Select Committee on BBC Charter Review Minutes of Evidence


Examination of Witnesses (Questions 1200 - 1219)

WEDNESDAY 7 DECEMBER 2005

Mr Charles Allen and Mr Clive Jones

  Q1200  Lord Kalms: I think I heard you say that you are working closely with the BBC, though actually they are your competitor and you expect to have competitive bids. I am not sure how you can actually work closely with them and not break any anti-trust law that exists. Perhaps you would explain to me what you meant. When the BBC makes a bid it is excluded from the same rules and regulations that you may have to have in making that bid. Do you think that is equitable? In other words, you already start with a slight handicap in that their bidding process is more relaxed than yours; though there are punitive measures they are more punitive for you than they are for the BBC and whereas they get their hand slapped, you get your butt kicked, so there is clear demarcation. Having said that, presumably you might have a comment to make on how can you work closely with a competitor.

  Mr Allen: It is really worthwhile understanding that although we compete with the BBC for viewers, we do not compete with the BBC for money. Let me explain that. If 100 people are watching television, I of course want as many as possible watching ITV, but say 40 of those people watch ITV, if the rest are not watching ITV, I desperately, desperately, desperately want them to watch the BBC, because we are rewarded on a share of people watching commercials, we are not rewarded on ratings. Just to give you a couple of practical examples, a few weeks ago we had headlines which said "The Daleks exterminate Ant and Dec". Doctor Who was getting nine million, Ant and Dec's Game show Marathon was getting seven. On that Saturday evening we had a 67 per cent share of people watching commercial television. I opened a bottle of champagne and that was good news. The opposite can be shown when you read the headlines that say "Fantastic X Factor on a Saturday night wiping out the BBC's show about a man and a baby". We had seven million, they had two. That was actually bad news for me because some people were not watching us, they were not watching the BBC and they were watching my competitors. What you want with a key public service broadcaster is complementarity. Yes, we compete with them, but we want complementarity. The worst thing that can happen to me is that I am doing a period drama and they put a period drama up against it. Effectively we split the audience that would watch period drama and, frankly, we frustrate the public because they would want to watch both. The best thing for me is when I have a younger screen programme and they have an older screen programme, or vice-versa. It is important to understand that that is where we can work in a collaborative way.

  Q1201  Lord Kalms: Do you pre-agree not to have a costume drama at the same time, or is it just chance? If it is chance, then you are not working together.

  Mr Allen: The way the system works is that the BBC are required to publish their schedules three weeks in advance of us so we can have complementary scheduling. Under the previous regime of management, they still complied with that, but against all of the key programmes it said "To be advised" and literally on the day we had to publish it, they came out and changed it. That was why you would get head-to-heads; the previous management saw beating ITV as their principal objective. Fortunately currently under the new management that is not the remit and they are now back to publishing what they are going to do and we can avoid frustrating the public. There will still be some element of head-to-head, that is inevitable, but what happened under the old regime was that they had a brief to beat ITV and that was not necessarily in the public's interest because you would have common shows then.

  Mr Jones: There is also a limited number of events, in terms of sport, on which we truly cooperate. This Friday the draw will happen on the World Cup and England is obviously in that World Cup draw. It is a big tournament. It is one of the great major sporting events. It would be crazy, as used to happen in the past, if we were both trying to schedule the same games. We shall sit down post Friday and agree a concordat, so the first four England games will be split two and two. Equally, we shall try to split some of the other matches, whether Germany, Brazil or Italy, so the consumers get the best possible deal over three weeks. We did the same with the European Cup last year. We only work together on a limited number of occasions. There will be a point later in the tournament, particularly if England progresses, where we shall both want to show the games and may the best broadcaster win, but it is in the interests of the viewers.

  Q1202  Lord Kalms: You did not answer my question about the rules. Do you want the rules changed so the bidding process is an absolute level playing field, or does it not worry you a great deal?

  Mr Allen: Because we do not compete, that part of it does not worry me. There were two parts to the question: there was that part, but there was also the issue of the BBC and us bidding together and whether we could do it. Absolutely we can do it; it is absolutely legal to bid for the football rights together, there are no constraints on us. The only worry I would have comes back to the financial issue. If the BBC felt they had so much money, then why would they not just buy the rights themselves? The constraints of the licence fee are the things that actually made it work to the benefit of the public in the past. My serious worry is with what is on the table currently and for the reasons I said earlier. We want a strong BBC, you can understand now why, but people find it a bit strange that the chief executive of ITV should say he wants a strong BBC. I want it for the commercial hard-nosed business reasons I gave earlier, but an over-funded BBC would have the exact opposite impact: they would not work in concordat with us and they would drive a level of inflation that is just so significant; that is the big worry. The numbers they are talking about, just to underscore it, the £1.6 million they are seeking for additional quality, is twice the level of our overall budget. The quantum is just so ridiculous that you really do need to focus on it. When I came to see you last time, you will see that I said I was very supportive of the BBC, incredibly supportive of the licence fee because I thought it was the right way to do it, but the quantum that has now been asked for is just so ridiculous that I am slightly surprised, although there has been some negative reaction, that nobody has really quite clocked the scale of it. Just one item alone is twice our overall budget and you can imagine how that would distort the market.

  Q1203  Chairman: It is a rather curious way of doing it, but do you think it is just a sort of bid on the part of the BBC so it can be scaled down?

  Mr Allen: That has certainly been the situation in the past and when you do have that, you tend to average at somewhere between what you had and what you were asking for. The point I am making here is that if you got anywhere near a third of what they were asking for, that would be ridiculous. My view is that the BBC can be made more efficient and we should be looking for an RPI minus situation going forward; they could certainly afford it. You heard from Channel 4 about the scale of their human resource department. We can give you figures for every single department which just demonstrate that this is not the most efficient organisation and when all of us are being asked to be more efficient, then surely building in a structure which asks the BBC to be more efficient over time will give them the benefits that we get. As we move from analogue to digital we are not paying for both analogue and digital. I do not see any of that in the document and the figures are so broad brush that you cannot even go back and analyse them. What does £1.4 billion for super inflation mean? What does that actually mean? The quantum is just so great. I feel very passionately about it because I think that broadcasting is about an ecology and what we have had to date is the BBC and ITV and Sky and multi-channel which have operated an ecology. If you significantly change that ecology, then you damage it quite significantly.

  Q1204  Lord Kalms: We are talking now about big bucks, the Olympic Games. Do you see opportunity and danger? You are talking serious money, so how do you see your position vis-a"-vis the BBC? Are there dangers?

  Mr Allen: There is definitely an opportunity with the Olympics. I had the privilege of being the vice-chairman of the London bid and I am delighted it is coming to London; that is the good news. The less good news is that the BBC have already secured those rights for 2012. Having said that, I should rather they went to the BBC than went to any of my other competitors. So, for the reasons I gave earlier, that is not a particularly unhappy situation. The good news for us is that key global advertisers will need to advertise around them, so the BBC might have them but they will take some of their advertising time and invest with us. It is not a particularly bad situation as such. We do not have the distribution to take all of the rights anyway and the BBC have historically taken them. Historically, the BBC have done a very good job. I chaired the Commonwealth Games in Manchester which the BBC covered and they did a fantastic job. At the opening ceremony nobody expected anyone to watch and the viewing figures were going up from seven to eight to nine million which was fantastic for me as chairman of the Commonwealth Games but not so fantastic for ITV. However, I do not see any particular problems with the Olympics as such. I think the BBC will do a great job and they have the rights.

  Q1205  Chairman: Let us just go back to that BBC licence fee point again, which is rather an important point for us. The BBC are bidding for RPI+2.3 or it could be RPI+2.8 depending on what decisions are made. You simply regard that as completely out of the question.

  Mr Allen: I think it is the scale of it. Just to give you a sense of the numbers, in 1999 before the licence fee decision, ITV had revenues of £1.9 billion and the BBC had revenues of £2 billion. Today, because our revenues are declining in ITV1 with the switch from analogue to digital, we have £1.6 billion of revenues and the BBC have nearly twice that. If you then project forward to the end of the licence period, we should have revenues less than that, less than £1.4 billion and the BBC would have revenues of nearing £6 billion, depending on how you calculate it. The sheer quantum of it is just ridiculous. Surely you would be looking for the BBC to be getting fitter for the next licence round, whether or not there is a debate to be had on how they are funded, rather than exploding in terms of costs. Mark Thompson talked about the BBC having a Jacuzzi of cash when he was chief executive of Channel 4; this sheer quantum is a Jacuzzi of cash. If I leave nothing else with you today: £800 million is the total revenue investment we make in programming and across a number of areas they are asking for twice that and one and half times that in key areas on figures which I just do not understand. They are light in terms of cost reduction and heavy in all the costs. Another thing in there which I am very supportive of is the move to Manchester. Again, here is a quantum of £600 million to move to Manchester. That is a lot of Pickford trucks, that is a lot of money and I do not see the £50 million they are getting from the North-West Development Agency in any of their figures.

  Q1206  Chairman: We shall come to that precise point but just a last point on this. Tell us about your own budget going forward.

  Mr Allen: What we are basically saying for the ITV budget is that because of the constraint on ITV revenues, because ITV1 revenues will continue to decline, what we are attempting to do is constrain it at the current level. So the objective for our team is to try to constrain it to the current level by changing the mix of the programmes. We are not looking at inflation-busting increases in that; we have to do that. Just to put that in context, going back five years 30 per cent of our revenue ended up on screen, now over 50 per cent of our revenue ends up on screen but with the revenue declining, though we are holding it stable, an increasing part of our revenue will end up on screen. When we hear the BBC talking about inflation plus, plus, plus, that just does not make sense when the major commercial competitor is moving in the opposite direction because of this move from analogue to digital.

  Q1207  Lord Maxton: On cost, one of the reasons the BBC are asking for an increase is to cover the switchover. Most of that money will be going to marketing but also into improving the digital terrestrial television. I have to say that it seems to me that the BBC would be on whatever platform the Government had decided to use for digital switchover. You, however, are a major beneficiary if it remains terrestrial digital rather than Sky, whether satellite, cable or telephone, which is the other alternative. In a sense the BBC licence fee payer is going to be subsidising you, are they not?

  Mr Allen: I find it difficult to see how. Every single viewer who moves from analogue to digital costs me money, every single person, for the reasons I gave earlier.

  Q1208  Lord Maxton: But if it is terrestrial, you are more likely to benefit, if you are still on that platform.

  Mr Allen: It is better than them going to Sky. Let us be very clear that the figures I gave you earlier, 27 per cent peak time share to 22 per cent peak time share for Freeview, every percentage point costs me £20 million. There is no advantage to me from everybody who moves. In addition to that we have an £80 million licence fee to pay and we are funding our share of the roll-out. So I struggle to see where we get a benefit. Is it advantageous for us to be on DTT rather than Sky? Absolutely. Are we working hard to build up that platform? Absolutely. That is in line with government policy to ensure that there is a choice out there for people and 15 million people in Britain have chosen not to have to pay and that is a really legitimate choice. That is why we have created an investment in ITV2 and ITV3 and ITV4, to give them the best choice in DTT. ITV2 is now the most watched digital channel; it is ahead of Sky One. ITV3 is in the top five and ITV4 has recently been launched.

  Q1209  Lord Maxton: By 2012 DTT will be such an outdated technology.

  Mr Allen: It may be an outdated technology, but it will be the one which is in most people's homes. It will absolutely be the technology.

  Q1210  Lord Maxton: There are telephones in most people's homes.

  Mr Allen: Absolutely. The cost of putting our pictures down telephone lines is too expensive. This is the cheapest route to get mass market broadcasting to the viewers.

  Q1211  Lord Armstrong of Ilminster: Does the European Commission's reform of the sale of Premier League broadcasting rights present a real opportunity for terrestrial broadcasters to acquire live rights?

  Mr Allen: To be honest, we are very disappointed with the current proposal. It does not bring in real competition to the marketplace; it absolutely fails to do that. Just to give you the background to that, the last time round the agreement was that eight games could be sold outside the overall package. Sky then put in place a minimum price which was so high that none of the players could actually bid for it. This time round I felt very comfortable that the Commission was taking this very seriously and was looking at having real competition here. Just to explain how that market works, Sky pays approximately £340 million for FA/PL rights. There is a debate about how much, but £180 million comes from them selling those rights on to pubs and clubs, approximately £100 million comes from cable companies, so Sky effectively gets all the rights to those football games for £60 million a year. That is actually a very small proportion. What we were arguing was that the rights should be split into two packages. Why two packages? If you wanted to access that pubs and clubs market, if I were to come to you as the owner of a pub or club and I said I had 10 per cent of the games or 20 per cent of the games, you would not talk to me. If two players came to you and we both had 50 per cent of the games, you would be able to access that marketplace. The current proposal does not allow that. It allows one player to have five or six packages and that may allow some access for free-to-air broadcasters, but it is quite limited. An opportunity has absolutely been missed here and I only hope that the next time round we shall see the real benefits of having a couple of players bidding this out and see how we and other key players could have got together, with some rights for free-to-air, either ourselves or the BBC and other rights going to pay TV.

  Q1212  Chairman: What you were saying about selling on, could you not have done the same?

  Mr Allen: The issue is that Sky has the incumbent customer base, so they are incumbent players with that customer base. You would have to take it out of that and bid against them. The real problem is that one of the ideal partners for us would have been a cable company. If the cable company did bid up the costs and lost, that would bid up their own costs, because Sky just passes the cost back to them. They are then in the invidious position that if they bid and lose, they bid up the cost and Sky just passes the absolute cost back to them, whereas this would have avoided that as an issue.

  Q1213  Lord Peston: What is puzzling me, certainly wearing my economics hat, is that I took it for granted that what the Commission were interested in was promoting competition and since the Premier League has a monopoly of the highest level of club football in this country, that is a monopoly the Commission are saying must not be exploited to the full. Therefore, what they have done makes no sense whatsoever in terms of their own objectives. Would you agree with that?

  Mr Allen: Not only would we agree with it, the input coming from Ofcom, the UK regulator, absolutely supports our argument. They fully supported the argument that you need to break it up in a particular way. You still have a dominant buyer; you have a single seller and a dominant buyer so it makes no sense.

  Q1214  Lord Peston: As someone who watches lots of sport, we lose one of the best things which comes from competition, which is innovation. In other words, there is no incentive at all for Sky to find different ways. The one I should most like to have is the red button where you can switch off the commentator. The BBC did have that for a while and you could just have the picture. I am still hoping that one day someone will get the rights and I do not have to have commentators boring the pants of me. Do you agree that this is a serious matter in terms of innovation?

  Mr Allen: I completely agree. The idea of having two equal and opposite parties who were competing both on quality and presentation would really have driven it up and it would have allowed the consumer to have access. At the moment, unless you are prepared to pay the full package, because what Sky does is package those contents within the total package, unless you are prepared to pay £30 to £40 per month, it is bundled so you have to buy the whole thing. This would allow the consumer who wanted more than the free-to-air rights to buy some additional games but not all of them. That was the idea. We are disappointed that did not happen.

  Q1215  Chairman: If I am in the Premier League, I just want to get the best price possible, do I not?

  Mr Allen: Yes.

  Q1216  Chairman: It is a monopoly of the Premier League, but goodness knows, there is enough sport around to show. Why should the Premier League be forced to give this portion here and a portion there to other broadcasters?

  Mr Allen: Because we believe it would have brought real competition, there would have been benefits in that competition exercise, benefits for the public, and you would have wider exposure for sport. They did not choose to do that; they fought against this kind of thing. They fought against anything which the European Commission wanted to do and that should be a question this Committee should rightly put to them.

  Q1217  Baroness Howe of Idlicote: What do you think the logic was for them to come to such an uncompetitive decision?

  Mr Allen: We found the decision very surprising, considering that we had had detailed discussions with Europe, very detailed discussions with our own regulator and we had made our case very clear.

  Q1218  Chairman: Are you talking about the Commission?

  Mr Allen: Yes.

  Q1219  Chairman: A certain amount of lobbying took place. Have you heard that?

  Mr Allen: There was indeed; allegedly.

  Chairman: We still find it quite difficult to get the detail of this lobbying.


 
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