Examination of Witnesses (Questions 430
- 439)
TUESDAY 17 OCTOBER 2006
OFCOM
Q430 Chairman: Good morning everybody,
and welcome to this which is a further session in the Committee's
consideration of the opportunities and challenges for the creative
industries from new media. Our first set of witnesses is from
Ofcom. I would like to welcome the Deputy Chairman of Ofcom, Philip
Graf; Tim Suter, Partner for Content and Standards; and Peter
Phillips, Senior Partner for Strategy and Market Development.
Part of the problem that we are faced with in this inquiry is
that we have spent several months on it and some of the questions
which we started off the inquiry by asking have now been answered
and new questions have arisen during the course of our consideration,
and that is a reflection of the speed at which things are changing.
Perhaps I could begin by asking you whether or not there are any
developments or changes that have taken place since you originally
submitted your memorandum to us which you would draw our attention
to? What do you see as the current creative challenges in this
area?
Mr Graf: Thank you Chairman, and
thank you very much for giving us the opportunity to come before
you today. I think, as you rightly said, we are faced with something
that is changing at great speed. If you look at the underlying
changes—the increasing personalisation, increasing interactivity,
increasing flexibility (mobile, fixed, on the move and at home)
increasing disruption to business models—that is what we
see played out quite extensively, even since we submitted our
evidence to you. Two particular transactions: News Corp's acquisition
of MySpace and Google's acquisition of YouTube have further illustrated,
if you like, the whole development of social networking and the
economic possibilities there. Ofcom's own communications market
report in August highlighted the impact of these changes on 16
to 24 year olds where you were seeing, for example, 16 to 24 year
olds spending 21 minutes more, something like 15% more per week
on the Internet than the average and seven hours and nearly 25%
less watching television than the average UK viewer. There was
a report in yesterday's Guardian which some of you may
have seen that showed, for example, that about 14% of people had
downloaded a television or radio programme on the Internet; 31%
had read a blog, which is encouraging for some MPs I guess, and
20% had downloaded a film. You will have seen also Mark Thompson
and his description of the "Martini" generation. Encouraged,
I believe, by Ofcom's policy on local loop unbundling, we have
seen a number of other major transactions this year. We have seen
this in Telefonica's acquisition of O2, the Virgin and NTL deal,
Sky's acquisition of EasyNet, Carphone's launch of TalkTalk and
then the acquisition of the AOL business, the launch of BT Movio,
the transformation, if you like, of a fixed-line operator such
as France Télécom into Orange. France Télécom
branded Wanadoo, a fixed-line business, the name of a mobile network,
Orange, which was only developed 10 or 15 years ago, as a brand.
So what you see is the multiplicity of platforms, inter-platform
competition, competition within platforms, wider content choice
coming from that, new services coming from that increased opportunity
for innovation, increased opportunity for development of economic
wealth. All of these are posing twin challenges for us at Ofcom.
One: a real challenge to make sure that our regulatory strategy
allows the development and the flowering of the good economic
potential, innovation and creativity and that at the same time
we have a regulatory environment which seeks to protect the vulnerable
and to make sure that those people who get left behind in this
are properly catered for as well as making sure that strategy
is geared to where we are going, not where we have come from.
So that is the where I see the landscape at the moment, Chairman.
Chairman: Rosemary McKenna?
Q431 Rosemary McKenna: Good morning,
gentlemen. Given what you have just said about regulation, you
said in your original memorandum that piracy is a significant
concern which is now being tackled by market mechanisms. Do you
still believe that legislative and regulatory intervention is
not necessary to protect the creators from unauthorised reproduction
and the dissemination of creative content?
Mr Graf: Fundamentally, our position
has not changed but, if I may, I will ask Peter to answer that
question specifically for you.
Mr Phillips: As I am sure the
Committee will be aware, intellectual property law is largely
outside Ofcom's specific remit but it is central to the markets
and the areas which we are responsible for, so it is something
which we obviously take an interest in, not only through intellectual
property protection of content but also in terms of the technology
and Internet Protocol (IP) which is required for many of the developments.
There has been a transformation of the opportunities for media
within our sectors as a result of changes like the development
of the PC as a media platform. Also the ability to copy or edit
material has changed out of all recognition over the last 10 years.
Taking music as an example, we saw from the mid-1990s the growth
of illegal downloading and file-sharing. We believe that that
was in large measure due to the absence of a legal market and
so because the record companies were not providing the opportunity
for legal downloading there was no opportunity, and yet there
was significant consumer demand. What we have seen in recent years
with the launch of things like Apple's iTunes is a massive growth
of legal downloading because for consumers it is often much simpler
and easier and requires much less knowledge of the technology
to be able to do it. We believe that similarly in TV and film
markets that the development of legal markets is one of the most
important developments in dealing with all this. The second thing
I would say, and Tim may want to add to this, is the importance
to us of education and media literacy, for consumers to understand
what the consequences of their actions are. As Philip said, our
belief is that we are not keen on additional regulation being
the next step. We think the development of markets and the education
of consumers are the two most powerful ways of addressing the
problem.
Q432 Rosemary McKenna: What are you
doing with the process of educating consumers about copyright?
Mr Graf: I will let Tim answer
that but if I may make two preliminary points on that. One is
that we know from our work that something like over 80% of consumers
are aware that material can be illegal or legal in terms of downloads
can be legal or illegal, so people are aware at a very high level
about this. On the other hand, over 50% of 16 to 24 year olds
actually think that downloading should not be illegal. Therefore
we are left with a situation, particularly amongst young people,
where we are in danger, as one of my former colleagues said, of
trying to regulate what teenagers do in their bedrooms with downloaded
content so we recognise this in this context. Tim, do you want
to pick up on this whole area?
Mr Suter: Undoubtedly in future
one of the principal ways in which we will deliver our objectives,
and I think the objectives of the whole communications industry,
is by ensuring that consumers and citizens have access to the
information they need, not only to protect themselves from things
that they do not particularly want to have but also to take full
advantage of things they do want to have. One of the underlying
issues there is understanding the nature and mechanics and business
of the industries with which you are interacting in getting the
content, and understanding why it is important to pay for content
that you are going to use, and what the impact of that is on the
sustainability of the industries you are talking about. So the
first thing we have been doing in media literacy is getting a
much better understanding of where issues arise, both in terms
of protection and also in terms of knowledge and interaction,
and then what we will be doing in future is putting in place publicity
campaigns, working with industry and other partners, to get that
information out there to those who are most likely to need it.
We cannot, on our own, change people's opinions about what they
do and do not want to do legally and illegally. What we can do
is make sure that they understand both the borders of what is
legal and the reasons for those legal instruments.
Rosemary McKenna: Thank you very much.
Q433 Mr Sanders: Given the figures
you just gave, Philip, is it not really naive to think that it
is the lack of legal downloads that leads to illegal downloads?
Mr Graf: I am sorry, I am not
quite sure I understand the thrust of your question.
Q434 Mr Sanders: Given the attitudes
of young people, it is not the lack of legal downloads that leads
to illegal downloads, is it; that is part of their culture.
Mr Graf: I think that certainly
there is an issue about culture here, but I would again go back
to what Peter has said, if you look at what has happened as a
result of the provision of legal downloads, I think that young
people are prepared to, if that provision is there, if the market
is catering for it and catering for it at the right price—
Q435 Mr Sanders: Is it not more to
do with the fact that there is choice and security and guarantee
of supply with a legal download and that is what people are paying
for now, that there are more legal downloads, whereas the culture
would be "why do I have to pay for this"? The thing
that turns people against an illegal site is more to do with fearing
for the security of their computer system or not being able to
get what they want; it is not this naive idea that it is to do
with the lack of legal downloads?
Mr Phillips: There are a couple
of pieces of evidence which it may be worth just mentioning. One
is that the best information that we have suggests that the growth
of illegal downloading has tailed off and that there has been
an absolute massive growth of legal downloading. I think there
are also a couple of studies, one in Germany and the other one
in Austria, which have highlighted falls of between 20% and 25%
in the amount of illegal activity that has happened as a result
of the growth of this market. I think the evidence would not suggest
that it is naive. I think it would be naive to suggest that there
will a complete end to illegal activity, but I think that the
balance in the market is changing really dramatically and substantially.
Mr Graf: The point you are making
is a good one in the sense of the choice and security that the
market will provide and the market by providing that will help,
I think, discourage illegal downloads, I am sure of that.
Q436 Chairman: I have considerable
sympathy with your view that you should only intervene in the
market where absolutely necessary but can I just ask you about
two specifics. The first is that a lot of people are saying a
crucial in the development of the protection of content will be
digital rights management. Is Ofcom willing to allow DRM to be
determined by the market or do you think there may be a role for
Ofcom in setting a framework for the DRM or requiring common standards
or some intervention?
Mr Graf: My first reaction is
that we are specifically excluded from copyright as part of our
remit. By some people's standards, we do have a fairly wide remit
already. I think where we certainly have a role to play is in
competition law in relation to inter-operability and areas like
that where we may be able to play a role in that sense, Chairman.
Mr Phillips: Our fundamental belief
is that the market is the most effective way for these kinds of
new technology to develop. The circumstances in which we would
be concerned would be if it was one player exerting inappropriate
dominant behaviour within a market as a result of abuse of a strong
market position. I think that is exactly the kind of circumstances
that Philip is referring to.
Q437 Chairman: Do you think that
is not happening already with iTunes having 70% of the market?
Could you not argue that they have a dominant position?
Mr Phillips: I think it is a market
which is in the early stages of its development. I think there
are a number of other major players who are launching new services,
we see Microsoft about to launch new services, and so I think
it would be very early to say that there is an enduring dominant
position for Apple within that market and one will be able to
take a better judgment as a more settled pattern of competition
develops over the coming period.
Q438 Adam Price: In that context
on the issue of competition are you concerned by the news that
the BBC, who you predict could possibly be the only public service
broadcaster in a few years' time, have signed a memorandum of
understanding with Microsoft which has almost a monopoly position
in many of the software platforms? Does that worry you?
Mr Graf: My initial reaction is,
number one, that we have made it very clear that we do believe
in competition for quality, so from our perspective we believe
that it is important that the BBC has competition going forward
in the future. That is an important part. That is where we have
a very clear role to play going forward in the future. I am not
sure I am in a position to comment on the BBC's individual commercial
negotiations with someone like Microsoft. Tim, do you have a view
on that?
Mr Suter: To the extent that that
became a competition issue then it is an issue that will be dealt
with by Ofcom in exactly the same way as it is dealt with for
any other player in the market.
Q439 Adam Price: With respect, it
is not any co-operation agreement is it; it is an agreement between
the biggest broadcaster in the UK and the dominant global software
company that is obviously making a great play for its Internet-based
future. Is that not disturbing at all in terms of competition?
Mr Phillips: Going back to what
the Chairman has just said about the position of other companies
within this kind of area, we have seen the emergence of Apple
in its iTunes service. Microsoft, although it is a large organisation,
is not de facto dominant in every market in which it is
operating. Clearly it is a set of circumstances that we want to
keep under review, as we would with all of our competition responsibilities.
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