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
The following key issues were discussed:
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
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
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
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
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
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
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.