House of Commons - Culture, Media and Sport

Select Committee on Culture, Media and Sport Minutes of Evidence

Memorandum submitted by PACT

Pact is the UK trade association representing the commercial interests of film, television, animation, distribution and interactive content compenies. We have a membership of more than 800 companies.

EXECUTIVE SUMMARY

1. UK citizens are amongst some of the most advanced users of new technologies: the number of mobile phones now exceeds the size of the total population; two thirds of UK households receive digital television; more than 60% of adults buy goods online; and a third of households have broadband.[1] As the minister for creative industries and tourism stated in January:

2. This willingness of the UK citizen to embrace new ideas, convenience and choice with a passion is coupled with, and perhaps driven by, a belief that high quality, original content is not a luxury, but a right.

3. The UK production sector has risen to this challenge. UK citizens not only enjoy one of the highest levels of domestically produced original content in the world, that programming is internationally renowned for its quality. The UK is the only European television sector to come anywhere near a positive balance of trade with the far larger US industry.

4. We are now witnessing another wave of change that will have far reaching consequences for everyone, creators, broadcasters and citizens alike. There is no option but to deliver to people want they want, when they want it. If we do not, they will find someone else who will provide an alternative, or find other ways to get it anyway. This is an historical truth, as illustrated by the explosion in intellectual property theft in the music industry.

5. It is therefore incumbent on broadcasters, producers, telecommunications companies, broadband operators, regulators and Parliament to create an environment in the UK that rewards investment, encourages innovation and delivers the high quality programmes and content that UK citizens expect—wherever they are and however they want to access it.

6. Ofcom's analysis, and independent research commissioned by Pact from leading analyst Oliver & Ohlbaum Associates, suggests that the dominance of the incumbent terrestrial broadcasters will continue long into the digital era. Historically, this dominance has enabled the main broadcasters to control the buying and selling of rights to intellectual property, allowing them to stifle the growth of secondary markets. The result has been to force secondary distributors to fill up their schedules with imported programming, a legacy with which we are still living today.

7. If the UK is to realise the full potential of new media it is vital that new entrants to the sector, such as internet service providers and telecommunications companies, are allowed reasonable access to UK content.

8. Currently, the dominance of the main broadcasters allows them to bundle additional rights, such as new media, into the main television license and "warehouse" rights—ie keep hold of rights in order to suppress competition from new markets. Additionally, the conditions attached to "hold-backs"—which allow a broadcaster to veto subsequent sales of a programme to a third party—frequently restrict the producer's ability to sell on programming.

9. Such practices are clearly not consistent with the spirit and intent of the 2003 Communications Act, which intended for a transfer of value back to the producer. Just as importantly, they risk stifling the growth of the new media sector.

10. If we are to foster innovation and allow the UK to continue to benefit from from high quality, original content, there needs to be a more open market in intellectual property rights, allowing both incumbent broadcasters and new entrants access to domestic content. New entrants will stimulate competition, encourage value for money, provide more investment and offer more choice to UK citizens and consumers.

11. To allow the vested interests of a few to reduce these opportunities will be seen in future as a failure to position the UK as a leading creative country.

Question 1: The impact upon creative industries of recent and future developments in digital convergence and media technology

1. The public now has unprecedented levels of choice not only in the variety of content available but in how it accesses that content. People can choose from pay-TV and free-to-air packages on satellite, cable, digital terrestrial or broadband. They can watch films and sports on a pay-per-view or on-demand basis, and pause and rewind live television using PVR technology. With the advent of content distribution via portable devices, audiences need not even go near a television. And those "audiences" are becoming creators, with "user-generated" content democratising the media, as illustrated so dramatically by the mobile phone clips that bore witness to London's July bombings.

2. The UK content sector is well placed to benefit from these developments, having a worldwide reputation for creativity and a proven track record in successfully exploiting its output globally. In made-for-television programme sales, the UK's market share of 10% is second only to the far larger US industry, and substantially ahead of its closest rival Canada, which is on just 3.9%.[3]

3. Developments in digital convergence and media technology represent an opportunity for the UK's audiovisual content creation sector to establish itself as a world-leading creative hub. New ways of distributing content, and emerging, wholly "new media" markets, offer fresh ways for the UK content creation sector to compete, both at home and on a global level. While a popular television show such as Coronation Street will register more than 10 million viewers on UK television, Google processes 150 million searches a day around the world.

4. UK companies are already amongst the pioneers in new ways of delivering content. HIT Entertainment and Endemol UK are, for example, key content providers for BT's new service providing video-on-demand programming via broadband and digital television, with US suppliers such as Paramount and National Geographic.

5. Further new entrants to the sector will offer more choices for audiences, and more platforms for content creators. Microsoft and Virgin Mobile are launching what is expected to be Europe's first nationwide live digital television broadcast service for mobile phones. Apple has launched paid-for video downloads on its iPod video player, while Google recently said it would make content available for its new desktop video player.

6. The potential role of such new entrants to the sector is illustrated in the deal struck by Yahoo! over the US version of The Apprentice. Producer Mark Burnett partnered with Yahoo! before taking the show to NBC. NBC were able to pay less for the show; but the advertisers whose products were placed within the show were able to cross-promote and cross-sponsor online. Yahoo! has a worldwide customer base of 400 million people, 200 million of whom are registered, representing a huge opportunity for UK content.

7. As well as investment in programming, these emerging platforms and new entrants are expected to foster diversity within the production sector—which in turn will help increase the variety of content offered to the citizen/consumer. Ofcom's research has found that commissions from digital television services are a particularly significant source of income for smaller producers,[4] reducing barriers to entry and helping them establish their businesses.

8. However, realising these benefits is far from guaranteed. For the UK content creation sector to take full advantage of the opportunities presented, it is crucial that new entrants to the distribution market are allowed to compete alongside incumbent broadcasters for original UK content at a reasonable cost and with relative ease. Otherwise, they will fill their schedules with imported content, as they have done in the past.

9. The £2.6 billion UK market in new television commissions is still dominated by the main networks, which, along with their spin-off channels, account for 79% of all viewing and 95% of new non-news commissioning spend.[5] This gives the main terrestrial broadcasters huge strength in negotiating rights to content, as the Independent Television Commission's A Review of the UK Programme Supply Market concluded:

10. This bargaining power allows broadcasters to seek an array of additional rights to be "re-bundled" into the price they pay for the primary licence for no additional cost. This clearly represents a transfer of value back to the terrestrial broadcaster, negating the impact of the Codes of Practice as laid out in the 2003 Communications Act and potentially undermining the business model of Pact members.

11. More importantly, there is a long history of the incumbent broadcasters using their dominant position to stifle secondary markets by "warehousing"—ie not exploiting secondary rights in an effort to deny new entrants to the market access to content. This creates a danger that new entrants will be excluded from developing new platforms and services with UK content, resulting in a significant loss to both the viewer and the UK content creation sector.

12. The main broadcasters' ability to secure these secondary rights, based on their negotiating strength, is reinforced by their use of "hold-backs"—which allow a broadcaster to veto sales to a third party. The Codes of Practice were intended to ensure that independent producers were free to choose a secondary buyer. In reality, however, the conditions attached by broadcasters to hold-backs frequently restrict the producer's ability to sell on programming.

13. The growth of rival channels will make little difference to the importance of the primary licence as a source of programme finance, and hence have little impact on the ability of the terrestrial broadcasters to use their negotiating strength to bundle additional rights into the primary license and stifle the market. Ofcom stated this year:

14. Independent research commissioned by Pact from Oliver & Ohlbaum Associates supports this. The primary commission from the main broadcasters currently provides over 85% of the lifetime income for an average new programme, excluding children's. The study suggests that in the next 10 years, despite growth in secondary and ancillary markets such as video-on-demand and mobile, this is likely to remain above 75%.[8]

15. Without increased opportunities for licensing of programme rights, this continuing dominance risks stifling at birth all the nascent benefits of increased choice provided by new platforms. This will in turn perpetuate many of the restrictions of the analogue model. The growth of new services and platforms must not be taken for granted: many have only emerged in the last 10 years or less, and none were available 25 years ago, when UK audiences could "choose" from only two broadcasters, the BBC and ITV.

16. In today's market, broadcasters have argued that their dominant position could be undermined due to pressures on advertising revenues in the multi-channel era. However, these concerns may have been overstated. Overall advertising revenues have been growing year-on-year, with any decline in revenues from traditional channels offset by growing revenues from additional ones. Those additional channels will often belong to the same parent broadcaster as the terrestrial service.

17. In 2004, overall advertising revenues were up 7%, the biggest rise of any year since 2000, making advertising the main driver of growth after pay-TV subscriptions.[9] Ofcom's annual market report stated:

"TV advertising achieved robust growth of 7.4% in 2004, rising to 17.4% in the multi-channel sector."

18. Revenues for the first three quarters last year have outperformed the corresponding period in 2004, according to Ofcom's latest figures. The first three quarters of last year tailed off slightly from the high of the final quarter in 2004, but revenues are still stronger than those for the same period in 2004, at £2.9 billion compared to £2.8 billion.[10] While Ofcom is yet to release figures for the final quarter of last year, total TV advertising was up by 4% over the entire year, according to media research company Thomson Intermedia.

19. Growth is predicted to continue well into the future. In its conservative scenario, PricewaterhouseCoopers' model of the television market, commissioned by Ofcom, estimates that advertising revenues will record an overall annual growth rate of 2.1% in real terms for the period until 2014.[11]

20. Indeed, Channel 4's recent switch of its E4 and, this year, FilmFour channels from subscription to a free-to-air, advertising-driven model runs contradictory to broadcasters' protestations that the advertising market is collapsing. E4 has shown robust growth in advertising revenues since 2004, its last year as a pay service. Last year, E4's advertising revenues hit £60 million, compared to £38 million in 2004. We understand that E4 is forecasting between £90 million and £100 million this year.

21. Pact wants to ensure that we have an ecology in the future that is able to maintain high levels of original UK content and investment in a new world of on demand television. Our objective is not only to ensure the commercial well being of the independent sector but also to give UK viewers the broadest possible access to the high quality UK originated programming/content that they have come to expect.

22. Broadcasters also stand to benefit from new revenue streams that are emerging with new technology and methods of delivery, such as television shopping, interactive services, including premium rate calls, texting and "red button" services.

23. With traditional TV advertising revenues under pressure but with booming online ad sales, the way forward is to develop the market so as to reward producers and broadcasters for the on-demand use as well as offering consumers increased flexibility and convenience about how, when and where they watch content.

24. Subscription revenues earned by platform operators are growing and are now the largest single source of revenues in the television sector, at almost £3.6 billion in 2004.

25. Broadcasters are also diversifying online—ITV's recent acquisitions of Friends Reunited being a notable example—and potential revenues from online advertising have rocketed. The online advertising sector is predicted to be worth £1 billion by the end of the year, according to the Internet Advertising Bureau.

26. In the US, HBO now has a subscription on-demand service and a SVOD service. HBO has recently observed that their on-demand services have led to increasing viewers for their other shows.

27. Ofcom has concluded that it should be possible to allow the development of new media services in a way that supplements, rather than cannibalises, existing advertising. Citing the use of clips on mobile services, Ofcom recently noted that there is a lack of concrete evidence as to whether consumers will in fact substitute the viewing of mobile content for viewing the full programme on linear TV.

28. Pact does not accept that it is appropriate to simply duplicate the free to air services of terrestrial television in a broadband or mobile market where consumers are increasingly used to subscription and pay-per-play models. To do so would (we believe) lead to consumers being confused as to when an on-demand programme was perceived to be free and when they are required to pay. This approach should also help to address TV piracy by helping to develop commercial on-demand services that get UK TV content to the market immediately after the first transmission.

29. If the public is prevented from accessing content in the ways that are created by new hardware and digital technology, there is every reason to suggest many people will do so by illegal means. This was clear in the explosion in intellectual property theft in the music industry.

30. By eventually responding to consumer demand, and making music available in a variety of new online subscription, streaming and commercial downloading services, the music industry has now created an increasingly significant revenue stream. Global digital revenues were worth $1.1 billion in 2005. They are growing rapidly and are now worth 6% of total music industry revenues. Just two years ago, they were worth 0%.

31. The UK public is already showing a similar propensity in the television content sector, where the UK market is a leading offender in the illegal uploading of files, as we outline in our response to question 2.

32. However, just as the music industry has developed new revenue streams in online and commercial downloading services, evidence suggests that people will pay for the right kind of television content, if it is available by legitimate means where and when they find it most convenient. Average household spend on television 10 years ago was around £20 a month, on the television licence and the average BT bill. Now, over half of UK households are paying five times that for services such as BSkyB, multi-channel, broadband and mobile telephones.

33. In Pact's view, the best way to ensure a healthy level of competition in the platforms and services emerging with developments in convergence and media technology is to ensure there is a more open market for intellectual property rights.

34. Pact supports any broadcaster developing new services for new platforms. The current terms of trade do not prevent any of the incumbent broadcasters from making a commercial offer to acquire further rights from any producer beyond the primary license. Indeed, we would welcome the prospect of new investment into original content, as long as that investment is on properly negotiated commercial terms.

35. However, in practice, as we have outlined, the main broadcasters are seeking to re-bundle additional rights into the primary licence for no additional cost, undermining the impact of the Codes of Practice and stifling secondary markets.

36. The UK content creation sector is therefore at a crossroads: it could remain restricted by many of the historical structures and subsequent limitations of the analogue era; or it could be permitted to engage fully with new means of delivering content, a development which would serve the interests of the public and position the industry as a leading content hub of the future.

Question 2: The effects upon the various creative industries of unauthorised reproduction and dissemination of creative content, particularly using new technology; and what steps can or should be taken—using new technology, statutory protection or other means—to protect creators

1. The illegal use of television content is growing rapidly and research shows that the UK is a leading offender. According to a study last year by Envisional, an internet monitoring company specialising in anti-piracy and trademark and fraud areas, a typical episode of the television series 24 was downloaded 30,000 times globally in 2004; in 2005, that figure had more than tripled, to over 90,000. Envisional estimated that 18% of people involved in the unauthorised file sharing of copies of television programmes were from within the UK, the highest of any country.

2. Illegal uploading and transfer of audiovisual programme files is by no means confined only to US shows such as 24. A sample from October 2005 shows that the top 10 most downloaded programmes included four UK productions—Top Gear, Teletubbies, Wallace & Gromit and Red Dwarf. Top Gear was second only to Desperate Housewives, and more downloaded than Lost and The Simpsons.[14]

3. The example of the music industry illustrates what can achieved by providing a legitimate, commercial alternative to illegal downloading and unauthorised online transfer of music files. By responding to consumer demand the music industry has now created an increasingly significant new revenue stream. Global digital revenues were worth $1.1 billion in 2005. Although still a marginal business, they are growing rapidly and are now worth 6% of total music industry revenues. Just two years ago, they were worth 0%.

4. The UK is now the fastest growing online music market in Europe, recording 26 million sales of single track downloads last year, a four fold increase year on year.[15]

5. However, commercial downloading must go hand-in-hand with effective legal measures and technical protection. Digital technology, and the opportunities which it affords business and consumers, have brought into focus the vital importance of protecting, licensing and enforcing intellectual property rights. It is crucial that this importance is understood and appreciated across government.

6. Cross-departmental initiatives such as the IP Crime Strategy and the recent announcement by the Chancellor concerning the Gowers review into the UK's intellectual property framework are welcome. Continued close links with representatives across the creative industries are vital if these initiatives are to work effectively.

7. Central to enabling digital technology to provide increased choice and opportunity for both consumers and business are technical protection measures and rights management information systems.

8. The legal protections for Digital Rights Management already recognised in law at both European level and within EU member states should be maintained. This will allow the industry to develop an increasingly diverse choice of products and services for the consumer, including online and digital publications.

9. Copyright exceptions and limitations are applied in law only in special cases, which do not conflict with a normal exploitation of a work or other subject matter, and do not unreasonably prejudice the legitimate interests of a rights holder. This flexible test has worked well, enabling and accommodating recent rapid technological developments and should continue to be recognised and observed.

10. The market for Digital Rights Management solutions is a nascent one, and there are few nascent technologies for which there are not initial technical problems. Government and Parliament should continue to monitor developments in the marketplace, and the way that new technical protection measures and rights management information systems are brought to market. However, they should recognise the careful balance of interest established by the framework already provided for under the EC Copyright Directive.

11. The Committee is also urged to support measures that allow the Trading Standards Authorities further powers to enforce copyright offences.[16]

12. The Alliance Against IP Theft made a detailed response to the Patent Office consultation concerning measures necessary to implement the EC Enforcement Directive.[17] It is helpful that some of the issues raised are being addressed in the context of the draft regulations, which have just been drawn up. However some important issues such as concerns regarding presumptions and civil seizure and search remain outstanding.

13. Government should also support improved education and awareness about what intellectual property actually is, and why it is important. The need for education and awareness is exemplified in the issue of the scope of products which might fall under the generic description of Digital Rights Management.

14. The Government has for example committed to working with business leaders in order to embed the so-called CREATE principles within their own corporate and social responsibility commitments. These principles were developed though the Creative Industries Forum on Intellectual Property and were designed to express the key aspects of the value of intellectual property in the modern economic and social setting.

15. As these principles outline, improving understanding, respect and trust is not helped by the use of convenient terminology for a range of new products and services, with a variety of purposes, under the generic heading of DRM. Greater understanding will help ensure that, if there is unfavourable publicity over one product, the public does not tar all products under the same generic description with the same brush.

16. Pact has recently set out its more detailed views on this topic in its submission to the All Party Parliamentary Internet Group,[18] which is attached as an Appendix. (not printed here)

Question 3: The extent to which a regulatory environment should be applied to creative content accessed using non-traditional media platforms

1. The ideal regulatory framework will promote competition among all parties, including broadcasters, telecommunications companies, internet service providers and cable TV operators. This should include allowing a free market for IP rights to encourage new entrants to acquire, and ultimately invest in, UK-originated programming.

2. The current proposals for extending Television without Frontiers to regulate online services will potentially block competition, putting European companies at a disadvantage.

3. Those proposals also risk driving companies to set up outside the European Union so that they can continue to provide services, but may bypass regulations. Europe would therefore lose out on the economic benefit generated by these companies, while simultaneously failing to deliver Television without Frontiers' intended protections.

4. Some of those protections, such as prohibiting child pornography or advertising tobacco in any medium, are already enshrined in member states' own national laws.

Question 4: Where the balance should lie between the rights of creators and the expectations of consumers in the context of the BBC's Creative Archive and other developments

1. Pact broadly welcomes on-demand libraries and archives such as the Creative Archive, with two key provisos: they must afford protection for the subject of the work in terms of that work is re-used; and, above all, they must not undermine the content creation businesses whose work will stock such archives in the first place.

2. Such service offer a huge potential in increasing the choice of individual citizens in how they engage with content, allowing them to adapt content and effectively make it their own.

3. On-demand archives also offer wider social benefits, such as helping a country better understand itself by tracking the portrayal of different social sectors over time.

4. As such, the Creative Archive has a valuable public service role to play and can enrich the lives of the citizen/consumer.

5. However, while we for the most part welcome the increased choice that such services will offer the citizens, there are concerns over how the consumer is permitted to re-use content in ways that were never intended, particularly if that content features real people. We therefore urge the Committee to consider how service providers might adopt a more sophisticated approach in terms of what is permitted to be done with content. At the very least, different levels of permission need to be applied to different genres.

6. In terms of the impact on the creative industries, there are potential benefits provided that the rights of content originators and owners are properly recognised. The archive represents a shop window that can help creators sell on their content commercially, for example for advertising or to DVD publishers.

7. However, simply offering all content for free, without ensuring that users understand and accept how rights may be affected by such use, automatically risks negating or reducing the commercial value of that content. This would undermine the aim of the Communications Act, which allowed content creators to receive revenues from the intellectual property they create and thereby build viable and sustainable businesses.

8. Rights owners should therefore be able to choose whether their intellectual property is used by the Creative Archive, and whether they will seek payment for this use. The service must be able to offer them a fair return for the use of the rights, bearing in mind the effect that the Creative Archive may have upon the commercial market place.

9. We would also like to reiterate the need for effect Digital Rights management in the context of services such as the Creative Archive, which must go hand-in-hand with effective legal measures and technical protection, as we have outlined in our response to question 2.

28 February 2006

1 Ofcom, as of end 2005. Back

2 Speech to Foreign Policy Centre, 26 January 2006, James Purnell MP. Back

3 Rights of Passage: British Television In The Global Market, Television Research Partnership, page 3. Back

4 Review of the Television Production Sector, consultation paper, Ofcom, page 65. Back

5 UK TV Content in the Digital Age-Opportunities and Challenges, Oliver & Ohlbaum Associates, page 3. Back

6 A Review of the UK Programme Supply Market, ITC, page 5. Back

7 Review of the Television Production Sector, consultation paper, Ofcom, page 8. Back

8 UK TV Content in the Digital Age-Opportunities and Challenges, Oliver & Ohlbaum, page 3. Back

9 The Communications Market 2005, Ofcom, Page 192. Back

10 The Communications Market, interim report, February 2006, Ofcom. Back

11 Economic Analysis of the TV Advertising Market, PricewaterhouseCoopers for Ofcom, 2004. Back