Examination of Witnesses (Questions 380
- 399)
TUESDAY 20 JUNE 2006
CHANNEL 4
Q380 Chairman: Are you intending
to make specific agreements with individual ISPs or providers,
or are you going to be platform-neutral, in terms of making available
your content?
Mr Duncan: Our ambition, which,
in a sense, broadly follows what we have tried to do in the multi-channel
area, is to try to make our channels' content, programmes, available
to everybody, wherever they want to access it. This is now the
subject of more detailed negotiations. In principle, there are
two broad ways in which we will make video-on-demand available.
One is an open access PC, which will be on our own website but
also it links from other entry points on the web, and obviously,
in terms of cable, there is now one main company to do a negotiation
and a deal with. It is similar, for example, in the mobile telephony
area, where we try to avoid exclusive deals with individual providers
and try to make sure our content is available across, whether
it is Vodafone, or O2, or whatever, and I think that is something
we want to continue with, going forward, Andy, is it not?
Mr Taylor: Yes. The thing with
belonging to the internet is that it is very difficult to build
your own platform and create a walled garden around that platform.
The internet is about freely-available content, so the strategy
has always been to work closely with the other ISPs, Yahoo!, NTL,
and in terms of our video-on-demand service that will be the case
as well, to get the content out to as many places as possible.
Q381 Chairman: This agreement you
have described as win-win, yet it has taken a huge amount of time
to reach. You had a gun held to your head by Ofcom, essentially
who threatened to come in and impose if you could not get to it.
Did somebody blink, at the end, or, if not, why did it take so
long to reach what appears to be a sensible agreement benefiting
both parties?
Mr Duncan: I think the reality
is that there was a lot of concern on both sides, and valid concerns.
Pact were very good at understanding the concerns that we had
and I think we tried very hard to make sure we understood the
concerns they had. In terms of the principles, in some ways we
got some of those ironed out relatively early on, but then, when
you got into the detail of exactly how it would work, partly,
as we said earlier on, there is so much uncertainty about the
reality of what will happen that I think both parties were concerned
about making commitments which subsequently could end up being
a problem. I think the two things which definitely helped were,
one, that both parties wanted to get on with it. Certainly we
announced we were going to launch VOD this year, we did a demonstration
of our plans to Pact, which I think they were impressed with,
and there was a sense that, if we could not reach agreement, going
back to Ofcom, there could be further delay and that, in turn,
would be a problem for us, for Pact, their members, and indeed
the UK economy, in a sense, might lose out from a chance to get
on with this very quickly. To be honest, we have given a lot of
ground. There is a lot of ground that Channel 4 has given, both
in linear rights and in terms of new media, in order to pull off
this achievement, which is not ideal, I have to say. Back to the
earlier point, I think because we are 100% reliant on programming
from outside we are probably more vulnerable, going forward, than
the other broadcasters, with probably the exception of Five. Time
will tell whether we have got the balance right, but I think,
in principle, getting on and getting a deal done so we could get
into the market and, as was said earlier, I think there is an
opportunity to review this over the next two or three years and
make changes as necessary.
Q382 Chairman: You do not see this
necessarily as being a permanent, long-term solution?
Mr Duncan: I hope, on the issues
of principle, yes. On the specific detail of who gets what and
how money is split and some of the nitty-gritty, I suspect we
will have to make adjustments.
Q383 Mr Hall: Piracy: it is not something
we have associated particularly with terrestrial television, mainly
the music industry, and probably films, but, with the way that
this media is developing now, piracy is going to become a bigger
problem. Can you say something about the Piracy Group, which has
just been set up, and the way it is going to work?
Mr Duncan: Yes. I will make a
general comment and then ask Andy to respond more specifically.
I think the general point would be, we are extremely concerned
about piracy and illegal downloading, I would say, particularly
with American content. We have got first-hand experience of a
show like Lost, which we launched very successfully and
promoted over here. It has done very well, it is now on its second
series, it is continuing to do well, but there is quite a significant
gap between when it broadcasts in the States and when it comes
out over here, and it is something of a cult show, particularly
among teenage boys. There are certainly very high numbers of illegal
downloads taking place, which in turn substantially diminishes
the number of people watching it on our channel, which in turn
diminishes the advertising revenue we get, so I think we are very
worried about it. I think our broad, philosophical point is that
we want to get on and actually get ourselves up and running quickly
and try to make the shows available as quickly as possible. Certainly,
in the recent discussions we have had with the music industry,
their strong piece of advice to us was that they made the mistake
in not getting out there and making legal services available early
and now regret that, and we have the opportunity in television
to avoid that. It remains to be seen whether people will pay though.
We are vulnerable, even with legal pay models up there; if people
relatively easily can download it for free, with the sorts of
behaviours that already have grown up in the music area, there
is a vulnerability around there. We are very concerned and we
think the industry has to look at these issues very responsibly.
Mr Taylor: I think that is where
the agreement with Pact is so important. We have done some research
especially around Lost, in fact we have done two pieces
of research, of claimed behaviour of the illegal downloading of
Lost. The first claimed that 3.3 million people had illegally
downloaded series two of Lost, and the second piece of
research claimed that 2.2 million people had illegally downloaded
the second series of Lost.
Q384 Chairman: Was that in the UK?
Mr Taylor: That was in the UK
and that was before Lost had been shown on Channel 4 or
Channel 4.com, so we know there is evidence there. It has to be
said that it is at the moment predominantly around large US acquisition-type
content, but, having said that, the internet is really only just
moving from a phase where the first phase of broadband was about
audio, you could listen to music on the internet and the quality
was still good. In that first phase of broadband, video was still
a little bit patchy, and I think we are just moving into a new
phase now where, with 10 million broadband homes, not only are
there more people with broadband but they have got faster connections
and video is a much better experience on the web. It is early
days, in terms of video on the web, and the fact there has already
been quite a large amount of illegal downloading, I think, is
something we must be very wary of. The other point, just to reinforce
what Andy said, is that the music industry has definitely taught
us that we need to make our content available as soon as possible.
I think, in terms of the commercial model, we need to be extremely
flexible, because we can bring products to market which give a
great, engaging experience of viewing video on the internet, but
illegal is free, so we need to make sure, if we are charging at
a sensible price point and we are offering maybe added value but
also need to be flexible, that if we need to move to an ad model
then we can do so.
Ms Bulford: Just to go back to
the Piracy Group, which as you know includes the major broadcasters,
Pact, the BPI, Sky, Warner Bros and Sony, I think the role of
that group is very much to think about the things which the industry
needs to encourage to help combat piracy. I think there are two
broad areas, perhaps three, that we think more work needs to be
done on; the first is greater harmonisation around definitions
of copyright and much more clarity around what we mean by illegal
download, and clearly there is a big job to be done in terms of
bringing the public on that journey and helping them understand
what is meant there. There is also a lot of work to be done around
digital rights, management systems and interoperability across
borders and between different technology platforms. I think there
are three areas, in terms of incentives towards good behaviour,
where the industry has a big job to do. Firstly, clear guidelines
around when material will be removed, and that material will be
removed. Secondly, consistent application of putting out warnings
to avoid illegal download, and I think, increasingly, there will
be a role to play in looking specifically at technologies designed
to get round DRM systems that have been put in place. I think
that group will come together as quite an important industry voice.
Q385 Mr Hall: I do not want to put
words into anybody's mouth, but it occurred to me that the vacuum
which is created by hold-backs is one of the reasons why piracy
can prosper. Would you concur with that view?
Ms Bulford: The difficulty is
the windowing, in that if you have a window to put material in,
in one form, in one place, in one territory, that is the window
that you have negotiated and that is what you have, which is a
positive way of looking at hold-backs. I think none of us likes
hold-backs; we would like to see the material on the Channel 4
services and we would be delighted to pre-agree commercial terms
with producers at any point. The way in which the two-stage negotiation,
introduced to protect independent producers against bundling from
a broadcaster, works means that there has to be a second-stage
opportunity for producers to say, "No, we don't want to do
that deal; we're not comfortable with those terms. Those are the
principles that were introduced last time." The compromise
which has been agreed, which has worked very well with our digital
channels, which is that we offer an amount of money for the rights
for the period and if the producer does not want to take that
then those rights go into hold-back for a period, gives an incentive
for both sides to reach a sensible deal, and that seems to work
quite well. Broadly, that is where we are similarly with new media,
but for a much shorter period, for the five-month period. That
seems to us to be a sensible compromise between the need for us
to properly recoup the investment in those programmes which we
have commissioned and funded and nurtured and distributed and
taken to the audiences, and the need for producers to have an
opportunity to get out, and drives both of us towards reaching
a sensible deal which means the content will get out there.
Q386 Mr Hall: With the expertise
and genius that is out there, with all that which is around, that
is actually just going to invite continued piracy, is it not,
because people will not want to wait?
Ms Bulford: We are talking about
material which has been on Channel 4, which has been available
through new media for the period of 30 days, and then we are talking
about a period where we very much hope that we will reach a commercial
agreement with producers so that material continues to be available,
and those issues around illegal download, and all the rest of
it, are a further spur for both parties to reach agreement. In
the event that we do not reach agreement then they will be in
hold-back for that period, although the material would still be
available in a normal repeat pattern on the linear services which
Channel 4 has across all platforms.
Mr Duncan: It is worth saying,
we will definitely have everything up on the PC version of the
VOD service from the 30-day period, and I think we will expect
to do commercial deals, in the vast majority of cases. I think
what you are pointing to is unlikely to be a problem.
Q387 Mr Hall: It is just a fall-back
position, are you saying, it is there for negotiation?
Mr Duncan: Because it has got
to a two-stage negotiation it cannot happen to it, but, in principle,
our expectation is that we will end up doing deals and getting
the product out there, as we do with the digital channels.
Q388 Mr Hall: I am just astonished
by the number of people who have illegally downloaded Lost:
2.2 million.
Mr Duncan: Claimed to have.
Q389 Chairman: I am astonished by
this too. Lost can pull in an audience of about five or
six million, can it not? What is your view of this for Lost?
Mr Duncan: When it first opened
it had between six and seven million, which was partly an Opening
Night, big marketing campaign, etc. It settled down at something
like four million in the first series and it has dropped to about
three million now, so it is still doing pretty well.
Q390 Chairman: Seventy-five per cent
of people have downloaded Lost?
Mr Duncan: I suspect that this
is a claimed figure and it might mean once, not necessarily every
episode. I think our guesstimate would be that probably somewhere
between a quarter of a million and three-quarters of a million
of potential viewers on an ongoing basis have already downloaded
it. It is remarkable the number of particularly teenagers you
talk to who have already seen the whole series.
Mr Taylor: The problem is, of
course, that the illegal peer-to-peer sites, where people are
downloading music, are where video is appearing, so it is not
as if people are having to go to a new site, it is just appearing
where they are actually doing this already with music.
Q391 Mr Hall: I am just thinking
that, the lessons which could have been learned from the music
industry, the TV industry has been very slow to learn them in
this respect. Is that a fair criticism?
Mr Duncan: I think we feel we
are moving very quickly in this area, to be honest with you. I
think we have gone from a standing start, we will be the first
to get a VOD service up and running, we did a very significant
deal with Lost and Desperate Housewives, the first
one outside the States with Disney, to make that available on
a video-on-demand service a couple of months ago, which we also
marketed very aggressively. I think we are genuinely pushing very
hard and leading in this area. I think we have been held back
slightly by the delay in having a new media rights negotiation,
but, in principle, we are moving very quickly. I do agree with
you though that the lessons from music are very clear for all
to see. The big difference is that people are used to getting
television for free, in most cases, and therefore it is not exactly
the same as music. In the case of music, you buy it and you keep
it and you play it again and again and again; in terms of a programme,
typically you watch it once and that is it. You might watch Friends
a number of times and children watch programmes over and over,
but for most people they want to watch the programme just once,
so there are some differences. I think we have tried very hard
to move quickly in this area.
Q392 Mr Hall: What about simultaneous
broadcasts, broadcasting for the first time in the States and
broadcasting for the first time in the UK? That would solve the
problem, would it not: broadcast simultaneously, instead of being
delayed?
Mr Duncan: We are hoping to be
in a position to announce something about that reasonably soon.
I think, again, we are more in control of our own destiny on commission
programming than we are with acquired programming, where some
of the studios are much more reticent to come and do deals, similarly
with some of the sports rights holders, but we are hoping potentially
to make announcements on that quite soon.
Q393 Philip Davies: Can I ask you
about advertising. I know you have got some concerns about the
future revenue you might generate from advertising. Given that,
according to Thompson Intermedia, TV advertising was at 4% in
2005, compared with 2004, which seem to be figures borne out by
Ofcom, are you overstating the threat to revenue from advertising?
Mr Duncan: I have to say, I think
it is the single cause of most concern, at the moment, at Channel
4. We think the market was at about 2% last year, so certainly
that is the sort of typical figure that we have been working to.
So far this year, if you take January through to about August,
it will have declined by about 4% possibly, or 5%, and, in particular,
June, July and it looks like August as well, have shown more substantial
decline, so there has been a double-digit decline going on in
June and July and it look like it will carry on into August. The
market is not good, and certainly a number of people involved
in the market, or commentating on the market, think the conditions
are the worst they have been for a long, long time.
Q394 Mr Sanders: How much of that
is the World Cup though?
Mr Duncan: This is a very good
question. I think there is a debate, first of all, about to what
extent is this structural versus cyclical, and at best this is
a summer blip, perhaps possibly triggered by some advertisers'
concerns about the World Cup in June, and maybe thinking, "Well,
we'll sit the summer out and come back in the autumn." I
hope they will not, so I hope in September the market bounces
back and money returns. There is increasingly the more pessimistic
view, which is actually this is something of a structural decline
and that clients effectively are taking a policy decision to say
"We'll take money out of television advertising and put more
into the internet," where there is huge growth. So the TV
advertising market, £3½ billion, or so, the internet
advertising has come from virtually nowhere to now an estimated
£1.4 billion, some of that is search, some of that is display,
some of that is classified, but it is growing very rapidly, I
think now it is bigger than newspaper advertising. At a client
level, people are simply saying, "Well, we'll take some out
of TV and put more into the internet," and certainly I think
that the perceptions around the current performance of ITV as
the market leader are not helping. I think, for a lot of people,
they are looking at market leaders' performance and saying that
somehow television on the whole level is struggling. I think,
to take a step back from this summer, because we will all know
in a few months' time how the autumn is unfolding, over the next
few years very few people think we will be seeing very strong
growth and a lot of people think probably it will decline. Our
worries are primarily, back to my earlier point about the nature
of television viewing, that if people move away from linear viewing
to either PVRs or video-on-demand, the ability to skip ads or
to have as many ads certainly gets significantly reduced, and
time will tell, but I am not particularly optimistic about how
television advertising might do over the years ahead. I think
the earlier point about Thinkbox is a good one. Tess Alps is a
very good appointment to run Thinkbox. I think there are lots
of positive messages that the industry can and should be getting
out about television advertising, but I think it is the biggest
piece of uncertainty we face over the next few years, I would
say.
Q395 Philip Davies: What proportion
of your revenue do you expect to come from More4, E4, or whatever,
digital channels?
Mr Duncan: I think there are a
couple of points there. The first point is a structural point,
which is that Channel 4 operates, as does ITV1, at a very significant
premium to digital channels, so advertisers pay a big premium
to get to big audiences in all homes. What we are doing pretty
successfully in Channel 4, as multi-channel development takes
up and switchover starts to kick in, is we have developed a portfolio
of channels, with E4 and More4 and, as was mentioned earlier,
FilmFour. On an index, they get less than half the revenue, in
terms of advertising pulling power, than the main channel, so
a preview of Lost, for example, you could be watching Lost
a week early, or Shameless a week early, on E4, but, in
advertising terms, we get less money per viewer than we do for
Channel 4. It is not like the BBC, where if they keep it in the
portfolio it makes no difference financially; for us, it is financially
much worse. We have got a big issue around mix, which is causing
us a problem, which as the switchover process unfolds will actually
get worse for us.
Q396 Philip Davies: If one of the
problems is the fragmentation, of broadcasting more and more channels,
presumably you are causing yourself your own problem by launching
more and more channels because you are actually increasing the
fragmentation?
Mr Duncan: I do not agree with
that, in the sense that we would be like King Canute, to sit there
and say, "Let's try to hold the sea back." The world
is changing around us; we have to move with the times and try
to build the best position we can. I think the other issue is
a structural one, which is that we have got something like 23%,
24% of the television advertising market. We are actually quite
a significant player, in terms of website. I think, over the summer,
Big Brother probably will be the most visited entertainment
website in Europe; certainly, in a typical week, we get more than
MySpace or YouTube, for example, during the summer
months. Our ability to get similar advertising revenue from new
media is so fragmented; we are one of so many players. To put
it into context, we get the best part of £800 million in
advertising and sponsorship and we get about £6 million in
terms of new media advertising. Though it is growing, and growing
very fast, it is tiny, compared with the traditional revenue source.
Q397 Philip Davies: You mentioned
ad-skipping. Obviously, it is difficult to predict what effect
that is going to have. Have you made any `back of a fag packet'
calculations as to what impact that might have, or is it again
this sort of white elephant that you might have raised that will
not have any impact at all on revenue?
Mr Duncan: There are several studies;
some are more optimistic than others. Some suggest that actually
even people with PVRs do not time-shift that much of their programming,
and when they do they have still got some of the ads and they
notice some of the ads. Other studies are rather more pessimistic
and suggest there is a lot of ad-skipping. I have to say, most
people I have spoken to face to face, who have got SkyPlus or
Freeview PVR, skip most of the ads most of the time. I do think
it will take a period of years for this to unfold. BARB do not
measure these things straightaway; that takes time to come through.
Media agencies and advertising agencies are quite conservative
in the way they do things, so again that will take time to come
through, but over a period of years I think that plus the switchover
impact will be very, very difficult for us.
Q398 Philip Davies: To ask one more
question on ads, what impact will any sort of ban on advertising,
I do not know, fatty foods, and Burger King, and all this kind
of stuff, actually have potentially on your advertising revenues,
and is that a particularly big concern for you?
Mr Duncan: I think it would be
a very big concern. I think Ofcom have put forward three, well
thought through, albeit, from our point of view, difficult proposals;
all of them would have a negative financial impact, but I think
they are done in quite a measured way. I think the idea of a blanket
ban would be nonsense, actually; there is something like £140
million of advertising revenue which would be at threat, which
in turn would come straight out of investment in programming,
and I think there is very little evidence it would make much of
a difference. The truth is that people watching Coronation
Street or watching The Simpsons, or watching children's
programming, if you look into the detail of who is watching which
sorts of programmes at which times and which sorts of ads, I think
they have come up with some, as I say, sensible proposals which
would be pretty unpalatable, but if something has to be done I
guess we will have to go along with it. A blanket ban we think
would be very worrying and unnecessary and would not achieve the
impact that they want anyway.
Q399 Mr Sanders: This is a fascinating
debate because, at the end of the day, the advertising money is
going to drive the future of what is available to the viewer.
I have written two things. It seems odd that you are withdrawing
from a subscription service, FilmFour, to make it free-to-view,
at a time when you say the advertising income is going down. What
is happening to the other FilmFour channels; will they remain?
Mr Duncan: No. Basically, we are
relaunching as FilmFour. There will be a time-shifted FilmFour+1
version available on satellite and cable; on Freeview it will
be just the FilmFour channel. The economics are very straightforward.
Despite what I have been saying about television advertising revenue,
FilmFour has been available in only 300,000 or 400,000 homes,
we have not had control of the customer list, that has been done
indirectly by Sky, and therefore making FilmFour available on
an advertising free-to-air basis takes in 17 million homes. We
will get more money in the short term via advertising than we
have been able to historically via subscription, which, in turn,
will allow us to invest in films and more on the channel. It is
rather like with E4, that it is the right decision economically
but it does not take away the macro picture of overall decline
in time. Typically, we do not get much share of the subs; what
tends to happen with subscription is that the platform owner gets
the lion's share and the rights holders get a big chunk, particularly
sport and film and Hollywood studios. The channels that do best
are the ones that got there very early but the channels that came
rather later, and that included Channel 4, even in the late nineties
with FilmFour and early 2001 with E4, typically we have not had
much of a share of the subs.
|
