little bit more about that? Mr Pringle: What we are trying to do is identify or enable people to self-identify whether they are good at creative industries, because at the moment no‑one is really quite sure what those qualities are. We keep talking about creativity and how good it is for the country, and all the rest of it, but we have not actually defined what it is in a commercial communications context. We have a hypothesis, which is that people who are good at this business, and we started with the advertising business but we believe it may extend into all sorts of other creative industries, are very good at inductive logic and rational thinking, they can analyse data and come to some conclusions in a logical way, but also, at the same time, they are capable of creative leaps, of intuitive creative thinking. What is particular about them is that they can do both of these things to a very high order, hence the idea of diagonal thinking, and we are trying to prove that hypothesis is actually the case. We have run a small pilot with some so-called stars in our industry and the industrial psychologists that we have hired to do this job for us have shown that these five high-flyers are indeed extremely high, compared with the national average, on two proprietary tests for inductive logic and creative thinking. We have now done a cohort of people who are in the account management or client relationship sector and they too are showing extraordinarily high scores, compared with the national average, on both these dimensions; so we are gaining confidence that this thing called diagonal thinking exists. Very recently, Creative and Cultural Skills have co-funded with us the balance of the research to go through the other job functions in our business - creative people, media planning and buying people, DM people, and so forth - and by the end of this year hopefully we will have a validation at the first level that this thing exists. If that is the case, we are then going to develop a test, a self-test, which will probably be delivered online, which will enable people from all sorts of backgrounds, particularly people from ethnically-diverse backgrounds, and from disadvantaged socioeconomic backgrounds, to be able to do this test for themselves and get some instant feedback as to whether or not they have some of this diagonal thinking skill. At the moment, many of these creative industries are actually quite closed shops to people who are not already in them. The work experience goes to the friends and relatives of people who are already in the business, and so on and so forth, and we are very conscious that the gene pool is rather narrow, and if we are really trying to compete on a global stage we think that we need as much talent as possible to be able to get into this business. That is really what the project is about. The Government is currently proposing a new diploma, as I am sure you are aware, for 14 to 19 years olds, a parallel track to GCSE and AS and A Levels, and we are all for that, as long as it takes into account this idea that the people who are good at this business often have a combination of arts and sciences in their educational background. We also want to make sure that what is taught in these courses is as much to do with business skills as craft skills, because we know that works in this sector. I guess the thing that we are looking to is for the Government to ensure that the teaching of this diploma is actually delivered appropriately and there is a question-mark about where the teachers are going to come from. One of the things that we would like to see is the practitioners, people in the business, actually being enabled to go and teach in schools, visiting lecturers, and that kind of thing. I think I am right in saying that it is unusual that in this country these people are not paid to do this, it is all done on a pro bono basis, whereas in other EU states there are fees paid for these visiting lecturers. I think, as an industry, we really could make a huge impact on this diploma, if that little financial contribution were made. It is never going to compensate for these fellows' day rates but it might just cover the trade fair, cover the hotel, get them there to do this work, so we are very keen on that idea and we would like to develop that, and maybe the diagonal thinking thing could be part of the process of kids self-identifying themselves for the creative industries. Chairman: It is one o'clock. Thank you very much indeed. |