UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 1091-i

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

CULTURE, MEDIA AND SPORT COMMITTEE

 

 

NEW MEDIA AND THE CREATIVE INDUSTRIES

 

 

Tuesday 9 May 2006

MR JOHN HOWKINS, MS FIONA CLARKE-HACKSTON and JONATHAN SIMON

MR ANTHONY LILLEY, MR MARK OLIVER and MS CLAIRE ENDERS

Evidence heard in Public Questions 1 - 58

 

 

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Oral Evidence

Taken before the Culture, Media and Sport Committee

on Tuesday 9 May 2006

Members present

Mr John Whittingdale, in the Chair

Philip Davies

Mr Nigel Evans

Alan Keen

Rosemary McKenna

Adam Price

Mr Adrian Sanders

Helen Southworth

________________

Memorandum submitted by the British Screen Advisory Council

 

Examination of Witnesses

 

Witnesses: Mr John Howkins, Deputy Chairman, Ms Fiona Clarke-Hackston, Director and Mr Jonathan Simon, Senior Manager of Corporate Relations, Channel 4, the British Screen Advisory Council, gave evidence.

Q1 Chairman: Good morning everybody and welcome to this which is the first session of the Committee's new inquiry into challenges and opportunities offered by new media. We are pleased to have as our first witnesses the British Screen Advisory Council, which is an umbrella body with representatives right across all the various players in the industry. I hope that you will be able to give us a general overview and perhaps point us in the direction where you think it will be helpful for the Committee to focus its attention. Can I welcome Fiona Clarke-Hackston, the Director of BSAC, John Howkins the Deputy Chairman, and Jonathan Simon, the Policy Consultant. Can I ask you to begin by perhaps giving us a general view of the kinds of developments which are taking place in new media and where you think the future lies. It is a terribly difficult question, to ask you to crystal ball gaze in this way but it might help us, to give us an opening perspective.

Mr Howkins: Thank you very much, Chairman. Thank you for inviting us here today. We will do our best in a very short space of time to give a broad overall summary of what the Council regards as the main issues that the industry is facing and should be dealt with. We will start with issues on which the Council and industry has some agreement, and then we will move to an equal number of issues upon which the industry does not have a particular agreement. Taking your four questions in turn, the first is the impact of digital convergence and we would say on that all our members, whether they are in TV, film or new media, are experiencing very dramatic technological changes which are forcing them to think about their business in new ways which are themselves leading to new technological innovations. All companies are thinking of new ways of selling existing products; and some, a smaller number, are developing new products. The difference between products and services is becoming very blurred, and we are in a continuous state of change. We are moving towards a future where most content, and all digital content, will be accessible online. We expect, what we call, very large content aggregators to emerge, like online hypermarkets, so consumers can access and download whatever they want, any time, anywhere. We also expect at the same time many small start-ups. Most of these will fail; some will succeed and some will sell on to the big distributors, the big aggregators, and the example there recently is Skype. The technological changes are radical but our view is that the companies need to be even more radical, and imaginative, in meeting new consumer demands or satisfying existing demands in new ways. We face several fundamental questions and the first is how to build and maintain audiences. That is the heart of the business. The second is if, when and how to generate review. The third is the terms of trade between the creators, the rights holders and the aggregators. The fourth is the development of Digital Rights Management systems, typical protection measures. The fifth is whether or not the copyright regime will remain fit for purpose. Moving on to your second question, which is about copyright infringement and piracy, as you would expect us to say, this is an extremely critical issue for us. As more people move to broadband and broadband speeds increase we expect piracy levels to increase. Our view is that piracy is not just something which is a threat to current assets, balance sheets and current revenues but threatens innovation and ultimately UK competitiveness. Many of our members are spending a considerable amount of money and time on enforcement, education and awareness, either singly or in collaboration. This is private industrial activity and it needs to be supported by the appropriate regulatory framework, and we have made suggestions about how that might be done. Industry also accepts completely that the ultimate solution is to develop better ways of selling their product to the customer, but that takes time. Last autumn we hosted the Creative Economy Conference as part of the UK Presidency of the European Council of Ministers, and the view from across Europe, which we share, was that we were all broadly happy with the copyright framework and it is not in need of any major overhaul. Your third question was about the extent to which regulatory contact should be applied to new media platforms. Our view on that is that in such a continuously changing environment any changes to regulations should be undertaken with caution and with care. There has therefore been general alarm expressed about the European Commission's proposal to reform the Television Without Frontiers Directive, particularly to extend its scope to online media. We believe that this could inhibit the emergence of new services and increase legal uncertainty. We believe it would also lead to a substantial increase in compliance costs, not only for the industry but for the regulator. We therefore support the Government's line on this. We have related concerns about Digital Rights Management and technical protection measures. These systems can ensure consumers have access to digital content in new ways, over new time periods and at different prices. There have been suggestions, and are still suggestions, that such systems should be regulated. BSAC is not in favour of any regulatory intervention on the standards and interoperability of DRMs. We believe solutions should be market-driven. On the fourth issue, which is the balance between rights-holders and consumers, this is a continuing and fascinating debate. BSAC's position is that it is essential that public access to knowledge and ideas should be maintained in the online media environment; but that this access must be balanced by enabling commercial entities to exploit the full the value from their investments going forward. We develop this more in our BSAC paper on public access. It is crucial to ensure that the economics of the industry are sustained. Those are the issues upon which we have agreement. Briefly I would like to mention some that are perhaps equally important but upon which there is no agreement and the first is copyright term. Some people believe that longer terms incentivise creators to produce more and better work, thereby enriching the pool of content available to everybody. Others believe that longer terms inhibit the circulation of ideas - and therefore work against the public interest. We raise this issue; we have no consensus view on it. We can discuss this later on. The second issue we would like to mention is what we call "alternative licensing systems", whether it is a general public licence or Creative Commons. Systems like Creative Commons are based on the belief that creativity is held back by traditional licensing systems, and that everybody - creators, users and consumers - would benefit from user-friendly systems that clearly indicate if and how material could be copied. Initially, some sectors of industry were hostile to these alternative licensing systems in the belief that they in some way would uncut or challenge the philosophy and the practice of copyright itself. We believe the industry has now accepted that these alternative systems can sit alongside conventional, traditional systems. The launch of the Creative Archive has certainly helped in this. The third issue upon which there is no consensus is that of windows, which as you know is critical to our industry. It is widely agreed throughout the industry, and has been for some time, that we must move quickly to new ways of launching legitimate and attractive downloading services. However, there is an intense debate about how soon a film should be made available online after theatrical release. Rights-holders are already looking at and experimenting with significantly shorter windows, and putting out a download almost immediately after theatrical release; but, as you would imagine, cinema owners are strongly opposed to this. There may be issues here about the relative public support for production and distribution. That is a brief overview of the issues which we ourselves have been looking at and discussing over the past few months, years or decades. Thank you for your attention.

Q2 Chairman: Thank you for that. I think you have covered almost all the areas we are going to want to explore with you in some greater detail. Before bringing in my colleagues, can I just bring you back to this question of your view of where we are going; because there are so many different competing technologies at the moment and to some extent it is impossible to know which ones are going to emerge as being the dominant platforms. What do you see as being the factors that will influence that? For instance, do you see spectrum as something which over time is going to become a real constraint on the development of certain technologies? What other influences are there over this?

Mr Howkins: My suspicion is that the success of new services and the sale of content is to do with issues like convenience and price; in other words that the media industries, the media companies, are becoming less like the companies we knew which are to do with spectrum and regulated industries, and they are becoming more like commodity goods. The companies which are successful understand the consumer demands; they understand about marketing, branding, pricing, customer loyalty and services - the issues which companies in other sectors are very familiar with. I think the media industries have got to learn how to exploit those factors. The ones which do learn to exploit those factors, whether it is an existing media company or, let us say, Tesco, are the ones which will succeed.

Mr Simon: Could I add to that. I completely agree with what John has said. If all these changes are being driven by technology I think the winners and losers will be defined as much by what the actual consumer proposition is. If you look over the last ten years at the different TV platforms Cable has had the best technology but it is Sky which is the real winner because they understood the consumer far better than anyone. Over the next few years, if not months, you are going to get some interesting hybrid platforms emerging where, for example, Sky has bought an ISP and they are actually going to finally be able to add true interactivity to their platform. What BT is doing, adding ADSL onto a Freeview box, will again add interactivity onto Freeview. You are going to get some very interesting hybrid models emerging which even a year or two ago no-one particularly anticipated, and I am sure there will be more to come.

Q3 Helen Southworth: How far are you expecting pressure from creators to influence the direction of the middleman, the broadcasters and record companies? How much do you think that is going to affect the changes? Far more now creators are being able to get a direct relationship with consumers. How are you seeing this value-added bit in the middle working?

Mr Howkins: It is a very important question. My own view is that the role of the marketing person, the distribution person, the brand on which this is put out, the owner of the platform, will have (for most people, for most industries) the dominant role of going forward. That does not stop someone coming along around the edges establishing a direct relationship; but I think increasingly the larger or the more successful that individual creator becomes they will wish to use the marketing route to the audience of the larger companies. This is why we say we think there will become larger and larger aggregators who will deliver the stuff to the audience, and that is where the audience will go for stuff. That is not to stop people coming along and doing something around the edges; but we believe that that will only work for quite (what I would call) small creators operating at the margins.

Q4 Helen Southworth: Within that scenario you are seeing develop how are you going to see the dynamism, the excitement, the new creators coming in and being able to develop their processes? The middle people and the aggregates, their role in bringing on creativity and exciting content is going to be very crucial, is it not?

Mr Howkins: Their role in doing that is very crucial. If they do not do that they will not succeed. It is like a film distribution chain or a book-selling chain - they have got to be very sensitive to the demands of the consumers. There may be a role for competition policy in there. If someone is in a sufficiently large dominant position in the market and is abusing that, there may be a role for the competition authorities to step in. We do generally see an increasing role for the competition authorities, both in regulating the terms of trade and possibly in regulating Digital Rights Management and technical protection measures.

Q5 Helen Southworth: Your membership - you represent a fairly wide range of the audio- visual industry interests. Presumably you do not have a consensus view within that about the impact of new media. What different opinions do you have within that?

Mr Howkins: We rather pride ourselves on reaching consensus on a remarkably broad range of issues. We do not vote, but we do reach consensus on a broad range of issues. By convention, if there is one particular person or one particular company or sector that cannot go along with the consensus view, they do not stop the Council expressing that as the Council's view.

Q6 Helen Southworth: Can you give examples of areas of consensus or areas of disagreement which might be helpful to us?

Mr Howkins: Fiona, as Director of the Council, is the person who is more in touch with this division.

Ms Clarke-Hackston: I think there are a range of different issues here. Some of the issues are issues where the Council having a view does not actually harm another constituent or constituent part of it. For example, we have been extremely active in areas like film policy because, in terms of creators, having an effective and well-funded film industry is extremely important to the future. It may well be that film, for example, can reach new audiences in a way that it has not been able to do before. Those issues are issues that are of less importance to some members than to others, but overall their campaigning to find effective mechanisms to support film are extremely beneficial to the sector as a whole so the rest of the members will be quite happy to see us do that. There are other issues - there is a wide range of them - where there is not agreement. With some of the issues around copyright there is not agreement because within the membership we have, for example, the trade unions; so you are talking about the workforce; you are talking about some of the creators, like the writers and so on, and their perspective may well be different on issues than, for example, the big companies who are licensed for various agreements. There are a whole range of different issues. DRM is another one that John touched on just now where there are different views. There is not a single view that DRMs should not be regulated; people feel that they should be market-driven; but there is not entire agreement about the use of DRMs other than that.

Q7 Mr Evans: I know the death of the cinema has been announced many times over the past 30 or 40 years and it has bounced back, but with all the changing technology and new media coming up and the hybrids you are talking about and downloading anytime, anywhere, how long do you give the cinema?

Mr Howkins: I think it will continue for the foreseeable future, by which I mean a very, very long time. I do not envisage the death of the cinema at all for two compelling reasons: it gives young people a place to go out with their friends. The main reason why people go out to the cinema is to go somewhere and sit down for 90 minutes and have a nice experience. Secondly, the medium of film shows no sign of being designed for any other purpose but to be seen in a large room with other people.

Q8 Mr Evans: What is the problem then with releasing films shortly after they have done the cinemas?

Mr Howkins: At the margin people will stay at home and you will find it harder to get the older audience.

Q9 Mr Evans: I am not convinced - sorry.

Ms Clarke-Hackston: I think what you may see (and none of us quite knows) are different models developing. You may well see cinemas moving to a position where a certain type of cinema supports a rather more expensive evening out than we are seeing at present with a different range of food; a different cinema-going experience. With the advent of digital cinema it will be possible to put on a whole range of movies that at present you cannot see. I went to my local cinema at the weekend and Mission Impossible was playing on seven screens and there are 16 screens there. With the choice you will get, the digital cinema has the potential to be much greater. What you may well see is people organising evenings out in a different way where you have dinner and more of a theatre-type evening, whether you spend a bit more money and part of it is the experience of being in the building. We have seen that with quite a number of the smaller cinemas in London now where they have a special clientele who know what they are showing and so on. You may see that at one end. What you may also see is a polarisation where the big cinemas use a whole range of screens for a cheaper form of entertainment for the sort of people John has referred to - for the young people who need to get out of the home and want to go out with their girlfriend, or whatever, on a Friday night. I think you will see it splitting. I could not have said this three or four years ago but, talking to cinema operators, I have been struck recently by the way they are looking at other ways in which their cinemas can be used. It is not just digital cinema; they are experimenting with a whole range of other activities that people might like to go and see, for example boxing matches. At a few cinemas at Leicester Square they have been experimenting with different ways of game playing, where you have a hundred people who have an active consol in the audience and they can play a game and you can have a hundred different people fighting on the screen in front of you. If you think about surround sound and the size of the experience, for people who enjoy games I should imagine that this is very exciting and very enjoyable. You may well see a whole range of different use of cinemas in the future.

Q10 Mr Evans: Do you foresee a lot of traditional cinemas closing because they simply cannot compete with people who have huge screen laptops who will be able to download the very latest films only released perhaps a month ago?

Mr Simon: The consumer experience will be very important. The reason cinema bounced back in the 1980s was the multiplexes and the idea you could actually go to the cinema and sit in a comfortable seat and get a good view of the screen even with someone sat in front of you. I think the problem with the smaller ones is, unless they can invest in the maximum comfort and viewing for the people who might go out to the cinema, it will be more tempting to stay at home where you have got a big screen at home. The big chains which can invest and keep their cinemas as comfortable as possible - and where you have got more screens you can be more flexible in how you play a wider range of movies - will be in the best position.

Q11 Mr Evans: If they do not invest they are going to go through?

Mr Simon: It will be harder for them if they do not invest, yes.

Mr Howkins: I think the proportion of revenue coming out of cinema and the proportion of revenue coming out of downloading and DVDs will change significantly. As with publishing, most publishers see the hardback as a loss-leader and make most of their revenue off of the paperback. I think with cinema the distributors are accepting that they will get less and less net revenue out of the theatrical release and more and more revenue out of the DVD and downloading; but they need the theatrical release in the same way as publishers need hardbacks because that is how you get reviews and how you get word of mouth and buzz. You need the marketing event of a theatrical release and you need the marketing release of the hardback book.

Q12 Mr Evans: One final question on scheduling. How long away do you think it is that scheduling is going to disappear completely and people will access their television in a different sort of way, i.e. the Radio Times will completely change, or the TV Times, and you are just going to have a list of programmes that you like with a code where you will be able to say, "Right, I'll watch it now", and if I want to watch 20 editions of Will & Grace, or whatever, then I will watch 20 editions and nobody is going to tell me when I can watch them.

Mr Simon: I think the TV channel will be more resilient than some people think. It is the same point which John just made which is, the showing of a TV programme on TV creates a particular point in time at which you can focus all of the marketing and branding; and, particularly if it is a new programme, you are doing it to promote that programme. I think what you will get is vision-on-demand will sit concurrently with the broadcast. You will get, "Watch it tonight at nine o'clock, but if you've missed it you'll immediately be able to watch it on demand". Vision-on-demand viewing will, to some degree, substitute for the TV viewing. I think the concept of a schedule will remain but there will be a particular case for live events, whether it is news or big reality shows like Pop Idol or Big Brother, where if you did not watch it last night you probably never would, so for them timing is very important. Even for a brand new TV series you cannot just dump 100 episodes on a server and say, "Right, watch that". The marketing of it is very important and you need to get everyone to watch on day one and do it at roughly the same time, and even then create new episodes every week.

Q13 Mr Evans: If they do not do it somebody else is going to do it like, Napster or BitTorrent; somebody will just put 100 editions of whatever the popular TV series is.

Mr Simon: The 100 editions will appear on demand but it will be complementary to the TV schedule. The first showing will be on TV on a traditional channel but you will immediately be able to watch on demand afterwards.

Q14 Mr Evans: I thought the first showing would be made available online pay-per-view prior to it being fully made available?

Mr Simon: It could be, but even then it would probably be one week before so it would be anchored still to the TV schedule.

Mr Howkins: It is hard to get the demand for it unless you offer it for free and make an event for it. If no-one had heard of Lost and you put it out or you offered it on pay-per-view or on-demand they would not watch because they had not heard of it. So you have to give it out for free to start with, get the marketing, get the buzz and the event and then you can play around with all sorts of different ways to make more money.

Q15 Adam Price: On cinema again - to what extent has the advent of the plasma screen, surround sound technology and home cinema eaten into the extent of the cinema audience in the last couple of years?

Mr Howkins: I think to a very small extent. I accept the plasma screen is a significantly better viewing experience, and that the new plasma screens are a higher resolution than the digital screens we are seeing in the cinema. Technically the domestic screen is now better than the public screen. It does not (I do not think) have an impact on the wish of the film-maker, the distributor and investor to release as part of a big event, to make a marketing event out of release. As far as I am aware, people are still going to the cinema for new releases and then maybe the DVD; and they are watching on the plasma screen sports or older films. That is extremely healthy because we get a longer-term revenue (not quite a long tail yet); but we are getting a longer-term revenue for the library and the back orders.

Q16 Adam Price: What about the DVD - will the DVD still exist in ten years' time?

Mr Howkins: I think it will continue to decline. The industry has had a fantastic few years out of DVDs. I think the disc as a platform will continue to decline and more stuff will cone online.

Q17 Mr Sanders: Can I come back to Jonathan, and this is an issue which I think threatens to really undermine the concept under which you are working. If you need cinema or you need TV scheduling in order to market a product, what is happening (and Lost is an example) is a great many people who were fans of the first series have seen the second series on downloaded DVD even before the second series has been broadcast, and that threatens, presumably in terms of viewing figures, the viability of there then being a third series. In a sense, the new technology can kill off a good product because so many people take away the value, through illegal means, of being able to enjoy it. How can the industry tackle that?

Mr Simon: I think there are two separate issues here: one is the issue of piracy, so illegally accessing content which has not been made legally available; and the second is on the global release patterns, where something is released in America before it is released in Britain. It is the combination of those two which creates the problem for Lost. In this specific example it is a problem; whereas if it was a British series which had not been released anywhere it would not necessarily exist. To look at the two issues, I think there is going to be pressure for very big, globally popular content (whether it is TV or film, then probably even more so) for global release dates to converge to minimise the effects of piracy, to make sure that when something is released in America it is available much quicker, if not simultaneously in Britain. For a lot of content I think there will be simultaneous releasing but not for everything. In terms of piracy, as John said in his opening remarks, it is critical we address that and do everything we can to reduce piracy of content. We also need to be able to develop new business models to make content available legally as consumers want it. DVD, video-on-demand - the whole range of different ways in which consumers want to access content needs to be made available to them legally so they have a legal alternative to get what they want.

Q18 Adam Price: Is the industry suing consumers in the same way the music industry is?

Mr Simon: No.

Q19 Rosemary McKenna: We all remember the panic in the music industry when people started downloading and it took them quite a long time to get their heads around it. What lessons have you learned from that period? All the memoranda that have come in actually refer to the problems of piracy and unauthorised reproduction. What lessons have you learned and are you developing new business models to deal with that?

Mr Howkins: I think the two points that should be made are, first, because the music industry had a terrible time and could not see a way out of it, and technically what had happened to music was going to happen to audio-visual material, so film and television had a number of years (let us say four or five years) to prepare for itself. Second, it actually realised that the music industry did not crumble and die - it survived. It survived partly through its own efforts and partly through the efforts of people from outside the music industry; and that gave heart I think to anybody else that whether you are dealing with text or images these systems which appear very threatening are actually not; because what you are doing is selling music, selling entertainment or selling images and to say that people are going to stop watching that, straight from the creator's mouth, from the creator's source, is not the case. We had warning and realised it was not as bad as it might have been.

Ms Clarke-Hackston: Can I just add to that. We have learnt an enormous amount from the music industry, I think particularly in the area of film. I think in the television industry there are some differences, not least due to the fact that the consumer is used to the notion of time shifting as a legitimate way of copying. I think that makes the message and the nature of the message we have to sell to the consumer about when things are and are not legal a harder message. We have been talking about that extensively. We are at the early stages of doing some work - it has not applied to television as much as when film was hit. It was music, then it was film and we are now going on to broadcasting. We did a piece of research a year ago last January which looked at the impact of technology such as BitTorrent on downloading. At the time we were looking at programmes such as big American series that do extremely well, like 24. You could see that 24 was being illegally downloaded on the West Coast of America within about half an hour of it being shown on the East Coast and this completely undermines the existing business model. I think there are a number of things the industry needs to do. Firstly, and most importantly, it has got to develop new business models to take account of that. Meanwhile there is a lot of the anti-piracy activity going on in terms of fighting piracy, which is so much more complicated than we all thought it would be (we thought at first it was just a battle, and now we know it is an education process with the public), and we have got to make people more aware of these things. It also feeds of course into the media literacy agenda as well. I think people are much more sophisticated about the way they are fighting piracy now and, hopefully, those efforts can slow it to such an extent that meanwhile the new business models develop and that is our best hope really.

Mr Howkins: Most publicity is good publicity. Keifer Sutherland has signed up for another five series and his fee has not gone down!

Q20 Rosemary McKenna: That is another interesting point, is it not? There are some people in all the industries who make huge amounts of money and there are other people working very hard in the various industries making very, very little. When people see someone like Keifer Sutherland making that kind of money they say, "Why shouldn't I download it?"

Ms Clarke-Hackston: I think you are right. This is one thing our industry has learnt from music: early on the music industry used quite a number of high profile extremely rich people to make comments about the issues around piracy. That has changed and you do not see that any more. It was an own goal.

Q21 Philip Davies: On the issue of copyright law, new media leads to certain anomalies in terms of the law. For example, there are the same rights with regard to recording a viewing content delivered by a traditional television as there are for new services such as video-on-demand. Do you think that the same rights should apply across the board?

Mr Howkins: I think the existing copyright system in terms of the rights that a rights owner has (the author, recording artist and performer) are satisfactory; it is a question of contract. More and more negotiation is taking place and it is a question of contract. We do not think there is a need for a new right to be put onto a particular contractually agreed kind of delivery.

Ms Clarke-Hackston: One of the dangers that you have, if you do such a thing, you might undermine investment in these new business models that we are trying to see in these new forms of delivery. It is cause for nervousness - the idea of a new right. We do not believe there is a need for it in any case. Certainly a lot of the work we did at the tail-end of last year was looking at these issues. As John mentioned, we had the Creative Economy Conference in the autumn where we met with people in the creative industries from 25 Member States, and the view was that there was not a need for a new right.

Q22 Chairman: I understand at the moment it is actually a breach of copyright law to burn onto an iPod. Clearly that is because copyright law knew nothing about iPods when it was written. Do you not think that that matters - that the law is that ancient and simply does not take account of modern technology?

Mr Howkins: I think it would be fair to say that this is an issue upon which there is not a great deal of consensus. It was illegal to copy from an LP onto a cassette. It is illegal to copy from one hard disk to another hard disk, whether it is on a computer-to-computer basis or computer-to-iPod basis. By and large the industry at the moment would wish it were otherwise but think that the problem of establishing a new right and doing it in such a way the public accept it as being fair and reasonable is not worth the candle - in other words, it is just not worth it.

Q23 Chairman: Does it not make it harder if essentially what happens is that the industry chooses which particular laws they think they wish to enforce and which ones they actually do not care about people breaking? Clearly the industry is not going to prosecute anybody burning onto an iPod.

Mr Howkins: I think this is where Digital Rights Management or technical protection measures come in. You could have some software that would allow you to, let us say, download a piece of music or piece of content for a period of one day, seven days, four weeks or whatever you want and the consumer would pay appropriately for that. The consumer might pay a pound or so for a week and then maybe a full price equivalent to a DVD price for a number of months. That would be enforced through software that would ensure that the content was either not accessible or self-destructed after the appropriate period. That is the way the industry is going at the moment, to write software, to put the software into the consumer's hard disk, rather than invent or create a new right. It would be easier to do it through a contract.

Q24 Philip Davies: The Chancellor announced a review into intellectual property rights under Andrew Gowers. What would you like to see as the upshot of that review? What recommendations would you like that to come up with; or what recommendations would you not like it to come up with?

Mr Howkins: We have said to Andrew Gowers what we have said here, which is that, in our view, the basic copyright system is extremely useful; it works well; the framework is broadly correct and appropriate to us; and we do not anticipate any problems going forward. We have proposed a few changes - some of them come under the heading of "enforcement". We think there are certain steps the Government should take to allow not for the laws to be changed but for the laws to be enforced in a stronger and more effective way.

Q25 Philip Davies: Are there any lessons from abroad that you think we should learn about how to deal with these things?

Mr Howkins: I think broadly the UK, which sits halfway between the continental way of copyright and the American way of copyright, has broadly got it right. We share directives with the European Union; we share an Anglo-Saxon tradition with America; we are a sort of hybrid of the two. I think broadly that the UK system of copyright (I will not claim it to be better than) is as good as other countries. I do not see another model out there in terms of state legislation that we should copy.

Q26 Mr Evans: If somebody has bought a CD should they not have the right to be able to burn it on their iPod, or burn another copy for the car?

Mr Howkins: The law says they should not; 100% of the practice says they do. The rights owners have been grown-up and sensible and not taken people to court about it.

Q27 Mr Evans: So the law is an ass! Secondly, on the downloading of TV programmes you have just said that people were downloading on the West Coast what had just appeared on the East Coast. You have all admitted nobody is chasing any consumer that is doing it. Any person who is doing it is not getting prosecuted anywhere as far as you understand it?

Mr Howkins: Can I just say, as far as I am aware industry is not prosecuting consumers; but industry is being extremely active when what is called the "user groups" get hold of content and duplicate it in industrial quantities. If there is an infringement case by an individual for their private use -----

Q28 Mr Evans: Industry is not selling DVDs on Westminster Bridge and I have seen people on Westminster Bridge flogging films I did not realise had even been made they are that recent and everybody is turning a blind eye to that, by the looks of it. Downloading it on BitTorrent is a different ballgame completely, is it not? Surely there will be a huge loss of revenue to the industry if that is allowed to go unabated?

Mr Howkins: The industry is taking active steps to find out the people who are getting hold of copies that they should not get hold of and copying and selling them in industrial quantities.

Ms Clarke-Hackston: One of the difficulties is the international nature of this. You will appreciate it is not just within this jurisdiction. One of the things, certainly on the television side, people are beginning to look at now is how you take up the hubs of these activities, rather more than going for the individual who has chosen to download, upload or whatever they are doing. It is not easy territory because it is such an international problem.

Q29 Mr Evans: Is it because it is like putting your foot out against the flood - it is just going to be totally ineffective and you are going to pick on a few people but, in the main, there are so many people doing it now that it is pointless to chase anybody?

Ms Clarke-Hackston: I do not think I would agree with that. I think there are codes of behaviour which operate in one jurisdiction which do not ----- by the way that people approach issues and whether or not they are prepared to do things that are against the law. I think by and large in the UK we are pretty law-abiding; I think there are undeveloped countries where perhaps people are less so. I do believe that a lot of the anti-piracy messages and a lot of the enforcement messages are having impact and there is some evidence of it. I suspect you will be seeing giving evidence the Alliance Against Copyright Theft and they have done some very interesting research which shows that the awareness of the illegality of copying is growing; and also they have done other work where they have talked to people and they have got people's views as to people's willingness to purchase. Quite a lot of piracy is driven by people who are unable to get the content that they want. As I say, the sooner we can roll out these business models the better and, hopefully, then monetarise it in some way which will mean that we still have an industry.

Q30 Adam Price: You have mentioned Digital Rights Management software. The experience has not been too good. I had a Sony MP3 player for Christmas and luckily I did not download the software until January otherwise it might well have wiped my hard disk. What protection is there for people to prevent this kind of software from damaging their computers etc?

Mr Howkins: These systems are, in a sense, the Holy Grail and people have been working on them for a very long time. There is a wide agreement in the industry that we have not got it right. We have not got it right in terms of protecting consumer interest; nor have we got it right in terms of allowing us to do what the industry wants to be able to do. We need to have some sort of technical protection system, Digital Rights Management system, and we will get there. We have not yet got there; we are treading rather cautiously I think is the right thing to say. We are aware that we do not want to have any PR disasters, or for the consumer lobby to begin to distrust them. We are urging caution.

Q31 Adam Price: What about the privacy issues? If the software allows you as an industry to scan people's hard disks, how can we prevent that from being used for illicit purposes?

Mr Howkins: I think there are real concerns about privacy and personal data and those must be taken account of.

Q32 Chairman: You said at the start you did not wish to have statutory control or regulation, DRM, but wanted the market essentially to allow it advance?

Mr Howkins: Yes, we believe the industry itself is sufficiently aware of these systems to sort it out itself. We do not think there is a package or public regulatory constraints that can be moved across. The systems are not at that stage yet. We would prefer to write them out ourselves, and then if we get them wrong for someone to come along and say, "You are getting that wrong". We think at the moment we should be left alone to do it.

Q33 Chairman: What about transparency at the very least so that consumers are aware that as when Adam has his new Sony Walkman and he downloads his software that this software actually does carry with it quite a lot of extras which allow Sony to monitor his computer activity. Do you not at least think they should be required to make it plain to consumers?

Mr Howkins: I think Sony was badly damaged by that all over the world; it was a disaster. It has learnt from that, I am sure, and I am sure everybody else has learnt from that as well.

Mr Simon: I think Apple did something similar and there was an immediate outcry and within 24 hours they changed their policy and issued a software download after they had been accused of also being able to access private information. In that sense the power of the individual in user groups on the internet gives them a voice which people never had before, and you could not get very rapid responses from industry.

Q34 Alan Keen: In your introduction you touched on the Television Without Frontiers extending regulations and you said that it would inhibit providers. What would be the consequence of not doing it? Can you give me a bit more information on the "for and against"?

Mr Howkins: What the Commission is proposing is a new level of Commission regulation. We prefer to operate as we have in the past in this area, which is industry self-regulation in the online world. We do not believe that the Television Without Frontiers standards and restrictions should be moved over from the broadcast world to the online world. We cannot see any advantages, in answer to your question.

Ms Clarke-Hackston: The aim of the review of the directive was to bring video-on-demand services within the orbit of Television Without Frontiers. I think the main problems that we have are that the definitions are extremely wide, and a whole range of services beyond that - services some of which, we are not quite clear what they are because they are babies, are being embraced by this. We have major concerns as an industry that this will damage those young services and lead to a reduction in investment in those services; and possibly those people who wish to set up those services will do so outside the EU as a result. We think that the proposals could be extremely damaging from the point of view of competitiveness. We also feel that a whole range of services that we can recognise, the video-on-demand services, are covered already by the Electronic Commerce Directive already and it will lead to a lot of confusion because nobody will know which directive they should be honouring when they are operating. We have a whole bundle of concerns about that. It illustrates really the difficulty of regulating when things are moving so very fast. We are not quite sure where things are going.

Mr Simon: Just to add to that, one of the effects the extension of scope could have is to massively increase compliance costs, and that applies equally to industry but also to the regulator. Ofcom is really concerned about it. Our position is that everyone in Britain is pretty much of a common view here - industry, Government, regulators alike. What is really worrying is that across Europe people either disagree with us or they are not engaging with these issues. The Commission seems to be pretty determined to drive these changes through. We are having real trouble engaging with our counterparts across Europe to make them understand some of our concerns.

Q35 Chairman: That is interesting because I attended the EU Audi-Visual Conference in Liverpool - and nearly lost the will to live after the first day - but there, as you rightly say, the British position was unanimous, from the Government, industry and everybody, and yet it appeared to have no impact on the Commission whatsoever. The Government have since suggested they think they are making progress in the Commission, but is that not your impression?

Mr Simon: I think progress is pretty minimal actually. I spoke to people at Ofcom who go to Brussels and show demonstrations of websites and say, "This is the kind of service which will fall under the new definitions. Do you really want to regulate this?" It looks nothing like broadcasting or the traditional services. The people in the Commission just say, "Parliament says, yes". I think maybe some very modest progress has been made, but it is pretty modest at the moment.

Q36 Alan Keen: In your New Business Models paper you make the case for extending regulation in order to stop anti-competitive behaviour. Does Ofcom not provide that service already? Does Ofcom not already provide, and the other authorities, what is necessary to stop anti-competitive behaviour?

Mr Simon: For the most part the position is actually that you should not extend regulation. I think there is a very, very narrow slither of content whether you could online offer content which is like a traditional linear scheduled TV channel and then you would say, on the grounds of platform neutrality, if it really looks like a TV channel it should be regulated like such. As this is going to be a very, very tiny part of the current content delivered online, most of it is going to be on-demand content and our position is you should not try to extend the regulations to that.

Q37 Helen Southworth: What impact are you expecting on the industry from the BBC's Creative Future plan?

Ms Clarke-Hackston: The Council has not discussed the BBC's Creative Future so we cannot offer a view on that, I am afraid.

Q38 Helen Southworth: Do you have any views on the Creative Archive and the impact that will have on driving changes in the industry?

Mr Howkins: We welcome a Creative Archive very much. We have addressed this in our paper on public access, because we feel that it is a natural and logical way of the BBC making its programme archive materials more easily available or, in many cases, available for the first time to the public. We think the BBC was brave and should be supported in so doing. We think it started slowly and it will take some time to "get up to speed", if you like; but we welcome it. We welcome the chance to see again, listen again and to get access to this astonishing store of material in the BBC archive.

Q39 Helen Southworth: Do you think it will have an impact on the way some big aggregate providers work in future?

Mr Howkins: I have talked with some other organisations who, in my view, might pursue the same policy and I have not found many that are so interested in the audio-visual media world, because they do not have the same public obligations. In the print world libraries are certainly going down that route - either making available what they have newly acquired or digitising their existing stock and making that available. I think the principle of making available to the public stuff that the public has in some way or another already paid for is an important principle. The BBC has demonstrated that very clearly. I think the principle should, and I think it will, move into other areas which I would welcome.

Chairman: I do not think we have any more questions for you. Thank you very much indeed.

Witnesses: Mr Anthony Lilley, Chief Executive, Magic Lantern Productions, Mr Mark Oliver, Chief Executive, Oliver & Ohlbaum Associates Ltd and Ms Claire Enders, Chief Executive, Enders Analysis Ltd, gave evidence.

Q40 Chairman: Can I welcome our three next witnesses: Anthony Lilley, Chief Executive of Magic Lantern whom I listened to yesterday. I am sorry it is two days in a row that you have been summoned to the House of Commons. You corrected us yesterday that we should not be talking about "new media" but should be talking about "now media" and I took it on board when you made that comment. Also Mark Oliver, Chief Executive of Oliver & Ohlbaum; and Claire Enders, Chief Executive of Enders Analysis, both of whom have become experts in analysing these developments and advising many, many companies on them. Can I perhaps begin by asking you a similar question to the one which we asked BSAC at the beginning about the developments that are taking place; how do you see the changing media landscape at the moment? What do you see as the future and the main ways in which consumers are going to access media in years to come?

Ms Enders: I actually wanted to take up a point which I felt would be helpful to the Committee, which is that consumers are dealing with a greater and greater level of complexity but they are also dealing with it effectively. In fact, the number of networks that people access is increasing and, therefore, I think the issue of platform dominance really diminishes in importance. We are no longer living in a world where any individual is actually a captive of any network. If you have a telephony service, you can switch. 83% of adults have mobile telephones. There are eight million subscribers to satellite, 3.5 million subscribers to cable and digital terrestrial TV, which has been an amazing success. The main drivers of these phenomena are a growth in software driven solutions of which DRM is but one and software driven models, Google and Yahoo, essentially network independent models, which are very effective in creating new networks which are human networks like MySpace or all the online media. Consumers are dealing effectively and very efficiently with all these new choices and have done for a very long period of time. The UK has the highest penetration of DVD players, MP3 players and freeview, digital terrestrial TV and satellite. It is among the most densely internet enabled countries in Europe. It is a country with a good development of mobile data services like 3G. I believe the multiplicity of networks that people are accessing successfully across a very broad spectrum - 65 year olds who send and receive texts - is something that should make everybody feel very positive about how people are embracing technology, how it is changing their lives and how that diminishes the need for regulation. On your point about the TV Without Frontiers Directive, something the panellists did not mention was perhaps that deregulation would be a good thing. Many of these software driven models are greatly diminishing the value of Spectrum, certainly in commercial radio space. 48% of UK adult internet users listen to webcasts. There are dramatic changes going on in that sector. It is an amazing sense of optimism that the Commission must have that they can regulate anything online. I think it is foolish and comes from a European tradition of wishing to control. The UK has over a long period been more on the deregulation side or the less regulation side of the equation and that has done great wonders for the UK creative industries, for diffusion of consumer electronics, for enablement of new business models. The UK is the biggest legitimate download market in Europe for music. It is a place where a lot of people have figured out that the iPod DRM traps iTunes but they are happy to use it. Even though paradoxically many of these models develop into effective monopolies and oligopolies, Google has 60% of UK search income. Apple has between 80 and 90% of the legitimate download market in the UK that belongs to iTunes. I feel very optimistic about the way that whatever historical development of regulation has caused a lot of these models to flourish. I would urge you to pay attention to how regulated models that exist today are very much in need of being deregulated. Otherwise, those companies are more shackled than companies that are only working in the software space in which there is a great variety of models and no Spectrum constraints. Those would be my pleas for attention to deregulation.

Mr Oliver: I would support most of that. One of the casualties of moving to a digital age of segmented and fragmented media choice is we should stop talking about the consumer as one description. There are people who will be using all sorts of different ways to consume TV and people who only use one or one and a half ways to consume TV. We must realise, when we talk about the way consumers will change and what the implications are for the creative industries, that we are not talking about one consumer group any more. We are talking about very different behaviours by very different groups. One of the ways that companies will survive and thrive in this age is to target the right group with the right services. When we talk about what has happened to the music industry, we have to recognise that is an industry where its core market is quite young, especially for new music coming out as opposed to archive music, where perhaps take-up of piracy and means of sharing material was very rapid and it is also an industry where the old method of exploiting the consumer, which was the album, was a very inefficient and disliked way of selling music because you buy a lot of tracks you do not want. It is horses for courses in terms of consumer groups and which business models will collapse. It depends where you are starting from. We must not make generalisations that the film industry is going to suffer because anybody could be downloading two hour films and that will not be the case.

Mr Lilley: I would come at both those contributions from a slightly different angle, agreeing with them broadly. This is not a zero sum game, the impact of new media on creative industries. There is new stuff happening. There is vastly more spent on media and communications now than there was a decade ago. If you work where I work in the new media so-called, there are whole sectors growing incredibly quickly that are not dependent on television, radio or music. They are native to this new media, technological environment. If you look at companies like mine who make web content or mobile content, there can be a games development sector in the UK and these are not sectors dependent for their living on new ways of distributing existing products, although the technologies impact their distribution platforms as well. They live natively in this world. You cannot do what I do every day without these technologies. There are lots of companies growing up in this sort of space. The high level comment from me would be not to assume that the new media are necessarily only attacking the business models and the intellectual base of existing creative industries. There are impacts on them clearly and we have heard a lot of them so far, but it is important to keep the balance right. There are more people involved in web production in the UK than in television production in the UK by a very large number. There is greater revenue generated in exports by our computer games sector than by large parts of our creative industries. It is rather tempting to believe that it is the guys who have been at the table who are necessarily going to continue to be the dominant players at the table. That said, there are clearly major impacts from the new technologies on the existing media. I spend my working life in between these two new and more established worlds. One of the great temptations I would warn against is this belief that any one medium is setting out to kill another one. We heard in the earlier session about cinema. Media do not die; they just get better at what they were good at. Cinema becomes better at being cinema. It becomes a unique experience that you can only do in a cinema. Newspapers are having to learn how to be better at being a piece of paper you might want to carry around with you or the thing you lie in bed with on a Sunday. The paper on Sunday is different to a paper on a Monday morning for a reason. It is a different consumer experience and they are evolving in those directions; likewise the conversations about broadcast television. I agree totally with Jonathan that the benefits of broadcasting in terms of live content and the marketing potential are absolutely enormous but they do sit alongside the benefits of potentially being able to watch any programme you ever wanted to watch. If you happen to own sports rights, you are probably doing okay. If you happen to own a channel that does nothing but play out makeover shows all day, I think you are probably on a hiding to nothing in the medium term because if somebody wants makeover shows all day they will probably get them from somewhere else. You then come into a set of rather difficult, complex questions about the extent of public intervention of this space. I would argue for some consideration to be given not so much to specific regulation but to the framework in which DRMs, for instance, engage. There was an interesting conversation in the previous session about the law being an ass because people behave outwith it. There is an important debate around DRM. What are the public policy confines in which we believe these decisions are made? The French, for instance, have started to discuss that. Is it appropriate that, for instance, educational use can be exempted by DRM or is it not appropriate? Are we privatising some public policy questions into the DRM contracts which we want to consider? We may decide that is the right solution but we need to at least have considered that question before we just assume that is the case. Those are broadly the main issues that arise for me. The major change in the structure of the sector though is to do with the way that we finance innovative work in the long term. All the questions for me come back to how do we lay off risk for whoever is going to put the money up in the first place. My final point about the creative industries is that there is no such thing. There is an incredibly variegated set of industries which have very different business models. How you finance the writing of a novel is fundamentally different from how you finance the production of a computer game or a movie. The business models you can use to recoup that investment likewise are different. You can recoup a novel very slowly by getting paid as an individual for speeches or whatever. Somebody has to put 100 million on the table to make a film. Somewhere in between, there is a vast range of business models but one will not apply.

Q41 Chairman: Clearly there is going to be an evolution and, as we discovered in our analogue switch-off inquiry, there are some people who think four channels is quite a lot and have no real desire to have any more, let alone 130. Therefore, there will be the group of consumers who want IPTV, video on demand, PVRs, high definition and there is the other group who find the whole thing utterly bewildering. I assume you see a gradual growth in the first and shrinkage in the second group. What long term impact does that have, particularly on things like free to air television? If consumers are more and more using video on demand and using PVRs to bypass outbreaks, is there a future for commercial, free to air television?

Ms Enders: For sure. As Ofcom has arrived at, you need to accompany that development of very market driven models with deregulation of Spectrum based constraints, programming requirements, programmes made in X, Y and Z around the country, local news programmes for commercial radio. Anthony was talking about newspapers and cinema. These are not regulated media. They can adapt. Commercial radio stations are not adapting particularly well because they have enforced upon them a number of requirements which are onerous and expensive. It is the same with TV. There are X number of minutes. You have to do Y at this hour. When you look at the self-empowerment of consumers in this country to embrace and use technology in the ways that they do, they are not going to buy into external views about what those products that they consume should be comprised of. Commercial TV models like commercial radio models should be broadly speaking deregulated and that is where the UK is going to go. One thing that is very important to keep in your minds is that there has been a dramatic change in the speed with which business models are diffused due to the role of China in manufacturing consumer electronics, so you have very fast, subsidised diffusion models for 3G phones, PVRs, set top boxes and so forth. This means much more complex business models which are hybrids between consumer electronics and content. Content is the weak link. Content could be given away. Apple has sold $11 billion of iPods and only $500 million of iTunes. You can imagine that the margin on those iPods is pretty wonderful. In a lot of these consumer electronics models there is no compensation for content owners today for the fact that their content is used to drive those models. A video iPod on which you can see an episode of Lost . The maker of Lost does not get any compensation for the fact that a video iPod is absolutely useless without music and video on it. One of the things the UK has erred on is getting out of the loop on levies on consumer electronics which go to content producers. Those are real compensations and they do capture some of the economic value which the content industry is making to consumer electronics and for which it is not compensated in the UK alone.

Mr Oliver: There is an issue about content's role in this. We have had an industry structure which is going to be under a lot of pressure, which has been focused upon maximising investment in content, especially in the UK. If you suddenly realise there is a much bigger industry with players like Apple, whose business model is basically about selling iPods, there is no mechanism by which to compensate them for that. There might have to be some way to force them or encourage them to invest in content. I have put down on paper the idea of levies on equipment but I have a problem with that. It is not in fashion. The EU does not like it at all. Secondly, it is anti-new technology take-up if you put a levy on something you want people to have. I have been working on the idea that maybe the levy needs to be on the software. When you buy an iPod and iTunes you are effectively making a purchase of the software which is then put onto your PC as well. That is the licensed software and part of that charge could go to content creators. To add to the iPod analogy, I think it is the case that iTunes allows you to transfer your iTunes library five times from one PC to another. On the fifth time it wipes out. They do not know this yet but when they transfer it five times over a six or seven year period they are going to lose it. There is a mechanism where they are going to relicense software and that is another charge so it is not as if it is a once in a lifetime charge and you have the problem of where you get the money from in the future. Maybe what you need to do is levy the capacity to consumer on demand rather than the machine itself.

Mr Lilley: That comes to a really difficult question that you get asked regularly in our line of business around video on demand versus PVRs, which Mark and I have talked about before. There is a PVR in existence in Britain which records everything on television all the time and it costs a few thousand pounds. You cannot buy it in the shops but there is such a thing at the BBC at the moment called Pandora, rather aptly, and it records every freeview channel all the time. The storage capacity of that device gets bigger and bigger over time; it gets cheaper and cheaper. I can effectively have infinite television without paying anybody for a video on demand service. That is the elephant in the room of the whole conversation. There are a lot of people building models based around video on demand across networks. There are quite a lot of people building hardware that allows you to record television programmes. There are some people in the middle like BT and Sky trying to present models that are a bit of both but somewhere down the line there is a very interesting question from a consumer point of view which is: all I want to do is watch the programme I want to watch on TV now. If it is easy to do it from the PVR and, by the way, I do not have to pay for it, that is a really easy call. In content company terms that is a disaster waiting to happen. That is all their secondary markets very badly dented and this is not decades away. This is years away.

Q42 Chairman: Can I come back to the interesting question about potentially putting a levy on hardware? I recall the debate about whether or not we should have a levy on blank cassette tapes because there was almost no other purpose for buying them other than to record music, either off the radio or albums, but with a video iPod that is not the case. You have people saying, "I do not use my video iPod to watch Lost. I use it for home movies" or something, "or pictures of my family." Equally, how do you possibly decide who should get the money? You raise a levy but who on earth decides how you should divide it up between the content creators?

Mr Oliver: Those complex problems have been handled by the collection societies for many years. Either you monitor all consumption and often that comes along with making a levy on all consumption; or you have a general levy where you apportion the income by a sample base and take a sample of what music is used. In hairdressers and cafes, people are not wanting every song played. A sample is done on that and that is how moneys are allocated, so we have a model, probably a model which could be facilitated by new technologies. Apple know my music tastes. Every time I put a CD on Apple, it goes back to their catalogue so not only do they know my iTunes taste; they know every CD I have in my room.

Mr Lilley: Then they try and sell you another one by the same artist.

Mr Oliver: Not only the same artist. Sometimes it is a completely different artist.

Ms Enders: The equity argument is one that we face every day. Many of us pay a lot of taxes and do not use the services for which we are theoretically paying. The element of the good of society is not a generally understood one in terms of these issues. I am trying to get a reflection on the fact that very fast changing business models will change relatively quickly the remuneration of music composers or writers, artists, producers, script writers and so on. Some thought has to be brought to bear. If there is a dramatic change, for instance, among music composers, of which there are 40,000 registered, their incentive to create will change. It is an interesting phenomenon. For instance, Canada has a levy on equipment which is extremely effective and which has resulted in the fact that Canadian music publishers and song writers, of which there are quite a large number, generate more income from the sale of MP3 players than from the sale of music downloads. That enables them to have whatever standard of living and to create and do whatever they like. It does not hurt consumers because we are talking about very small sums. There is a plethora of equipment which is put in consumers' hands in order for them to consume media. These products are meaningless without the consumption of media. The makers of the PVRs, the MNOs with the hand sets and so on - there has to be some reflection on the fact that the content owners are enabling these models. They are helping them to succeed but they do not get compensated. Mark is absolutely right that levies are out of favour. A one pound levy or something like that is not a significant sum in the context of the costs of these consumer electronics and they have been successfully adopted in other countries. It is just one of those things where the UK, if I may as a citizen, because it was a European thing, said, "No thank you." Perhaps on this one occasion it might have been worth reflecting a bit longer on the interests of the artistic community in the UK. It might be worth reflecting again, given what we know about the future which is that we are going to have more and more consumer electronics in people's hands for sure.

Q43 Adam Price: I would be interested if you could elaborate as to how a levy based system could interact with the more traditional intellectual property, copyright based system. Would a levy allow you to put more output out there free so that people could create new stuff for themselves? Would you be able to put more free, unlicensed material out through a levy, depending on what level you set the levy at?

Mr Oliver: In theory, yes, if you were collecting your money in a different way. The per usage charge could be lower. We are talking about different things here because the per usage charge is probably being charged by a distributor who takes their bit of the money and gives a bit to the content aggregator, who then gives a bit to the content creator. The levy would be probably going straight to content creators and perhaps the aggregators, depending on the rights situation. It is not quite the same industry taking the same decisions. In effect, if in the content industry some of the aggregators were getting more revenue directly there would be less pressure on them to gain revenue for the platform which would mean less pressure on prices and margins of the platforms. Yes is the answer.

Q44 Adam Price: You mentioned that some countries have gone down this route. Could you give us some examples?

Ms Enders: This is not a subject on which I am an absolute expert. It is just noteworthy. I think everybody in this room would agree that the change in business models of all these industries will affect the remuneration of artists, composers and broadcasters. Therefore, the one thing that the UK can jump for joy about in the creative industry - there are many things to be thankful for - is that it has the most vibrant music industry in Europe. I am sure we are all aware of the fact that this lack of regulation has had a very powerful impact on innovation in the UK. One simply wants to guard against a drop in that absolute remuneration because advertising models change, because piracy dramatically increases as it did in the music industry, which had a 20% haircut on its revenue worldwide in five years. These are changes that could happen to the cinema industry. We cannot predict where cinema revenues are going to go, where DVD revenues are going to go, the amount of piracy. A large amount is physical piracy, the guys on the bridge. Having at least several reliable sources of revenue for the creative industries, particularly given how small a levy would be in relation to the cost of consumer electronics and how clearly the business models encompass hardware, software and content, should be something that people reflect on. It is something that will be a handicap for the industry going forward. For instance, in other European countries that often have blank tape levies, I do not know how the income is distributed but I know that it is a valuable, relatively steady source of income for the film industries locally and that is a good thing. There is nothing wrong with having more revenue, particularly when it comes from consumer electronics manufacturers who would be delighted if people stole content. On your point about iPods, 99% of the iPod material has to be pirated. Why? Because there are 42 million iPods that have been sold and one billion iTunes songs so that is 20 songs per iPod sold. As you know, the smallest capacity iPod can hold 1,000 and the biggest ones 15,000 or 20,000. The $11 billion revenue generated by Apple and the margin that it makes which is considered to be 25% on each iPod have been fuelled by the fact that the iPod can hold so much illegally transported material. I am just putting that on the table as something of an anomaly.

Mr Oliver: I think we can all agree that there is this issue. If there is the ability to pirate or to download/transfer CD tracks for nothing, to build up your own private catalogue and have your own on demand music and TV without paying any extra fees, there are three responses. One is to say that is not a problem. It is a great one-off gain to the consumer. The creative industries will survive; no problem. I disagree with that because there will be a shortfall of revenue if that happens. Next is we can control it through DRM and make sure that at least every legitimate system has an active DRM system which does things like wipe things out and lock them up after a few days so that it will not happen. That is a possibility but then you have a problem about interoperability of DRMs and whether you are handing someone a quasi-monopoly. It is also not very friendly to consumers who suddenly come to their machine and find it has been locked or wiped. The third alternative is let them have it but let them pay a levy when buying the equipment or downloading the software for the capacity to do this. It seems to me that is quite pro-consumer and lets them do it, and also for the content industry it gives them some money from it.

Ms Enders: It is the same thing with ISPs. There was a discussion in France which was dropped but ISPs sell broadband. Why? To use the web but also to download. 60% of internet users in this country have done some form of downloading. Who knows how much of it is illegal? We do not want to go and look in everybody's lives but we have to face the fact that the complete fragmentation and opening up of all possible avenues to content, which is what the internet is, is facilitating piracy on an epic scale. There must be some concern. The ISPs also benefit from selling. What do you need a broadband subscription for? Yes, we are all going to do home working, of course.

Q45 Adam Price: You could have a levy on bandwidth?

Ms Enders: Not on bandwidth, no. It is more the companies whose business models depend on selling access to content. It is a general point, whether it is Apple or ISPs or Yahoo or AOL on its portal. It may have an aggregator of webcasts. There are lots and lots of portals and aggregators and middle men that are benefiting from use of content without proper remuneration from the content industry, in my opinion.

Mr Lilley: It is important not to take this too far though. It is part of the issue but increasingly, as business models around content online are developing, a large number of those players are getting involved more directly in the economics of the content business. You find now that increasingly the Yahoos and Googles of this world are starting to realise that they could benefit in a more structured way from content as well. I agree with everything the guys are saying but for me it is a small part of an ecosystem where there is this developing world of new models and new ways of doing business. Somebody said earlier, "Is the advertising model dead?" The advertising model for online content is the hottest place to be at the moment. Google's share price and revenues are largely based on advertising. It is advertising for this online world. It is advertising that takes advantage of the fact that it can place the response to the search query that you put in. It gives you the context sense of advertising but it is advertising nonetheless. A number of existing big content players are experimenting with advertiser funded video on demand services, including some of the broadcasters here who were talking about that. It is about evolving these models into the new worlds as well as the completely valid arguments about the consumer products companies. The tipping point you can see coming with ISPs now is fascinating. In the US some of the ISPs are starting to say they may charge the content companies for guaranteed access to bandwidth and that is an amazing moment, when they realise that content is so significant to them that it is costing the money in the running of their networks. I firmly expect to hear that conversation in this country over the summer. If the BBC wants to deliver video on demand to everybody, that is going to cost television companies a lot of money, so somebody is going to get involved in a conversation about who is paying. That is a maturity moment for the new media content industries when it is not just about pirated content; it is also about legitimate content.

Q46 Helen Southworth: The merger of NTL, Telewest and Virgin Mobile is going to create national capacity for a company to have quadruple play, the television, fixed line, mobile telephony and high speed broadband. How are you expecting that to impact in terms of consumer use of quadruple play? Is there going to be the demand? Are people going to want to go for it or are people going to want to move across different providers?

Ms Enders: There are many different business models that are developing because the cost of customer relationship management and of acquiring subscribers is considerable. However, one would like to say about multiple play products that it is only a very small minority of people in this country who have any interest in them. In the UK, we have a very vibrant set of competitors in each product space and that is a product of the exceptional regulatory system, I hope, and also access to capital. The UK is very porous to foreign capital and therefore there is a lot of investment. In each of the spaces which you describe, there are multiple competitors and UK consumers are used to selecting from a pool of very high quality and low quality options of which pricing and subsidy of hardware are features. In each of the spaces that NTL, Telewest and Virgin Mobile, a combined entity which is currently called NTL, will be active there are extremely effective competitors. Consumers will have an option to pick a bundle of this. From Carphone they can get telephony and broadband. From Sky they will soon be able to get broadband. If consumers want these products in the shape and form they are offered to them, wonderful. It is not going to give NTL any form of fundamental, competitive advantage.

Q47 Helen Southworth: Is it going to change the way that the other providers look at their spectrum of provision?

Ms Enders: We are in a situation where the economics of supplying broadband in particular over ISPs are so fragile and so poor - BT has only been able to make a margin on consumer broadband this year after five years of operation - that therefore to spread the fixed operational costs of customer service and customer management over multiple products is seen as something which will help the industry adjust to the fact that there is a dramatic decrease in pricing of broadband which goes on and on. There are essentially defensive business models about cable ring fencing its customers and selling them more products. I am sure that there are many multiple play strategies being developed, but they have to prove themselves to the customer and, more to the point, a company has to be able to effectively execute across a number of multiple products which it may not be able to do. Sky is very good at pay TV but who knows about broadband? There are a lot of good people out there already selling broadband so we will see. I do not think this is just something that is an interesting phenomenon and it has no long term impact. NTL cannot capture any one of its consumers unless they are happy to be captured by NTL and happy to be customers. Given the turn rates of all these companies which are above 20%, there are a lot of people who say, "I am not happy. I am going to change supplier" and they do so all the time.

Mr Oliver: NTL has been triple play for many years and they have many customers who take telephony and do not take TV or who take telephony and do not take TV and broadband.

Ms Enders: 33% of NTL and Telewest's customers together take the triple play which means 67% have opted out of taking the triple play so far, so good luck with the quad play.

Mr Oliver: They have huge price incentives to take the extra services and still are not taking them. It would help if they answered the phone occasionally.

Q48 Helen Southworth: What about the changes in the city wireless zones? There is a series of these things happening.

Mr Oliver: There is an issue about internal network investment. A lot of people are putting a lot of investment into exchanges, into wireless, on the basis that they can capture part of the market. I suspect if you add up all the business plans they would add up to twice the size of the market because they are all assuming they will get a large share of the market, but they will not. There is a general issue which is not unusual in telecoms. It has happened over the last 20 years. Effectively, there is no return on new investment because the capacity you put into the ground is huge and you never see it back. The question is where are these platforms going to get their money back from and the answer they are all coming to is content or social media, some type of connection between people where you can get money out of them. That is why the future of the content industry is very much tied up with the future of the platform industry. I do not think the platform industry will make a return on its money from people just paying for connectivity. It has to make money from something else and that is what leads to the fact that the two industries are going to have to collide or cooperate. That gives rise to all these issues about if content is driving the demand should not content get a fair amount of the money.

Q49 Helen Southworth: Can I ask about, from a consumer perspective, access into new media right across the spectrum of consumers? I suppose part of what I am asking you about is, with the expansion of access using different vehicles, do you think we run the risk of ending up with a digital divide and we have people who perhaps are not as sharp as consumers or are not getting as much access to information about new technologies who might only end up with television access when they might wish to benefit from the resources?

Ms Enders: I have to honestly tell you that I really do not understand this digital divide point that constantly crops up in the UK. I have worked with the NSPCC on an online counselling service and it is very interesting. We discovered that even in the poorest of the poor in the UK there is access to the internet, either at home, at friends', at school or a community centre. In terms of access to services which are really important to certain core groups of consumers who want to connect with the online world, there is no problem. People should be allowed to make their own choices about what enables and improves their lives. There are a lot of people who hang on broadband helplines asking where the plug is. There are many mechanisms, some of them very cheap, to get help. I was told by one company which offers broadband that the average requirement for customer support of a new subscriber to broadband this year was running at about 120 minutes a month so that is two hours of advice about how to plug everything in, what the screen means and all this stuff. There is a lot of hand holding going on for commercial reasons. You are not going to get a broadband subscriber to stick to your service unless you are supporting that broadband subscriber. There are many companies that understand how to support consumers' own ability to embrace technology. We all have friends who are much handier with Sky-plus boxes, who understand the new interface on this, that and the other. I am very handy with Nokia communicators. I am a great proselytiser for them and I hand out iPods for Christmas but that is because I like music. We all live in networks where someone has figured something out and has read the manual from end to end. The government has done everything in its power to enable large swathes of the population for access. In particular, groups of people who are at risk have access to alternative forms of support. Many consumers who want access to these products have access to helplines and support groups that help them and that must be one of the reasons why the UK is the most advanced society in terms of the big nations in Europe and technology adoption, because whatever is working it is working really well.

Mr Lilley: I would come at that from a slightly different place. The challenge is in terms of service and content design, what we make and how we make it available. Because we have a certain number of large market players who are dominating the space, they are designing services for mass markets. One of the great benefits of the internet per se is that it allows small groups of people to get together and do their own thing. One of the great commercial opportunities is in making those, not just making large, mass market services, but it is very difficult to persuade the City that you are going to find a recruitment path quickly for a service that may appeal and be wonderfully valuable to 20,000 people, not to mass market numbers. These are content industry problems rather than infrastructure industry problems. It raises a set of interesting questions about how government procurement of content and services and e-government works, whether it is properly citizen centric or whether it is processed from the centre. It raises a lot of interesting questions about what we do with the £300 billion a year we spend on the BBC as a part of that. How is that part of helping design these sorts of services and these approaches to the new world? It will turn out that there are quite a lot of commercial niche properties, as they call them, which can be developed and made profitable down the line somewhere. In the public service broadcasting review from Ofcom, this concept of the public service publisher, an entity designed for this world, in theory so that it is a sort of broadband, networked public service entity, does not look like anything we have today. It does not look like a version of the BBC. It looks like it helps citizens from the bottom up to do interesting things. For me, the access question is more about service and about people having something they want to use these technologies for than it is about access to the technologies themselves.

Mr Oliver: You raise the issue of digital divide. There are legitimate divides and worrying divides. There is always going to be a divide between people's use of technology. If there are two areas that might be of concern - I do not think they are of much concern - one is as you upgrade to very rich content. I agree everybody wants access. If they have any money at all they can get onto the internet and do something. I would not worry about it too much. There will be entry level tiers and so on which do not cost very much. The other one is the divide with the rural, less dense, urban areas where, because of the way telecoms systems work, you might find you only have one or no provider. That is an issue to be addressed with specific policy initiatives where things like Y-max come in because you have an alternative that can deliver broadband. They can be specifically dealt with at the time.

Mr Lilley: What is most interesting about this is that the debate seems to be framed in terms of digital television which is much the easiest technology to solve this with. It is costly and time consuming but digital switchover is not a major moment from my point of view in the digitisation of Britain as a society. It is just digital television. There is a much bigger set of questions to be asked. Policy makers are absolutely focused, it seems to me, on digital switchover and television and not in quite the same way around what the service is and what the content delivery should be. You can measure it. I can understand why and it is politically contentious if you are going to turn somebody's television set off but it does not seem to me to be the right long term policy framing for the overall debate.

Q50 Helen Southworth: When I asked you about the digital divide, you said - I am paraphrasing - that there was none. You had done a lot of work with NSPCC young people. Who has been doing the work with Age Concern, Help the Aged and those groups of people who might be less advantaged in society? What is happening about those?

Ms Enders: They can subscribe to a broadband service if they want to.

Q51 Helen Southworth: I am sure they can but I want to know how they know that there is a broadband service and what it is.

Ms Enders: They are surrounded by advertising and people who are living in this world. Many 65 year olds have mobile phones. Why did they get mobile phones?

Q52 Helen Southworth: Is there anything other than advertising that is dealing with this?

Mr Oliver: Let us focus on which part of the 65-plus population might be a problem. I think you are talking about people probably living on their own without much income, without much interface with the modern technology world, who may benefit from having access and do not even know that they can get access or what it is. They do not have a grandchild who can help them, either because they do not have one or because the grandchild does not want to see them. That is a social issue and there is a proportion of the population like that. You are right. That is an issue where the adverts do not mean anything to them and they do not have anybody to help them in the social network. That is a problem of social networks and of isolated people but that is one way of connecting them up and making them less isolated. Let us focus on who these people are. They need targeted help. I do not think it is all people over 65; it is a proportion of them.

Q53 Helen Southworth: People very frequently say in common conversation, "I cannot work the DVD player. I have to wait until my son or daughter, nephew or niece comes home". Does that not happen any more?

Ms Enders: That has been the case for a long time. People have had to deal with VCRs, mobile phones and so on. The presumption that everybody's life is going to be improved by broadband access is wrong. ITV has an average age of viewer of 55. Many people are very happy spending their evenings watching Coronation Street. They do not really want to be on Google searching for information about the situation in Iran. It is not going to improve their lives. You have to let them choose. There are not people demonstrating in the streets for more access. There is a lot of access and it is not necessarily an improvement to everybody's lives. We have to face that.

Mr Oliver: There are things that broadband offers to isolated people, older people, that could benefit their lives. A lot of those are about access to public and community services and there are initiatives in that sector to improve people's knowledge and online access. Maybe something is missing there. Maybe people, in theory, can get access to local government services online but unfortunately do not know how to plug the thing in. That is something that needs targeted help at that particular point.

Mr Lilley: That is the key point for me. It is not about whether technologies can be put in place; it is about whether there is any net benefit from having them. I do not think enough is being done in that area but I do not think it is because we cannot get the technologies in place. There was quite a good leader in The Economist a few months ago about computer games, talking about why some parts of society had this sort of demonisation of computer games: they are bad; they are hideous; you do not get anything from them; they are a terrible waste of money and time. The article did a wonderful job of pinpointing people saying the same thing about the novel in Victorian times and unfortunately came to the conclusion that then these people die. There is an evolutionary process here that goes on. I am not saying that about all people, of course. That is why I started by saying there is not enough being done. Also, frankly, it is fine sometimes for there not to be enough being done in some of these areas. Speaking as a personal, technical support for two sets of parents, 120 minutes? I dream about 120 minutes.

Q54 Chairman: I would pick you up though on something you said earlier because that is why I think digital switchover is significant against everything else because it is the compulsion. Nobody is forcing old people to take broadband if they do not want to.

Mr Lilley: From the point of view of a citizen, it is critical because of that distinction. In terms of the country's digital strategy, it is a very small part of the game.

Q55 Philip Davies: Can I ask about advertising? You mentioned a growth of online advertising and you were also quite bullish about the future of free to air television. Sir Alan Sugar wrote recently in his usual understated way, sitting on the fence, that digital devices make it easier than ever to programme out the ads, and what kind of brain-dead viewer is going to sit there solemnly watching them go through if they have the option of jumping? Do you agree with that?

Ms Enders: Definitely. Some viewers do not want any ads. Why do you think that so many people are listening to webcasts? What is the feature of webcasts that is so interesting? No ads; no talk. There are many people who download products in the internet population. It is control; it is portability, convenience, no ads and so on. I am sure that for a very large number of people however the fact that there is another aggregator making those choices, if you are of average age, 55, and watching ITV it is presumably because you like the choices that ITV1 is making for you. If you wish to switch over to the BBC, there is always that option or indeed, if you subscribe to any one of the many networks and you can get either cable, satellite or DTT, you have even further options. This is one of the underlying reasons why I mentioned deregulation, because in this context for commercial media, whether radio or TV, to have the flexibility to cut the adverts to smaller snippets, to programme material in different ways, to have different content requirements at different times of the day, all these issues are ones that restrict the freedom of these businesses to compete with completely non-regulated media.

Q56 Philip Davies: The conclusion that Alan Sugar drew was that advertising has had it on television.

Mr Oliver: Consumer research exists on PVR usage. At one extreme there is one survey that says people with PVR spend two-thirds of their time watching television and they skip 75% of the ads, a disaster scenario. The most recent research this morning came out to say 13% of time is spent watching programmes on PVRs and they skip less than half of the ads. The truth is somewhere between but we do not know yet. Again, this goes back to my warning at the beginning. Do not talk about all consumers as one. There are lots of consumers who do not like ads, who are very time pressured, who want to see that programme and want to see the series on the weekend and they are going to do whatever they can to record it. There are lots of people who will not be like that but do it occasionally. There are things on at the same time, things they want to catch up with et cetera, but they will not do it all the time. Network TV will have to get better at what it is good at, which is live event television, things happening at the time, and also it will have to change its business model in the sense that the spot ad may be dead but advertising on network television will not be dead. Therefore, EU regulations which mean you have to have spot ads every so many minutes per hour are going to be outdated and unfair. The internet is not regulated like that. The business models will adapt. There may be slightly less money in the system but I do not think there is a disaster scenario. There are a lot of people who will do what Alan says and not watch any TV adverts but there are many people who will and TV will change what it is to ensure it captures more people at the time they are watching.

Mr Lilley: The key for me is when is an ad a service. When does an envelope arrive through the post and you do not throw it in the bin because it is junk mail? In our house, that is something like what is on at the Brighton Festival. That goes on the notice board because we think it is a service. It is actually an ad. The really significant question is how do you move away from this interruption based model of saying, "Okay, you are sitting there so we have you for three minutes. You are going to watch these now" to this world of ads which are services. There are clearly many variants in between. There is advertiser funding content; there are aspects of product placement and all those issues. In the online and on demand world, if you are looking for a car and you Google for the car brand, those ads that come up are a service to you. That is what you are looking for. If you are looking for a pram or whatever, that is really handy because it saves you going somewhere else. It is not really about the death of advertising; it is about the evolution of advertising away from toleration towards service.

Q57 Philip Davies: If there is such a growth in people who advertise online with Google and the like, presumably companies only have so much of a marketing budget to spend. If more and more of it is going there, presumably there is less and less of it to go on normal TV advertising. What effect might that have?

Ms Enders: In reality over 20 years what has happened is an enormous multiplication in media. We have had huge growth of commercial radio. The number of regulated and unregulated magazine titles has exploded and so forth. The choices have been increasing very dramatically for a very long period of time. Because consumers are harder to reach in aggregate, advertising has been growing faster than GDP certainly in the UK for a long period of time and in the US. Companies that advertise have found deficiencies in other parts of their value chain but one thing for sure: they have been spending more on advertising. That has been a feature for a very long time. You may look at the car industry in the US. It is spending more than ever before on advertising and yet at least a number of the companies are close to bankruptcy. It is not something that people cut. It is the last thing that people cut. Empirically, you see this phenomenon where the harder people are to reach the more media have to be used in order to reach a target group and the more advertising will grow in aggregate and it does grow at above GDP rate.

Q58 Philip Davies: You do not think it gets to the stage where it becomes so difficult to understand who is watching what and how to get people that advertising agencies decide that this whole thing is just a busted flush now? "We are better off doing direct mail, putting things through people's letter boxes" and so they give up on media altogether because it is so complicated. You do not ever see that happening?

Ms Enders: Why would they work themselves out of a job? Who benefits from selling advertising? The agencies. The whole industry works together to deliver to advertisers, to do what Google does. 60% of online advertising in this country, which was about 1.4 billion in 2005, was search which is connecting buyers to products. Essentially that is what TV does. It just does it in a different way and there is the direct economic transaction that is potentially going to occur, but these systems all work to the same ends. Everybody is on the same page. Every media owner wants a vibrant advertising medium and to do really great things for consumers. All these services have to evolve. For instance in this country, measurement systems keep advancing to be able to record different kinds of phenomena. It took five years to get hardly reliable stats about, for instance, website consumption. It is still a very fragile business. People do not really know what is happening there but over time, as things become more significant, they become measurable and they have an economic value. We are all working to that end. The UK is a pretty efficient market for this because it is a very innovative culture also in advertising. Advertisers are really keen on new things. In fact, I think they get over-keen. We have had all kinds of hyped stories, interactive advertising for instance, and some of them happen and some of them do not. Companies invest in offering those services and drop them because they do not work. Other companies keep on offering them. The BBC has a very distortive impact on commercial models, as I am sure you are aware. That is one of the things that keeps a lot of the commercial models flourishing in the UK. There is this whole area of media consumption which has no ads.

Mr Lilley: Two final things on advertising. Two rather strange things are happening. Internet video sites such as U-tube, Blinks and Google video are jammed to the gills with adverts because they can be content that is entertaining in its own right and clever people in the advertising world are starting to understand that. One of the other unintended consequences is that good adverts, even when you are skipping on a PVR, stand out, particularly the one that is last in break because that is when you know the programme is going to start. Maybe the value of that one is going up now down. There are always unintended consequences in these technology markets.

Chairman: Can I thank you very much indeed?