House of Commons - Culture, Media and Sport

Select Committee on Culture, Media and Sport Minutes of Evidence

Memorandum submitted by Pact

Pact is the trade association representing the commercial interests of independent film, television and interactive content creation and distribution companies across the UK. The UK independent production sector currently generates £1.28 billion of television-related revenue a year.

EXECUTIVE SUMMARY

1. Pact welcomes the Culture, Media and Sport Committee's timely inquiry into public service media content. The UK can be proud of its tradition of public service programming, but much of the regulatory framework that unpins its provision will become less effective in the digital era. Children's programming, a key public service genre enshrined in the Communications Act 2003, [28] is already facing a crisis.

2. One of the cornerstones of public service broadcasting is the provision of UK-produced content, as opposed to imported programming. The public places a high value on new, home-grown programming that reflects and strengthens the nation's cultural identity. In Ofcom's comprehensive consumer research for its recent public service broadcasting review, it found that 74% of people viewed a high proportion of programmes made in the UK as important. [29]

3. The importance of domestic programming is also noted in the Communications Act 2003, which states that:

4. It should be noted that original in this case means in effect UK-produced. Under the Broadcasting (Original Productions) Order 2004, original programmes are those commissioned by a public service channel, with a view to their first showing being on that channel. In practice, this means they typically are UK-originated.

5. Ofcom also acknowledges the value of UK-made programmes in its public service broadcasting review, describing one of the core characteristics of public service broadcasting as providing programming that is: "Original—new UK content, rather than repeats or acquisitions."[31]

6. Thus, the public, Parliament and the regulator have acknowledged the importance of home-grown programming. Historically, the UK production sector has succeeded in meeting this demand, and the UK public has enjoyed a high level of original programming as a result. The television industry spends around £2.6 billion a year on original programming, meaning that licence fee payers benefit from one of the highest levels per capita of domestically originated content in the world.[32]

7. Independent production companies make a major contribution to this programming. The UK independent production sector currently generates £1.28 billion of television-related revenue a year, [33] providing programming for all public service broadcasters, including:

— Jamie's School Dinners: highlighted children's diets, and had real impact in changing behaviour (Fresh One Productions).

— Who Do You Think You Are? stimulated interest in our diverse heritage (Wall To Wall Television).

— Wallace & Gromit in the Curse of the Were-Rabbit: global blockbuster with uniquely British voice (Aardman Animations).

— Himalaya with Michael Palin: proved serious documentaries can have popular appeal (Prominent Television).

— Question Time: consistently providing an engaging platform for political debate (Mentorn).

8. Highly competitive, the independent sector acts as a creative catalyst for broadcasters' in-house production departments, providing competition and ensuring a plurality of supply in the content creation sector. 40% of Pact's full producer members are based outside London, meaning that the programmes our members create reflect the diversity of the entire UK.

9. The public regards such diversity in programming as highly important. In its recent review of public service broadcasting, Ofcom found that more than 82% of people saw "issues of range and balance in programming and across the schedules" as important. [34] This made range and balance one of the public's key concerns regarding public service broadcasting.

10. Alongside diversity of supply in the content creation sector, plurality of provision in terms of the number of different broadcasters offering such programmes is crucial in delivering this range. It enables the provision of complementary services for different audiences, ensures a variety of perspectives, and provides competition to spur innovation and investment in new types of programming and delivery.

11. Ofcom acknowledged the importance of plurality in key public service genres in its public service broadcasting review, warning that:

12. This view was supported by the Government's BBC Charter Review White Paper, which states: "The Government believes that sustaining a plurality of PSB providers who both complement and compete with each other has been important in ensuring that this quality and diversity are maintained."[36]

13. This plurality will come under threat in the digital era as the traditional spectrum-PSB trade-off between commercially-funded broadcasters and the regulator becomes less relevant. In the run-up to switch over, Ofcom is likely to come under increasing pressure from commercial broadcasters to allow them to reduce their public service obligations as they face fragmenting audiences and a slower rate of growth in advertising revenues for analogue channels.

14. To some extent at least, this pressure on revenues may be offset by potential new revenue streams from emerging services, such as digital spin-off channels, video-on-demand and online delivery. Channel 4's E4 channel has, for example, shown robust growth since switching from a pay service to an advertising-driven model. Last year, E4's advertising revenues hit £60 million, compared to £38 million in 2004. We understand that E4 is forecasting between £90 million and £100 million this year.

15. Pact is therefore opposed to Channel 4 moving into in-house production, or increasing its share of rights to the content that Pact members create, in a misguided attempt to secure additional revenues.

16. Channel 4's innovative structure as a publisher-broadcaster without an in-house production department is fundamental to ensuring a healthy diversity of supply in the production sector, creating breathing room for companies in the highly competitive independent arena. In turn, independently-made programmes such as Wife Swap, Shameless and Brookside have been integral to Channel 4's freshness and success.

17. Independent producers have been willing and innovative partners in new media for various broadcasters, having been pivotal in such services as Channel 4's broadband factual channel 4Docs or Big Brother's pioneering interactivity. Instead of the retrogressive step of vertical integration, the way forward is for Channel 4 and content suppliers to use their creative relationship to develop new ways to provide audiences with content that is as high quality as it has been in the analogue era.

18. However, it is clear that some genres of public service broadcasting—notably children's programming—are already under particularly intense pressure. Children's programming is often a difficult proposition if left purely to market forces: it is true that some high profile children's programmes generate strong sales from merchandising around the world (with the corresponding benefit to UK exports), but these are largely in the pre-school genre for kids younger than five. Pre-school has traditionally accounted for 10-20% of first-run original children's hours on all public service broadcasters, according to Ofcom. The vast majority of programmes in other genres, such as children's drama or children's factual, do not have such a luxury.

19. ITV stopped commissioning new UK children's programmes 12 months ago. It has continued with this policy despite Ofcom's ruling last year that it is not allowed to cut the amount of children's hours it broadcasts each week. ITV's decision to stop commissioning has removed the biggest investor in new UK children's programming outside the BBC in one stroke. ITV invested around £22 million a year in new UK kids programmes; between them, all other commercially-funded broadcasters, including secondary channels, provide around £10 million.

20. This has been exacerbated by Ofcom recently introducing significant restrictions on advertising around children's programming. While Pact absolutely accepts these restrictions in view of the need to protect children's health, this will act as a further disincentive for commercially-funded broadcasters to invest in new UK children's programmes.

21. Ofcom's advertising restrictions will kick in in 2007. Ofcom anticipates a loss of £39 million in advertising initially. This amounts to more than the total amount (£30 million-£35 million) that all commercially-funded broadcasters spent on new UK children's programmes each year before ITV's withdrawal. Now that ITV has stopped commissioning, it represents nearly four times the total amount spent on new UK children's programming (about £10 million).

22. New UK children's programmes, so important given television's role in developing children's sense of identity, require a greater funding commitment than simply buying in imported programming largely financed by overseas broadcasters. They will therefore be amongst the first areas to be axed in order to make up for lost advertising revenues. Some programmes already have been.

23. These factors have combined to leave a gaping hole in funding for new UK children's programming outside the BBC. As Five's chief executive recently stated: "The long-term future of UK-produced children's programming outside the BBC is bleak."[37]

24. This would clearly severely damage plurality and the level of home-grown programming in a key public service genre. Pact has been developing alternative funding models and proposals for children's programming, which we outline in this document. We also detail alternative models of public funding provided in other countries.

25. In two of these examples—Australia and Canada—there are also restrictions on advertising around children's programmes, as Ofcom recently introduced in the UK. By investing in children's programming through a variety of public means these countries have been able to protect children from certain advertising while enjoying strong indigenous children's production sectors, ensuring that their citizens can make and watch their own stories.

26. Pact thanks the Select Committee for explicitly including children's programming in its terms of reference for this inquiry and thereby allowing this issue to be highlighted. We also welcome Ofcom's forthcoming review of public service broadcasting and children's television.

27. We are asking the Secretary of State for Culture, Media and Sport to launch an urgent review of funding for children's programming in order to sustain this world-class sector and ensure that a high level of new UK programming is widely available to the public. We urge the Select Committee to support us in this request.

1. THE PROSPECTS FOR MAINTAINING PLURALITY IN PUBLIC SERVICE BROADCASTING IN THE DIGITAL AGE

1. The public regards diversity as highly important in public service broadcasting, according to detailed consumer research by Ofcom. In its recent review of public service broadcasting, the media regulator found that more than 82% of people saw "issues of range and balance in programming and across the schedules" as important.[38] This high level of response made range and balance one of the public's key concerns regarding public service broadcasting.

2. Range and balance were defined in this research as:

(a) Balanced diet of different types of programme (both general entertainment and other types) within peak viewing times of 6.00-10.30.

(b) A choice of different kinds of programme across the main channels at all times of day.

3. Plurality of provision is crucial in fulfilling these criteria. It enables the provision of complementary services for different audiences, ensures a range of perspectives, and provides competition to spur innovation and investment in new types of programming and delivery.

4. Nowhere is the benefit of competition between the BBC and commercial channels better illustrated than in the children's genre. The competitive duopoly that emerged in the 70s and 80s between ITV and the BBC created some of the nation's best-loved children's programming, and made the UK unrivalled anywhere in the world in children's programming. Rainbow, Blue Peter, Sooty, The Wombles, Paddington Bear and Tiswas were amongst the classic, long-running programming that emerged from this creative competition.

5. Ofcom acknowledged the importance of plurality in key public service genres in its public service broadcasting review, warning that:

6. Ofcom also concluded in its recent report on Digital PSB:

7. This view was supported by the Government's BBC Charter Review White Paper, which states: "The Government believes that sustaining a plurality of PSB providers who both complement and compete with each other has been important in ensuring that this quality and diversity are maintained."[42]

8. The BBC has also acknowledged the role of plurality in providing public service programming, saying: "We understand the arguments in favour of plurality in public service programming, and strongly support the ongoing contribution of ITV1, Channel 4 and Five as investors in high-quality British programming across a wide range of genres."[43]

9. In addition, Ofcom has noted that plurality can help inform the process of regulation by providing valuable benchmark information about the performance of different providers.[44]

10. Ofcom has broken down the areas where plurality within the industry is important as a way of delivering plurality in programming. Pact agrees that it is useful to consider plurality on the three levels defined by the regulator. These are:

(a) Plurality of outlets: so that viewers do not have to be reliant on a single provider in order to receive PSB.

(b) Plurality of commissioning: so that a range of commissioners working for different organisations can bring their different perspectives to bear on the system.

Below, we will deal separately with the prospects for maintaining plurality in each of these areas in the digital age.

Plurality of outlets

11. Commercial terrestrial broadcasters have traditionally been willing to accept public service obligations in exchange for access to a limited number of analogue terrestrial broadcast licences on offer, together with the associated spectrum to allow terrestrial broadcast delivery. In addition, broadcasting licence fees have been set below their commercial value.

12. In return, broadcasters have been willing to accept public service requirements to broadcast certain levels of certain types of programming—such as "first-run", ie new, and "original", ie originally commissioned (in effect, British).

13. The spectrum-PSB trade-off will become less relevant in the digital era, and therefore public service obligations will be harder to justify. Access to digital platforms will be relatively open, and spectrum space will no longer command the premium it has done in analogue.

14. In ITV's case, the spectrum-PSB trade-off has established an important public service alternative to the BBC, creating the only consistent mainstream competition to BBC1. ITV1, ITV's main terrestrial channel, and BBC1 consistently dominate the weekly lists of most watched network programmes. Their most popular shows attract audiences of 10 million-plus.

15. Channel 4 and Five have their own important roles, but typically barely figure in the top 75 shows. They do not represent alternative mainstream platforms to the BBC.

16. A range of relatively new channels without public service obligations on cable, satellite and digital platforms do offer alternative outlets for public service content. Channels such as Animal Planet, The Science Channel, Discovery Channel and The History Channel provide specialist programming on history, wildlife and scientific discoveries, amongst many others.

17. The Satellite and Cable Broadcasters Group, the association that represents these channels, states that these thematic channels cater "for specialist interests or appealing very directly to specific demographic groups" and are a strong way to engage non-mainstream audiences with challenging public service content.[45]

18. These channels provide a degree of competition for the terrestrial broadcasters, as well as secondary platforms for the public service content originally commissioned by terrestrial broadcasters. Again, however, their relatively limited audience figures mean they cannot be regarded as a mainstream alternative to the BBC.

19. Nor are they able to replicate the level of investment in public service content provided by the terrestrial public service broadcasters. While welcome, they have to date offered only a relatively modest amount of investment for the creation of new content, often relying on repeats of programming commissioned by the terrestrial channels and imported programming. Without significantly raising their investment in new UK programming, they cannot be regarded as a replacement for terrestrial public service programming in the foreseeable future.

20. Indeed, a reduction in the programme investment provided by the terrestrial public service broadcasters would restrict the amount of public service programmes available for these secondary channels to acquire and show as repeats, thereby undermining public service broadcasting on cable, satellite and digital channels.

Plurality of commissioning

21. Plurality of commissioning—ie different broadcasters each with their own commissioner, or each with multiple commissioners—is key to ensuring that a range of tastes and views are reflected in deciding which programmes are made and broadcast. A plurality of commissioners and a diversity of content creators complement each other as ways to bring a broad range of programming to audiences. Reducing commissioning centres limits independent suppliers' routes to market, making it increasingly tough for them to sustain a viable business.

22. Ofcom has proposed the creation of a £350 million-a-year public service operator to provide plurality in public service broadcasting. While this idea has some merits, one crucial question mark is where this significant amount of funding is to come from. It is also unclear what type of organisation would be needed to run this broadband platform—anything other than a completely stand-alone entity risks undermining a key benefit of a public service operator, namely to increase the plurality in commissioning. We comment further on the public service operator proposal in section 4.

Plurality of production

23. The independent production sector is key to ensuring a plurality of supply, providing creative competition for broadcasters' in-house production departments and an alternative to imported programming. The production sector remains highly competitive, with hundreds of independent companies competing not only with each other, but also with broadcasters' in-house departments and overseas companies.

24. This competition shows no signs of abating, particularly since the introduction of new Terms of Trade as a result of the Codes of Practice laid out in the Communications Act 2003. Donal MacIntyre, the star of investigative documentary series MacIntyre Undercover, told reporters on launching his new production company, Dare Films, in September last year: "The new Terms of Trade agreement means we can retain more rights. It's a much more interesting time to form a production company. There are just a lot more opportunities out there for independents."[46]

25. MacIntyre is not alone in seeking to take advantage of the new Terms of Trade. Dozens of independent companies have launched in recent months. Many have significant investment and have already won commissions, including Malcolm Gerrie's Ingenious Media-backed Gorgeous Entertainment; David Mortimer and Richard Hopkins' Fever Media, which has financing from Sony BMG; Daisy Goodwin's Silver River; and Jane Lush and Fenia Vardonis' Splash.

26. The Terms of Trade and the Codes of Practice laid out in the 2003 Communications Act have helped level the playing field for these companies. Other companies were already benefiting from revenues generated by their intellectual property before the introduction of the new terms.

27. For example, Hat Trick, one of the larger independent production companies, struck overarching deals with the BBC and Channel 4 over 10 years ago, and has controlled many of its rights since then. Now, however, the Codes of Practice and the ensuing Terms of Trade between producers and broadcasters provide a framework that allows all companies to secure a fairer share of the revenues from the content they create, and thus grow their businesses.

28. In addition, the growth in the number of channels represents a further incentive for new and smaller companies. As Ofcom's research has found, commissions from the growing number of digital television services are a particularly significant source of income for smaller producers, reducing barriers to entry and helping them establish their businesses.[47]

29. There has been a degree of consolidation within the production sector, often bringing new investment into the sector through the creation of companies that are attractive to private investors.

30. However, growth has been far from limited to larger companies. Many smaller or medium-sized companies are rapidly building their profile, including such fast-rising businesses as Firefly, Outline and Impossible Pictures, and major Welsh producers Boomerang, Nant and Cwmni Da.

31. As Ofcom noted in October its Review of the Television Production sector, the most recent edition of the annual Broadcast Independent Survey indicated that: "the biggest growth as a percentage of the overall market in 2005 was amongst smaller companies."[48]

32. The year before, the Broadcast survey indicated that the highest relative growth came from mid-sized companies (ranked 11-50). In contrast, the survey also indicated that the relative share of the top 10 companies has stayed flat over the last four years (2005 approx 53.4%; 2004 approx 55%; 2003 approx 55.45%; and 2002 approx 54.7%).

33. Nevertheless, the Codes of Practice are only just starting to come into effect and growth in the independent sector remains fragile. Even the biggest companies remain dwarfed by the in-house production departments at broadcasters. The combined annual turnover of all companies with turnover greater than £50 million is £267.6 million. Turnover at the BBC's in-house production department is close to £1.2 billion, and more than £600 million at the Channel 3 companies.[49] Furthermore, no single large independent accounts for more than 10% of the new programming supply of any broadcaster.[50]

Channel 4's innovative role

34. Channel 4's innovative structure as a publisher-broadcaster without an in-house production department, along with the independent quota across all broadcasters, continue to be fundamental to ensuring a healthy diversity of supply in the production sector, creating breathing room for companies in the highly competitive independent production sector. Channel 4's annual commissioning spend on independent productions of £315 million is by far the single largest source of funding for indies, eclipsing BBC1 and BBC2's combined £280m, ITV1's £150 million and Five's £59 million.[51]

35. In turn, independents have been key to Channel 4's success in providing audiences with programming that "exhibits a distinctive character", as it is required to do under the Communications Act.[52] Because of its publisher-broadcaster status, the channel has been able to select the best, most diverse, competitive and original programming from a range of external suppliers.

36. In the process, many of those programmes have been amongst the channel's most commercially successful output, generating advertising revenues and opening up new revenue streams such as telephony.

37. This successful and mutually beneficial creative relationship has been evident from Channel 4's opening night in 1982, when Mersey Television's Brookside began its 21-year run of tackling socially challenging story lines. Over the next 24 years, independents have supplied much of the programming that has become synonymous with the channel's freshness. Trainspotting, Shameless and Jamie's School Dinners have all challenged convention in different ways, while Wife Swap was dubbed "subversive social anthropology."[53]

38. In contrast, production departments at other broadcasters can potentially stifle competition in the supply market. Broadcasters' market power creates the possibility of them unfairly limiting external suppliers' access to viewers, restricting the development of new channels and services, as well as growth in the production sector.

39. There were, for example, sustained and widespread concerns that the BBC was not commissioning the best ideas on merit, but unduly favouring in-house production. It has recently addressed these issues with measures such as the Window Of Creative Competition (WOCC), opening up a further 25% of commissioning to all external suppliers.

40. Research suggests that it will remain a buyers' market into the foreseeable future, and that vertical integration at broadcasters will therefore continue to be a factor in the supply of programming. A recent study commissioned by Pact from Oliver & Ohlbaum Associates noted that the primary commission from the main broadcasters currently provides over 85% of the lifetime income for an average new programme. Oliver & Ohlbaum predicted that in the next 10 years, despite growth in secondary and ancillary markets such as video-on-demand and mobile, this is likely to remain above 75%.[54]

41. In its Review of the Television Production Sector this October, Ofcom confirmed that vertical integration at broadcasters remained "a significant issue". Along with the independent quota, the regulator found that "the position of Channel 4 as a publisher-broadcaster continues to provide an important balance to the sector."[55]

42. Pact is therefore opposed to any weakening of Channel 4's publisher-broadcaster status, as well as to any bid by Channel 4 to increase its share of rights to the content that Pact members create.

43. Instead of taking the retrogressive step of vertical integration, Channel 4 should be encouraged to work with external suppliers to develop new services that incentivise both supplier and broadcaster, as well as offer increased choice and convenience to consumers.

44. We elaborate on future funding models for Channel 4, along with the other public service broadcasters, in section 3. Essentially, however, emerging ways of delivering content are opening up potential new revenue streams, for both broadcaster and supplier. Channel 4's E4 channel has, for example, shown robust growth since switching from a pay service to an advertising-driven model. Last year, E4's advertising revenues hit £60 million, compared to £38 million in 2004. We understand that E4 is forecasting between £90 million and £100 million this year.

45. Independent producers have been willing and innovative partners in new media for various broadcasters, having been pivotal in such services as Channel 4's broadband factual channel 4Docs or Big Brother's pioneering interactivity. The way forward is for broadcasters and content suppliers to use their creative relationship to develop new ways to provide audiences with content that is as high quality as it has been in the analogue era. In turn, this will provide the public with increased choice in what they want, and when and how they watch it.

Reflecting the entire UK

46. Plurality in terms of programming that reflects the diversity of the entire UK is another crucial aspect of public service broadcasting. The Communications Act requires ITV, Channel 4 and Five to broadcast what appears to Ofcom to be "a suitable proportion"" of UK programmes that are made from outside the M25 area.[56] This provision must also include "a suitable range"" of programmes from outside the M25.[57]

47. Ofcom acknowledges the importance of the Nations and regions in its review of public service broadcasting, stating that a key aim in designating channels as public service broadcasters was to ensure that a free-to-air service was available to all viewers that "served particular audiences, eg children, Nations and regions."[58]

48. As well providing programming of particular appeal to people outside the London area, programming broadcast on a national level that reflects life beyond the M25 has the capacity to enrich the country's cultural identity. This has also been identified by Ofcom as a key purpose of public service broadcasting.[59]

49. In delivering plurality in a digital age, the continuing development of a healthy and sustainable production sector outside of London is critical. Allowing indigenous independent production companies to develop and compete will provide not just different accents, but a multiplicity of voices.

50. Under the Communications Act 2003, all the commercial public service broadcasters are therefore required to commission certain levels of network programming from outside the M25 by value and volume. The regional production quota, Ofcom states, aims "to encourage the maintenance or development of a range of production centres in the Nations and regions, rather than a concentration in the London area, and to ensure that the independent production sector maintains its geographic diversity."[60]

51. In 2006, 40% of the independent supply base was located outside London, and most of the larger independent companies have established regional offices.[61] However, this could easily be reversed: the regional production quotas for broadcasters that are enshrined in the Communications Act are starting to work, but they need time to have the effect that their introduction intended.

52. We consider the current out of London roles of each of the public service broadcasters below:

BBC out of London

53. It is reasonable to expect the BBC to increase its out of London commissioning of network programming, as proposed by Ofcom. It is therefore anomalous that the BBC's out of London requirements are the same as Channel 4's and less than ITV's. The BBC, paid for by viewers across the UK, should be required to commission 50% of its network value and hours, bring it in line with ITV. A timeframe to achieve this level should be agreed and fixed.

54. The BBC has not developed or delivered a robust strategy for delivering its out of London quotas. In the past it has been difficult to establish exactly what was being contributed towards BBC out of London value and why. The corporation failed to provide satisfactory answers when challenged on the veracity or viability of some claims and policies.

55. Pact would particularly like to see greater commitment from the BBC towards the English regions, beyond news and current affairs. The reduction of ITV's public service obligations to regional programming has left a void in the English regions.

56. In contrast, in the Nations of the UK, the development of new voices and access routes to the BBC has created a wealth of new talent. The BBC's national provision to Scotland, Wales and Northern Ireland has benefited from new thinking, new investment and new ideas and is bringing rising audience ratings regionally. Some of this talent is going on to network success.

ITV out of London

57. Pact supports Ofcom's recommendation for ITV1's quota for network production outside London to increase to 50% of total originated hours and 50% of spend. This will help the out-of-London sector to grow, in the process maintaining and encouraging plurality.

58. The reduction of ITV's non-news regional hours to 0.5 hours per week at digital switchover, however, adds to the persistent decline of regional production. ITV's introduction in 2005 of the ITV Regional Development Fund for network programming consists of a £9 million investment into the sector over three years. However, we are concerned that, to date, the level of commissioning has been very low, reflecting a lack of commitment on the part of ITV. ITV's regional production fund runs an Executive Producer Scheme, aimed at building creative relationships with independent companies in the regions through a fast-track scheme, and this may help to improve future levels of commissioning.

Channel 4 out of London

59. Channel 4 produces 30% of its programming from the Nations and regions. We are concerned that the mix within the 30% may not truly reflect a range of programming, as required by the Communications Act, as we have noted above. Most of the quota is delivered via a small number of regular suppliers providing daytime programming. Genres such as documentary and current affairs, which deliver strongly in terms of plurality and regional voices, are not well represented within the mix. Drama is the exception, where programmes such as Hollyoaks reflect voices from the regions.

Five out of London

60. Pact applauds Five for introducing its voluntary 10% out of London target in 2001. Pact also acknowledges Five's willingness to meet suppliers based out of London and its regular scheduling of commissioning briefings across the country.

61. In 2005, Five commissioned 29.7% hours and 23.1% value from out of London, far exceeding its current 10% quota. Without wishing in any way to be seen as punishing the channel for its excellent achievements, we support the current quota being increased to 20%, which could be done easily and with no harmful effects to the channel. This would establish the current commissioning strategy and safeguard for the future. This should be done within an agreed and fixed timeframe.

2. PRACTICALITY OF CONTINUING TO IMPOSE PUBLIC SERVICE OBLIGATIONS ON COMMERCIAL BROADCASTERS

1. As we have mentioned in section 1, commercial broadcasters have traditionally been willing to accept substantial public service obligations in exchange for access to a limited number of analogue terrestrial broadcast licences, together with the associated spectrum to allow terrestrial broadcast delivery. In addition, broadcasting licence fees have been set below their commercial value. In return, ITV and Five have been willing to accept public service requirements to broadcast certain levels of certain types of programming

2. The BBC and Channel 4 are gifted these licences and the spectrum necessary to allow terrestrial broadcast delivery of analogue TV services. However, their public service obligations are embedded far deeper: the BBC through the licence fee and Channel 4 through its public ownership, which means it has no shareholders to return profits to.

3. The UK spectrum-PSB trade-off will become less relevant in the digital era, and therefore public service obligations will be harder to justify. Access to digital platforms will be relatively open, and spectrum space will no longer command the premium it has done in analogue.

4. In the run-up to switch over, Ofcom is likely to come under increasing pressure from broadcasters to allow them to reduce their public service obligations as they face fragmenting audiences and a slower rate of growth in advertising revenues for analogue channels.

5. Broadcasters are already seeking to cut back in their investment in public service programmes in order to maximise revenues. This is shown most dramatically in the children's genre, where ITV has already stopped commissioning new programmes, wiping out around £22 million in investment per year. As we explain in section 5, this represents the lion's share of investment in new UK children's programming by commercially-funded broadcasters.

UK regulation

6. The Communications Act grants Ofcom only limited powers to prevent broadcasters cutting back on their spend on creating home-grown programmes in key public service genres in this way. The Act does not explicitly require broadcasters to invest a certain amount of money in new public service programming. Rather, it requires them to show a certain amount of UK or, less frequently, European-produced programmes by time.[62]

7. The Act does require that broadcasters consult with Ofcom if they wish to make "a significant change" in programme policy, allowing Ofcom a limited ability to prevent broadcasters from making dramatic cuts in investment in new programming.[63] However, as shown in the gradual decline in new UK children's programmes on commercial public service broadcasters that we outline in section 5, it has not prevented a steady erosion over several years.

8. Nor does it allow Ofcom to directly stop a broadcaster cutting investment in programme creation; the regulator can only step in when a broadcaster details its plans for the coming year's schedule, which occurs in the autumn only a few months before programmes are due to be broadcast. In practice, programmes are produced a year in advance, if not longer.

9. Once commercially-funded broadcasters switch fully to digital and no longer require licences for Channels 3, 4 and 5, none of these obligations will apply (although Channel 4 will of course remain publicly owned). These broadcasters will then be bound by frequently ineffective European regulations, as detailed below.

European regulation

10. European regulation, through the Television Without Frontiers directive, applies to all broadcasters, including those not bound by UK public service broadcasting duties, such as cable and satellite services. It will continue to apply in the digital era, albeit in a revised form that is expected to extend to certain on-demand services as well as traditional television channels. The directive calls for all broadcasters to air a majority of European works and commission at least 10% of programmes from independent production companies.

11. However, the directive has failed to ensure that broadcasters meet either obligation. Both the European and independent quotas in the directive contain a "where practicable" clause that has allowed broadcasters with services in the UK to argue that they are unable to fulfil such duties on the grounds that their businesses are relatively new—even in the case of broadcasters that have been established for nearly 10 years.

12. Pact has called for the removal of the "where practicable" clauses for European works and independent productions. These clauses are in Pact's view being abused by broadcasters in order to avoid their responsibilities under the directive.

3. VIABILITY OF EXISTING FUNDING MODELS FOR ITV, CHANNEL 4 AND FIVE

Failure to evolve

1. The analogue era has been dominated by an oligopoly of terrestrial broadcasting groups, with the resulting restrictions in choice in how the public accesses content.

2. Traditionally secure in their dominance of the advertising market, the incumbent commercial terrestrial broadcasters have often been slow to develop alternative revenue streams. ITV has to date failed to deliver an effective online strategy beyond purchasing Friends Reunited for £172 million, while Five did not even launch digital channels until 2006.

3. Along with failing to develop their own alternative funding models, there is a long history of the dominant terrestrial broadcasters actively seeking to stifle others from creating new services that might compete with them. Between them, ITV, Channel 4, Five, the BBC, and their spin-off channels account for 95% of non-news spending on original primary rights commissions.[64] Historically, this dominance has enabled them to bundle additional rights, such as new media, into the main television license and "warehouse" rights—ie deliberately not exploit secondary rights to programmes in an effort to deny new entrants to the market access to content.

4. This creates a danger that new entrants will be excluded from developing new platforms and services with UK content, resulting in a significant loss to both the viewer and the UK content creation sector. The result has been to force secondary distributors to fill up their schedules with imported programming, a legacy with which we are still living today.

5. The 2003 Communications Act successfully addressed this oligopoly of the terrestrial-based broadcasting groups by introducing new Codes of Practice between broadcasters and independent producers. Under the Act, and the Terms of Trade created as a result of the Act, there must be a clear distinction between the types of rights in question when a programme is commissioned. A broadcaster retains key rights, notably the primary transmission. However, the producer retains certain secondary and ancillary rights, such as video-on-demand, and is thereby allowed to benefit from the exploitation of the content that they have created.

6. While the impact of the Codes is only starting to be felt, they have begun to increase the variety of ways in which content is delivered to the public and stimulate sustainable growth in the independent production sector. In its recent review of the television production sector, Ofcom concluded that the industry consensus was that the Codes were working well and helping to underpin growth in the sector:

Pressure on current model: cyclical or structural?

7. Pact recognises that commercial broadcasters now face certain pressures on their advertising revenue streams, although it is important to bear in mind that they still remain dominant, both in terms of today's advertising market and in their spending on programming.

8. Analogue advertising revenues are today higher than they were a decade ago. They peaked in 2000 far beyond all previous levels, then fell back from this record high, but have climbed since, as shown below:

9. Debate has raged about whether the slowing of advertising growth on analogue channels is due to cyclical factors, or structural changes linked to the growth of digital media. Clearly there are certain pressures on advertising at the terrestrial channels, but in our view these concerns may have been exaggerated. Broadcasters often have a vested interest in arguing that their dominant position could be undermined in the multi-channel era. In reality, current pressures are at least in large part due to cyclical trends in the advertising market, along with regulatory mechanisms particular to ITV1, rather than just structural issues such as fragmenting audiences.

10. A recent independent study concluded that as much as 70% of the recent decline in growth in the advertising market is due to cyclical factors such as the wider economy, with the remaining 30% downturn reflecting structural issues such as fragmenting audiences and internet advertising.[66]

11. Predictions for the future impact of PVRs should also be treated with caution. Patrick Barwise and Sarah Pearson's recent study on PVR viewing habits concluded as much, casting doubt on predictions that the devices will have reduced commercial audiences even by as little 10% in the next few years.[67]

12. Crucially in ITV1's case, there are specific regulatory factors affecting advertising revenues. The contract rights renewal (CRR) mechanism has had a significant impact on advertising revenues. This regulatory mechanism was proposed by ITV as a way to ensure it did not abuse its dominant market position following the merger of Carlton and Granada. Under this system, advertisers' spending on ITV1 reduces in line with a fall in ratings. ITV's advertising revenues are therefore directly linked to the popularity of its programmes. Press reports indicate that the CRR cost ITV £140 million in lost revenues last year, which would represent the chief factor in ITV1's overall decline.

13. Having slumped last year, ITV1 may now be showing signs of stabilisation. Net advertising revenues fell by 12.5% (or about £182 million) in 2006, but we understand that revenues are predicted to be down only by 7% (about £105 million) next year.

14. It should be noted that the ITV group has been able to offset at least a large part of current declines in advertising revenues at ITV1 through growth at its digital spin-off channels. ITV1's net advertising revenue fell by 3% (£45 million) in 2005, but rose at the group's remaining channels by 91%, hitting £111m. This resulted in a total rise in advertising revenues at the ITV group of 3% year on year.[68]

15. Going forward, commercial terrestrial networks are likely to remain the dominant force in the advertising market well into the digital age. Terrestrial channels are predicted to account for 60% to 70% of available advertising revenues by 2015, according to independent research commissioned by Pact from Oliver & Ohlbaum Associates.[69] This will be helped by commercial networks being likely to see their share of advertising revenue fall more slowly as they raise the price of their advertising to partially compensate for losing share. This has happened with ITV over the last 12 years.

16. Predicted advertising revenues for the terrestrial-based broadcasting groups grow further once their digital spin-off channels, such as ITV2 and E4, are factored in. These groups are likely to account for 75% to 80% of advertising revenues.[70] Their spin-off channels, while not commanding the advertising prices of the main networks, sell at prices considerably higher than other thematic channels.

17. The same broadcasting groups will also continue to dominate spending on new UK programming. The primary commission provided by these broadcasters currently provides 85% of the lifetime income for an average new programme. Despite growth in secondary and ancillary markets such as emerging video-on-demand services, this is likely to remain above 75% in 10 years' time.[71]

18. This will perpetuate the conditions that led to many of the analogue model's restrictions in audience choice, allowing broadcasters to potentially seek an array of additional rights to be "re-bundled" into the price they pay for the primary licence for no additional cost and `warehouse' rights, as we have outlined above.

Developing new funding models

19. Channel 4 chief executive Andy Duncan recently warned that Google would shortly earn more advertising revenue in the UK than his channel. In Pact's view, this should not be viewed as a threat to television. On one level, much of Google's income derives from keyword advertisers, not traditional television advertisers. But more importantly, such new services offer broadcasters, along with content suppliers, an opportunity to develop potential new income streams, while providing greater choice for consumers.

20. This has been shown in the new services that terrestrial broadcasters are beginning to develop. Channel 4's E4 channel has shown robust growth since switching from a pay service to an advertising-driven model. Last year, E4's advertising revenues hit £60 million, compared to £38 million in 2004. We understand that E4 is forecasting between £90 million and £100 million this year. ITV's new participation channel, ITV Play, launched in April 2006 and made £9 million profit in the first half of the year.

21. As Ofcom has pointed out, new services and traditional broadcasting do not have to represent a "zero-sum game."[72]

22. This view has been reflected in Pact's approach to agreeing Terms of Trade with broadcasters based on the Codes of Practice in the Communications Act. We have aimed to allow all parties, suppliers and broadcasters, to generate revenues by offering content to the public as quickly and as conveniently as possible. As the recent Terms of Trade over new media rights demonstrate, Pact has been willing to make concessions in certain highly significant areas, such as a 30-day window that Channel 4 insisted was crucial to its health.

23. These Terms of Trade do not prevent broadcasters from making any other commercial offer to acquire further rights from any producer in order to develop a new service. Indeed, they are structured to encourage broadcasters to acquire further rights on a commercial basis. Furthermore, if the broadcaster does not wish to acquire exclusive rights, it is still able to exploit that content on a non-exclusive basis.

24. Requiring broadcasters to acquire rights at a commercial price should not be detrimental to their wellbeing. Rather, it should incentivise them to exploit those rights in order to recoup their investment by opening up new funding models—and in the process stimulate the programme supply market by allowing creators to share in the value chain.

25. Embracing such opportunities, and in the process providing the public with choice and convenience in how it accesses content, should also help to address IP theft by encouraging the development of commercial on-demand services that bring UK television content to the market immediately after the first transmission. If the public is prevented from accessing content by legitimate means, there is every reason to suggest many people will do so by illegal means. This was clear in the explosion in intellectual property theft in the music industry.

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

27. Many people in the UK are already showing a similar propensity in the television content sector, where the UK market is a leading offender in the illegal uploading of files. According to a 2005 study, 18% of people involved in the unauthorised file sharing of copies of television programmes were from within the UK, the highest of any country.[73]

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

29. Independent producers have been willing and innovative partners in new media for various broadcasters, having been pivotal in such services as broadband factual channel 4Docs or Big Brother's pioneering interactivity. The way forward is for broadcasters and content suppliers to use their creative relationship to develop new ways to provide audiences with content that is as high quality as it has been in the analogue era. In turn, this will provide the public with increased choice in what they want and when and how they watch it.

4. CASE FOR PUBLIC FUNDING OF BROADCASTERS IN ADDITION TO THE BBC

1. Public service broadcasting provides a range of fundamental benefits for the UK public. It guarantees the provision of:

— free-to-air services for all viewers;

— key genres, such as news, children's and religion; and

— programmes for different audiences, eg children, Nations and regions

2. As noted in section 1, plurality in the number of channels offering public service programming has been crucial in providing for a range of tastes and points of view.

3. However, it is clear that that the current regulatory framework governing public service broadcasting will be become less relevant, and that Ofcom may not have explicit powers to require appropriate levels of investment in public service content. If a regulatory solution cannot be found, there is a case for the public funding of content.

"Top slicing"

4. Proposals to "top slice" the licence fee to provide additional funding for commercial public service broadcasters raise a number of questions. Most importantly, if the BBC were to lose investment as a result, this must not come out of programme budgets. Otherwise, the overall level of investment in public service programming would still be reduced and the licence fee will effectively be used to subsidise commercial companies.

Public Service Operator

5. As we mentioned in section 1, Ofcom has proposed the creation of a £350 million-a-year public service operator to complement the BBC. While this broadband platform has some merits, one crucial caveat is the issue of where this significant amount of funding is to come. Again, simply top slicing the licence fee risks damaging other genres of public service content, unless it can ensured that the investment lost by the BBC would not come from programme budgets.

6. We are also concerned over the time frame for the creation of a public service operator. Certain public service genres are already under threat. If the Government or the regulator waits until switchover to create an alternative source of funding to the current terrestrial broadcasters, there is every chance that content creation in some genres—notably children's programming—will already have been wiped out.

7. In children's, ITV has already stopped commissioning new UK programmes. This has removed in one blow the lion's share of funding from the commercial broadcasting sector for British children's programmes.

8. We note that Ofcom's proposals for a public service operator do not include any increase in children's programming, Pact has developed various funding models specifically for children's programming, as we explain in section 5.

5. FUTURE OF KEY AREAS OF PUBLIC SERVICE MEDIA CONTENT SUCH AS NEWS PROVISION AND CHILDREN'S PROGRAMMING

News and current affairs

1. Providing independent news and current affairs programming is an essential part of the fabric of public service broadcasting. This is enshrined in the Communications Act 2003, which requires public service channels to include "high quality" news and current affairs programmes.[75]

2. However, Ofcom recently found that current affairs programmes were being marginalised by broadcasters, stating that:

3. Ofcom adds that "all current affairs programme makers and commissioners interviewed for this report accept that the genre is under extreme pressure in today's multi-channel environment."

4. Regulation excludes news programming from the definition of qualifying hours of independent programming, and independent producers have therefore not been active in this genre.[77] However, Independent producers are capable of producing high quality news programming, and should be able to compete with in-house production for commissions in this area.

5. When independent producers have been able to compete for commissions in genres usually reserved for in-house production, they have produced successful programming.

6. The sustained success of Question Time, produced by Mentorn, over a number of years shows that an independent production company can consistently deliver one of current affairs' most important and accessible programmes.

The crisis in children's programming

7. The UK broadcasting sector has entered a critical period for the future of public service children's programming. As we will detail, children's is a key public service genre under the Communications Act 2003. Yet commercial public service broadcasters are already dramatically cutting back investment in new UK children's programming.

8. This is the result of a gradual but steady decline in the level of new UK programming in the children's genre shown on commercially-funded public service broadcasters (ITV, Channel 4 and Five) over recent years, precipitated a series of factors over the last 12 months that have triggered a collapse in investment new UK children's programming.

Public support

9. The majority of the public values UK-produced children's programming, according to Ofcom's consumer research for its review of public service broadcasting. Ofcom found that a majority of people surveyed agreed that:

— all the main terrestrial channels should have an obligation to show children's programmes (51%); and

10. Ofcom found that parents were concerned particularly about provision for older children being inadequate. Parents are worried that 10-12 year-olds are, as a result of this lack of provision, migrating onto a diet of soaps, MTV and adult content, which is sometimes unsuitable.[79]

11. The public also judged new programmes of all genres to be important. 80% of people stated that a high proportion of first-run programmes was important. Only 27% of people felt that popular programmes from America were important.[80]

12. This supported earlier audience research in ITC's What Children Watch report, which concluded that parents view programming from the UK as culturally important for their children:

13. Investigating the educational benefits, the 2004 Digital Beginnings study found that 96% of parents consider that high quality television programming improves their children's general knowledge, literacy, vocabulary, attention, comprehension, sorting and classification:

Cultural value

14. An appropriate level and range of UK-originated programming is a crucial part of public service children's programming, not least because of television's role in developing children's sense of identity.

15. The UK production sector has traditionally excelled in meeting this demand. Nowhere is the benefit of competition between the BBC and commercial public service channels better illustrated than in the children's genre. The competitive duopoly that emerged in the 70s and 80s between ITV and the BBC created some of the nation's best-loved children's programming, and made the UK unrivalled anywhere in the world in children's programming. Rainbow, Blue Peter, Magpie, Sooty, The Wombles, Paddington Bear and Tiswas are amongst the classic, long-running programmes that emerged from this period of creative competition.

16. Factual programming has created a window onto the world for younger audiences. In this genre, commercially-funded broadcasters have provided programming ranging from magazine formats such as Magpie and the hugely successful Rainbow, which explored language and number concepts, to scientific, historical or wildlife shows like How!, and Prove It!. Arts programming such as Art Attack and The Book Tower has stimulated creativity and reading, while dramas such as Press Gang or Children's Ward have helped children understand social issues or difficult emotional subjects. Classic entertainment has been provided in the form of programmes such as The Sooty Show and Noddy, while Thunderbirds fired the imaginations of a generation of youngsters.

17. Successful contemporary shows from the commercially-funded sector include:

— My Life As A Popat: nominated for Commission for Racial Equality award (ITV).

— My Parents Are Aliens: deals with contemporary family values (ITV).

— Fifi And The Flowertots: promotes environment and health (Channel Five).

— Peppa Pig: celebrates the warmth and humour of family life (Nick Jr).

— A Different Life: teaches about children with unusual lives—from having rare disabilities to living in the South African bush (Five).

— Rooted: follows children travelling to family's country of origin (Five).

— Michaela's Wild Challenge: explores nature and environment (Five).

— Brainiac: science made fun (Sky1).

18. The value of such programming is reflected in the Communications Act, which identifies children's programming as a key public service genre. In detailing the areas on which Ofcom must report in its regular reports on the fulfilment of the public service remit, the Act states that these obligations will be fulfilled if programmes on public service broadcasters:

19. Along with calling for a range of high quality programming within the children's genre, the Act explicitly refers to original programmes. Under the Broadcasting (Original Productions) Order 2004, original programmes are defined as those commissioned by or for a public service channel, with a view to their first showing being on that channel. In practice, this means they typically are UK-originated.

Educational benefits

20. A wealth of research indicates that high quality programming can have a positive effect on children's development. The National Literacy Trust, the UK charity that promotes literacy, has stated that age appropriate television can improve children's attention, expressive language, comprehension, receptive vocabulary, letter-sound knowledge:

21. Research by Jackie Marsh for the University of Sheffield suggests that, for the majority of children, television is not passive. They are inspired to do other things while watching—48% talk to the characters on screen, 77% sing, 69% talk about the programme, and 73% dance.[85]

22. Most recently, a 2006 University of Chicago study of 800 schools concluded that an additional year of pre-school television exposure for the students in the model had slightly raised average test scores. The University of Chicago also concluded that television's positive effects on verbal, reading and general knowledge are largest in households where English is not primary language.[86]

23. Also this year, a British Film Institute report suggested that the impact of high quality television could be more pronounced in lower level occupational households. The report found that between 30% and 40% of households amongst the lowest occupational levels watched more than six hours of television a day, compared to less than 10% households ranked highest.[87]

24. Further exploring the social impact, the 2006 University of Chicago study found that high quality programming can have a particularly beneficial effect for children from minority groups where English is a second or additional language. The report concluded:

Economic value

25. Children's programming accounts for 15% of all UK programme exports (by airtime), the highest genre after film and drama. This is an over performance compared to other countries, testifying to the worldwide reputation of UK children's programmes. The average level of kids exports for other countries is 12%.[89]

26. Children's programming has therefore been a key genre in the UK television sector's recent export success. The UK's market share of overall television exports is 10%, second only to the far larger US industry, and substantially ahead of its closest rival Canada, which is on just 3.9%.[90]

27. A key part of children's companies' export success has been their ability to generate a far higher proportion of revenues from secondary and ancillary sales, including merchandising, than companies manage in other genres. According to research by Oliver & Ohlbaum Associates, UK children's and animation programming generated £105 million in income from the primary commission in 2004, but £219 million in secondary and ancillary use. This means that an average 68% of income from children's programmes comes from secondary or ancillary sources. In comparison, the proportion of income generated from secondary sources for all other UK programmes is just 15.3%.[91]

28. Without the initial investment from the primary commission, effectively acting as a "shop window" for future sales, a company cannot generate the subsequent income from secondary sources and merchandising. The loss of broadcasters' initial programme commission of a programme will therefore have a roughly threefold impact on a production company's turnover, due to the resulting loss of secondary and ancillary sales.

29. Independent production companies will be one of the parts of the children's sector hit hardest by cuts in production funding at commercial broadcasters. Independents produce around 80% of qualifying children's hours for ITV and 84% for Five, the two biggest commercially-funded investors in the genre.[92]

30. The independent production sector is worth more than £200 million in turnover a year in terms of companies specialising in children's and animation. This includes some of the UK's leading television companies, such as Hit (Bob The Builder), Ragdoll (Teletubbies), Entertainment Rights (Postman Pat), and Chorion (Noddy). Aardman Animations (Wallace & Gromit) has acted as a driving force in establishing Bristol as an internationally recognised centre for the production of and training in animation.

Skills

31. The UK children's production sector is renowned for developing highly skilled people who go on to work in other television genres or different sectors. Children's programming provides a microcosm of all television genres, allowing people to cut their teeth in children's drama, entertainment, factual or animation, before moving on to other areas of television or other sectors such as the computer games industry.

32. Over the last 10 years, a proliferation of animation courses has sprung up—Skillset, the sector skills council, calculates that there are 44 colleges offering 159 animation degree courses alone. A decline in the animation production sector will inevitably make it more difficult for graduates to secure employment.

33. The skills involved in creating programmes that communicate with children are highly specialised, and have been developed over decades by UK companies that have built up worldwide reputations. Once lost, however, there is every chance that these skills will be gone for good. Delaying addressing the current difficulties facing the children's sector until switchover in 2012 may well be too late: there could be very little of an industry left to save.

Recent decline

34. Ofcom's figures show that there has been a pronounced decline in new UK children's programming in recent years on commercial public service broadcasters, ie ITV1, Channel 4 and Five.

35. During this period, new UK children's programming dropped at all commercial public service broadcasters. Channel 4's provision fell almost to zero.

36. This decline in programming on commercial public service broadcasters has been mitigated by two factors—the secondary channels dedicated to children on, for example, cable and satellite, and the BBC. Both are providing welcome additional investment (if modest in the case of the secondary channels), but both come with significant caveats.

37. In regard to the secondary channels, we urge caution over Ofcom's figures regarding the levels of new UK programming that are broadcast on these services. Pact understands that much of what is counted as British on these channels is, in fact, imported cartoons tied together by short pieces of UK-shot footage and continuity links. In reality, the vast majority of programming on secondary channels is imported programming, often originated by their parent companies in the US.

38. Based on best available figures, Pact estimates that secondary children's channels invest at most £6.6 million a year in new UK kids programming. This is a quarter of what ITV1 invested before it stopped commissioning new UK children's programming, as we will explain in the next section. This £6.6 million is a welcome injection of funds into the sector, but cannot be seen as a replacement for the complete withdrawal by commercial public service broadcasters.

39. We estimate that the secondary channels have to date barely compensated for the gradual drop in new UK children's programming on commercial public service broadcasters in recent years. However, this was until the current crisis sent investment levels plummeting, as we detail in the next section.

40. Crucially, however, such secondary channels have only limited availability. Only 72.5% of homes receive multi-channel television on their main set and seven million homes still have no access to digital television, according to Ofcom.[93]

41. The BBC has been another compensatory factor, significantly increasing its provision through the welcome launch of the CBBC and CBeebies channels. This has been enough to ensure that the overall amount of new UK children's programming has increased in recent years.

42. In the process, the BBC has become by far the biggest commissioner in the sector. From 1998 to 2004, the BBC went from commissioning around 40% of new UK children's hours on all public service broadcasters to around 60%. Although the BBC's investment is now more vital than ever for programme-makers, its increasing dominance has paved the way for a near monopoly in the sector as a result of the current crisis, as we outline in the next section.

Current crisis

43. As we have outlined above, the level of new UK children's programming on commercial public service broadcasters has declined gradually in recent years. Now, however, it is experiencing a crisis. Over the last 12 months:

(a) ITV stopped commissioning new UK children's programmes 12 months ago. It has continued with this policy despite Ofcom's ruling that it is not allowed to cut the amount of children's hours it broadcasts each week. Furthermore, it has also cut the total number of hours of children's hours to just two per week for January, despite Ofcom's ruling. At time of writing, ITV claimed that this was a temporary move.

(b) Pact understands that Five's commissioning of new UK programmes for older kids (outside the so-called pre-school genre) is under severe pressure. We have written to Five requesting confirmation of whether it is cutting commissioning of new UK programming for older children and await a reply. After ITV, Five represents the single biggest source of investment in new UK children's programming, investing £4 million-£5 million a year.

(c) Ofcom has introduced significant restrictions on advertising around children's programming. While Pact absolutely accepts these restrictions in view of the need to protect children's health, this will act as a further disincentive for commercially-funded broadcasters (ie ITV, Channel 4, Five and the secondary children's channels) to invest in new UK children's programmes.

44. These factors have combined to leave a gaping hole in funding for new UK children's programming outside the BBC. ITV's decision to stop commissioning has removed the biggest investor in new UK children's programming outside the BBC in one stroke. ITV invested around £22m a year in new UK kids programmes; between them, all other commercially-funded broadcasters, including secondary channels, provide around £10 million.

45. Ofcom's advertising restrictions will kick in in 2007. Ofcom anticipates a loss of £39 million in advertising initially. This amounts to more than the total amount (£30 million-£35 million) that all commercially-funded broadcasters spent on new UK children's programmes each year before ITV's withdrawal. Now that ITV has stopped commissioning, it represents nearly four times the total amount spent on new UK children's programming (about £10 million).

46. After broadcasters find alternative advertising revenues, Ofcom estimates the impact from its restrictions will fall to £23 million a year—still more than double the total spend on new UK children's programming by all commercial channels.

47. This is enough to decimate all new UK programming outside the BBC. New UK programmes, which require a greater funding commitment than simply buying in imported programming largely financed by overseas broadcasters and public subsidy from abroad, will be amongst the first areas to be axed in order to make up for lost advertising revenues. Some already have been.

48. Five has responded to the advertising restrictions by publicly stating that:

49. The table below represents Pact's calculations based on best available data of recent and future levels of investment from commercially-funded public service broadcasters in new UK children's programmes.

50. To explain our methodology, we understand that ITV has in recent years spent £20 million-£25 million on new UK children's programming. However, ITV closed down its in-house children's production department last year and has not had a children's commissioner for the past six months. To Pact's knowledge, ITV has not commissioned a new UK children's programme from internal or external suppliers for the last 12 months. This has reduced its investment in new UK programming to zero.

51. Channel 4 is currently not commissioning any new UK children's programmes, while Five is expected to scale back children's programming in genres other than pre-school (we have written repeatedly to Five and are awaiting a response to confirm this).

52. According to Five, it has traditionally spent £4-5 million on new UK children's programmes; we have based our estimates for its future spending on Ofcom's calculations for the impact of its advertising restrictions on Five, which we estimate to amount to a £2.1 million loss in revenues.

53. Based on best available date, we estimate that the secondary channels (Cab/sats) spend £6.6 million on new UK kids programming a year. Based on Ofcom's estimates for the impact of its advertising restrictions, we have predicted a drop in spending of around £4.7 million.

Future funding models

54. Pact welcomes the Select Committee's decision to review the provision of children's programming as part of this inquiry, as well as Ofcom's forthcoming review of public service content. We are asking the Secretary of State for Culture, Media and Sport to launch an urgent review of funding for children's programming in order to sustain this world-class sector and ensure that a high level of new UK programming is widely available to the public. We urge the Select Committee to support us in this request.

55. Pact has been developing alternative public funding models for children's programming. We outline below a proposal for a Children's Production Fund, which will invest in suitable UK children's productions.

56. We also detail alternative models of public funding provided in other countries. In two of these examples—Australia and Canada—there are also restrictions on advertising around children's programmes, as Ofcom recently introduced in the UK. By investing in children's programming through a variety of public means these countries have been able to protect children from certain advertising while enjoying strong indigenous children's production sectors, ensuring that their citizens can make and watch their own stories. In these examples, investment comes essentially in four forms:

(a) Direct investment from Government, eg Australia's Film Finance Corporation.

(b) Public-private partnership, as in the case of the Canadian Television Fund, which is financed by the Department for Canadian Heritage and cable and satellite broadcasters.

(c) Regulations on commercial broadcasters such as quotas obliging them to broadcast a certain amount of hours of domestic content or invest a certain amount in types of programming (Australia has both).

(d) Tax incentives for investing in local production.

57. In Australia and Canada's case, Government-backed incentives have established these countries as magnets for international co-productions, attracting investment into local economies from around the world.

58. In the Republic of Ireland, a combination of tax incentives and public funding, has helped create an internationally renowned animation industry. The current period of success has seen animation companies export successful shows across the world. Magma Film's 2006 animated feature film The Ugly Duckling And Me sold to 23 countries worldwide, while Brown Bag's television series I'm An Animal sold to 15 international broadcasters.

59. We have also included a summary of UK support for the film industry, as the conditions affecting cinema are comparable to those for children's television. Both are seen as having a public service or cultural value, and both suffer from a market failure. In film's case, that market failure is the domination of distribution by US studios with their own supply of imported films; in children's television, Ofcom's recent regulation restricting advertising has created a market failure by undermining broadcasters' ability to attract the advertising that they need to fund production.

Public funding models for children's television

Australia

1. Restricted advertising during children's programming, ban during pre-school.

2. Significant public funding for children's production: Film Finance Corporation (main public funding body) invests more than half of its total television spend on children's programming (£7.2 million per year).[95] This is a significant investment considering that the total value of the children's production sector in Australia is £34 million a year.

3. Film Finance Corporation is a wholly-owned Government company funded on a triennial basis which supplements state support with revenues that it recoups from the productions in which it invests. The programmes in which the Film Finance Corporation invests are also financed by private sector partners.

4. Commercial free-to-air television channels required to air a certain amount of new, Australian children's programming and invest in local children's production. Pay TV drama channels subject to compulsory expenditure on new Australian drama.

5. Tax incentives for films and TV series.

Canada

1. Quebec restricts advertising directed to under 13s.

2. Canada provides significant public funding: £18 million a year invested in children's programming across the country via the Canadian Television Fund.[96] The fund is a public-private partnership, financed by the Department of Canadian Heritage and cable and satellite broadcasters.

3. 60% of broadcasting schedule must be Canadian content.

4. Tax incentives on regional and national level worth an estimated 15-40% of budget.

France

1. State investment in animation production worth approximately £12 million annually from main public agency, the CNC.[97]

2. Additional state funding for children's genre from CNC as well.

3. Broadcasters required to ensure that 40% of all programming is French.

4. Plus tax incentives.

1. Generally the market is much freer—children's programming open to product placement unlike in the UK; no restrictions on type of advertising around children's programming.

2. The Corporation for Public Broadcasting is the largest single source of public funding for public television and radio programming, with revenues of around $480.4 million, mostly from Congress.

3. Sesame Workshop (formerly known as the Children's Television Workshop), the non-profit organisation behind Sesame Street, receives funding from the US Department of Education, the Corporation for Public Broadcasting, the Carenegie Corporation of New York and the Ford Foundation.

4. The Children's Television Act requires each channel that offers children's programming to serve the educational and informational needs of children through its overall programming, including core educational programming. Core programming is defined as programming specifically designed to serve the educational and informational needs of children ages 16 and under, and television stations must air at least three hours per week of core educational programming. These regulations have recently been updated to apply to digital broadcasters as well.

UK film industry

1. Comparable to children's television production sector because a) acknowledged cultural value, b) market failure in both (in film—distribution is owned by US studios; in children's television—regulation has restricted advertising).

2. UK film benefits from around £50 million a year in investment through the National Lottery.

3. Tax credits provide filmmakers with approximately 15-20% of production budgets.

Republic of Ireland

1. Significant tax incentives for film and television production through the section 481 clause. A 2002 report from Screen Producers Ireland estimated that the clause provided the Government with a 3:1 return on its investment. This report also stated that due to the beneficial tax incentives, Ireland is one of the most favoured international locations for US producers. Unlike the UK film tax regime, the Irish tax credit is open to television producers as well.

2. RTE, the Irish national broadcaster, benefits from both government funding and advertising revenue. The Broadcast Funding Act 2003 allowed for an increase in RTE's funding as long as 5% of the rise went to the Broadcasting Commission of Ireland (BCI) to set up an independent production fund, known as the BCI Sound and Vision Fund. This is worth about Euros 8.5 million a year. It is aimed at funding independent television and radio productions that reflect Irish culture, heritage, experience, the Irish language and adult literacy. Children's programming is specifically highlighted as a genre eligible for support.

3. Irish Film Board has a budget of Euros 14 million and is open to television series.

Wales

1. Finance Wales runs the £7 million Wales Creative IP Fund as part of the Welsh Assembly Government's strategy for the creative industries in Wales. The fund acts as a gap financier, investing in a production alongside other funding.

Isle of Man

1. The Isle of Man Treasury introduced a £25 million development fund for television and film production in 2002.

2. The Isle of Man also provides production credits for television worth up to £350,000 per production.

A children's production fund

Size

The size of the Children's Production Fund would be £23 million a year, the same as Ofcom's estimated impact on revenues of advertising restrictions after mitigation. This should be reviewed after a period of two years once the real level of anticipated cuts in children's programme budgets is clear.

Type of programmes

The fund will be required to invest in a diverse range of programming across all children's genres. It will publicly declare the percentage of funds earmarked for each children's sub-genre each year.

The fund will invest in a minimum number of hours, which it will publicly state each year.

Who qualifies

The fund will be open to qualifying independents.

The fund will be required to invest in a diversity of suppliers.

Any project which secures investment from the fund must qualify for UK nationality under the cultural test guidelines set out by the Department for Culture, Media & Sport for film.

Investment criteria

The fund will invest a maximum of 30% of the production costs of any one project.

The fund will recoup pro rata and pari passu with other finance.

The fund will have a revenue corridor against the sales agent/distributor where the agent/distributor is recouping sales advance.

Once the fund has recouped its investment in a project and a contribution to the overhead and running costs of the fund, it will receive additional income worth one third net of the percentage of equity invested, capped at 10%. The remaining two thirds net will count as producer equity and be recouped by the producer.

The fund will require that it has the opportunity, if it chooses, to invest on an equal basis in the second series of any series in which it invests.

Editorial control remains with the broadcaster. However, the fund will only invest subject to approving a financial plan and may seek additional information and assurances from any other financial party.

Any project other than animation which secures investment from the fund must have a UK broadcast only licence worth a minimum of 50% of its budget.

Animation projects must have 25% or more of their budget secured from UK sources, including a broadcaster.

In the case of all projects, this can consist of licence fees from more than one UK broadcaster, for example deals with a terrestrial and a secondary channel.

Training

The fund will require that productions in which it invests contribute a significant amount to the IPTF, the charity that funds training via voluntary contributions from independent television production companies (administered by Pact). Contributions from productions are set at 0.25% of production budget (cap £8,750).

January 2007

28 Communications Act 2003, Section 264 (6) (h): In detailing the areas to be included in Ofcom's reports on the fulfilment of the public service remit, the Act states that obligations will be fulfilled if programmes on public service broadcasters: "include what appears to Ofcom to be a suitable quantity and range of high quality and original programmes for children and young people." Back

29 Review of Public Service Television Broadcasting, Phase 1, Ofcom, page 49. Back

30 Communications Act 2003, section 278 (1) (a). Back

31 Ofcom Review of Public Service television Broadcasting, Phase 3-Competition for Quality, page 7. Back

32 Review of the Television Production Sector, A Consultation, Ofcom, January 10 2006, page 1. Back

33 Prospects for Independent UK Production to 2010, Oliver & Ohlbaum Associates, September 2006. Back

34 Review of Public Service Television Broadcasting, Phase 1, Ofcom, page 49. Back

35 Review of Public Service Television Broadcasting, Phase 2, Ofcom, 5.13. Back

36 Charter Review White Paper, A public service for all: the BBC in the digital age, March 2006. Back

37 Five chief executive Jane Lighting, Mediaguardian, 17 Nov 2006. Back

38 Review of Public Service Television Broadcasting, Phase 1, Ofcom, page 49. Back