Joint Committee on Draft Communications Bill Report


Implications for Investment:

Note of discussion meeting 4 July by Julian Dickens, Specialist Adviser

The Committee was joined for breakfast by Kitty Usher, Bernard Balderston: Procter & Gamble, Sally Davies, John Enser: Olswang Solicitors, Eileen Gallagher: Shed Productions & PACT, Mark Thompson: Channel 4, Marc Vlessing: ProVen (private equity investment), Christina Willoughby: Chrysalis & BTDA and Julian Dickens: Specialist Adviser to the Scrutiny Committee, and Andrew Starling.

The following key issues were discussed:

Sally Davies

This session saw the discussion of concerns that the entry of a US major into the UK market is likely to lead to the UK media market being used as a small part of a company's international operations. It was confirmed that the economics of the television business in the US necessitates the exploitation of content across as many international distribution points as possible. Where distribution points are owned and operated by a US major the pattern is for an increasing percentage of content to be sourced in-house.

In the US developing successful TV programming is very expensive. A large studio can have up to $250m invested in programming in any one season and international sales become a key mechanism from which to generate incremental revenue. Therefore an owned and operated channel overseas is an important way for studios to generate revenues, as the studio can control the content that is shown on the channel. This trend towards in house exhibition would have two likely effects - both the reduction of access for UK producers, and the removal of key US programme franchises from third-party, competing broadcasters.

The use of production quotas was raised as a possible mechanism to prevent US majors swamping UK assets with US content. However it was noted that these restrictions only safeguard the quantity of independent productions shown (at least 25%) and not the 'quality' of them. The concern was expressed that independents could be granted access for 'cheaper' programming slots and will lose access relating to more valuable forms of programming, including formats, drama and series, with these slots being reserved for 'in-house' productions from a US studio.

It was suggested that the loss of key programming rights from the open market would not occur, since a production division of a US merger would not seek to place all its content on an owned channel, but would continue to sell it at a premium to the highest bidder. In return it was pointed out that a 'matching rights' mechanism would both ensure premium return, and keep key franchises in house. It was also noted that pay rights to almost all key Fox Television programming had been sold to Sky in recent years. News Corporation has indeed made an explicit virtue to analysts of its ability to place its own product on News Corporation distribution outlets.

In summary, it was suggested that the US majors must be viewed as huge international production and distribution machines. The US domestic market is critical - other markets are peripheral.

It was suggested that issues of programming supply and access are not necessarily able to be addressed effectively via existing competition remedies. In particular it was noted that the UK does not have the same anti-trust regulations that are present in the US that protect smaller companies against larger corporations.

Finally, the point was raised in discussion that protecting ITV against foreign competition is likely to lead to the continuation of a badly managed ITV that is likely to wither within the UK market. Taking an overprotectionist route therefore is not in the best interests of the UK media market. By contrast, opening the market to US investors would bring inward investment, expansion and job creation. It was noted in response that when Disney bought ABC it quickly cut costs and merged operations. ABC International (ABC's international programme sales operation) was reduced from 200 staff to two within a few years of the acquisition, with the operations being handled by Disney staff. The same impact could be expected to be felt by the sales operation of a UK company in the event of a purchase by a US major (e.g. Granada International).

Marc Vlessing, UK private equity market

The private equity market is only likely to take a more direct interest in UK media at the point a viable exit can be envisaged. The pre-requisite to any investment is that there is a commercial business of substance, but the key to attracting investment is identifying a reliable exit strategy. If the Communications Bill allows US players into the UK market the private equity market is therefore likely to be more interested in taking an investment in other market players - such as independent producers - in expectation of a possible trade sale in due course. The UK production market is already dominated by 12-14 key companies that produce 80% of programming. Private Equity companies have considered investing, but are unsure of the exit strategy.

However, even remaining US entry barriers would not guarantee immediate market entry. The most likely long-term media company investors are - to different degrees - facing a range of short term financial obstacles at the current time. Shareholders and financial markets are unlikely to view a foreign acquisition favourably in the near future. Over time, however, it must be expected that they will recover, at which point UK media companies would become likely targets for US buyers.

By contrast, reciprocity is unlikely to allow UK (or even European) media companies to achieve success in the US market as these companies do not have the required scale. Reciprocity as a mechanism to protect the UK market is largely seen by the investment community as a 'red herring'.

Overall, it was suggested that economic ownership is a misplaced tool to manage the UK media market; rather, ownership should be open, with reliance on legislation governing original content, access for independents, and restrictions on intra-group trading of rights (e.g. UK 'fin-syn' regulations) to create a dynamic market rather than changes in ownership regulations. All of these measures would contribute to making independent producers stronger. Currently the independents, while creatively good, do not have a library or ownership of assets to make them strong self-standing businesses. One mechanism to address such concerns could be a UK equivalent to the US 'fin-syn' regulations; others suggested a code of conduct to safeguard the UK independent production sector.

Would the best UK independent production companies end up being sold to US majors? If it is US majors that have invested in the UK then they are the likely buyers, but it could equally be French, Italian or German companies too. Talent also has a proven history of following opportunity and are unlikely to support production companies that do not have a proven track record.

It was suggested that although under this scenario there would indeed be investment in UK production, this would in practice only lead to a sale to a US buyer in due course anyway. It was accepted that this was the likely outcome. If US majors invest in the UK then they will be the likely buyers, but it could equally be French, Italian or German companies too.

Bernard Balderston, Procter and Gamble

Advertising is a critical element in the funding of the UK media industry. Proposed legislation needs to have regard for advertisers in the proposed changes. Advertisers require a strong commercial sector able to attract programmes and large audiences.

However, further consolidation of ITV presents a number of problems for advertisers as a result of its impact on advertising sales. There is no substitute for ITV for advertisers and if consolidation is allowed to happen ITV's dominance of the advertising sales market will lead to price increases. In addition the remaining sales houses are likely to be forced to merge to retain any ability to compete. In turn that will result in fewer selling points and, again, inevitably higher prices.

This would be a retrograde step from a relatively competitive and balanced advertising market. Advertisers are not convinced that a 'quasi-independent' sales house will be able to achieve independence. Advertisers will lobby for a referral to the Competition Authorities if a merger of Carlton and Granada is proposed. There was general agreement that a combined ITV sales house would raise competition issues.

The role of sponsorship becoming an increasing part of the advertising mix was raised; however it was felt that in the medium term spot advertising would remain the dominant form of advertising.

Christina Willoughby, Chrysalis

It was strongly proposed that if ITV consolidates, the two existing ITV international rights sales houses would be combined, reducing competition in the market. If a US major were then to purchase ITV the sales operation would be merged into the catalogue sales operation of the US major. The impact would be that specialists in UK programming are lost, to be replaced by generalist programme sales operatives. The ability of UK programming to maximise foreign sales opportunities would therefore be expected to decline.

John Enser, Olswang

Competition law can be an effective remedy in certain circumstances; for example, pay-TV rights markets (sports, movies). However, effectiveness depends on there being an enforcement mechanism that can act where market distortions are occurring, and within an acceptable time-frame. The historical performance of the ITC is not impressive in intervening with competition-based complaints. The challenge for competition law is enforcing it effectively and in a timely fashion.

The issue of funding for competition investigations was raised. In addition, the ability of UK competition culture to aggressively target companies infringing competition regulations was questioned. Finally, concern was raised over the issue of recruiting experts that could understand the market and carry out the necessary interventions. Does the Communications Bill equip authorities with the right power, authority and funding? Fin-Syn was a very effective mechanism to protect the programming sector in the US and may be a model worth investigating for application in the UK.

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Prepared 31 July 2002