House of Lords - European Union - Minutes of Evidence

Select Committee on European Union Minutes of Evidence

Memorandum by Ofcom

SECTION 1

The Issues Raised and Ofcom's Responses

1. Ofcom's evidence to the inquiry is based on the original Commission's proposals published in December 2005. They do not reflect amendments to these proposals which are currently under discussion in the Council of Ministers and the European Parliament. The Committee will by now be aware that there have been significant developments in both the Council Working Group and the Parliamentary committees considering the proposal in recent weeks.

25 OCTOBER 2006

2. The first of three groups of questions identified by the Committee focuses on the need for a regulatory initiative in the area:

(a) In our current rapidly converging and evolving technological and market environment, is it appropriate to try to recast the regulatory framework?

3. Ofcom agrees that as communications services converge and new services emerge the existing regulatory framework needs to be re-examined. In particular, the television industry has seen significant changes since 1997, mainly as a result of the introduction of digital technologies and an increase in choice both of content and of delivery platforms for broadcasting services. Television broadcasting services are now delivered not only via cable, terrestrial or satellite networks, but also using the Internet Protocol, mobile and wireless networks. In addition to these new developments in television broadcasting, new audiovisual content services are emerging alongside traditional ones, and they are growing fast.

4. This is having an impact on the way citizens are accessing and viewing content. Today, consumers have wider choice both in terms of content and in terms of the device from where to access that content. Technological developments have also allowed viewers to have greater control over their media consumption and we are seeing that viewers are taking an increasingly active, rather than passive, role in the way the use and consume media content. In consequence, traditional business models, in particular that of free to air commercial broadcasting supported by "spot advertising" revenues, are coming under pressure and will need to evolve.

5. Accordingly, Ofcom welcomes the European Commission's intention to revise and modernise the rules that apply to television broadcasting. In particular, we welcome the proposals to modify the definition of broadcasting to make this truly "technology neutral", and the removal of outdated restrictions on spot advertising minutage and placement within programmes. We support the retention of the country of origin principle as the basis for the single market.

6. However, Ofcom believes that the response to the challenge of convergence should not necessarily be the extension of traditional broadcasting rules and principles to the new media services. These services are only just emerging and present very different characteristics from traditional linear television.

7. While public interest objectives in the area of consumer protection (and particularly minors) remain valid in the new media environment, traditional regulatory approaches are neither appropriate nor effective in addressing the challenges created by changes in communications technologies and consumer behaviour.

(b) What are the advantages and disadvantages of regulating this area? Are the regulatory costs proportionate to the benefits?

8. Ofcom believes that regulation in this area needs to be: (i) proportionate, (ii) effective and (iii) enforceable.

9. As a general principle Ofcom favours refraining from intervention unless there are certain public policy outcomes that cannot be delivered by the market alone. The broadcasting sector has been one area where specific and targeted intervention has been applied in the form of both positive obligations on broadcasters to deliver certain forms of broadcasting that the market might not deliver or under-provide; and negative obligations to restrict the harm and offence which an unfettered broadcasting environment could cause. In such cases, intervention should be targeted and proportionate to the market failure identified. It should be consistent, accountable and transparent in both deliberation and outcome. Ofcom is required by statute to seek the least intrusive regulatory mechanism to achieve its objective. Generally speaking, in relation to new and emerging content markets Ofcom's approach has been to avoid premature intervention. We think such a precautionary approach is equally valid at European level.

10. The Commission's proposals as drafted remains broad, vague and ambiguous. It potentially, and perhaps inadvertently, catches a significant number of new media services, including Internet services. It would extend regulation to third generation mobile and web-based services, including videoblogs, online video games, webcams, online newspapers or magazines which carry significant amount of video content, and even individual websites that host user-generated content.

11. This brings potentially thousands of businesses within the scope of regulation including start-ups, SMEs and sole traders. The new media sector has the potential to be very significant in economic terms for the EU economy, but at present is at an early stage of development, and is characterised by many small firms and start-ups innovating and taking risks. An example of this is YouTube, recently purchased by Google, which was started by three friends in late 2005 and initially operated out of a garage. Earlier this year it still had only 25 employees. The existing and future European equivalents of YouTube are a major source of potential future EU creativity and competitiveness. They can be expected to contribute above average growth compared with other sectors, and, critically, have a significant enabling role in relation to other key markets such as broadband deployment.

12. These services are currently growing fast. The European mobile industry, for example, is expected to reach 60 per cent 3G handset penetration, [1]and over 57 million mobile TV subscribers[2] by 2010, while the online games industry has been forecasted to become the fastest growing by 2009, with revenues of $2.2 billion. [3]Furthermore, it is estimated that the number of blogs registered worldwide doubles every five months, with over 1.2 million new entries a day. [4]

13. Importantly, these services are also uniquely vulnerable at this stage of development, to regulatory risk and uncertainty. Furthermore, some of these services, or some elements of the value chain, are easily portable between jurisdictions. The proposals could have the unintended consequence of discouraging or delaying investment. The worst case scenario for Europe is that economic activity which would have taken place in Europe, providing jobs and stimulating growth here, will take place elsewhere, be it in the US or in the Far East.

14. In order to contribute to the debate and assess the regulatory risks of the Commission's proposals, Ofcom asked RAND Europe to conduct a study on the indirect impacts of the proposals (See Appendix II). The report highlights some important economic risks inherent in the Commission's proposals. These risks are particularly important in relation to the new media industries that RAND Europe has examined and which are strategic for European future competitiveness: IPTV, mobile multimedia and online games.

15. These risks accrue not just to shareholders of the companies concerned, but to the EU economy as a whole and hence to EU citizens. The results of the RAND Europe study are in accordance with feedback to Ofcom and the UK Government from businesses and investors.

16. Finally, Ofcom would like to emphasize the need for continued vigilance in this market, and the importance of regularly conduct research and reviewing the regulatory framework so that it reflects market and consumer realities prior to any formal regulatory measures being taken, Ofcom would argue that public authorities, regulators and service providers need to be fully informed of the nature and impact of these new services and understand changing consumer behaviour. Furthermore, Ofcom is committed to consult widely with all relevant stakeholders to assess the impact of regulatory action before imposing regulation.

17. The second group of questions addresses whether the Proposal, in its current form, can meet its own broad objectives:

18. As set out above, Ofcom welcomes the Commission's intention to modernise and liberalise the rules that apply to television broadcasting.

19. In particular, Ofcom supports the simplification and relaxation of the complicated rules that apply to advertising. Advertising remains the primary source of revenue for the broadcasting industry in Europe, playing a key role in maintaining the sustainability of free-to-air commercial broadcasting, and ensuring a rich, high quality and diverse programme offering. Advertising revenues are also critical for the promotion of European TV content production. As noted, however, this traditional advertising-based business model is coming under pressure as a result of increased competition between broadcasters and the effects of new technologies such as Personal Video Recorders (PVRs) which allow viewers to skip advertising breaks.

20. In this light, Ofcom supports the Commission's intention to provide a greater degree of commercial flexibility for broadcasters, while maintaining a necessary level of protection in the traditional television environment. In particular, we agree with the Commission's view that the daily advertising limits and the minimum of 20 minutes required between advertising breaks are no longer needed. The need to attract and retain viewers will, we believe, act as a discipline on broadcasters and prevent gratuitous or excessive advertising minutage, and the removal of the restriction on the location of advertising breaks within programmes will allow for breaks to be scheduled in the way which relates most naturally to the narrative of the programme concerned. We further welcome the Commission's general approach that the principle of separation of commercial content from editorial content should be replaced by one based on transparency.

21. However, we find it somewhat inconsistent that the Commission proposes to further restrict the quantitative rules for advertising in certain programme genres, including, news programmes and children's programmes, where interruptions can now only take place every 35 minutes, instead of the previous 30 minute limit. This stricter approach is not only at odds with the Commission's liberalisation policy, but it can also perversely impact on the incentives for broadcasters to produce and show these programme genres.

22. With regard to films, we believe that the minor liberalisation of the rules proposed by the Commission is insufficient. The liberalisation advertising rules for other programming will create a relative disincentive for the showing of this genre and might, in particular, discourage the transmission of non-Hollywood films by free-to-air broadcasters.

(d) Does the proposal contain measures that will effectively protect public interest objectives?

23. The Commission's proposals retain the public interest rules on protection of minors, incitement to hatred and advertising ("Audiovisual commercial communications" in the jargon of the new directive) as they currently apply to television broadcasting. These rules have proved effective in delivering a high level of consumer protection and harmonising minimum standards across Europe.

24. However, Ofcom considers that the extension of regulatory controls traditionally designed for television into the new media online environment is both inappropriate and likely to be ineffective.

25. While Ofcom agrees that citizens (and especially minors) need to be fully protected in the online world, we believe that greater emphasis should be put on the responsibility of content providers through the development of codes of conduct and the provision of self-protection systems to consumers such as filtering, rating or access controls. As the EU has recognised on a number of occasions self-regulation and co-regulation can prove very efficient in delivering public policy objectives and consumer protection. This is particularly the case in the area of internet delivered services, where traditional "command and control" regulation alone cannot deliver on a promise of consumer protection.

26. We need to develop a combination of instruments which include: effective criminal laws, greater consumer empowerment through self-protection tools, the development of media literacy, and the establishment of reliable self and co-regulatory structures representing all relevant stakeholders. This is, in our view, a superior and more effective alternative to deliver on that promise.

27. Specifically, Ofcom would like to emphasize the importance of media literacy in any regulatory ecology for new media. As well as a responsibility on providers of services, this new world unavoidably places a responsibility on consumers to take steps to protect themselves and their loved ones from harm and offence. But the skills necessary to undertake such self-protection requires a degree of "media literacy". Ofcom has a statutory duty to promote media literacy, and we have been increasingly active in this area (See Appendix I for a summary of activities). Stakeholders not only in the UK but across the EU should build on progress made to date and extensive research should be carried out on the most appropriate model(s) for content labelling going forward.

(e) Does the Proposal achieve an appropriate balance between the objective of harmonisation and right of Member States to control audiovisual media services in a manner which reflects national concerns and interests?

28. As with any other European legislation, the Television without Frontiers Directive needs to strike a very delicate balance between the objective of harmonisation and the realisation of a single European market for broadcasting services on the one hand, and the respect for subsidiarity as regards national cultural and public interest concerns on the other.

29. Ofcom believes that the current proposals fail to strike such a balance as regards online services, going beyond what are currently minimum EU standards.

30. In particular, there are concerns as regards the fundamental right to freedom of expression. The Commission proposals widely extend the grounds of the prohibition of incitement to hatred to cover things such as incitement to hatred on the basis of age and disability. These go well beyond what is currently general law in the UK, applying higher restrictions on speech to the new media sector. Whilst policy in this area is clearly a matter for government not Ofcom, we consider that it is difficult to justify applying such an approach to new media but not (say) to offline media, publishing and newspapers.

31. The third and final group of question focus on specific topics addressed in this Proposal:

(f) Defining the nature of the regulated services—Is there agreement on the Commission's proposal to distinguish between linear and non-linear services?

32. The Commission's proposals identify two types of services within the broader category of "audiovisual media services". On the one hand, linear services, where the service provider determines the time of transmission ("pushed services"), and, on the other hand, non-linear services, where it is instead the user who decides ("pulled services"). A different level of regulation is then applied to each category of services.

33. While Ofcom agrees with the Commission's underlying principle for this revision that in the new media environment, there are different kinds of protection needed depending on whether the television service is pushed to consumers or accessed on-demand, Ofcom believes that the Commission's definitions are too broad, vague and ambiguous.

34. As currently defined, on-demand services will cover a whole range of services, going well beyond "video-on-demand", which was the apparent target of the Commission's proposals. The definition would extend to services that have little to do with television, and for which there is little rationale for regulation of this kind.

35. Ofcom has strongly called for improvements to the drafting in order to clarify the different characteristics of each of these services. It is Ofcom's view that the scope of the proposals should only extend to cover services in a form characteristic of television broadcasting, which will lead consumers to reasonably expect some type of regulatory protection to apply. Examples of such services could include video-on-demand services which provide time-shifted or archive TV programmes to viewers.

(g) Jurisdiction and country of origin—Does the Proposal go far enough in facilitating the free movement of broadcasting services?

36. Ofcom supports the retention of the country of origin principle in the Commission's proposals and believes that it does encourage the provision of cross-border services in the television broadcasting market.

37. The country of origin principle has been essential for the creation of an internal market for broadcasting services. It provides broadcasters that operate in more than one Member State with legal certainty as to the rules that apply to their services. By offering regulatory clarity and lowering regulatory costs, it has also made it attractive for international broadcasters (eg MTV) to establish their production and distribution hub in Europe, and it has triggered the launch of new pan-European services (such as Eurosport or Euronews) with distinct linguistic versions. All in all, and since the Directive was first adopted in 1989, the European television market has witnessed a significant increase in the number of cross-border channels.

38. Not only has the European audiovisual industry benefited from this, but, most prominently, UK citizens have also gained from an increase in terms of content and programme choice. If the country of origin principle were to be weakened, or worse, abolished, then different and divergent rules could apply to broadcasters that provide services in more than one European country. This will undermine the benefits of the single market, and it will discourage the promotion of cross-border broadcasting services and the launch of new channels. It is therefore Ofcom's view that this remains the only sensible way of addressing the regulation of broadcasting at the EU level.

39. Ofcom recognises that there could be cases in which the principle of country of origin regulation might result in "forum shopping" with a view to circumventing the application of national broadcasting legislation. Such an abuse of the country of origin principle should be avoided.

40. It should be noted, however, that controversial cases remain the minority. Any possible amendments of the establishment criteria should be carefully considered to avoid the undesirable outcome of impacting on the vast majority of channels that are non-problematic.

41. The Commission has sought to address the problem of circumvention in the new proposals by introducing a procedure that allows a Member State to "adopt appropriate measures" to prevent "abuse or fraudulent conduct" of a media service provider established in another Member State that directs all or most of its activity to the territory of the first Member State.

42. Ofcom welcomes the Commission's attempt to avoid the abuse of the country of origin principle and the greater emphasis placed on the co-operation between national regulatory authorities.

(h) Regulatory approach—What role should industry self-regulation play in the new regulatory framework?

43. Currently, there are a number of successful self-regulatory and co-regulatory initiatives which will have a positive impact in the protection of consumers in an online environment. Examples of these are: the Independent Mobile Classification Body (IMCB), which sets a Classification Framework for commercial mobile picture-based content; ATVOD, which self-regulates in the area of video-on-demand, the Internet Watch Foundation (IWF) [5]which identifies and takes action against images of child pornography as well as criminally obscene and racist content; and the Advertising Standards Authority (ASA), in the area of advertising.

44. On an international level an example of an international self-regulatory initiative is the Internet Content Rating Association (ICRA). ICRA encourages content providers to self-classify their content using its rating system, which in turn enables end-users to use filtering software to block access to any websites which they deem undesirable based on the rating information. Over 100,000 internet content providers have already self-labelled using ICRA's rating system, including Microsoft, AOL, T-Online and Hustler. However, the vast majority of internet content is still not labelled.

45. Ofcom is aware that developing reliable and successful self-regulatory or co-regulatory structures is not an easy task. It requires a significant commitment and investment of time and effort by government, regulators, industry and indeed consumers themselves. Furthermore, the success of self-regulation and co-regulation will, to a large extent, be determined by the specific regulatory culture and traditions of each country, and of the sector in each country.

46. Ofcom would warn against regulatory interventions that could jeopardise current or future initiatives in this area, by giving the wrong signal on what should be the direction of travel for this industry. Rather, greater efforts should be made, both at national and EU level, to encourage and support the development of these structures.

47. Ofcom also believes that as self-regulatory and co-regulatory schemes mature, and as consumers develop the media literacy skills that they need in order to make effective use of self-protection techniques, there will be less need for direct intervention in the regulation of online multimedia content.

(i) Advertising and commercial communications—Should broadcasters be given greater flexibility in respect of the commercial arrangements they enter into for the financing of programmes?

48. As set out above (see answer to question (e)), Ofcom welcomes the liberalisation of the rules that apply to advertising, in particular the relaxation of the quantitative restrictions.

49. In the new multiplatform environment, audiences are increasingly fragmented. Competition for viewers, and therefore for advertising revenues, has become fiercer. The advent of subscription television models and video on demand services puts pressure on traditional advertising-funded models. In addition, technological developments such as personal video recorders allow viewers to fast-forward through advertising breaks. All of this challenges both broadcasters and advertisers to innovate and to develop complementary revenue models.

50. Ofcom believes that the maintenance of a dynamic, competitive, and culturally rich audiovisual industry for Europe critically relies on the existence of advertising regulations that allow broadcasters the commercial freedom and regulatory flexibility necessary to remain competitive, while delivering public policy goals. Advertising regulations designed for an analogue era with a limited number of channels are not appropriate for the multi-channel environment. They could inhibit the future provision of high quality programming, including cultural programmes and independent productions. Policy makers have therefore an interest in enabling broadcasters to evolve in order to meet the challenges, and embrace the opportunities, that the new digital world will pose.

51. The Commission has proposed to allow product placement subject to transparency requirements, as a way to provide a new financial stream for broadcasters.

52. Ofcom believes that this is an important issue that must be considered carefully. We have recently consulted with our stakholders on this matter in order to bring in further evidence on the benefits or otherwise of allowing product placement. It is clear that the introduction of product placement remains an issue on which there is no consensus—in general broadcasters favour a controlled introduction of product placement whilst consumer and viewer groups oppose the concept. It is also clear that before any even limited and controlled introduction could be contemplated there remain a significant number of issues on which further detailed work would need to be undertaken. Predicted economic benefits also appear to remain modest, at least relative to the size of the existing spot advertising market.

(j) Protection of minors and human dignity—What controls should be imposed on non-linear services in respect of illegal and harmful material, such as the granting of a "right of reply"?

53. As set out above, while Ofcom agrees that consumers should be protected in the online world, we believe that applying sector specific rules conceived and designed in a different market environment is inappropriate.

54. Instead, the regulatory model for the online world needs to rely on a combination of instruments, which include general criminal laws and effective self and co-regulatory regimes which place greater emphasis on the responsibility of content providers and consumers themselves, as well as the promotion of media literacy tools.

(k) Media plurality and cultural diversity—Do quotas continue to be an appropriate mechanism for promoting the production of "European works"?

55. Europe's content production industry is vibrant and dynamic. Current multi-channel and multi-platform broadcasting markets offer excellent opportunities for sector growth for the development of the creative industries. In this area, there is a clear interest in enhancing the range of cultural expression and diversity available to European citizens through the various media.

56. Quotas for nationally produced programmes or quotas in favour of independent producers or minority groups are one way to safeguard cultural and linguistic diversity. Articles 4 and 5 of the TVWF Directive seek to achieve this.

57. The "content quota" provisions need to be understood and applied in context and in a way that is proportionate. In the case of small broadcasters or start-ups, the burden of compliance may be very onerous and quota-type of obligations do not seem to be appropriate. For this reason, Ofcom welcomes the retention of the words "where practicable" in the new proposals.

58. Further, Ofcom believes that judgements as to whether it is practicable for a broadcaster to comply with Articles 4 and 5 are best made at Member State level, in accordance with the principle of subsidiarity.

59. Ofcom notes the rapid proliferation of broadcasting channels across Europe (Screen Digest estimate there were 100 in 1990 and over 1,000 by 2003). The fact that many of these individual channels may not yet have reached the quotas in Articles 4 and 5 should not obscure the fact that this explosion of channels has provided many more opportunities for independent and European production than existed before.

60. With respect to non-linear services Ofcom shares the Commission's view that "given the different nature of non-linear services, and the differing degrees of user control, [ ... ] `content quotas' for these services are certainly not the right instrument to achieve cultural diversity, and could even be counter-productive".

61. Therefore, Ofcom does not see a basis for introducing binding quotas for non-linear services. The advent of new digital platforms and services lowers barriers to entry to the market for EU content providers. It is Ofcom's view that a strong and competitive market for new media services is most likely to serve both the interests of European and independent production as well as the growth ambitions for the content and communications sectors envisaged by i2010.

62. The imposition of quota-type measures at this stage of development would be premature and would risk hindering the growth of these services, some of which are competing with larger and better funded providers. What is more, quota obligations might not be the best or most adequate way to encourage diversity in an "on-demand" environment, where consumers will decide what to watch and when from a catalogue covering a vast array of content material.

63. In summary, while Ofcom believes that Articles 4 and 5 of the TVWF Directive are still valid and adequate for the promotion of European works for linear services, we would find an extension of these provisions to non-linear services to be disproportionate. The Commission text rightly leaves it to Member States to determine what measures should be taken to promote, where practicable and by appropriate means, production of an access to European works. There are of course a range of other ways in which such promotion could take place, certainly not restricted to the introduction of a quota system.

3 November 2006

APPENDIX I

OFCOM'S WORK ON MEDIA LITERACY—SUMMARY OF ACTIVITIES

64. The relevant statutory provisions relating to the duty to promote media literacy are set out at section 11 of the Communications Act 2003 ("the Act"). Ofcom's work to promote media literacy is part-funded by grant-in-aid from the Department of Culture, Media and Sport.

65. Ofcom's definition of media literacy is "the ability to access, understand and create communications in a variety of contexts".

66. Our principal role is to provide leadership and leverage to help achieve our goal. In the early years the focus of our work will be on achieving greater understanding of the levels of media literacy in the UK, and encouraging greater awareness of and confidence and competence in the use of new communications technologies.

67. In order to gain an initial picture of the extent of media literacy across the UK, Ofcom commissioned an "audit" of how UK adults and children access, understand and create communications, with a particular focus on electronic communications. In this context, access has a much wider definition than take-up or accessibility issues: it includes understanding of what each platform and device is capable of and how to use its functions; while understanding relates to how content (such as television and radio programmes, internet websites, or mobile video and text services) is created, funded and regulated. The findings of the Media Literacy Audit were published as a series of reports which are available at: http://www.ofcom.org.uk/advice/media—literacy/medlitpub/medlitpubrss/

68. The Audit findings will help to target both Ofcom's and stakeholders' resources for the promotion of media literacy. Stakeholders were invited to a series of meetings across the UK in October 2006 to discuss what actions need to be taken to address the media literacy needs identified by the Audit.

69. Ofcom has created a number of partnerships to deliver activity to promote media literacy.

70. In England and Wales we worked with the National Institute of Adult Continuing Education (NIACE) to highlight media literacy as a major theme for Adult Learners' Week 2005 and 2006. In the run-up to, during and after the Week itself, NIACE encouraged colleges, voluntary and community sector providers, libraries and media organisations to offer open days, enabling adults to try out different media literacy tasters. In partnership with its Welsh arm, NIACE Dysgu Cymru, organised amongst other activity a media literacy conference for providers in the Millennium Stadium Cardiff.

71. Ofcom with the eGovernment unit in Northern Ireland produced a CD-Rom (Internet Made Easy). The aim of the project is to provide every household in Northern Ireland (700,000) with access to the CD to promote the benefits of technology for everyday life and work.

72. Ofcom and the Home Office are working with the industry to develop a standard and kite mark scheme for domestic internet filtering products. The aim of the project is to create a benchmark for the performance of Internet filtering, monitoring and blocking applications. This will help provide more internet users with the confidence needed so that they and their families can safely use the internet. The standard is due to be launched by the Home Secretary at a meeting of the Home Office Internet task Force in December 2006.

73. In recognition of the particular needs of older people, Ofcom organised, with Help the Aged, a series of media literacy workshops with broadcasters across the country. The workshops were for members of Help the Aged's "speak up for our age" forums and give forum members a first hand experience of news production; this experience can then be cascaded back to their forums and other membership organisations to enable them to engage with broadcasters more effectively.

74. Ofcom provided support for trainers taking part in Silver Surfer Week—a week-long event where local organisations and groups provide computer and internet taster sessions for older adults who want to learn and experience first hand the benefits of being digitally connected. Silver Surfer Week is organised by Age Concern and Digital Unite.

75. Ofcom publish a quarterly online bulletin to professionals with an interest in media literacy and has developed an extensive area of the Ofcom website with information on media literacy for both professionals and the public. The information is available at: http://www.ofcom.org.uk/advice/media—literacy/

76. Ofcom provide the secretariat to the newly formed Associate Parliamentary Media Literacy Group. This group, under the chair of Danny Alexander MP has developed a programme of events to help inform parliamentarians about relevant issues such as the changing regulatory environment and digital switchovers and older people.

77. We all face new challenges from emerging technologies and convergence of content delivery platforms. We anticipate the need to undertake further work to understand peoples changing expectations and experiences in new communications technologies.

78. As well as the work funded by grant-in-aid from DCMS, Ofcom undertakes and fully funds a range of work that supports this media literacy project. This includes activity in relation to Code development and implementation, consumer research including ease of use and uptake of technology, complaints and enquiries to the Ofcom Contact Centre, development and promotion of information and advice relating to digital technologies and liaison and lobbying of industry and political opinion formers in the UK and Europe.

APPENDIX II

STUDY BY RAND EUROPE ON THE INDIRECT IMPACTS OF THE PROPOSALS—OFCOM SUMMARY

79. Ofcom has published an independent study conducted by RAND Europe, which looks at the potential indirect impact of the European Commission's proposed Audiovisual Media Services (AVMS) Directive.

80. Since 1989, television services in Europe have been regulated by the Television without Frontiers Directive, which created a single market for the provision of television services and established minimum content rules in areas such as protection of minors and advertising. In December last year, the European Commission published a proposal for a new directive. The draft is currently being considered by the European Council and the European Parliament, and adoption is expected by 2007, at the earliest.

81. The Commission proposes to extend the scope of regulation to all audiovisual media services, which have been defined as services the principal purpose of which is the provision of moving images, with or without sound, to the general public, in order to inform, educate or entertain. Nine months into the discussions, it remains unclear which services are exactly caught by these proposals. However, it appears that a number of strategically significant new media sectors could potentially fall within the scope of the new Directive, including mobile multimedia, online gaming and IP television.

82. The proposal has raised serious concerns among UK and European industry, on the grounds that it will significantly increase regulatory costs and uncertainty. Further, it has been argued that it will negatively impact on innovation, European competitiveness, and the Lisbon Agenda goals.

83. For its' part, Ofcom has expressed serious doubts about the practicability and appropriateness of extending broadcasting regulation to a whole range of new media services which are very different from traditional TV, both in nature and in the manner in which they are consumed.

84. Clearly, in accordance with better regulation principles, it is important to be able to understand the potential impact that the Commission's proposals will have on these strategic sectors. The Commission, as required, published a regulatory impact assessment along with the draft Directive and asked RAND Europe to provide some supporting economic analysis as part of that process. RAND Europe identified a number of key factors which would determine whether the benefits of extending the scope would outweigh the costs. However, it was not possible within the study's timeframe for RAND Europe to look at the potential impact on specific industry sectors.

85. Ofcom believes such an analysis is critical for the purposes of assessing the full impact of the Commission's proposals. It therefore asked RAND Europe to undertake further research and to look in particular at the potential indirect effects in three key sectors: IPTV, mobile multimedia and online games. Indirect effects refer, in particular, to the possible effect that regulation could have on companies' investment and location decisions. RAND Europe concludes that these indirect effects, whilst difficult to quantify with precision, could be significant given that (a) the new media industries affected by this proposal may be at an early stage of development, with major investment and location decisions still to be made; (b) each of the sectors identified has elements within it that could be relocated relatively easily outside of the European Union; and (c) new media industries are often characterised by a significant number of small and medium sized firms which previous studies have shown are particularly vulnerable to regulatory risk.

86. The study concludes that:

— The new media sectors affected by this proposal are strategically significant for the EU economy. They can be expected to contribute above average growth compared with other sectors, and, critically, have a significant enabling role in relation to other key markets such as broadband deployment.

— There remains a significant problem of "regulatory risk" as a result of the definitions in the Directive being insufficiently precise. The risk arises because firms cannot state with any degree of certainty what the actual application of the Directive will be, and whether or to what degree they will be affected by it.

— In general, "light touch" regulation, wherever possible delivered through industry self-regulation, is important in both reducing the size of regulatory costs and reducing regulatory risk and uncertainty.

IPTV

— If the latter model prevails, it is highly probable that much of the activity regulated by the draft AVMS Directive will take place outside Europe and hence be outside the remit of the directive. As a result, no economic benefit would accrue to Europe from this economic activity. RAND Europe recommends that more analysis is done to understand the likely direction of this industry. RAND Europe also notes that it will be important to avoid the situation in which the costs of compliance with the AVMS Directive become a critical factor in determining the prevalence of the latter model.

mobile multimedia

online games

— Ofcom believes that this report highlights some important economic risks inherent in the Commission's proposals. These risks are particularly important in relation to the new media industries that RAND Europe has examined and which are strategic for European future competitiveness. These risks accrue not just to shareholders of the companies concerned, but to the EU economy as a whole and hence to EU citizens. The worst case scenario for Europe is that economic activity which would have taken place in Europe, providing jobs and stimulating growth here, will take place elsewhere, be it in the US or in the Far East. The results of the RAND Europe study are in accordance with feedback to Ofcom and the UK Government from businesses and investors.

87. Our conclusion is that legislators should:

— Make further efforts to clarify the scope of the services caught by the Directive.

— In addition to the general need for greater certainty, we think the RAND Europe study makes a compelling case for the complete exclusion from the proposals of the online games industry.