Examination of Witnesses (Questions 340
- 359)
TUESDAY 20 JUNE 2006
PACT
Q340 Chairman: Good morning. Welcome
to the fifth session of our inquiry into New Media and the Creative
Industries. We have three sets of witnesses this morning so can
I begin by welcoming PACT: John McVay, Chief Executive, Alex Graham,
the current Chairman, and Malcolm Brinkworth, Managing Director
of Touch. Obviously, since we started this inquiry there have
been developments and you have now successfully reached an agreement
with the BBC and with Channel 4 over new media rights. Can I ask
first, looking at your agreement with the BBC, how do you see
it working in the future, what do you see Pact as having achieved
from that and what differences will it make to your members, in
terms of exploitation of rights, firstly, during the course of
the series, and, secondly, after the final programme has been
transmitted?
Mr Graham: Thank you. The BBC,
as it happens, and I would like to say we have now actually reached
an agreement with ITV as well, just in the last couple of days,
so Channel Five remains the outstanding agreement and we are hoping
to get there soon with them. Obviously, the BBC's needs were different
from the commercial broadcasters', in the sense that they were
looking to extend their free, seven-day catch-up window. The nub
of the agreement is that we have given the BBC what we describe
jointly as an enhanced seven days, so we have given additional
rights to the BBC which will allow licence-payers to download
programming within the seven days but they will then have an additional
three months in which to watch the programme. The BBC was concerned
that in the original terms you would have to not only download
the programme within seven days of its transmission but also you
would have to watch it within those seven days, and we agreed
that was rather tough on the licence-payer so we have given them
the extra three months. We have also allowed what is called series
stacking, a sort of jargon in all of this, which will allow you,
basically, if you have missed the first couple of episodes of
a series, so you come in on episode three and you decide to download
it, you will have the option, again within a three-month window,
to go back and catch up on episodes one and two of a series. In
return, we have several significant gains. The independent producer
will now be able to offer the programme digitally for sale on
the eighth day, after the seven-day, free catch-up window. We
did have this right before, but it was restricted only to sales
made through independent producers' own websites. We argued that
this was discriminatory against a smaller independent producer,
who simply would not have the resources to set up their own sales
operation, so the BBC has now agreed that independent producers
can offer that digital sale via a third party website. We have
also agreed a much more simplified mechanism for releasing programming
into the secondary UK market. We had already agreed a shorter
hold-back period, programming released after six months, in the
case of BBC1 and BBC2, after 18 months in the case of Three and
Four. We have maintained those shorter hold-backs but we have
now agreed a much more simplified mechanism for releasing them,
so that the approvals that the BBC need over that will now be
done much more simply. I know this is a source of aggravation
for both independent producers and for some of the secondary channels.
I guess the third significant thing is that we have agreed, in
return for the enhanced services at the front end, that independent
producers will now get, within the period of the BBC licence,
an enhanced revenue share, so that instead of a 50/50 split on
revenues between the release of the programme into the secondary
market and the end of the five-year licence that will now be 75/25
in the independent producer's favour. There is an exception and
this is across all the broadcasters. Returning series are a source
of concern for all the broadcasters protecting the brand, so where
a series is a returning series, so it comes back every year, or
every six months, we have a mechanism which we have called the
rolling release mechanism, whereby—it is slightly complicated—series
one of a returning series would be released into the UK market
after the transmission of series three, and so on, series two
after series four, so it is a two-series hold-back. We feel this
strikes a balance between the desire of the incumbent broadcaster
to protect their original investment but actually ensures that
the returning series are released into the secondary UK market
more quickly.
Mr McVay: Previously, just to
be clear about it, the returning series were normally never released;
they were always under a five-year licence and then subsequent
hold-back. Another significant thing we have changed, in both
the Channel 4 and BBC terms, is those broadcasters sought to define
a programme as a landmark, which was not a scientific definition,
it was basically that they could call any programme a landmark
and therefore withhold it indefinitely from any source in the
secondary market. Those clauses have now been removed as well.
Q341 Chairman: This arrangement applies
presumably purely to independent productions made for the BBC,
does it?
Mr McVay: Yes, that is what we
have been negotiating for; if the BBC wants to apply it to anyone
else...
Q342 Chairman: The BBC in-house productions,
as far as you know, would the BBC intend to make available in-house
productions for broadcast on other channels, perhaps, under similar
terms?
Mr McVay: We already do, through
the joint venture with Worldwide and UK TV. We have made the point
to the BBC that we would seek parity, whereby, if the BBC were
releasing their programmes even earlier then, the hold-backs we
have agreed, we would seek the same parity. We think, otherwise,
if the BBC effectively dumps programming into the secondary market,
the value of our programmes would be diminished because there
would be other markets.
Q343 Chairman: This is fairly complicated.
Mr McVay: Yes.
Mr Graham: We have had five minutes
and we have not even started yet.
Mr Brinkworth: We will issue a
glossary of terms.
Q344 Chairman: In order perhaps to
make it a little simpler, let us take something like Spooks,
a very successful, independent production for the BBC; we are
now on about series three, I think. Just using Spooks as
an example, let us say Spooks was going out now, the BBC
would make that available for download for seven days, so this
week's episode would be available for seven days after transmission
and I could watch that any time within three months, after which
it would mysteriously self-destruct, like Mission Impossible?
Mr McVay: Yes; we would get a
little bit of music for it as well.
Q345 Chairman: How does the hold-back
arrangement work?
Mr Graham: Let us assume it was
the third episode of the new series of Spooks; you could
download that episode and you would be able to watch it at any
time in the next three months. Indeed, once you decided to watch
it, or I should say open it, you then have a further seven days
in which to watch it. It can sit on your little box and you can
have it for up to three months; as soon as you decide to watch
it, so if you started to watch it and then got interrupted you
would still have seven days, but if you start to watch it then
after seven days it self-destructs. If you had not discovered
the joys of Spooks before and you downloaded it and watched
it, you would now be able to go back and download programmes one
and two from that series, even though they had run out of their
seven-day window. Under the series stacking arrangement you can
go back and catch up, and you can do that for a series of up to
13 episodes, in other words, within a three-month period you can
go back and catch up on that. From the point of view of the independent
producer, let us assume that show goes out tonight, then in a
week's time the independent producer could offer it. Then, if
you really loved Spooks and you wanted to own the episode
for ever, you could go and buy that episode either directly from
the independent producer or via an iTunes-style website, you could
pay a price which is yet to be determined by the market, but you
could go and spend 99p or 49p or £1.49p and then you would
own the digital version of that programme for ever, like a DVD
but downloaded digitally. From the independent producer's point
of view, because Spooks is a returning series, the producer
would not be able to sell this particular series, series three,
until series five had been transmitted. It depends slightly on
how quickly programmes come back, but if we assume, say, in the
case of a series like Spooks, it comes back every year,
more or less, it would be another two years before the independent
producer could sell that series into the market. As John said,
that is a significant shift, because in the past the rule of thumb
was that returning series remained held back from exploitation
for the life of the series, so if a series ran for 10 years then
you would not be able to sell it into the secondary market at
all, so it is a significant move forward for us.
Q346 Chairman: Does this cover all
types of distribution? If Spooks went on mobile TV, would
the same arrangement apply?
Mr McVay: The broadcasters, rightly,
I think, have sought what we call simulcast rights on mobiles,
so basically that means when they transmit their linear signal
out on Freeview or on analogue they can also provide that to mobile
TV as well, and that is a broadcast right. At the end of the day,
we want to be able to watch television and watch art content and
we want to give broadcasters the opportunity to market their wares
to the paying public or the licence fee-payers.
Q347 Chairman: Lastly on the BBC,
the argument has always been made by the BBC that the licence
fee-payer has financed the production and therefore should have
the right; is there any geographic constraint, so if I live in
North America am I able to have access?
Mr Graham: No.
Mr McVay: DRM is geographically
restricted.
Q348 Chairman: It is restricted to
the UK?
Mr McVay: Absolutely; that is
a primary condition for us in all the new media rights we have
been negotiating, that it has to be restricted to UK territory.
Mr Brinkworth: For all broadcasters.
Mr McVay: : Just
one point on what we have tried to do, particularly when the details
come in a bit more and people have a chance to pore over it, in
all the deals, we have tried to make sure that at no point were
rights restrained from the British public. Even if you cannot
get pay-per-view or you hire or rent an episode, you can still
buy it within eight days. We worked it out, one, because we think
consumers and citizens want choice, but also it is the way to
combat piracy as well, that by making more content more freely
available, or more widely available, that is the way to address
piracy issues as well.
Q349 Rosemary McKenna: Can I ask
you a question that we were discussing before we started, because
you were involved in the discussions last year, can you remind
us of the percentage of independent production that the BBC must
put out to outside the London M25 area?
Mr McVay: The nations and regions
overall percentage is 33%, it is under the old `Hatch' figures,
as it was called. Within that, there is a specific quota for independent
producers; there is no sub-quota. The quota applies for the whole
of the BBC. Obviously, we have been working hard to encourage
the BBC to do a lot more out of London and we are in quite involved
discussions about how they can do that. Our view has always been
that the way you do that is by building up production capacity,
and the way you build up production capacity is by giving people
work, making productions, and that is the way you sustain production
outside of London.
Q350 Rosemary McKenna: Can we move
on to Channel 4 and the differences. It seems to me that the BBC
agreement was key in allowing them to make the agreements with
the other broadcasters. In the Channel 4 agreement, where exactly
will the broadcaster still control the new media rights and share
the revenue with you and where will you control the exploitation
rights and the revenue?
Mr McVay: With the commercial
broadcasters, we started from the position that these should be
commercial services and we want to see broadcasters building up
commercial services in the new on-demand space, and we think there
are opportunities there not only to satisfy their desire to protect
their linear revenues but also to build up new opportunities.
We actually went into the negotiations, from day one, saying that
we wanted to give them a commercial right to use our programmes
on new commercial services. The question was for how long and
we had a lot of to'ing and fro'ing on that. Channel 4's original
position was it was 30 days and they would give it away for free;
we found that a bit hard to swallow, it is our programming and
our revenues they are talking about as well. We have now agreed
with Channel 4 that they have a primary commercial window for
pay-per-view and subscription VOD for 30 days and we will share
in the revenues from the exploitations of those programmes for
30 days, and this is where things get even more complicated. We
were very conscious about concerns from other players in the market
and new entrants, about issues around warehousing, so within the
commercial deals we have a number of pinch-points, which we call
"use or lose" clauses. Basically, if Channel 4 chooses
not to use a programme on the commercial service then the programme
reverts exclusively to the producer, from day one. At the end
of the initial 30-day period, if they have not negotiated on commercial
terms to retain the programme on their service then the programme
will go exclusively to the producer. If they have started negotiation
but there has been no deal agreed then that programme, in effect,
will be blacked out for five months, so for a total of six months
from transmission the programme would not be available on the
Channel 4 service, on pay-per-view or SVOD, or on any competing
service. That way we try to protect the value of the programme,
so if someone, at the end of the six months, wants to buy it from
us on a competing service then it has still got some value in
it. Also it forces the broadcasters to make clear decisions about
what they want to put up on the service, what is the commercial
proposition they are seeking to develop but which did not automatically
bundle the programmes into a catch-all. Alex put it well, a debate
we were having at Westminster Media Forum is, if someone pays
for something they tend to try to get their money back and exploit
it and do it properly; if they do not pay then effectively that
can often be warehousing because they are not actually looking
to derive value from that programme. That damages us, but also
potentially it damages new entrants, who are seeking to build
new offerings as well.
Q351 Rosemary McKenna: Could you
talk us through a typical BBC 4 series, say, The Thick of It;
how could that be exploited under the new arrangements?
Mr Graham: Let us say, Green
Line; so Channel 4, on any episode of Green Line, for
30 days after transmission, they would be able to offer Green
Line on a commercial basis, so if you wanted to go and catch
up with Green Line, you could for 30 days. Unlike the BBC,
it would not be for free and there are different kinds of pricing
models. To be honest, we felt strongly that we did not want to
be in a position where we were dictating Channel 4's business
models. We felt that we wanted to try to reach a simplified solution
whereby we would give Channel 4 this window and agree a revenue-sharing
model with them, but, essentially, we expect there to be several
potential business models. The two most obvious ones are, one,
that you will have a sort of `all you can eat' model, a sort of
Pizza Hut model, where you would pay, say, £5, £10 a
month and be able to download pretty much as many programmes as
you wanted in that month, or you could go for an a" la
carte model, where you might decide to pay simply by download.
It depends on the kind of user you are, if you expected to download
a lot of programmes in the course of a month you would go for
the monthly subscription, if you thought, "Well, maybe I'll
want to download only two or three," you would go for the
pay-per-view option. Within those 30 days Channel 4 can offer
the on-demand service; that will be offered either via digital
television services, such as Sky or BT or Home Choice, and it
will also be offered via the Channel 4 website on broadband, so
you would be able to access it from a number of different points.
It will always be a Channel 4 branded service, we have made it
very clear to Channel 4 that this 30-day exclusive window applies
only to the Channel 4's own brand, so Channel 4 cannot take our
programme and, as it were, give it to another service provider
and let them sell it within the 30 days, it has to be part of
the Channel 4 service. Within those 30 days, Channel 4 and the
producer can negotiate, so Channel 4 and Talkback would sit down
and talk about deal terms to extend Channel 4's exclusive licence
beyond the 30 days, assuming that Channel 4 wanted to. Channel
4 might decide they do not want to, in which case, after 30 days
it comes back to the producer. If Channel 4 wants to extend it,
the producer has to offer it to Channel 4, but the producer does
not have to accept the deal that Channel 4 offers, just to avoid
them simply low-balling the deal. If the producer decides not
to accept a deal then the producer cannot immediately go and sell
it to someone else, they have to wait for six months, so it is
a kind of mechanism. Actually, we have this mechanism already
in relation to Channel 4's secondary channel E4, and we have kind
of borrowed that mechanism from the E4 deal. It is a mechanism
which forces both sides to reach an agreement but it does not
force the producer to take what is an uneconomic deal.
Q352 Rosemary McKenna: Does that
apply to repeats; is the new agreement about a new production,
or does it apply to a production that has already been used?
Mr McVay: We have yet to discuss
that with Channel 4, how existing contracts for programming then
appear on their service. We have held discussions with the BBC
about that, but the implementation of transitional periods has
yet to be worked out. I am sure Channel 4 will tell you more later
today about their plans, so they are looking towards a service
that will probably carry programming which has already been contracted
under broad arrangements and we will have to discuss how to resolve
that.
Mr Graham: It is worth saying,
just as a bit of context, I think it is important to understand
that all the broadcasters, and particularly commercial broadcasters,
came to the table with a strong desire to try to have quite extensive
hold-backs against new media exploitation. I think, to be fair,
they were concerned about the impacts of new media on their business
models. We came to the table trying, on the one hand, to understand
those concerns and to try to recognise the importance, after all,
the incumbent broadcasters are still the major investor in UK
content, so it would not be in our interests to undermine their
business model, but, at the same time, trying to strike a balance
between what we regarded as their legitimate needs and the needs
of the market. I think, in the end, we feel, although it has taken
three months of pretty tough negotiations, what we have is a deal
with all the broadcasters which manages to strike that balance
between their desire to protect their initial investment but provides
a real shot in the arm, both to the existing UK secondary channels,
in terms of much earlier access to content, and to new entrants
into the market, the BTs and Yahoo!s, who are going to want to
come in and, hopefully, devise yet more innovative ways of bringing
content to people.
Q353 Mr Sanders: I want to go back
to warehousing. Would a deadline for how long a show can be warehoused
help the industry as a whole, and what would be an appropriate
warehousing period?
Mr McVay: Our original submission
to Ofcom was that we felt seven days was the longest period, indeed,
many of our members felt one day was too long, but through the
negotiations we have arrived at commercial use for 30 days, so
it is not warehouse that is actually available. I think, any warehousing
at all, ie if the programme is withheld from any sort of access
by the public, is absolutely damaging to the public interest and
also to the commercial interests of the producers and indeed the
broadcasters. We have never liked the word `warehouse', producers
do not like warehousing; we want to see our programmes in as many
shop windows as possible, as quickly as possible.
Mr Graham: Just to be clear, because
these definitions are a bit slippery and even in the negotiations
there were times when we were trying to clarify them. If I understand
you to mean what I understand by warehousing, the deliberate removal
of a programme from the market-place in order to protect the person
who owns the rights, to be fair, there is no warehousing in that
sense of the word in any of these agreements. There are hold-backs
against exploitation in other markets, but the broadcaster, in
order to enforce these hold-backs, must agree to make that programme
available in the market-place.
Mr Brinkworth: One of the key
things is trying to balance very clearly the huge investment in
programming and regional programming that goes into the UK market
and genuinely allowing that to see out, in terms of the revenue
that can be derived from secondary use, in growing a secondary
market. It is balancing those two that has been uppermost in our
minds in the whole negotiation process.
Mr McVay: Not in everyone's mind.
Mr Brinkworth: In our mind.
Q354 Mr Hall: In terms of the secondary
agreements, the Satellite and Cable Broadcasters Group criticised
Ofcom because they said it actually favoured terrestrial broadcasters
at the expense of everybody else in the business. Last week, at
the Committee, we were told by John Hambley that the latest agreements
would do little to improve the situation for their sector. Have
you got anything to say about that?
Mr Graham: I read the joint evidence.
I think he did preface his statement by saying that he had not
seen the detail of the agreements.
Q355 Mr Hall: He still did not think
it was any good?
Mr Graham: I am slightly surprised.
It is certainly true, I think, that the incumbent broadcasters
set out to try to impose quite severe hold-backs on secondary
exploitation but the deals we have achieved seem to me to be very,
very good news indeed for the satellite and cable broadcasters.
Just across the board, three headline points; one is a hugely
simplified release mechanism from the BBC.
Q356 Mr Hall: Is that what you have
just explained to the Committee, the hugely simplified release
mechanism?
Mr McVay: That is the sort of
non-linear that we have explained, but the recent linear programmes
basically, for the vast bulk of BBC programmes, it is six months,
it is a lot more straightforward. That means that the cabsat guys
will have many more products come to the market sooner.
Mr Graham: In the case of ITV,
until now ITV has imposed a pretty rigid five-year hold-back against
everything that ITV has commissioned. We have now reduced that,
in the case of non-returning programming, to six months, and to
returning series to two and a half years, so that is a dramatic
impact on the secondary UK market. The third thing is that part
of the Channel 4 deal is a reduction in the Channel 4 overall
licence from five years to three years, which means that all programming
will now be released completely into the market-place after three
years. I find it difficult to understand why the cable and satellite
broadcasters think this is a bad deal for them. I would have thought
that this is going to be a huge shot in the arm for the UK distribution
business, and for them particularly.
Q357 Mr Hall: Can I put the question
to you in another way then. Do you think this new deal will actually
enhance competitiveness and plurality within a multi-channel phase?
Mr McVay: We hope so, yes.
Mr Graham: Yes; that is our intention,
because we reckon that our members benefit hugely from the opening
up of the market. That has been a huge benefit of the impact of
the codes of practice; you see the impact of the original codes
of practice. There has been a huge growth in the amount of programming
available in the UK secondary market and we expect that, combined
with the new media delivery systems, to give a further shot in
the arm. We hope so, and we expect so.
Mr Brinkworth: It would be very
nice to see the cable and satellite industries also putting similar
amounts of money into original programming, which would have a
very beneficial effect on the industry.
Q358 Mr Hall: What about the impact
on independent producers, because they produce the primary broadcasts;
are they fearful that they might lose out if they do not do deals
on secondary rights? You have got the primary broadcasters which
produce commissions; are they fearful that they might lose those
commissions if they do not accept the deals that they have been
offered on secondary rights?
Mr Graham: We have been very clear
that one of the issues which have been on the table with the major
broadcasters has been the question of the availability or otherwise
to bundle their own secondary channels into the deals that they
commission. We have been very clear, and have won this argument,
that we have resisted any kind of bundling, in fact we have actually
managed to unbundled More4, which is Channel 4's other secondary
channel, so that Channel 4 will now pay separately for that. Right
across the board, ITV and Channel 4, and indeed we are negotiating
currently with Five, but we are taking the same position with
them, the commission for a primary channel does not depend on
them acquiring rights. They cannot acquire rights in any guarantee,
they can negotiate to acquire those rights and price them separately
but they cannot guarantee to acquire those rights for their secondary
channels.
Mr McVay: That is one of the things
that Parliament sorted out in the Communications Act, that there
has to be a separation of rights under the codes of practice,
and that has been enforced through Ofcom approving those codes
of practice. Broadcasters may seek it but we felt that was not
consistent with the legislation, or indeed the commercial interests
of our members.
Q359 Mr Sanders: Can I look at unauthorised
reproduction of creative content and the fact that illegal downloading
is a factor of everyday life. It has been suggested that worldwide
release dates for shows would combat illegal downloading. Do you
think this would help?
Mr McVay: It could do, in terms
of movies, and indeed Hollywood is experimenting with that just
now, and I know our friends in MPA are looking at it carefully,
in terms of how that works.
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