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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