Memorandum by Virgin Media
SECOND CALL FOR EVIDENCE
1. INTRODUCTION
1.1 Virgin Media has previously submitted
evidence to the Communications Committee and attended a hearing
with the Committee in November. Virgin Media notes that the Committee
has now entered the second part of its inquiry and intends to
focus in more detail on the regulation of news and media ownership.
1.2 As will have been evident from Virgin
Media's previous submissions, Virgin Media is not itself a producer
of news programmes and is not, therefore, in a position to comment
in detail on the regulatory provisions of the Communications Act
2003 as they apply to the broadcast of news programming.
1.3 However, as Virgin Media set out in
its original evidence to the Committee, as a media business and
broadcaster, Virgin Media has a strong interest in ensuring the
quality and diversity of the news. A diverse range of news providers
is important both to a democratic and plural society and to a
commercially competitive broadcasting sector. When Virgin Media
previously submitted evidence to the Committee and appeared before
it in November, the Competition Commission and Secretary of State
for Business and Enterprise had not yet reached their final decisions
on BSkyB's acquisition of substantial minority stake in ITV. These
decisions have now been taken and published and Virgin Media considers
that they provide a useful insight into the effectiveness of the
media public interest considerations and raise pertinent questions
as to how the operation of these provisions could be improved.
2. THE EFFECTIVENESS
OF THE
MEDIA PUBLIC
INTEREST CONSIDERATIONS
2.1 This submission focuses, in light of
the Secretary of State's and Competition Commission's recent decisions
in connection with the acquisition by BSkyB of a substantial minority
shareholding in ITV, on the second question contained in the Committee's
second call for evidence: whether the public interest considerations
for media mergers set down in section 58 of the Enterprise Act
2002 are strong and clear enough to protect a diverse and high
quality news media.
2.2 As set out in Virgin Media's written
evidence to the Committee on 4 October 2007, as the only case
in which the media public interest considerations set out in the
Enterprise Act 2002 have been considered by the regulators, Virgin
Media believes that the process, approach and decisions of the
regulators in this case are very important for any consideration
of the efficacy of the current media public interest regime.
2.3 In Virgin Media's view, it is clear
from the BSkyB/ITV case that, while in Virgin Media's view the
relevant statutory provisions relating to plurality are clear,
their application by the Competition Commission and Secretary
of State in this case would suggest that a further review might
be appropriate.
2.4 Virgin Media considers that the Competition
Commission has erred in its interpretation of the provisions of
section 58A of the Enterprise Act 2002 governing the application
of the plurality test in this case. It considers that these errors
have had serious implications, as they have resulted in the Commission
applying its analysis to the wrong questions when considering
the effects of the BSkyB/ITV transaction on plurality.
2.5 Virgin Media considers that, as a result
of these errors, the Commission's conclusions on the plurality
issue are unsound. Accordingly, the adoption by the Secretary
of State of these same errors in his decision renders his conclusions
similarly unsound.
2.6 Section 58(2C)(a) of the Enterprise
Act required the Competition Commission to consider the reduction
in the number of persons with control of media enterprises as
a result of the acquisition. Section 58A (which is headed "Construction
of consideration specified in section 58(2C)"), clearly sets
out in mandatory terms how this provision is to be interpreted.
2.7 Notwithstanding the clear wording of
the Act, in Virgin Media's view the Commission has misinterpreted
and misapplied those provisions in a construction which finds
no support in established principles of statutory interpretation,
the overall scheme of the Act, the Explanatory Notes to the Communications
Act, the DTI's Guidance, or Ofcom's advice to the Secretary of
State. The Competition Commission's misinterpretation of the legal
provisions appears to have arisen from a desire on its part to
apply the law as it considers it should be rather than as it is.
2.8 In its provisional findings the Commission
considered that it was appropriate for it to apply a qualitative
assessment of control "regardless of" the correct
interpretation of the statutory provisions. In doing so it failed
to appreciate that the public interest regime is distinct from
the competition test and requires a legal and public interest,
rather than a quasi-economic, analysis. Plurality is different
from competition, and the different test reflects its binary nature.
Once plurality has been lost through the acquisition of material
influence, it is gone.
2.9 As a result of its misinterpretation
of section 58A, the Competition Commission has applied a "substantial
lessening of plurality" test which is not provided for in
the Act. In consequence the Commission concluded that the Acquisition
would not "materially affect" the sufficiency of plurality
of persons with control of media enterprises servicing audiences
for news. It did not consider the correct statutory question,
which is whether, following the bringing together of Sky and ITV
under common ownership or control (as deemed by section 58A(5)),
sufficient plurality of persons with control of media enterprises
remains.
2.10 It is notable that neither the Competition
Commission nor the Secretary of State were sufficiently sure that
their analysis of the relevant legal provisions was correct that
they could discount the analysis presented to them by Virgin Media.
Indeed, both the Competition Commission (at paragraph 5.26 of
its report) and the Secretary of State (at paragraph 20 of his
decision) attempted to consider how their analysis might be different
if their legal analysis were incorrect. The fact that these regulators
sought to apply a range of interpretations of the provisions does
little to enhance future certainty as to the application of these
provisions. This lack of certainty in the first ever case will
undermine the future application of the provisions to the detriment
of all those with a stake in a predictable and transparently regulated
media sector.
2.11 Virgin Media considers that the plurality
test is, at heart, a simple one, which requires the Secretary
of State to look at the number of persons controlling media enterprises
post acquisition and to assess whether this is sufficient to safeguard
diversity of the media in respect of audiences in the UK. However,
it is apparent from the Competition Commission and Secretary of
State's analysis that confusion has arisen from their interpretation
and application of these provisions.
2.12 In the Secretary of State's final decision
in the Sky/ITV case, he has attempted to clarify the reasons behind
the reference decision, stating that, in making a reference, "the
Secretary of State is asking the Commission to undertake a qualitative
assessment of the actual position as it relates to the continued
sufficiency of plurality following the relevant merger situation
concerned". However, it is not apparent from the Secretary
of State's reference decision that this was the case, since it
appears that, in making a reference, he was of the view that if
Sky and ITV were found to be under common control under section
26 of the Enterprise Act 2002, he would also be required to treat
them as under common control for the purpose of the plurality
test (see paragraph 17 of the Secretary of State's reference decision).
3. THE EFFECTIVENESS
OF THE
FOUR REGULATOR
SYSTEM
3.1 In the Communication Committee's Second
Call for Evidence, it asks whether having four bodies involved
in the regulation of media markets gives rise to any problems
and whether there are any reforms that might address such problems.
In Virgin Media's view, the four regulator system does not appear
to have worked effectively in the BSkyB/ITV case, although as
regards the public interest assessment, three regulators are of
central relevance, as the OFT is limited to considering jurisdiction
and competition issues.
3.2 Virgin Media is not convinced that the
role of the Secretary of State in this case has added anything
to the process other than to delay the decisions at both the first
and second phases, where the Secretary of State ultimately simply
followed the views taken by the OFT, Ofcom and Competition Commission.
For example, at the first phase, the OFT announced on 12 January
2007 that it considered that it had jurisdiction to consider the
transaction. Under its ordinary 40 working day timescale, the
OFT would have reached its decision as to whether to refer the
transaction to the Competition Commission by 9 March. Following
the Secretary of State's intervention, the OFT and Ofcom were
required to make their reports to the Secretary of State by 27
April 2007, which they duly did, but it was not until nearly a
month later on 24 May 2007 when the Secretary of State announced
his decision to follow the recommendations of the OFT and Ofcom
and refer the transaction to the Competition Commission. At the
second stage, the Competition Commission reported to the Secretary
of State on 14 December 2007, with the Secretary of State's decision
being made on 29 January 2008 adopting all of the findings of
the Competition Commission.
3.3 All told, the involvement of the Secretary
of State in this case appears to have added at least three months
to the regulatory process in the context of the ownership by Sky
of a significant minority shareholding in a key publicly listed
competitor at a time of rapid and dynamic change in the industries
in which they are active. Given the Secretary of State has accepted
the decisions of the OFT, Ofcom and Competition Commission at
each stage, it is debateable whether the benefits of his involvement
have justified the additional three months.
3.4 One of the additional problems with
the multiple regulator system is the delineation of responsibilities
between them. For example, it is clear that Ofcom reached a particular
view on the interpretation of section 58 and section 58A of the
Enterprise Act 2002 in sending its Report to the Secretary of
State on 24 April 2007 recommending a reference and it was also
called to give evidence before the Competition Commission.
3.5 Appearing before this Committee in November,
following the publication of the Competition Commission's Provisional
Findings, Mr Ed Richards, Ofcom's Chief Executive responded to
a question from the Chairman asking whether he was surprised at
the Commission's provisional conclusion was that pluralism of
the news was not an issue raised by the acquisition, by saying:
"We were a little surprised, yes. We are
pretty relaxed though, because they found a concern in relation
to competition. As a result of finding a concern in relation to
competition, they have raised the question about the appropriateness
and appropriate level and conditions of that shareholding, and
therefore the issue will be addressed through that means. We are
therefore pretty relaxed about where we are". (Minutes of
Evidence, 14 November 2007, Response to Q900)
3.6 In the Secretary of State's final decision
on 29 January 2008, the Secretary of State noted that Ofcom had
confirmed that it did not intend to provide any further advice
to the Secretary of State in light of the Commission's final report.[6]
3.7 There are two points that Virgin Media
considers are of importance arising from these events. First,
there appears to be a failure in the regulatory review process
and communication between Ofcom and the other regulators. It is
clear from Mr Richards' statements before this Committee that
Ofcom had different views on the question of the effect of the
acquisition on media plurality. Indeed, that Ofcom had a different
approach to media plurality is apparent from the Ofcom Report
to the Secretary of State on 27 April 2007. Instead of conducting
an assessment of the qualitative level of control that BSkyB would
have over ITV as a result of the acquisition, as the Commission
has done, Ofcom conducted a sufficiency-based analysis of the
levels of plurality in independent ownership following the acquisition
applying the deeming provisions in the Enterprise Act 2002 to
presume a reduction in the number of media enterprises in independent
control as a result of the acquisition.
3.8 In Virgin Media's view, it is inappropriate
for Ofcom to evaluate the plurality assessment in this case from
the perspective that the Commission's finding on competition means
that it is irrelevant whether it adopts the correct interpretation
of the plurality test. It appears that Ofcom has not strongly
presented to the Commission its view on the approach to plurality
because the Commission's approach to competition would result
in some degree of divestment. Virgin Media considers that a greater
level of divestment may have been required if the Commission had
also identified concerns in relation to plurality. In this connection,
Ofcom's failure to address its concerns about the Commission's
plurality assessment may have made a difference to the ultimate
decision on remedies. Moreover, the case sets a very poor precedent
for future cases where there may not be a necessary coincidence
of competition and plurality issues (for example in cross media
situations where different product markets are in issue as regards
the competition analysis).
3.9 Secondly, it is questionable whether
Ofcom is fulfilling its duties as the specialist sectoral regulator
for communications and the media if it fails to address its concerns
in relation to the Commission's approach to a key aspect of the
legislation relevant to the fulfilment of its duties. In particular,
whilst Ofcom appeared before the Competition Commission and it
is conceivable that it stated its views to the Commission, it
is surprising, given Mr Richards' views before the Committee,
that Ofcom decided not to make any representations to the Secretary
of State. This reinforces Virgin Media's view that the four regulator
system does not work effectively as the division of responsibilities
between them does not appear to be clearly demarcated. If Ofcom
were surprised by the approach of the Commission to plurality
it would have been beneficial for it clearly to state its views
on this to the Secretary of State.
3.10 As set out above, it is clear that
there were some novel issues to be determined in analysing the
plurality test set out in the Enterprise Act 2002 for the first
time. As such, there may be some benefit in a "second pair
of eyes" being involved in the process. However, it is far
from clear that the presence of four pairs of eyes have materially
added to the consideration of these issues. This is particularly
the case given Ofcom's apparent unwillingness to put its views
forward to the Secretary of State, and the Secretary of State's
apparent failure to apply his own analysis to the case as a check
to the views being put to it by the Commission.
3.11 For a multi-regulator system to work
effectively, there either needs to be a clear delineation of responsibilities,
or a willingness by the regulators to express contrary views to
one another and to explain and justify those views. The Secretary
of State should take an engaged approach to the assessment of
the issues, balancing the views of the regulators and interested
parties. The apparent unwillingness of the regulators to tread
on each other's toes appears to have undermined the effectiveness
of the regime in this case.
3.12 Finally, there is a lack of transparency
as regards the Secretary of State's involvement in the decision-making
process and an opportunity for all interested parties to put forward
their views. There is no right for the main parties or third parties
to have any dialogue with the Secretary of State or BERR officials.
Having written to the Secretary of State in response to his invitation
for additional representations, Virgin Media volunteered to meet
with the Secretary of State or BERR officials to explain its views
further. The response Virgin Media received was that there would
be no meetings between BERR and any of the interested parties.
Virgin Media expressed the desire, that if any such meetings with
parties did take place, that it should be given the same opportunity
to meet with BERR officials. In response to a parliamentary question,
Gareth Thomas MP indicated that BERR officials had met with representatives
of BSkyB, but no such opportunity was extended to Virgin Media
(or presumably to other interested parties and stakeholders).
4. CONCLUSIONS
4.1 Virgin Media considers that the publication
of the Competition Commission's and Secretary of State's decisions
in relation to the BSkyB/ITV case represent relevant context for
the Committee's review of the effectiveness of the media public
interest criteria set out in section 58 and the efficacy of the
multiple regulator system.
4.2 When the media public interest provisions
were introduced by Lord Puttnam into the Communications Bill in
addition to the 20/20 Rule (which prevents a national newspaper
proprietor with a market share greater than 20% from purchasing
more than 20% of ITV) one of the concerns expressed was the danger
that the larger national newspapers could acquire the remaining
Channel 3 licensees. This clause was inserted prior to the merger
of Carlton and Granada and accordingly there were two Channel
3 providers at that time. The concerns expressed would therefore
be even greater following their merger to create ITV. Accordingly,
like Mr Richards, Virgin Media was surprised that the Competition
Commission and Secretary of State did not identify a plurality
concern in relation to the bringing together of BSkyB and ITV
under common control.
4.3 Virgin Media considers that, in this
case, the failure of the Commission and Secretary of State to
address the plurality concerns which, in Virgin Media's view,
plainly arise from the combination of BSkyB and ITV highlights
the possibility that the media plurality test is not robust enough
in its application to protect a diverse and high quality news
media. Whilst in this case, assuming there is no successful appeal
by BSkyB of the decision, it is fortunate that the Competition
Commission has reached an adverse conclusion on competition (which
appears to be Ofcom's position) and the effects on plurality will
at least be mitigated by the likely reduction in shareholding
that will be required in order to address those concerns, this
will not be the situation in every case.
4.4 It is clear from the statements of the
various regulators and their published documents that the Competition
Commission and Ofcom had different views on the correct interpretation
of the various provisions of the media plurality test and, in
particular, the provisions of section 58A. Virgin Media considers
that the scope for two alternative views as to the interpretation
and application of these provisions within the regulatory system
is unfortunate and may lead to difficulties in other cases.
4.5 Furthermore, Ofcom's failure to make
representations to the Secretary of State despite its surprise
at the Competition Commission's conclusion on plurality issues
reflects a significant failing in the current regulatory system.
7 February 2008
6 Final decisions of the Secretary of State for Business,
Enterprise and Regulatory Reform on British Sky Broadcasting Group's
acquisition of a 17.9% shareholding in ITV plc dated 29 January
2008, paragraph 12. Back
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