Examination of Witnesses (Questions 1-19)
MS PATRICIA HODGSON, MS SARAH THANE AND MR RICHARD PEEL
THURSDAY 23 MAY 2002
Chairman: Good morning. There are rather more of you than expected. It is a little like a first-night audience! Welcome, Patricia, and thank you very much indeed for a really exemplary paper. I learned a lot and I am really grateful to you and your colleagues for allowing us to feel smart. Now I will try and prove it!
1. This is essentially, so the Government assures us, a deregulation Bill, but a lot of concern is going to be about content. The Bill gives powers to OFCOM to give responsibility to the Content Board. Do you think those powers are right and how do you see the balance if we do are not to end up with an organisation that knows the price of everything and the value of nothing? How is OFCOM going to balance its twin responsibilities, its technical responsibilities and, one might say, its more cultural responsibilities, and will they all rest with the Content Board?
(Ms Hodgson) Well, the draft Bill makes it clear that the Content Board will carry out the content, audience research and media literacy functions. That seems clear enough. We think its statutory basis, the fact that its members will be paid, as it says on the face of the Bill, and the intrinsic interest in the issues that will be its responsibility will underpin its standing and authority. We also think that it reassures the public and stakeholders in two ways: first of all, that there will be due focus on important issues of editorial standards and content quality; but also that those issues will be taken by this Board and will not overwhelm the Commission, the main Board, because it will be important that the main Board is able to take an overarching economic view and to be clearly seen to reach decisions where it balances what competition can deliver in the interests of the public and where there may need to be some regulatory intervention. I do not know whether Sarah wants to comment on how she sees some of the responsibilities of the Content Board.
2. When she does, she might also say whether she would like to see any more responsibilities actually written on to the face of the Bill rather than left to the discretion of the OFCOM Board.
(Ms Hodgson) My immediate response to that is that if what is on the face of the Bill viz content issues taken by the Content Board is not strong enough, I would be surprised and any body has to be able to develop in the light of experience. I am quite nervous about detailed prescription, but, Sarah, what do you think?
(Ms Thane) Well, I certainly agree with what you have just said. I think you have got to strike a balance between there being the overarching clauses about the sort of things that the Content Board will look at and not spelling out too many individual items because that obviously will be for the Chairman and the Board of OFCOM to determine. Why I think the Content Board is so important is that it offers that all-important lay input and direction on content issues. It is very important that professional staff within OFCOM work with representative lay members in these incredibly important cultural and social areas of broadcasting. I would have thought that the Board would naturally lead on behalf of OFCOM on code-making and review, revision of codes redress, fairness and privacy issues, on overseeing complaints and monitoring trends in broadcasting. Obviously there is the whole Tier Three public service remit side of it which they would have a key part in and presumably on the radio side as well as, as Patricia mentioned is explicitly in the Bill, audience research and media literacy, and clearly as you move towards a more complex media environment for viewers and consumers, this new function for OFCOM in promoting and developing media literacy is a critically important one which I think would have to be devolved to the guidance of the Content Board.
3. So you do not see, having promised us light-touch regulation, that the Content Board is going to become a super-nanny for the communications industry?
(Ms Thane) I would hope not. I would hope it would play a proper role in interfacing between viewers and the main Board and it would be looking at high-level issues and guiding staff and liaising with the stakeholders. It has got a particularly important function, I imagine, in audience research and keeping abreast of what viewer expectations are.
(Ms Hodgson) Perhaps I could just add a point there. We think the general intention of the regulatory clauses is the right one, that they envisage a high-level public service remit and then flexibility for OFCOM to apply that as the market changes. I think perhaps for reasons of time those clauses are more detailed and possibly not quite as clear as they might be and they give a rather over-detailed and interventionist flavour. I think our view of that part of regulation going forward is pretty high level and simple, that the quality of content should rest on investment targets rather than bureaucratic programme-by-programme intervention, that there should be simple remits for the commercial licensees that OFCOM can vary as the commercial market changes, and that self-regulation under Tier Three is genuinely self-regulation, but rooted in the high-level external pressure of annual independent reports to this House that are available to the licensee boards, to the Governors of the BBC, to Parliament and to Ministers so that where back-up powers are needed, they are rooted in something objective and independent.
4. You make a very welcome differentiation between the consumer and the citizen. How do you envisage the Content Board amplifying that differentiation and what is the role of the Content Board in sustaining that differentiation?
(Mr Peel) I think the distinction between consumers and citizens will be or should be made very clear. We welcomed the idea of the Consumer Panel. We have a concern that the Consumer Panel might drift into consideration of content issues, but we think with a proper structure in place, and we are advocating the establishment of content panels around the country to replace the current Viewer Consultative Councils, we would expect that these panels will be more representative than the current Viewer Consultative Councils in the sense that they would, for example, ensure that significant ethnic minorities are represented in certain areas and significant minorities in other areas are there too. Their responsibility will be to feed into the Content Board. We have also made a recommendation which of course is very much a matter for Parliament, but we are suggesting that perhaps advisory councils could be established and these will be chaired by the respective representatives from the nations and regions and perhaps pull together the interests of the citizens in the various nations and regions. So I think what we are suggesting is that there should be a clear distinction between the interests of citizens and the Consumer Panel which very much looks after questions of access, choice and communication provision.
5. Just to follow that on the Content Board and the regions, you have more or less covered the question I wanted to ask, but what would you like to see included on the face of the Bill? You propose the use of streamlined councils of the nations and regions, which I like, and it complements the representative function of certain members of the Content Board. What purposes would these councils serve and, as I have said already, would you wish to see this proposal included on the face of the Bill?
(Mr Peel) I think, as I said before, this is a matter for Parliament. With broadcasting a reserved matter, we know there are concerns, as you expressed, about how well OFCOM and the Content Board is going to respond to the particular interests of the nations and regions. We really put this forward as a proposal for discussion. The idea effectively is that OFCOM would provide a real foundation for the members of the Content Board with regional responsibilities, and in the nations, a link with the devolved administrations. I think members of the Committee are probably aware that the ITC conducts a major programme of research on an annual basis and we are careful to make sure that that research is not concentrated in London and the south-east and we also elicit views from the public on issues ranging from programme quality to generally acceptable standards, and we do this through citizens' juries, through public meetings and seminars that are held across the UK. As I mentioned before, we also have been running for more than a decade Viewer Consultative Councils, so there is a lot of activity that is going on out there. It is also worth mentioning that we are in discussion with ITV at the moment about strengthening the accountability of ITV licensees and we hope to be in a position to make an announcement about that early next week. I think, in summary, the regional advisory councils will pull together these initiatives locally and we think, in doing so, will strengthen the Content Board.
6. You will be aware that one of the criticisms of some regulators is that they take decisions in secret or it is not understandable why they took decisions. The Bill proposes certain accountabilities. Do you think that, as proposed in the Bill, the accountability and transparency is right? Is there more that should be there or how would you see OFCOM operating in that respect?
(Ms Hodgson) There is, as you say, in the Bill an important general duty to best practice and then the tests of transparency, accountability, proportionality, codes being put out to consultation and appeals against decisions, but the proof of the pudding of all those sorts of things is how well they are delivered in practice. Sometimes they can just generate another bureaucratic industry of rhetoric. I would emphasise three particular areas where I think Parliament can offer guidance to OFCOM and help ensure that it is genuinely transparent, simple in the way it operates and accountable. First of all, there are seven general duties on the face of the Bill which may have a danger of paralysing decision-making, and they could be distilled. Everybody will have a view about how they might be distilled, but basically you can summarise them as promoting the economic interests of consumers by ensuring economic efficiency in the delivery of telecoms, broadcasting and so on, and promoting the political and cultural interests of citizens (and this is the consumer/citizen dichotomy), through access, diversity and plurality of content, and then achieving those objectives as far as possible through competition, and I think that might have a greater simplicity. Secondly, as I think we have already said, we place great emphasis on accountability to Parliament through the annual report and through select committees. We think the Tier Three arrangements are well-intentioned, but, as I said, we think they are a bit complex at the moment and that self-regulation would depend upon the annual supply to all the stakeholders of an independent and objective analysis of how the market is working and public service within that. Thirdly, we believe that Parliament should set a broad framework in terms of editorial standards, community standards, what is required for public service broadcasting in terms of quality and diversity, but that government should, as it always has for the past 50 years, keep well clear of broadcasting decisions. We are just a little bit concerned that the order-making powers in the areas of editorial standards and quality might run the risk of drawing politicians into those occasional public panics that happen, you know, I am thinking of Brass Eye, and that that might not be wise.
7. The Bill actually says "have regard to regulatory best practice". Is that not a bit like a New Year's resolution, in that you can ignore it?
(Ms Hodgson) Yes.
8. It can just do its own thing and not give reasons and people are in the dark as to what are the real reasons why a decision has been made.
(Ms Hodgson) I think giving reasons is absolutely vital, but you can pile on all the requirements in the world and what will matter will be whether this is a slim body composed of professionals, that there are controls on budgets and numbers that do not allow regulatory creep and empire-building, and in the end the leadership of the Commission and the appointments to the Commission.
9. In your evidence to us you refer to the desirability of using competition as a means of delivering benefits to consumers wherever possible, and of course you point both to the view you take about the ability of OFCOM as an integrated regulator to use Competition Act powers and in due course Enterprise Act powers to deliver benefits that way, but also then you talk about access requirements and the desirability of having open access by using ex ante rules. I firstly want to start by just asking where do you see that balance being struck and how do you see that balance changing as a consequence of the shape of the Bill, as such, because, on the face of it, the rhetoric is about more competition, the legislation is about the complex structure of ex ante rules and licence conditions?
(Ms Hodgson) I hope it is not, although I was talking to Reed Hundt, who is an ex-Chairman of the FCC, and he said that one of the problems with the media and communications world now is that it is becoming so complex that it is moving beyond discourse. I thought that was a splendid phrase because there is a danger that we cannot see the wood for the trees. We do have a bit of a problem at present in that the ITC has some small competition powers, but we rely on the OFT really to exercise competition powers. They do not have media expertise. The ITC puts enormous emphasis on access for different service providers to audiences. The only way to get competition between all the service providers out there is if they can reach audiences through gateways and we know that our industry is characterised by some large players who inevitably control that interface between the networks and services on them and the home.
10. That really is precisely the point because, on the face of it, Competition Act powers should be able to deal with that issue because if somebody has significant market power as a result of that particular control of the market or a technology platform or whatever and tries to impose some unwillingness to supply or imposes some regulatory conditions, Competition Act powers should bite on that.
(Ms Hodgson) The problem is when you have an oligopolistic industry and foreclosure. If you can keep a service provider out of the market for two or three years, which I am afraid is the time it takes for the competition processes to be effective, quite often it is not worth that player starting a service. Now, this has been debated and thought through in Europe and the UK over the last seven or eight years and unusually and uniquely in this particular sector both the European Union and the UK came to the conclusion that what they needed was the requirement for fair, reasonable and non-discriminatory access through, for example, satellite conditional access systems. So there is simply a requirement in EU Directives and it has been translated into this Bill and in our view it has worked very well. For example, Sky has driven an enormously successful digital satellite service, the most successful digital service in the UK, a really great achievement for the communications sector. It has been obliged to keep that platform open to Disney, BBC, Channel 4, Discovery, and actually the fact that it is open has helped Sky's success, and this is terrifically important for the industry.
11. I do not doubt that in particular instances ex ante rules can deliver precisely what one is looking for, but in circumstances where you say that the technology is becoming extremely difficult, it is going to be intensely difficult for the regulator to keep up with how complex the market is going to become. It seems to me that essentially you are saying you want to have Competition Act powers, you want to have the Enterprise Act powers in due course, but they are not sufficient to do the job, whereas I think they have not been tested in that sense. The ability of Enterprise Act powers and Competition Act powers not only to deal with the reality, but the expectation of market foreclosure or some kind of agreement which has an anti-competitive basis is there in the legislation, and the question is whether OFCOM is going to use those powers or whether OFCOM is going to use its own licence conditions primarily. At the moment you are edging towards the, "Well, let me explain why OFCOM should be"
(Ms Hodgson) I am sorry, I was not making myself clear. Fair, reasonable and non-discriminatory access where there is either a bottleneck or significant market power is obviously an aspect of competition legislation. That was all I was emphasising. I was saying that what is in the competition legislation in this particular area is enormously important and I hope to see it stay and be used effectively. I was not suggesting additional licence powers. I think those battles have been won and the tools are effective in competition legislation.
12. Where competition powers are concerned, and obviously they apply to other public service broadcasters and commercial broadcasters, but, as I understand it, they do not presently apply to the BBC, correct me if I am wrong, except where it is engaged directly in commercial activities in competition with other providers, would you prefer to see competition powers extended to the BBC and the exemption removed?
(Ms Hodgson) This is an area of some misunderstanding. Competition powers do of course apply; competition rules do apply to the BBC, as an organisation and in terms of its commercial activities. We have had competition powers in the UK spread across a number of different bodies and fundamentally exercised by the OFT with appeals to the Competition Commission, and the OFT is covering the whole of the economy. It does not have media specialists particularly. When OFCOM is established with concurrent competition powers, I would expect and hope that it will act swiftly and effectively and we may see quite an impact as a result of that.
13. So you think that the exemption for services of general economic interest or statutory undertakings in the Competition Act should not apply to the BBC, full stop?
(Ms Hodgson) No, I did not say that. I just think that these are very difficult issues. Clearly the nub of public service broadcasting is the extent to which it serves the public interest and, in so doing, forecloses the market or makes it difficult for others to supply services. This will be one of the nubs of OFCOM's responsibilities and it will be the absolute core of the judgments it will have to make at the highest level, and Parliament will offer guidance, but even so, those will be very difficult decisions. I am simply making the subsidiary point that by having sectoral expertise and competition expertise in the same place, I hope those decisions will be well informed.
14. In terms of protecting production of various kinds, independent production in particular, the Bill talks about a 25 per cent quota for independent production. Can you explain to us why 25 per cent and why not 30, why not 35, why not 40, and why a quota is the best way of achieving any particular result rather than seeing what competition will deliver and then intervening if that is clearly not delivering the necessary diversity of production?
(Ms Hodgson) I suspect there are Members of your Committee who know more about this than I do. Parliament decided on the 25 per cent. There have been lobbies for higher numbers. The arguments have been made by the integrated broadcasters that they need a degree of critical mass, and this will continue to be a very fraught issue. I would just make two points. One, I think investment in original production and requirements for investment in original production, whether that is for an integrated broadcaster or independent, is going to be an enormously important part of the new landscape going forward. I am very pleased to see it in the Bill in relation to the nations and regions. It may be that we might consider seeing it in relation to production for UK audiences in general. I think the second point that really helps "indies" is the ability to hold on to their rights and it may be that an integrated decision-maker with concurrent competition powers may find itself more effective in this field than the number of competition regulators have managed to be over the last few years.
15. You touched on regional alongside independent and original production. I must confess, I found it curious when I reached that bit and there was an expression of "outside the M25 area" as to quite why it works like that because if you are producing at Pinewood or Leavesden or Hatfield, that is very useful, but it does not seem to be on the basis, therefore, necessarily that you could achieve quite the degree of regional diversity you are looking for.
(Ms Thane) I think over the last few years, and it certainly started with the revision of the Channel 4 licence in 1997-98 when Chris Smith was Secretary of State, one was trying to look at how you effect a reasonable balance between the great hub of production activity that resides in London and the fantastic suck of talent into London, particularly in areas like light entertainment, drama, et ceteraand regional production. As part of that licence settlement, Channel 4 were given a 30 per cent out-of-London quota by spend for their production because they entirely commission inhouse. That worked extremely well, I think, but as we looked ahead a couple of years ago, thinking about the consolidation of ITV into ultimately a single owner, we also felt that there was a danger of accelerating this process again, all the production activity in the UK starting to suck into London, hence we are extremely pleased to see on the face of the Bill these requirements for there to be targets for out-of-London production. I think again it is the difference between making a creative product, as a television programme is, and making widgets. I think it is terribly important for UK citizens as a whole to know that they have got a voice within UK television through production activity and creative activity.
(Ms Hodgson) Did you have a better phrase?
16. That is what you are here for, to see whether you have a better phrase.
(Ms Thane) The intention might work better than the phrase.
17. It would probably be easier to move the M25! I will ask a quick question and you may well want to think about it and come back to us. Given the possibility of foreign ownership and the uncertainty of reciprocity, would you be comfortable with the notion of a ratchet on independent production quotas based on audience share so that an outside investor buying a company like Channel 5 with a relatively small audience share would be absolutely conscious that if they manage to drive audience share up to 25 per cent, they would effectively be caught in a ratchet which would increase the domestic content?
(Ms Hodgson) It is a very interesting idea. I think we would like to come back to you rather than speak as the ITC on the hoof, but that idea in general that you link obligations to share of revenues is, we think, a very important one. If you look at the remits for the public service licensees in the Bill, they are a bit rum so that Channel 3, which currently spends £800 million has the same remit as Channel 5, which spends £150 million, to deliver quality and diversity. That seems not quite right and some kind of flexibility for OFCOM to judge over time because revenues will change over time, but to judge what is appropriate and reasonable as a share of responsibility seems to me something worth thinking about.
18. If you would come back to us, we would be very grateful.
(Ms Hodgson) Yes.
19. I would like to pick up some of the points we have already got to and I am going to start with what was going to be my last point and come back to access. One of our difficulties is one can clearly talk in general terms about what this organisation may or may not do, but we have the uncomfortable job in a very short timescale of looking at the Bill, and I want to come back to the Bill. I just, on access, want to refer to your paragraphs 7 and 8 in your submission on competition powers and access requirements. There is a general sort of message of, "We are jolly glad that all this is happening", and you then say, "the network business is characterised by bottlenecks at the point of supply to the home and is susceptible to market dominance, so regulators must use effective tools (notably access requirements) to ensure competing service providers can reach audiences on fair terms". My question really is are you satisfied at this point that the clauses in the Bill are adequate or do you think that there needs to be any change in the Bill?
(Ms Hodgson) I think the clauses in the Bill are adequate. It is how they are used that is the point and there is a lot of history behind these few words of whether the fair, reasonable and non-discriminatory terms which have been settled for access to satellite have in truth been fair, reasonable and non-discriminatory. It will be one of the biggest challenges for OFCOM.