Examination of Witnesses (Questions 1183
WEDNESDAY 7 DECEMBER 2005
Mr Charles Allen and Mr Clive Jones
Welcome. Thank you very much for coming. It has been a very busy
time for you and we are even more grateful because of that. May
I start with the latest headlines that are being created by ITV
and ask you about your aim to buy Friends Reunited. I see in the
Financial Times one fund manager is quoted as saying "We
cannot work out why ITV would want Friends Reunited. We cannot
see the industry logic, or how it would link to ITV's other businesses".
We are not a bunch of analysts, but tell us what the purpose is.
Mr Allen: This is part of our overall strategy.
I laid out a strategy 18 months ago which said that we needed
to stabilise ITV1 but we needed to grow our revenues outside ITV1.
People have more choice as ITV1 moves from analogue to digital
and that has a direct impact on our revenues. In an analogue home
we get a 27 per cent share, in a Freeview home we get a 22 per
cent share and in a Sky home we get a 16 per cent share, so as
we transition from analogue to digital our ratings will decline.
It is not about the performance of the channel, it is about an
arithmetic calculation, that people have more choice and we are
more affected because we are a mass market channel. So what are
we doing about it? The strategy is to grow our business outside
ITV1 in two areas. One is to create a family of channels that
would compensate for people who, once in multi-channel, wanted
content of their choice; so ITV2 is younger female, ITV3 is ABC1
and ITV4 basically is younger males. We also said that we wanted
to try to create revenues outside advertising and we created a
whole new consumer division with the objective of building relationships
with the consumers, ideally turning viewers into consumers. We
have started down that path: we have created something called
ITV Mobile. Rather than lose the viewers when they go out of their
front doors, they will actually get content on the move, which
we think is quite exciting. We have created ITV Broadband which
is our on-line offer and we are piloting something called ITV
Local, which is a very local service in Brighton; the early signs
of that are actually quite interesting because we are able to
use the massive infrastructure we have. We see it as creating
communities of interest. Where does Friends Reunited fit into
that? It is a pay business; 80 per cent of the revenues come from
subscriptions. The core business was basically catching up with
old school chums, but they have built a series of businesses.
They have built a genealogy business; if you want to know where
you are from. I am told we are all six steps away from royalty;
maybe if you are Scottish it might be seven or eight, but most
people are six steps away from royalty, or six steps away from
a star. We can see an opportunity to build up a database there
for people to find out about their relatives and we use that to
build that up. It also has a dating business in there and it also
has a jobs business. Effectively what we are doing is using this
as the engine room to drive ITV's community of interests. The
way we see ITV is that it is about bringing people together, it
is about backing creativity and it is about acting responsibly.
The brands Friends Reunited and ITV fit well within that.
It presumably shows another step on the diversification of all
the media groups?
Mr Allen: Yes. When we joined the two companies
together, Granada and Carlton, 90 per cent of our revenues came
from ITV1; just two years later, now 30 per cent of our revenues
come from outside ITV1 and we know, because of the move from analogue
to digital, that we are going to have to build that and we have
set ourselves public targets to do that. The revenues from ITV1,
because of the move from analogue to digital, simply will not
be enough to fuel growth for ITV.
What, if any, relevance does this have for the BBC? What implications
does what is happening here have for the BBC?
Mr Allen: One of the most significant things
which worries people outside the public broadcasting space is
the BBC's untrammelled ability to move into a whole range of services.
So one of the key things which would be an issue is if the BBC
had been able to create or buy similar products and one of the
things you have touched on before is that there needs to be absolute
clarity on the service arrangements for the BBC; not only new
service arrangements, but, really important, public consultation
on the existing service arrangements, full debate, full review
of all of the services so we can then move forward. A good example
is the MP3 stuff the BBC is doing which you were chatting about
earlier. My view is that there has been no public consultation
on that and if there were on umbrella BBC.co.uk, then that would
cover a multitude of sins. There needs to be much greater clarity
on exactly what the current services are, so that things do not
go under the wire. There is relevance related to this, related
to all commercial activities and the commercial activities of
ITNyou have heard from ITN beforeand the worries
which the commercial sector has that the BBC will be able to do
a number of these things under their existing service agreements
and how we police that going forward.
So your real concern is fair competition and duplication of services.
Mr Allen: Yes; clarity of public funding. We
want to know why public funds are being used to create something
that the commercial sector will provide anyway. That is a basic
premise of the things we are looking at: it has to be something
that the structure addresses.
Q1187 Lord Maxton:
Do you see Friends Reunited as a continuing growth? It seems to
me that schools, colleges, everybody else have their own websites
and their past members subscribe to it or log into it and there
are organisations like the Records Office in Scotland. It is cheaper
for me to go into the Scottish Records Office to find out about
my genealogy than it is to go to Friends Reunited. As you see
more and more people getting their own websites, do you actually
see that as an area which will continue to grow?
Mr Allen: The thing to remember is that Friends
Reunited has about 15 million members already and it is already
a community of interest as such. One of the interesting statistics
I have found is that on the genealogy side, when we started the
due diligence for buying this business eight weeks ago, there
were 40 million names on it and six weeks later, there were 46
million names there because it is much easier than any other option.
What is happening is that people are populating that site with
their relatives, their friends and that is creating a really interesting
asset. What I also see is that as we are able to introduce video
capability, to have moving pictures there, pictures of your children
now and in the future, pictures of your grandparents or whatever,
that will make it very interesting. It really is a live, living
Let me go back to our first report and ask you about one of the
issues that came out of it, which was the value of the analogue
spectrum. Have you ever made any sort of estimate of the value
here? There was at any rate an assumption that once we went digital,
analogue spectrum would actually have no value at all, which is
clearly not the case.
Mr Jones: Are we talking about what will be
done with the spectrum which remains?
Mr Jones: I think the key issue here is that
it can be valid in a number of different ways. There has to be
a serious appraisal of what one should do with the spectrum that
is freed by the move to digital switchover. One of our key concerns
would be to try to ensure equality across the digital platforms
in terms of high definition television. We have an opportunity
next year when we shall hopefully be doing an experiment with
the BBC around the World Cup. We have wonderful television pictures
in the UK through the PAL system, but when one is able to see
an HDTV, particularly for sporting events or high quality drama,
it is a leap forward again. Some people have compared it with
the difference between black and white and colour; that is a slight
exaggeration, but it is very significant. One of the aspects of
HDTV is that it is actually very spectrum hungry. Sky will begin
HDTV next year, TeleWest, to which Lord Maxton subscribes, are
talking about beginning HDTV services next year. It would be deeply
unfortunate if DTT, which we think would be the most popular delivery
mechanism to the bulk of the population and of course will be
free, did not have an HDTV capacity on Freeview. I would hope
that some of the spectrum that is freed up is not automatically
put out to the highest bidder, but that Government and Ofcom make
their own value judgment and take proper concern for the citizen
consumer and use some of that spectrum for HDTV. We should certainly
like to put some of our high quality dramas out on HDTV, as would
the BBC, as indeed might Channel 4. Equally, as we move forward
on the basis of listed events continuing, it would be great to
be able to put World Cups, Olympics and other significant events
Valuation is going to depend exactly on purpose.
Mr Jones: Absolutely; absolutely.
And there is really no guide, you can put no guide on value, except
that one does know there is value.
Mr Jones: There is value, but also it depends
on other things. For instance, if one, at the point of digital
switchover, and I hate to use technical terms, moved the current
system on Freeview, which is called 16 QAM, which means about
30 channels can be put out, to 64 QAM, you could probably move
the number of channels you could put out to around 50. One could
make adjustments there and still create space for HDTV. It is
also dependent on the power that is actually used, so a number
of ratios could be used.
Chairman: We might come back to those
points. Let us get on to what our inquiry is about on this occasion.
We are looking at sports and other areas, but sports in particular.
Q1192 Lord King of Bridgwater:
You have mentioned the issue of Sky scooping the pool on cricket
and the issue around whether there is more scope. You said that
the BBC had a big role to play in helping sports be more available
free to all viewers. Can you work together more?
Mr Allen: We already work together on big events
like the World Cup; we tend to work together on big international
events and there are more examples. The key to this is ensuring
that we maintain the listed public events; that is the key to
it. Then both of us, and for that matter the BBC/Channel 4 or
BBC/ITV, BBC/Channel Five, can work together. We do have quite
a close relationship with the BBC in buying these rights together.
Q1193 Lord King of Bridgwater:
You did not see cricket as your sport really?
Mr Jones: No. ITV did briefly show cricket.
We showed the Gillette Cup about 20 years ago when Yorkshire were
about to win it with a sterling innings from Geoff Boycott. Unfortunately
David Frost insisted that we switched to his programme, so we
missed the final two overs. Cricket has not been very keen on
ITV since. It is problematic; given the length of cricket games
and our advertising break structure, cricket is not a natural
fit with ITV. Traditionally, it has not been a sport we have bid
for. We have bid for everything else, for athletics, boxing, soccer,
but cricket has never been a natural fit with ITV, so we did not
put in an offer.
Q1194 Lord Peston:
More generally than cricket, you take the view, probably an arguable
view, that if, say, you were providing some free-to-air sport
of some sort, it would be absurd for the BBC then to bid against
you to do the same thing. I understand the argument, but the counter-argument
which is always there, which has been around for a very long time
actually, is that if the BBC does not show these things, then
people will ask why they are paying a licence fee to the BBC.
It is quite tricky getting the balance right. My difficulty is
that I can see both arguments are valid, but you have to come
to a practical conclusion on this.
Mr Jones: When you have a major broadcaster
like the BBC, it is hard not to agree that they should not provide
a fuller range of services from sports, through current affairs,
through drama, through entertainment. Our concern going forward
has to be that actually there is a logical and level playing field
and our particular concern with the enormous licence fee increases
that they are seeking over the next number of years, not millions
of pounds but many billions of pounds, is that a very useful market
intervention, because that is what the BBC is, which has produced
one of the great broadcasting organisations of the world, does
not use those very large sums of money to create a major distortion
in the market. A number of years ago we faced the BBC bidding
against us for the Champions' League, a tournament which was designed
for commercial broadcasters, a tournament built around sponsorship,
which frankly sits uneasily in the licence-funded BBC. One does
not in any way wish to see a diminution of sport in the BBC, but
one wishes to see a level playing field and one does not want
to see them using money which might be being supplied to them
to ensure digital switchover being switched into overarching bids
for sports rights.
Mr Allen: May I just pick up on Lord King of
Bridgwater's point and add to that. The reason the BBC and ourselves
work together is that they do not often have the funds to do all
of it. If they had the funds to do all of it, they would not talk
to us. If you look at their current proposals, of the £6
billion they are looking at, they are saying they want £1.6
billion for additional quality and therefore if they had the money,
they would not talk to us. They are looking at £1.4 billion
for super inflation. Only the BBC and we have the capability to
buy these rights, so if one party has £1.6 billion of funds,
either they do it on their own or they actually become the self-fulfilling
prophecy that creates super inflation. Whether that is for sports
rights or buying the best talent or buying the best writers, or
buying the best scripts, that is where we should have a material
problem with the current proposal.
Q1195 Lord Peston:
What you are really talking about is fair competition and a level
Mr Allen: Yes; absolutely.
Mr Jones: Our annual programme budget on ITV1
for all our programme services is around £800 million and
they are seeking £1.6 billion.
Q1196 Lord Peston:
I understand that argument. Concentrating largely on sport, Freeview,
or whatever it is called, is very important to you and when you
showed your Champions' League game on ordinary ITV, I cannot remember
whether you had another one on.
Mr Allen: We did; we had the other game on ITV4.
Q1197 Lord Peston:
I thought you did. The thing that troubles me a bit is that at
the moment, whereas virtually everybody can get ITV as an ordinary
terrestrial channel, where I live in the country I cannot get
the ITV channels on Freeview, which I find amazing because I can
get an enormous number of other channels I do not want.
Mr Allen: ITV4 is not only on Freeview; ITV4
is on Freeview, Sky and cable.
Q1198 Lord Peston:
I am in a terrible area myself in the sense that, where I live,
on the one hand I cannot get Freeview and on the other hand I
am in an area of natural beauty so I cannot have a Sky dish either.
This means that if I were stuck in the country I could not, to
take a different example, get the old Taggart. Happily
I was in London so I was able to get it, which showed me that
sometimes standards do fall because it was great, which is why
archiving is a dangerous business, let me tell you. Are you investing
more in making sure that your Freeview stuff, or whatever it is
called, is more generally available? It seems to me that your
case for sport would depend considerably on that.
Mr Allen: Our challenge is to show a sport across
a number of platforms. When you only had ITV1 in the old days
you would only have been able to see one game anyway. This was
an additional game that we were able to show because we now have
ITV4 which has access to Freeview, cable and satellite. The good
news is that hopefully, with improvement as we move from analogue
to digital, you may be in an area which can then receive it. The
signal will improve as we invest in the DTT infrastructure and
hopefully as the BBC does.
Q1199 Lord Peston:
Just to conclude this whole bit. The BBC clearly sees its role
as being able to reach everybody. Is that your philosophy as well?
Mr Allen: Absolutely. We see our philosophy
across ITV1 and all of our channels as we move from analogue to
digital as providing across a range of channels.
Mr Jones: Under our digital licences, which
we have only just agreed with Ofcom, we have agreed alongside
Channel 4 to replicate the map, in so far as it can be replicated
because there are slight differences between the digital and the
analogue map. That 98.5 per cent of the population which currently
receives analogue signals will get the digital signals. As we
move through to 2008 and on until 2012, we shall provide the same
universal service as the BBC do and hopefully we are about to
agree our transmission contract with a supplier.