Memorandum submitted by Satellite and
Cable Broadcasters' Group (SCBG)
The Satellite and Cable Broadcasters' Group
(SCBG) is the trade association for satellite and cable programme
providers. Its members are responsible for over 100 channels in
the UK and in addition broadcast many more services from the UK
to continental Europe and beyond. SCBG channels remain highly
targeted, with audience shares ranging from less than 0.01% to
2% of digital viewers, but with a combined share approaching 20%
of all UK television viewing. They provide a range of entertainment
channels, specialist factual and educational services for viewers
interested in history, music, nature, art or science, as well
as broadcasting to cultural and ethnic minorities in their own
languages. They are also developing innovative enhanced and interactive
services and increasingly attracting audiences migrating away
from traditional channels.
Satellite and cable broadcasters operate in
an extremely competitive and volatile environment, without privileged
access to scarce Government-controlled spectrum or to the must-carry
status afforded to terrestrial networks. They depend entirely
on their own programming investments and marketing initiatives
to attract and keep audiences across a range of different broadcasting
platforms. Their viability depends on an ability to adapt to technological
developments, respond directly to audience preferences and quickly
absorb commercial pressures.
Satellite and cable broadcasting is the fastest
growing sector in the UK television industry, employing over 6,000
people in the UK with revenues of nearly £5 billion. This
sector produces more originated programming than the terrestrial
channels combined, accounting for more than half the UK's total
spend. Satellite and cable channels are also providing a huge
boost to public service output, broadcasting 14,000 hours of public
service programmes in a typical month.
1. INTRODUCTION
The emergence of a digital channel sector independent
of the terrestrial networks has been a UK success story, and has
played an important part in achieving the Government's objective
of a dynamic, competitive communications economy. The sector comprises
over 200 channels whose ambitions to acquire, co-produce and commission
UK content have increased as the sector matures. The last five
years have seen a rise of 19% per year in original UK commissioning
on multi-channel services, as documented in Ofcom's Review of
the Production Sector. Furthermore, this sector is developing
innovative content propositions for new media platforms and is
well placed to offer flexible arrangements for these uses of producers'
intellectual property.
SCBG believe that the development of the independent
channel sector, and its strategy towards UK content commissioning
and acquisition, will be vital in maintaining plurality and diversity
in UK broadcasting. In the area of programme rights, policy intervention
is required to ensure independent digital channels are protected
from predatory activities by incumbent terrestrial broadcasters.
SCBG wishes to illustrate the potential benefits
that fair and effective competition in the market for rights can
deliver for producers, content providers and, most importantly,
UK citizens and consumers.
By ensuring the development of a competitive
market for independently produced content rights, the UK's independent
production sector has an opportunity to end its dependence on
the terrestrial broadcasters and remedy the market failure caused
by their collective buyer power. It can also thereby provide support
for market entry of new and diverse sources of investment for
UK content production, and help independent producers find innovative
ways to bring their work to consumers.
2. CONSUMER INTEREST
SCBG believes more emphasis should be placed
on Ofcom's obligation to stimulate competition and plurality in
the consumer interest. This reflects Ofcom's objective as specified
in Section 3(2) of the Communications Act to secure:
"the availability through the United Kingdom
of a wide range of television and radio services which (taken
as a whole) are both of high quality and calculated to appeal
to a variety of tastes and interests; the maintenance of a sufficient
plurality of providers of different television and radio services";
and in carrying out this duty to have regard
to: "the desirability of promoting competition in relevant
markets"; and
"the desirability of encouraging investment
and innovation in relevant markets".
Instead, we observe Ofcom focusing only on the
viability of the terrestrial broadcasters in their arrangements
with independent producers rather than acknowledging the wider
impact of revised Terms of Trade on the whole broadcasting and
production economy.
The five terrestrial networks are at present
able to contribute the majority of expenditure on UK programme
commissioning because of their public service status and privileges.
This puts them in a position of enormous strength in relations
with independent producers, as discussed in more detail below.
However, the consumer interest demands a broadcasting environment
that offers the greatest choice across a number of providers and
in a variety of different environments. If terrestrial broadcasters
exploit their dominant position anti-competitively, it will damage
existing independent channels and stifle the emergence of new
media businesses. This will be to the detriment of consumer choice
and the development of long-term value generation for UK independent
producers.
We believe that Ofcom is not making sufficient
distinction between the incumbent major broadcasters' terrestrial
channels, whose public service role and obligations justify supportive
regulatory intervention in the short term, and their digital channels,
which are purely commercial enterprises but are being allowed
to benefit from PSB privileges.
Public policy should support a continued diversity
of supply, a new diversity in sources of investment for independent
production as well as a continued high level of original commissioning
for the main networks. But it should also enable independent channels
and new media companies to create and sustain complementary programming
businesses.
3. CURRENT POSITION
OF THE
TELEVISION PRODUCTION
SECTOR AND
LIKELY FUTURE
DEVELOPMENTS
As Ofcom's recent report acknowledges, the multi-channel
sector is of growing importance to UK production. The sector has
been steadily increasing its levels of first run commissioning,
providing opportunities for new producers and often breaking new
talent. Thematic channels are quick to respond to producers' approaches,
are able to build audiences for content that might not naturally
find a mainstream audience and have a track record of bringing
additional investment to the table for major network series.
From our discussions with a range of independent
producers it appears they, like us, would like to see an environment
where there is a diversity of funding sources for producers in
order that this type of investment can continue and develop.
Many independent channels have built their businesses
and therefore their potential to invest in original production
on the basis of free market acquisition, co-production or pre-purchase
of content. Their increased commissioning of UK independent production
has developed on the basis of this stable business model. But
its stability is currently under threat.
PACT's recent Oliver and Ohlbaum report on "UK
TV Content in the Digital Age" comments:
"Independent channels not aligned to networks
or major pay TV platform owners may struggle, especially if they
cannot get access to key sources of programming rights".
Independent research commissioned by SCBG from
Digital-i confirms this. It looked at trends in UK acquisitions
across 45 independent channels and demonstrates that their ability
to buy UK content at competitive market prices dropped around
2004, when the terrestrial networks began to launch their digital
portfolios, and that this decline is set to continue (see Annex
1: SCBG Survey of the UK Secondary Rights Market).
For some channels, this decrease has been dramatic:
"Our investment in programmes that first
aired on Channel 4 and Five has declined over 50% in the last
12 months".
Furthermore, where thematic channels are investing
and innovating, this R&D role often goes unrewarded because
of the terrestrials' negotiating strength:
"We took a series to the table and persuaded
ITV to take an interest in the show. But ITV are now insisting
[the producer] accepts an all rights deal (despite our willingness
to share) and [the producer] is obviously concerned that by going
with us they taint their relationship with ITV."
"We have an established series that we share
with Five but whilst negotiating for a second series they have
asked for some secondary rights as part of the primary package
which conflict with ours. Five has `suggested' to [the producer]
that they may not pick up further series unless these rights are
given to them and have even hinted they will not look at other
titles either".
"We have an established property that sits
across both [our channel] and [a BBC digital channel]. On the
new series we had to battle to keep the rights for [our channel]
as the BBC tried to take exclusivity".
This situation has resulted in many cable and
satellite broadcasters increasing their investment in US content.
It is driving up the price of US content at the expense of investment
in original UK content and in co-production or acquisition of
UK content. We would prefer a more competitive environment in
which our channels could add quantity and value to the overall
investment in UK independent production.
Finally, we acknowledge that there is work to
do to ensure that producers of all shapes and sizes are aware
of opportunities to exploit their intellectual property. Independent
producers do not always seem aware of their entitlement under
the new Terms of Trade and there may be cultural barriers to dealing
with secondary rights, as one channel describes:
"Some smaller producers don't know that
there is value in second windows or other territories outside
the UK and some don't really care—they just want their programme
produced so they give up a lot".
However, this is all the more reason for Government
and Ofcom to ensure the new Terms of Trade settlement leaves rights
open and accessible to stimulate increased competition. SCBG believe
the potential of the secondary market to bring new finance to
UK production has not yet been fully realised, partly because
we are early in the new Codes of Practice cycle but also, crucially,
because of these hurdles described below.
4. CODES OF
PRACTICE
SCBG do not consider that the Codes of Practice
are working well, because they have failed to stimulate a fair
and competitive secondary market.
SCBG consider that the holdback is the most
problematic element in the current Codes and our chief concerns
are the ability this gives to broadcasters to warehouse programming
and the onerous release terms that are applied in any case of
the holdback being waived.
The ability of the terrestrial broadcasters
to circumvent the spirit of the Codes of Practice with holdback
policies that favour their own digital channels is well documented
in the Oliver and Ohlbaum report, which acknowledges that the
problems of buyer power in the primary market are now acute in
the secondary market too:
"The main broadcasters' ability to secure
secondary rights for their channels can be reinforced by the holdback
provisions of the primary licence, which allow a broadcaster to
veto sales to third parties...
...current market structure and terms of trade
in the UK market give main commissioning broadcasters both the
ability and the incentives to achieve an anti-competitive outcome".
SCBG members' anecdotal accounts further support
this conclusion, that it is not in the terrestrial broadcasters
interests to release the holdback in practice:
"We have run into a problem with the implementation
of the Communications Act... [the public service broadcasters]
feel that since they are being forced to pay a slotprice, they
won't do any favours regarding holdback".
"The BBC has never allowed a second window
without a minimum holdback for 12 months. The latest production
we tried to do with them they originally said six month holdback
but then rescinded".
"We have a co-production budget which allows
us to commit up to 20% of the programme budget but few production
companies appear in a position to take it as they have to wait
for terrestrial channels to make holdback decisions once the programme
has aired".
"We currently have over £150 thousand
of programming which we cannot get through the BBC holdback process"
Although shorter holdback provisions were recently
agreed with the BBC and Channel 4, these remain problematic due
to the terms and conditions for release.
Firstly, in the case of "landmark"
programmes, secondary rights can be held back indefinitely as
long as the programme is categorised as landmark within six months
of transmission. But we have serious concerns about this "landmark"
status, whose definition lies entirely with the broadcaster and
whose process of selection and recording lacks any transparency.
Firstly, in the absence of a clear definition, and with no obligation
to select programmes for landmark status at the time of commission,
terrestrial broadcasters are able to cherry pick programmes based
on ratings alone. Furthermore, although Channel 4 has set a threshold
of 5% for potential landmark programming, the BBC has not set
a threshold at all. This uncertainty precludes pre-sales of certain
genres and is limiting investment by independent secondary channels.
It is clear that definitions, thresholds and selected programmes
should all be transparently agreed and in the public domain.
Secondly, the provision in current holdback
policies to exclude established strands on from secondary exploitation
is also being over-used. In particular, the BBC is defining increasing
volumes of its product under branded strands to restrict potential
secondary sales.
Thirdly, it seems to be accepted that five years
is an acceptable holdback period for children's programming. However,
this is a much worse position than the situation prior to introduction
of recent terms of trade when typically market forces led to holdbacks
of between six months and a year. Similarly, a five year holdback
period for children's programming also precludes pre-sales of
this genre of programming.
Finally, the BBC's criteria for an approved
secondary channel are onerous, for example channels have to sign
a hold back release agreement that requires prior written approval
for each transmission, all marketing and publicity, incorporation
in a generic channel promo and sponsorship.
We believe strongly that the holdback is an
anachronism that should be significantly reduced or eliminated.
In the case of a short holdback period, it must be agreed at the
point of commission rather than transmission, to enable third
party investment.
5. RATIONALE
AND FRAMEWORK
FOR INTERVENTION
BY OFCOM
SCBG seeks reassurance that the terrestrials'
dominant position is regulated not only in relation to negotiations
with independent producers but also with a view to maintaining
plurality in the rest of the broadcasting market.
The ITC's Review of the Programme Market, commissioned
by the Department for Culture, Media and Sport in 2002, argued
that a competitive secondary market for UK content would play
a vital role as counterweight to the dominance of the terrestrial
buyers, and as a means to help capitalise the independent production
sector.
However, just as the ITC report predicted might
happen, the vitality and competitiveness of this crucial secondary
market is being threatened by the terrestrials' ability to leverage
rights from independent producers for their own digital services.
Nearly all of the growth in multi-channel viewing over the last
two years has come from the terrestrials' digital channels[7].
Much of this growth has been the result of terrestrials leveraging
their position with producers to acquire high performing UK content
for their digital channels. As one SCBG member describes:
"A difficulty is the other nonstandard channels
being launched by these terrestrials, such as More 4... I can
see the landslide coming".
We accept that independent producers may sometimes
prefer to sell secondary rights to a primary commissioner's wholly
owned channel, but this must be on the basis of free and open
competition. Free market access to programme rights after a reasonable
primary window is paramount if independent channels are to go
on investing in UK content, building relationships with independent
producers and increasing their own production slates.
Therefore, although commercial negotiation is
a preferable means of resolving the current Terms of Trade issues,
we are nevertheless concerned that these negotiations should have
regard to the availability of UK content across the entire ecology,
and the ability of the "independent" secondary market
to buy and commission content from UK independent producers as
a competitive spur to the terrestrials' wholly owned digital channels.
We believe Ofcom should intervene to ensure
that:
(i) Terrestrial broadcasters' purchase
of primary rights for their terrestrial channel(s) does not confer
automatic rights to broadcast on their digital channels. The purchase
of secondary rights for wholly-owned channels should be separate,
separately paid for, and open to competition under the control
of the independent producer. The terrestrial channels' proposal
to bundle their wholly owned channels into the primary rights
package will preclude competition altogether.
(ii) Terrestrial broadcasters' purchase
of secondary rights must be monitored and regulated to ensure
that they are acting fairly. It is a widely held perception amongst
SCBG members that independent producers are being coerced into
selling the secondary rights to terrestrials' own digital outlets—even
if they would get a better price in the secondary market—because
of the importance of maintaining good relationships with the primary
broadcasters:
"The BBC eventually raised their
offer to [the production company] to get us out of the deal although
I don't think they put in the same amount we were paying. My feeling
is that they bullied [the production company]".
We recognise that a balance must be
struck that enables primary commissioners to get value from their
investment, but in most cases this value is returned on first
transmission. There is no evidence that terrestrial broadcasters
are valuing addition rights separately and increasing their payments
to producers accordingly, nor affording producers an opportunity
to seek alternative offers. Without these practices, there is
no fair and competitive market. It is therefore imperative if
Ofcom is to fulfil its duty to promote a dynamic, competitive
secondary market that it applies this objective to any approval
of new Codes of Practice or Terms of Trade.
(iii) No broadcaster should be able
to use holdbacks to warehouse secondary rights, preventing market
access to competitors and programme access to consumers. For example,
with the exception of regional productions, there is no potential
to co-produce or acquire networked ITV product within five years
of production. Under previous arrangements, secondary rights would
be released after a year. This applies even in the case of recurrent
series where a secondary channel has put up risk investment for
the first series. Similarly, Five are currently not accepting
co-production investment from any secondary channel. We understand
that the BBC also has a policy that no commission can have a UK
co-producer attached. These policies give immediate advantage
to digital channels owned or controlled by terrestrial broadcasters
which have early information and are able to tie up rights before
independent channels can compete. They are anti-competitive behaviours
that demand intervention.
Our preference, which is echoed by many new
media businesses, is for the concept of holdback to be abolished
entirely. We believe the application of holdbacks acts counter
to the public interest, because it denies consumer access to productions,
prevents creators of intellctual property exploiting it fully,
and creates a window that invites piracy.
Available evidence illustrates that television
production faces a similar problem from piracy that has been encountered
by the music and film industries (See Annex 2): Television Piracy,
An Envisional Briefing Note). As a result of piracy, many consumers
will have already viewed programmes from illegal suppliers within
hours of initial transmission so the exploitation value of these
rights is dramatically reduced for producers. Furthermore, consumers
will be denied the benefits of legitimate innovative exploitation
because investment will be curtailed.
The film and music production sectors have responded
to the illegal theft of their intellectual property by seeking,
where practicable, to remove holdbacks from their distribution
agreements. In contrast, the collective purchasing power of the
UK terrestrial broadcasters is undermining the ability of the
independent producer to manage how their content is exploited.
Abolition of holdbacks will therefore be a powerful tool in the
prevention of piracy as well as supportive of the independent
production economy.
6. COLLECTIVE
DOMINANCE
A principal concern that lies behind many of
the issues we have described is the ability and incentive that
the terrestrial broadcasters have to leverage into secondary or
new markets their existing collective buyer power over free-to-air
television rights. We question whether it is appropriate for Ofcom
to sanction such an extension of buyer power without representation
of either multi-channel or new media interests, whose business
models are most likely to be impacted by any reform of the Terms
of Trade.
The ability to leverage rights from independent
producers is just one outcome of terrestrials' collective dominance
in the market, which also includes their use of public service
incumbency and privileges to cross-promote, cross-brand and cross-sell.
This anti-competitive behaviour will inhibit diversity, plurality
and growth in the independent channel market and should be considered
by Government and Ofcom as part of a wider set of anti-competitive
practices by incumbent terrestrial broadcasters.
April 2006
7 BARB data shows that those digital channels available
on Freeview, which are predominantly terrestrial spin-off channels,
increased their share of viewing in all multi-channel homes by
26.5% between 2004 and 2005. Back
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