House of Commons - Culture, Media and Sport

Select Committee on Culture, Media and Sport First Report

6 Sustaining public service content

133. Given our conclusions regarding the future provision of public service content, this chapter outlines a framework to help the Government and Ofcom decide whether to intervene in the market, and discusses possible steps that the Government and Ofcom could take to ensure that plural provision in a competitive market is maintained in the digital age. It also discusses how the Government and Ofcom can get the most value for money and most efficient outcomes if they do decide to intervene.

Competition

134. We outlined earlier the Government and Ofcom's commitment to plurality and competition in the provision of public service content. In summary, Ofcom said that a "competitive broadcasting marketplace is a good starting point in the quest to ensure that citizens and consumers are able to benefit from a wide range of high quality programming and other content".[294] The Satellite and Cable Broadcasters' Group argued that competition is the best way of achieving public policy outcomes and that policy should aim to deliver diversity to audiences, rather than relying on further public intervention.[295] Robin Foster[296] advised DCMS that there is now a great opportunity to redesign the policy framework in favour of a greater reliance on market developments and that public policy interventions needed to be strategic, targeted and possibly less extensive than in the past.[297] On the other hand, however, we have already seen how a highly competitive marketplace is affecting the commissioning of more expensive, UKproduced children's programmes and how the evolving competitive environment is changing the future prospects for other genres which have hitherto been held socially valuable, such as regional programming.

135. Competition between providers has provided consumers with a range and diversity of content. We believe that in future, competition—not least with, and from, the BBC—will drive the provision of quality content for consumers, although there are already evident areas of concern. The most appropriate way for the Government and Ofcom to encourage the beneficial effects of competition is not to employ a heavyhanded approach to regulation. They should ensure the minimum amount of public intervention that is necessary to meet policy objectives with respect to the continuing availability of public service content in all its forms.

A FRAMEWORK FOR CONSIDERING INTERVENTION

136. If the Government's policy objective in the broadcasting market is to ensure the plural provision of content that meets public service purposes and characteristics as defined by Ofcom, the fact that broadcasters free from public service obligations currently provide a lot of this content suggests to us that an additional test is needed to consider whether the Government should intervene.

137. In 1999, Gavyn Davies, then chairman of an independent review panel commissioned by DCMS to consider the future funding of the BBC, and subsequently Chairman of the BBC Board of Governors, identified market failure[298] as a basic principle of public service broadcasting. His report on the future funding of the BBC concluded that "the natural definition of public service broadcasting is that it is broadcasting which, for one reason or another is desirable, but which the market will not provide or will provide in insufficient quantity" and added that "it is impossible to argue for a public service broadcaster unless market failure can be shown".[299] He suggested that:

"some form of market failure must lie at the heart of any concept of public service broadcasting. Beyond simply using the catchphrase that public service broadcasting must 'inform, educate and entertain', we must add 'inform, educate and entertain in a way which the private sector, left unregulated, would not do'. Otherwise, why not leave matters entirely to the private sector?"[300]

138. A number of witnesses also told us that market failure was a useful framework for considering whether to intervene to provide public service content. For example,
David Elstein, Chairman of the Broadcasting Policy Group, said that the simple test for defining public service content is to ask: "will the market provide or will it not?"[301] Lord Burns, former adviser on BBC Charter review to the Secretary of State for Culture, Media and Sport, told the Committee that public service content is "highquality material, probably originated in the UK, which the market itself does not provide".[302] Irwin Stelzer, Director of Economic Policy Studies at the Hudson Institute, considered that policymakers should "let the market define public service broadcasting […] by seeing what it is that the market is not producing, and then go from there".[303] This approach would prevent the Government from funding content that would already be provided and would avoid crowding out commercial providers in the marketplace.

139. Other witnesses were more wary of a market failure approach. For example, Tim Gardam, previously Director of Television and Director of Programmes at Channel 4, argued that he would not define public service content solely in market terms as it would be "unwise to forget the social and cultural purposes of television over and beyond its market purposes".[304] Jeremy Mayhew, a Partner at Spectrum Strategy Consultants, told us that while a marketbased test is superficially attractive, public service broadcasters have to perform a "balancing act between distinctiveness and reach"—in other words, broadcasting programming that other broadcasters would not provide and programming that appeals to a wide audience—which makes the issue too complicated for a market test to be applied.[305]

140. Perhaps surprisingly, the BBC recently advocated a market failure approach to public service broadcasting. In July 2007, Mark Thompson, DirectorGeneral of the BBC, said in a speech on the future of the BBC that "the only economic justification for the BBC—indeed for any public intervention in broadcasting—is market failure." He said that if "there is no market failure, you don't need public service broadcasting" and that if "purely commercial media can adequately deliver all of the public value that the public actually want, you don't need a BBC or Channel 4."[306]

141. We believe that the Government and Ofcom should only consider intervening in the broadcasting market where it appears that certain types of content would not be provided or underprovided. Given that the market currently provides a wealth of content exhibiting public service purposes and characteristics as defined by Ofcom and is likely to continue this provision in the future, we believe that the level of Government and regulatory intervention should diminish as we enter the digital age. In order to be clear about policy objectives, we consider that the Government and Ofcom should specify the socially valuable programming genres or areas which they believe should be sustained, and undertake a detailed, robust analysis of the amount of this content that is likely to be provided after digital switchover in order to identify where, if anywhere, there is likely to be a shortfall. We have already suggested children's programming and regional programming as two areas that merit examination. If the Government and Ofcom wish to intervene in areas where the market can provide, it is our view that they should explain why. More broadly, the Government and Ofcom should ensure that any decision to intervene is evidencebased, that the intended policy outcome is clear and measurable, and that the costs of intervention are transparent to consumers.

Public funding of broadcasters in addition to the BBC

142. Should the Government wish to intervene further to support the provision of public service content, we were told that there were a number of policy levers available. One lever was discussed at length in evidence: the provision of public funding, possibly from the proceeds of the licence fee, to broadcasters other than the BBC.

143. The total current direct and indirect subsidy for public service content in the UK is valued at about £3.5 billion. By far the biggest element of this is television licence fee income—over £3.2 billion in 2006-07—which is currently reserved exclusively for the BBC and paid over by DCMS in grantinaid.[307] S4C receives direct funding—just under £100 million in 2007—also paid by DCMS in grantinaid.[308] ITV, Channel 4 and Five receive indirect subsidies including free or subsidised spectrum, reserved capacity on the digital terrestrial television platform, a requirement that cable platforms must carry their main channel and, in the case of Channel 4, exemption from paying a dividend to the Government. In 2004, Ofcom estimated that the total value of the subsidy for ITV, Channel 4 and Five was around £430 million, but that this would fall to around £25 million per year after digital switchover.[309]

144. Many other countries that intervene to ensure the provision of certain types of content do so by distributing public funding to more than one broadcaster or content provider. In Canada, for example, we learnt that in addition to providing direct funding to Canada's national public broadcaster—the Canadian Broadcasting Corporation—the Canadian Government has created a Canadian Television Fund to support the production and broadcasting of highquality, distinctively Canadian television programmes. The Fund is a publicprivate partnership funded by the Canadian Government, cable companies and satellite service providers: independent production companies or private broadcaster affiliated companies can apply to the Fund for money to make certain genres of public service content. We also note that competition for public funding to support public service content is a feature of the New Zealand broadcasting system. The New Zealand Government provides direct funding for New Zealand's public broadcaster—Television New Zealand—and also provides direct funding for New Zealand On Air, a body which allocates funding to broadcasters and programmes not otherwise provided by the commercial market.[310]

145. In the UK, the Government has stated that it will review the case for making public funding more widely available beyond the BBC.[311] In June 2007, the Government announced that it will bring forward this review, most likely to commence in 2009.[312] In evidence to the Committee in October 2007, the current Secretary of State, Rt Hon James Purnell MP, said that no target date had yet been set for the end of the review, thought it would need to be finished by the completion of digital switchover. He also confirmed that, prior to the completion of the review, no decisions had been taken, such as "topslicing" the BBC licence fee or over a distribution model for public funding.[313]

146. If the Government were to conclude that public funding should be distributed more widely beyond the BBC, a number of funding sources would potentially be available:[314]

general taxation;
funds hypothecated from spectrum sales;
licence fee income; and/or
a tax on the turnover of UK licensed broadcasters.

147. The Committee heard a range of views on one of these options: further distributing licence fee income more broadly beyond the BBC. Licence fee income is forecast to rise from £3.2 billion today to around £3.9 billion in 2012-13.[315] By that time, the costs associated with digital switchover will have been met, potentially releasing more money for broadcasting purposes. There will therefore be a substantial amount of money available to support public service content for the next six years at least.

148. Many stakeholders supported the idea of making available public funding, including television licence fee income, to providers other than the BBC, in particular doing so on a contestable basis. For example, Lord Burns, in his advice on BBC Charter review to the Secretary of State for Culture, Media and Sport, recommended that wider distribution of licence fee funds, via competition, would help sustain plurality in public service content. Lord Burns envisaged the creation of an independent Public Service Broadcasting Commission, which would be able to award part of the licence fee to other public service broadcasters.[316] He told us that that the Government should identify the content that was missing and then establish and fund a body "to commission programmes in a contestable way" to fill "the gap between that which we would like to see and that which we think the market place will deliver".[317] Irwin Stelzer, Director of Economic Policy Studies at the Hudson Institute, argued that there should be as much competition within the funding framework as possible and that competitive bidding for licence fee income by programme providers would get the best out of the system.[318] Stephan Shakespeare, Director of Doughty Media Limited, also advocated wider distribution and argued that "if there is going to be a licence fee […] it ought not to prop up a monopoly".[319]

149. S4C currently benefits, albeit indirectly, from licence fee income. The BBC is required by statute to provide S4C with up to ten hours of programming per week. In 2007, S4C will receive around £23 million worth of licence fee funded content from BBC Wales and it has recently entered a strategic partnership under which the BBC will spend £72 million on S4C services over three years. S4C believes that this is a "blueprint for how public service broadcasters other than the BBC can utilise the licence fee for the benefit of other users" and that the system "sustains public service broadcasting outside of the BBC without compromising the BBC's independence".[320] Bobby Hain, Managing Director of STV,[321] described the BBC's provision of S4C content using licence fee income as a form of indirect redistribution of the licence fee and added that SMG may prefer a more direct version of that in future.[322]

150. Others were less positive about the idea of wider distribution of public funding, such as licence fee income. Ofcom, for example, told us that it did not have a definitive view on the issue but stated that everyone should "be openminded about the funding model" after digital switchover.[323] Mike Darcey, Chief Operating Officer at BSkyB, cautioned that when public funding is mixed with advertising funding, there is a risk that public money is used to make programming that is already commercially viable, raising the potential for the distortion of competition and state aid concerns.[324]

151. The BBC said that there are "powerful" arguments against distributing licence fee income more widely, such as breaking the clear link in the minds of the public between the licence fee and the BBC.[325] Caroline Thomson, Chief Operating Officer, BBC, said that "no one in their right mind would completely rule out the licence fee going to support either Channel 4 or other forms of broadcasting" but argued that there are other levers at the Government and Ofcom's disposal before this would be necessary.[326] Five stated that allocating licence fee income to any broadcaster other than the BBC would undermine the principle of the licence fee and weaken support for the licence fee in the longterm.[327] On the other hand, Iona Jones, Chief Executive of S4C, told us that S4C's support from the licence fee did not in any way diminish the BBC's accountability to licence fee payers.[328]

152. Others raised concerns that redistributing licence fee income would merely transfer funds between broadcasters and not lead to an increase in public service content provision. David Elstein, Chairman of the Broadcasting Policy Group, believed that the BBC might simply reduce its public service output if licence fee income was redistributed.[329] The Voice of the Listener and Viewer and Pact echoed this view.[330] However, a redistribution of licence fee income would have a positive impact on the provision of public service content if, for example, the BBC were to drop commercial programming—such as imports or reality television—as a result of the transfer, and the recipient broadcaster were then to use the money to provide public service content. Some stakeholders told the Committee that the BBC should prioritise public service content ahead of more commercial programming in any case. BSkyB argued that the BBC should be required to prioritise its activities so that it delivers more public service content in areas which might not be served in the future and that the licence fee settlement is more than generous enough for the BBC to do so.[331]

153. While the Government has committed itself to conducting a review of the case for wider distribution of public funding beyond the BBC, we note that the Government has already redistributed the licence fee to pay for broadcasting (and nonbroadcasting) activities. For example, the BBC's provision of content to S4C is an indirect redistribution of licence fee income. The Government has also directly redistributed licence fee income by requiring the BBC to contribute up to £14 million to Channel 4's capital digital switchover costs.[332] In addition, the Government has required the BBC to fund, from the licence fee, the £600 million digital switchover targeted help scheme. In our Report on Analogue Switch-off we expressed concern that the Government was using licence fee income to fund a social cost.[333] We still maintain this view, but we simply note that this demonstrates that the Government is willing to distribute licence fee income beyond the BBC to support outcomes other than the provision of public service content.

154. We note that the Government has committed itself to reviewing the case for making available public funds, including licence fee income, beyond the BBC and we welcome the Government's commitment to bring forward the timing of this review. We foresee that the BBC will remain the main provider of public service programming in the future and will continue to receive by far the largest share of the public funds available. However, we believe that public funding, should be made available beyond the BBC, on a contestable basis, to sustain plurality and to bring the benefits of competition to the provision of public service content that the market would not provide. We do not necessarily accept the arguments against the redistribution of public funding: redistribution might increase accountability and transparency and could lead to a greater provision of public service content. However, the body allocating public funding would need to take care not to fund programming that is already commercially viable.

155. We believe that the most appropriate source of public funds for public service content is either from the licence fee or from general taxation, although we do not believe that the overall cost to the public should be allowed to increase.

CHANNEL 4

156. Distribution of public funding to broadcasters other than the BBC has most recently been discussed in the context of Channel 4. Channel 4 contends that it will face financial difficulties and a "funding gap" in delivering its public service remit in the run up to digital switchover. Under Channel 4's current funding model, it crosssubsidises less commercially attractive public service output by generating profits from more commercial output. However, Channel 4 considered that "the old funding model that supported commercially funded public service broadcasting is breaking down". This view echoes Ofcom's prediction of the decline of the "PSB compact" and future pressure on advertiser funded public service broadcasters. Channel 4 argued that there is "probably a case for filling at least some of the funding gap that will be created as a result of digital switchover through new forms of public funding".[334]

157. Many broadcasters disagreed with Channel 4's contention that it will require further subsidies. For example, ITV said that "Channel 4 remains a broadcaster in rude good health" with high profit levels and growing market share.[335] BSkyB told us that the "claim by Channel 4 that it faces commercial difficulties in providing public service broadcasting is neither plausible at present nor likely to become so in the future" as "revenues have been growing strongly and profits are at record levels".[336] Greg Dyke, former DirectorGeneral of the BBC, told the Committee that he was not as pessimistic about the future of Channel 4's income as the broadcaster is, as Channel 4 has a young audience which is "crucial to advertisers".[337] Five described Channel 4 as a "robust and successful business" which was "well able to make a significant contribution to public service broadcasting for many years ahead"[338] and its Chief Executive, Jane Lighting, said simply: "I wish I had their problems".[339]

158. It is correct that Channel 4 is currently performing well. In financial terms, in 2006, Channel 4 Group generated revenues of over £930 million, made an operating profit of £14 million, and retained cash balances of £180 million. Between 2005 and 2006, Channel 4's digital channels, such as Film4, E4 and More4—which are supposed to create profits to subsidise public service content on Channel 4's main channel—increased revenues by 50% to over £128 million and halved their losses to around £17 million. In audience terms, between 2005 and 2006, Channel 4 increased the audience share of its main channel from 9.7% to 9.8%, and increased its portfolio audience share (including digital channels) from 11% to 12.1%.[340]

159. In the light of the concerns about its future viability, Ofcom recently conducted a review of Channel 4 including a financial review by consultants LEK. LEK analysed Channel 4's mediumterm outlook under a "no schedule change" approach, whereby its programme schedule in terms of genre mix, and peak/nonpeak, licence and remit programming was forecast to remain as in 2006[341] in order to "develop forwardlooking models based on a clear and consistent approach".[342] LEK's central case forecast was that Channel 4 is likely to face financial difficulties and be lossmaking beyond 2010, with projected losses of around £32 million in 2012. LEK also concluded that current cash reserves could be sufficient to cover losses until at least 2012.[343]

160. In June 2007, Ofcom stated that although Channel 4's ability to deliver public service broadcasting in the future is likely to come under pressure from 2010 onwards, there is no need for immediate intervention. Ofcom added that work to evaluate potential interventions in the long term should begin now and stated that it will assess a full range of options for intervention after 2010.[344]

161. Channel 4 is currently profitable and has been performing well compared to other terrestrial broadcasters. We note, however, that Ofcom believes Channel 4 is likely to face financial difficulties in the medium term. After digital switchover, should Channel 4's residual subsidy be insufficient to provide public service content that the market would otherwise not provide, we believe that Channel 4 should be able to apply, on a contestable basis, for public funding—which could potentially include television licence fee income—to make specific public service programmes that meet its remit.

162. Concerns were also raised that Channel 4's remit is not defined tightly enough and is no longer appropriate in the digital age. Channel 4 has a remit to provide a broad range of high quality and diverse programmes which, in particular:

demonstrate innovation, experiment and creativity in the form/content of programmes;
appeal to the tastes and interests of a culturally diverse society;
make a significant contribution to meeting the need for programmes of an educational nature and other programmes of an educative value; and
exhibit distinctive character.[345]

163. ITV told us that Channel 4 has benefited from a "loosely termed remit which has been interpreted very freely with few underlying measurable obligations and without any of the periodic assessments faced by the BBC (via Charter renewal) or ITV (via licence renewals)".[346] In May 2007, Lord Puttnam, the Deputy Chairman of Channel 4, called for a review of the broadcaster's remit, stating that its remit "clearly isn't fit for purpose in today's multichannel world".[347] He expressed concerns that the requirements to innovate and be distinctive are interpreted by today's programme makers as a remit to be controversial, with little regard for being respected and trusted by audiences. These concerns have been amplified in the light of Channel 4's provision of content that might not meet public service purposes and characteristics, however defined. For example, ITV said that the "reported £70 million per annum that Channel 4 spends on Big Brother and Celebrity Big Brother is not public service broadcasting".[348] On the other hand,
Andy Duncan, Chief Executive of Channel 4, argued that the format of Big Brother still met Channel 4's public service remit.[349]

164. In parallel with its work on Channel 4's finances, Ofcom also undertook work to assess Channel 4's delivery of its current public service remit. In April 2007, Ofcom noted that Channel 4 delivers the quantifiable elements of its remit, consistently meets and in some cases significantly exceeds its licence obligations and delivers many core public service broadcasting genres (for example, news and current affairs).[350] However, Ofcom concluded that a range of different kinds of measures will be required to assess Channel 4's public service contribution fully in the future and that quantitative measures such as hours of output or spending per hour in particular genres constitute only one part of a full assessment,[351] particularly given that several areas of its remit relate to the characteristics of its programming that do not easily translate into delivery of traditional programme genres.[352]

165. We believe that Channel 4's remit is inappropriate in the digital age and that it needs to be more tightly tied to the provision of content that the market would be unlikely to provide, such as highquality, challenging UKproduced drama and documentaries of the kind that used to be synonymous with the channel. A more tightly defined remit would help the body considering applications for public funding judge whether to allocate money to Channel 4 and would also more clearly justify the expenditure of public money on supporting the channel. Of course, Channel 4 would still be able to produce commercial programming to crosssubsidise the provision of content that the market would not provide.

Streamlining regulation

166. The Committee also heard concerns that some elements of the existing broadcasting regulatory framework unnecessarily prevented commercial broadcasters from generating revenues to provide content. We discussed earlier the restrictions on the advertising of products high in fat, salt and sugar, but the Committee considered two further regulatory issues in television broadcasting—the Contract Rights Renewal mechanism and product placement regulations—and one issue in radio broadcasting—licence restrictions in relation to format and localness.

CONTRACT RIGHTS RENEWAL

167. Commercial broadcasters, including ITV, cited the Contract Rights Renewal (CRR) mechanism as one regulatory intervention that was damaging the advertising market and limiting their provision of public service content. The CRR mechanism is a remedy imposed by the Competition Commission in 2003 as a condition of the merger of Carlton and Granada (two of the largest Channel 3 licence holders). The merger effectively allowed the formation of ITV plc, and the CRR was imposed in recognition of the concerns of advertisers about the extent of market power after the merger. As a result, the CRR imposes conditions on ITV plc which are intended to ensure that advertisers and media buyers are no worse off after the merger than before. It includes an automatic "ratchet"—a linkage which reduces the amount advertisers will have to commit if ITV1's audience shrinks.

168. Some stakeholders considered that it is necessary to review the CRR mechanism given the shift in advertising away from television towards the Internet and in light of its effect on ITV1 and commercial broadcasters as a whole. Since the CRR remedy was imposed, advertisers have been migrating away from television and radio broadcasters towards the Internet. The Internet Advertising Bureau noted that Internet advertising grew by 41% between 2005 and 2006 to over £2 billion, which is just over half the size of the £3.9 billion television advertising market.[353]

169. Michael Grade, Executive Chairman of ITV, told us that the CRR formula "ravages" ITV's revenues and has a severely deflationary effect on the cost of ITV's airtime.[354] There are concerns that the CRR remedy is having a negative impact not only on ITV, but on the television advertising industry as a whole. For example, Enders Analysis said that the CRR remedy is having a significant deflationary effect on total television advertising spending and has made it easier for airtime buyers to withdraw money from the television medium as a whole when there is a large fall in ITV1 commercial audiences in the previous year.[355] Michael Grade told us that the CRR is "damaging for the whole sector" as "all commercial broadcasters price directly or indirectly off the ITV price, so there is a lot of money leaking out of the whole of the commercial sector as a result of CRR".[356] He has also since argued that it creates incentives for ITV to skew programme commissions and scheduling decisions towards achieving the maximum possible audience rather than encouraging greater experimentation and risk-taking. Bobby Hain, Managing Director of STV, agreed that the CRR depressed revenues for his channel and for television as a whole.[357] Greg Dyke, former DirectorGeneral of the BBC, told us that the CRR has been "pretty damning to ITV" and noted that "some of the people who wanted protection at the beginning do not want it now because it has brought down the whole market".[358]

170. Michael Grade argued that it was time for a review of the CRR.[359] Ofcom told the Committee that it was in an "important dialogue" with the Office of Fair Trading (OFT) about the CRR. Ed Richards, Chief Executive of Ofcom, stated that it was true that the advertising market has moved on, but that it was also true to say that ITV1 still had a very high market share and that there were a number of different factors to consider.[360] We note that ITV is still unique in being able to offer advertisers the ability to reach mass audiences. Michael Grade agreed that ITV was still in a strong position and accepted that advertisers are "entitled to the protection that ITV will behave properly and fairly in the sale of its advertising airtime" but he still believed it was time for a review.[361] The OFT has now announced a review of the CRR mechanism.[362]

171. We welcome the OFT's decision to hold a review of the Contract Rights Renewal (CRR) mechanism. The advertising market has changed dramatically since the CRR mechanism was imposed and we believe there is a strong case for relaxing or possibly removing this remedy. We note, however, that ITV is still likely to have a high market share and consider that it is likely that there will still need to be some intervention.

PRODUCT PLACEMENT

172. A further reform which could support commercial broadcasters is the removal of the prohibition on product placement.[363] In our recent Report on New Media and the Creative Industries, we encouraged Ofcom to take advantage of the proposed derogation in the Audio Visual Media Services Directive under which limited use may be made of product placement.[364]

173. On 24 May 2007, agreement was reached on a new EU Audio Visual Media Services Directive. Under the new Directive, Member States would be able to allow product placement in cinematographic works, films, series, light entertainment and sports programmes, but not in children's programmes. The Directive should enter into force by the end of 2007, and it would then be for Ofcom to decide whether to permit product placement in the UK.

174. In December 2005, Ofcom published a consultation document on issues relating to product placement, with a clear caveat that any action would depend on European Union policy. The responses to that consultation varied: in general, broadcasters favoured a controlled introduction of product placement while consumer and viewer groups were opposed to the concept. Ofcom also noted that the predicted economic benefits appeared to be modest.[365] Pact noted that some genres (such as sport and entertainment) lent themselves better than others to product placement; and it suggested to us that if product placement were to be used sensitively and creatively, it would not have an adverse effect on the content itself.[366] Ofcom's research also noted public support for product placement which was "relevant to the programme and subtle".[367]

175. Given the concerns about the future provision of some genres of public service content, we reiterate our recommendation from our Report on New Media and Creative Industries that commercial broadcasters should be permitted to introduce product placement within the boundaries set by the new EU Audio Visual Media Services Directive.

RADIO

176. The commercial radio industry told the Committee that regulation of commercial radio should be reduced. Commercial radio licences are currently allocated by Ofcom via "beauty contests" which are based mainly on the applicant's proposed provision of public service content, such as news, traffic reports and weather. Ofcom is also required by the Communications Act 2003 to regulate to secure an appropriate amount of "local" material in commercial radio. Each local station is therefore required to provide a service which caters for local interests and is distinct from the output of other local services. Ofcom includes details of these obligations, known as the "format", in the station's licence.

177. The RadioCentre said that commercial radio is "pretty overregulated" given its size and relative impact in the market place.[368] The downturn in the broadcasting advertising market as whole has had an impact on commercial radio as well as television. While some radio stations, particularly those in areas where there is less competition, are highly profitable, others struggle financially. The RadioCentre told us that "competition between radio owners for advertising revenue is fierce".[369] Ed Richards, Chief Executive of Ofcom, agreed that commercial radio companies are facing a lot of pressure.[370]

178. The commercial radio sector also told the Committee that it would provide public service content without regulation. GCap Media said that commercial radio provides public service output because of its understanding of community needs and its sense of corporate responsibility.[371] The RadioCentre argued that its member stations make substantial public service contributions and many go beyond the minimum criteria required by Ofcom.[372] As such, the commercial radio sector considered that regulation requiring them to provide public service content is not necessary.

179. In particular, the commercial radio sector told the Committee that it would provide local content without regulation. Kevin Stewart, Chief Executive of Tindle Radio, said that "localness" was radio's unique selling point and that there was "no necessity" to legislate for localness.[373] The RadioCentre cited research that found that about 65% of commercial radio stations delivered more local news than their format required.[374] However, Ofcom stated that it did "not believe that the market would necessarily supply local programming […] as local programming is expensive, and it is always likely to be more profitable to network as much programming as possible".[375]

180. In April 2007, Ofcom released a consultation on radio regulation, which set out a number of proposals to deregulate the radio industry, including proposals to relax the format regulations on analogue stations. Ofcom proposed to link these changes to the level of digital radio takeup. Some stakeholders stated that restrictions should be lifted sooner as they believed that it would be hard to drive growth in digital listening while they were still subject to onerous regulation. Ed Richards, Chief Executive of Ofcom, told the Committee that he believed that regulation needed to be relaxed in relation to radio but that Ofcom needed to strike a balance to make sure it respected its statutory obligations relating to diversity and "localness". Tim Suter, Partner, Content and Standards at Ofcom, told us that Ofcom was focusing on finding the balance between relaxing regulation and maintaining a core of public purposes.[376]

181. We recognise the substantial provision of public service content from the radio sector, including commercial radio. We sympathise with the concerns of commercial radio that the BBC is overdominant with a 55% share of total listening and that the sector is too heavily regulated relative to its size. Ofcom proposes to reform the regulation of commercial radio and we encourage it to be as radical and as speedy as possible in removing requirements that are unnecessary given the impact of regulation on the commercial sector's current and likely future provision of public service content.

Indirect subsidies

182. In Chapter 4 we outlined the indirect subsidies enjoyed by ITV, Channel 4 and Five, including free and subsidised access to spectrum, prominence on the electronic programme guide and must carry status on cable. While we believe that the value of these subsidies is diminishing, some stakeholders told us that new indirect subsidies could play a role should the Government wish to support the provision of public service content in future.

183. Channel 4 advocated indirect, as opposed to direct, funding for public service content. It stated that, should the Government and Ofcom decide further support is necessary for Channel 4, support should come in the form of indirect subsidy, such as an additional gift of spectrum for digital terrestrial television. Channel 4 prefers indirect funding to direct funding as it believes that the former has enabled the evolution of vital commercial and entrepreneurial spirit in recipient broadcasters and has allowed an additional level of institutional freedom.[377] Andy Duncan, Chief Executive of Channel 4, said that the reason that the channel prefers indirect subsidies is that it allows it a creative freedom to take risks.[378] Channel 4 and Ofcom noted that external funding bodies may be able to exert direct control over the public service content for which they have paid.[379] However, we note that S4C receives direct public funding and we reiterate our conclusion that this demonstrates that broadcasters with direct public funding can deliver public service content without having their editorial independence compromised.

184. Direct funding also has a range of benefits. Ofcom pointed out that direct, transparent funding offers potential for a significant shift in the appreciation of the cost of public service content as it would, for the first time, make the cost of public service content explicit to all stakeholders, both recipients and donors.[380] In addition, as direct funding could make the cost of each element of public service content explicit, this could make value for money discussions easier and more prominent and enable higher levels of scrutiny to accompany the levels of funding.[381] Direct funding would provide transparency and accountability in how the UK spends public money on public service content, two factors which David Elstein, Chairman of the Broadcasting Policy Group, argued were necessary.[382] In any case, Ofcom noted that indirect subsidies will no longer be possible on the scale the UK has experienced in the past and stated that any further funding will need to be in direct forms.[383]

SPECTRUM

185. The largest current indirect subsidy for public service content is the scarce analogue spectrum allocated to the public service broadcasters. The BBC, Channel 4 and S4C each have an allocation of free spectrum. ITV and Five have privileged access to subsidised spectrum: these broadcasters make licence payments which include an implicit payment for use of the spectrum. It is generally recognised that the most valuable spectrum in the UK is between around 200 Mhz and 1 Ghz. The spectrum used to broadcast analogue television occupies nearly half—368 Mhz or 46%—of this spectrum.[384]

186. The UK's analogue television signals will be switched off, region by region, between 2008 and 2012. In principle, this means that all 368 Mhz might be available for new uses and technologies, including mobile television, wireless broadband and digital television services in both standard or high definition. However, the Government had previously decided that 256 Mhz—or 70%—of the 368 Mhz should be used for digital terrestrial television and be allocated, at no cost until at least 2010, to the public service broadcasters.[385] This leaves a remaining 112 Megahertz—known as the "digital dividend"—to be released for new uses.

187. It was suggested that some of the scarce spectrum that has not already been allocated to the public service broadcasters might be given in future to help sustain public service content. For example, Caroline Thomson, Chief Operating Officer of the BBC, told us that one lever for supporting public service content could be to offer broadcasters additional free or subsidised spectrum in return for commitments to provide public service content.[386] Channel 4 said that it is particularly keen to identify alternative means of indirect support such as access to additional digital terrestrial television spectrum.[387]

188. The way spectrum is managed, both in the UK and elsewhere, is changing. Spectrum is increasingly recognised as a valuable resource with many alternative uses. There is rapid innovation in wireless services, and every type of wireless device needs access to spectrum. It is therefore increasingly important to ensure that the way spectrum is managed creates incentives to use it efficiently, so that the use of spectrum changes when this benefits society. For this reason, most users of spectrum, including the Ministry of Defence, the emergency services and telecommunications companies, currently pay for access to spectrum.[388]

189. If the Government decides that additional forms of support are needed for public service content, we believe that this support should be provided using direct, accountable subsidies. On balance, we believe that the benefits of direct funding outweigh any risks to broadcasting independence. In particular, we believe that the Government and Ofcom should not interfere further with the spectrum market to pursue broadcasting policy, for example by allocating additional spectrum to support the provision of public service content.

190. In June 2007, Ofcom announced that from 2014, digital terrestrial radio and television broadcasters will be required to pay an annual fee—known as Administered Incentive Pricing—that reflects the amount of spectrum they use.[389] Ofcom's policy was criticised by broadcasters. Caroline Thomson, Chief Operating Officer of the BBC, stated that the proposals to introduce spectrum pricing for broadcasting would increase the pressures on the public service broadcasters.[390] Lisa Kerr, Head of External Affairs at the RadioCentre, argued that the existing public service content which commercial radio provides could be threatened because of the introduction of Administered Incentive Pricing.[391]

191. Ofcom maintains that a requirement to pay merely brings broadcasters into line with most other spectrum users. It adds, furthermore, that it has a duty to secure optimum use of spectrum and that that duty is best met by providing incentives to users to adopt technologies which enable effective and minimal use of spectrum. In evidence to our New Media and Creative Industries inquiry, Ofcom suggested that the likely cost to broadcasters, maybe in the region of £3 million per year for a channel such as ITV1, is comparatively small in relation to their previous licence fee payments and other regulatory burdens imposed on commercial broadcasters, and could be absorbed.[392]

192. We support Ofcom's decision to introduce Administered Incentive Pricing for spectrum used for broadcasting. We note that broadcasters have benefited from a long immunity from paying for the spectrum they use and that the introduction of Administered Incentive Pricing will merely bring broadcasters into line with other users of the spectrum, such as the Ministry of Defence.

193. Pressure is being applied upon Ofcom to reserve some of the "digital dividend" spectrum for high definition television services. For example, the public service broadcasters and manufacturers and retailers of high definition televisions (including Sony, Toshiba, Samsung and Dixons) have established a campaign—"HD for all"—which aims to ensure that Ofcom, in allocating the spectrum released by digital switchover, reserves adequate spectrum for public service broadcasting in high definition to ensure "that the social value of universal digital terrestrial television is not lost and the public interest is protected".[393]

194. Greg Dyke, former DirectorGeneral of the BBC, told us that some spectrum should be given away for high definition television as, without high definition, Freeview could become a transitory technology and not a longterm technology.[394] Michael Grade said that Ofcom's forthcoming allocation of the spectrum released by digital switchover "threatens to disadvantage digital terrestrial television viewers".[395]

195. Other broadcasters have suggested that some of the spectrum released by digital switchover should be reserved for "socially valuable broadcasting". For example, Teachers TV, a channel directly funded by the Department for Children, Schools and Families, told the Committee that "noncommercial social broadcasters" such as itself were failing to fulfil their potential for social impact due to restricted access to the digital terrestrial television platform. Teachers TV proposed that Ofcom should amend its auction model to achieve greater social value from the released spectrum.[396]

196. The Government has declared that it supports Ofcom's proposals to auction, on an open basis, the spectrum released by digital switchover and views such an approach as consistent with the Government's established policy.[397] In our Report on New Media and the Creative Industries, we concluded that a persuasive case had not been made to justify reserving spectrum for high definition television following digital switchover, and we endorsed Ofcom's approach of not favouring any particular technology or application in the framework being drawn up for reallocation of spectrum.[398]

197. We reiterate our support for Ofcom's technologyneutral approach to auctioning the spectrum released by digital switchover. We have continued to listen to the arguments but we fail to see how transmission of extra high definition digital terrestrial television channels delivers sufficient extra public value to justify intervention. In any case, we note that Ofcom and the public service broadcasters have agreed in principle that it is technically possible to transmit up to four channels in high definition within their current allocation of spectrum. We agree that the most appropriate use of the vacated spectrum is best determined by market mechanisms and note that this will still allow the broadcasters the option of purchasing additional spectrum in the marketplace.

294 Ofcom, Review of public service television broadcasting: Phase 3-Competition for quality, February 2005, p 3 Back

295 Ev 235 Back

296 An adviser on economic policy and strategic issues in the communications sector commissioned by DCMS to produce a report on future broadcasting regulation. Back

297 Robin Foster, Future broadcasting regulation, Report commissioned by DCMS, January 2007, p 14 Back

298 That is, whether or not the market would provide the type of programming. Back

299 Independent Review Panel, The future funding of the BBC, July 1999, p 137 Back

300 Independent Review Panel, The future funding of the BBC, July 1999, p 10 Back

301 Q 1 Back

302 Q 1 Back

303 Q 593 Back

304 Q 1 Back

305 Q 1 Back