Culture, Media and Sport CommitteeWritten evidence submitted by Discovery Networks

1. We welcome the opportunity to submit evidence to this inquiry into support for the creative economy, which we believe is timely, as it taps into a growing concern we have about a possible weakening of the UK’s appeal as a hub for international broadcasters.

2. We share the Government’s view that the creative industries have a strong potential for growth. Within those creative industries, the multichannel television sector has already demonstrated that it is capable of growth. Figures from Discovery’s trade association The Commercial Broadcasters Association (COBA), reveal that COBA members invested £623 million in UK television content last year, an increase of 31% year on year from 2010.1

3. Like Discovery—which has chosen the UK as HQ for its European, Middle East and Africa operations—many of these COBA members are international broadcasters who have chosen to locate their European operations in the UK, bringing important inward investment into the country.

4. The UK has much to offer an international media organisation. Discovery has decided to use the UK as a hub for its European broadcasting and production because we can benefit from a strong skills base, established infrastructure and a relatively benign regulatory framework. However, the UK also has competitors for the role of hub and in a tough economic climate, where technology means that jobs can move seamlessly to other jurisdictions, the UK must ensure its appeal is not eclipsed by others.

5. To retain—let alone grow—its status as a world-leading media hub, the Government needs to understand the critical factors at play in determining where international businesses locate themselves, and do what it can to ensure that the UK continues to represent an appealing business proposition.

6. For Discovery, there are two ways at present in which the UK could increase its support and improve its appeal as an international business hub—a tax incentive scheme that supports documentaries as well as drama productions, and a continued support of the Country of Origin Principle within the AVMS Directive, which allows us to continue to license 70+ international channels from the UK, with the legal certainty that the UK’s regulations will be enforced over those of other jurisdictions.

The UK as a European Hub for International Business

7. Discovery Communications is the number one non-fiction media company in the world, reaching more than 1.8 billion cumulative subscribers in the world in 210 countries and territories, broadcasting globally in 43 languages.

8. We have chosen to base two of our regional operations in the UK—Western Europe and Central & Eastern Europe, Middle East and Asia (CEEMEA)—and hold more than 70 Ofcom licences for channels across the whole of Europe.

9. Discovery’s investment in the UK is considerable:

We spent around £200 million in the UK in 2011 (including all programming, salary and business costs) and employ more than 500 permanent staff in the UK.

We are a core player in the wider broadcasting ecology in the UK. We commission from around 70 independent production companies in the UK and have a strong and successful co-production relationship with the BBC, which has produced ground-breaking natural history documentaries including Planet Earth, Blue Planet, Walking with Dinosaurs and Life.

10. Importantly, Discovery is reflective of the wider multichannel sector in terms of UK investment and the importance of the UK as an EU hub, as a recently published Oliver + Ohlbaum report,2 commissioned by the Commercial Broadcasters Association (COBA), shows:

COBA members are significant UK investors, spending £623 million on UK TV content last year (an increase of 31% year on year from 2010) and are worth £4.2 billion per annum to the UK economy.

The sector has increased direct UK employment by more than 8% since 2010, employing 9,000 people directly and 47,000 indirectly.

11. Crucially, much of this investment from COBA members is inward investment: the UK is the biggest European hub for TV investment amongst COBA members and UK investment amongst this group is higher than all the other European markets combined.

12. International broadcasters like Discovery are drawn to the UK thanks to its strong skills base, established infrastructure and a relatively benign regulatory framework.

The Internal Market for Broadcasting in the EU Needs Support

13. The EU’s Audiovisual Media Services (AVMS) Directive provides the basis for television legislation across the EU, setting out minimum rules on advertising, content standards, child protection, product placement and sponsorship, EU works and access services among other things.

14. The Directive’s Country of Origin Principle was designed so that service providers can license a service in one EU Member State but offer that service across all other EU jurisdictions without the need to comply with any additional rules. This is why Discovery is able to hold UK licenses for the majority of its European broadcasting operations. The principle is also reflected in the Council of Europe’s Trans-Frontier Television Convention which applies to European countries which are not EU members providing they have signed and ratified the Treaty. Discovery also makes use of this Treaty to broadcast from the UK to countries such as Turkey and Ukraine, without the need for additional licensing.

15. For any international broadcaster relying on the legal certainty of being able to base itself in one Member State and be subject to its rules across the whole of the EU and further afield, any weakening of the Country of Origin principle can have a serious negative effect on that legal certainty, and seriously undermine the rationale for creating a single European hub from which to operate.

16. Discovery is concerned that this important principle has been weakened in recent years and that it is increasingly being challenged by Member States, who believe enforcing local rules is more important than furthering the principles of the internal market for broadcast. Examples of this shift in attitude have manifested themselves in the following ways:

Member States threatening to block signals or prosecute individuals where local regulations relating to advertising or protection of minors differ from UK regulations.

Member States using the Authorisations Directive to insist that any broadcaster wishing to broadcast on DTT platforms is locally licensed and follows local content rules, despite the apparently platform-neutral basis of the AVMS Directive and a clause in the Authorisations Directive which stipulates that only technical rules and not those relating to content can be applied in this case.

Countries which are signatories to the Trans-Frontier Television Convention demanding local licensing in contravention of the Treaty or compliance on pan-regional feeds which happen to touch on their jurisdictions.

17. Discovery believes that to ensure the UK remains attractive as a broadcast hub, the Government has to make a strong defence of the Country of Origin principle. If it is undermined there is a risk that it will not be possible for broadcasters like Discovery to take full advantage of the possibilities put forward by a genuinely open market in content.

The high-end TV tax relief should apply to high-end documentary productions

18. In the March 2012 Budget, the Chancellor of the Exchequer announced that the Government will introduce corporation tax reliefs for the animation, high-end television and video games industries from April 2013. HM Treasury has recently consulted on the rules that will apply to high-end television productions, and the Department of Culture, Media and Sport is on the Cultural Test that will apply to the relief.

19. In response to both these consultations, Discovery has argued that the relief must be designed so that high-end documentaries, as well as dramas, can qualify if the UK is to avoid losing its status as a world-leading centre for documentary making.

The UK’s position as a leading documentary centre is under threat

20. Thanks to the commissioning power of the BBC and the highly skilled workforce that has built up around it, the UK has been a globally-acknowledged centre of excellence for documentary production for a number of decades. However, this position is now under threat:

The UK is unique amongst the core international documentary production markets in its lack of provision of tax incentives for television documentaries. Unlike the UK’s proposed tax incentive, similar schemes in Australia, Canada, the US (at Federal as well as State level) and Ireland3 offer incentives to factual as well as fiction productions.

The UK also faces competition from emerging markets: demand for documentaries in China and India has encouraged the growth of production facilities in Singapore and South Africa, both of which are offering tax incentives for local production.

The international documentary market is characterised by a small, highly-mobile pool of top talent. Thanks to technology, producers and editors can be based anywhere, meaning a programme to be researched in the UK, filmed in Africa, and post-produced in the US.

21. As a consequence, while there has been an increase in UK production from multichannel broadcasters such as Discovery, investment in “big ticket” productions or “super-docs” has tended to be made in places where a 10–20% rebate is available.

22. Unless an appropriately targeted tax incentive is developed to redress the balance, an increasing number of productions that would otherwise have located in the UK will be lured, along with UK talent, to overseas markets where generous financial incentives are available.

How should the proposed tax relief be amended?

23. The main barrier to documentary productions qualifying for support is the proposed cost per hour threshold of £1 million, which does capture the very top end of drama productions but not factual programmes, where average costs per hour are significantly lower,4 in part because much lower expenditure is required for on-screen talent. Lower per hour costs are matched by lower budgets for factual productions. For example, the BBC’s commissioning tariff only allows a maximum of £300,000 for even “the most ambitious factual programming”, compared to the top category in BBC drama which has a commissioning tariff of up to £900,000.5

24. The difference in production costs is recognised in the tax incentive schemes of the UK’s competitors. Discovery’s research shows that most jurisdictions6 report a cost per hour of around £650 000 for high-end documentary productions compared to that of closer to £1 million for scripted drama, with only the top 3–4% of high-end documentaries produced annually reaching that £650,000 threshold.

25. In order to ensure only genuinely high-end documentaries qualify for any tax incentive, most jurisdictions also make use of tightly-written definitions. For example, Screen Australia funds documentaries but is very clear that it ‘does not invest in programs such as reality or magazine television, infotainment, current affairs, cooking, how-to, sports programs, or projects whose primary market is the education sector.’ They use the regulator, ACMA’s very detailed definition of “documentary” for this purpose.7 The Irish scheme includes “creative documentary” in its tax break scheme, providing a very detailed definition.8

26. In order to keep pace with its competitors, Discovery therefore proposes that the UK incentive scheme includes a cost per hour threshold of £650,000 to a very narrowly defined genre of “documentary” productions, adapting rival tax schemes’ definitions of “documentary” for that purpose.

27. A few amendments to the proposed Cultural Test are also required to allow high-end documentaries to qualify. The Test proposed in the DCMS consultation is geared towards drama productions, with language such as “actor” and “character”, which is not always appropriate for non-fiction programming. The Film Tax Relief Cultural Test (which the TV Test is heavily based on), addresses this issue by making a series of exceptions to documentaries only, allowing the nationality of the “narrator” rather than the “character” to count towards the required total.

28. Discovery therefore recommends that the high-end TV tax relief cultural test adopts similar exceptions for documentary productions as are used in the film test.

29. We believe that by making minor amendments to the proposed tax relief scheme, the UK Government can do a great deal to support the UK’s documentary production sector. If the proposed incentive goes ahead but does not enable high-end documentary productions to qualify the UK risks (at best) losing the opportunity to attract an additional slice of the growing global market for premium factual television production and (at worst) a significant loss of future factual productions, which will increasingly be lured away by the UK’s international competitors’ financial incentives, despite its reputation as a centre of excellence for documentary production.

Conclusion

30. Discovery believes that the UK Creative Economy is strong and has the capacity to be even stronger. However careful consideration should be given to the potentially limiting effect on the development of the UK as a hub for the creative industries if it does not review regularly what the elements are that make it attractive in the first place to business and ensure that it remains competitive with other markets.

31. The global downturn has alerted more than one country to the possibilities that creating a creative industries hub can bring. Many have moved to provide tax incentives for production, games and animation. Many can offer the latest technology and skilled workforces. The UK needs to be able to offer all this and more if it is to remain attractive as a hub.

32. Another element which makes one market more attractive than another for industry is the level of regulation and consistency in its application. The UK is strong in this area but, as a market which is considered as a hub for international broadcasters in Europe, it needs to be a strong guardian of the internal market principles contained within the relevant Directive and it needs to be aware that any changes it makes to regulation in the UK will have an immediate and direct effect on channels outside the UK which are licensed here.

33. Most importantly the UK needs to ensure it has the flexibility within its legislative and regulatory arrangements to deal with the inevitable changes likely to come about as the content market continues to evolve. There should be discussion of whether or not the existing regulation for broadcast continues to be fit for purpose. There should be constant vigilance to ensure the UK remains as attractive in the future as a hub for the creative industries as it is now.

November 2012