Select Committee on Communications Minutes of Evidence


Examination of Witnesses (Questions 2020 - 2039)

WEDNESDAY 27 FEBRUARY 2008

Mr Andrew Harrison, Mr Mark Story and Mr Daniel Bruce

  Q2020  Chairman: Let me just start then on what is obviously one of your chief concerns and that is the current rules on plurality of radio ownership. Just tell us how they work.

  Mr Harrison: The rules are designed to ensure that in any local area there is provision for the plurality of two commercial providers plus the BBC in any local area. The way that then works is there is a points system by area under the regulation of Ofcom where points are totted up relating to the coverage area of a radio centre licence, the population that is therefore served and the relative market share to try to ensure that you get that plurality of provision.

  Q2021  Chairman: How are the areas defined?

  Mr Harrison: The areas are defined by the licensed coverage area consistent with the licence award, so with the particular measured coverage area that is part of the licence award.

  Q2022  Chairman: Tell me what that actually means in a city like Birmingham or Manchester. I am out-of-date. How many commercial radio stations are there in somewhere like Birmingham?

  Mr Harrison: In a big city you would have a large number of radio stations because you would have all of the national radio stations that would naturally reach Birmingham. You would automatically receive all of the BBC national services be that on analogue or digital, which in total is round about a dozen services, plus you would receive the three national commercial services, which is Virgin, Talksport and Classic FM. So you would automatically receive about 13 or 14 national stations. Then within that local area, in Birmingham specifically, I do not know the data off the top of my head, there would be another ten or 12 services that would be received just in that metropolitan area. It depends very much on the size of the population, how many services have been licensed and, in theory, can the area sustain.

  Q2023  Chairman: Give me an example of where the BBC plus two local stations would not be in the same ownership? What kind of area would that be?

  Mr Harrison: In principle that is all areas because that is the current ruling.

  Q2024  Chairman: You have given me Birmingham which has many, many operators inside it. It comes down at the other end to just two. That would be the minimum, would it?

  Mr Harrison: That would be the minimum if there is that many radio stations and generally there is. Generally there is more than one. I live in York. In York you have clearly all those national services that we have talked about from both the BBC and the commercial sector. Then in York itself you would have the local service, which is BBC Radio York and you would have a variety of others. In York city itself you can receive a variety of local stations depending on exactly where your house sits in terms of coverage. The local station is Minster FM, which is run by a small commercial radio company called the Local Radio Company. There are other services that reach into York, for example Viking FM, which is one of Mark's group of stations, run by Bauer, which is based in Hull but which would still spill over. You would typically get a station based in the market town and then, depending on the coverage areas, that would spill into the town from other stations.

  Q2025  Chairman: Although you have consolidation of ownership inside the radio industry, that means that one consolidated owner is competing with another consolidated owner.

  Mr Harrison: That is right, yes.

  Q2026  Chairman: So it is not that you have a situation where one local business is dealing with another local business, although that can happen. The typical thing would be a bigger owner but operating a local station competing with another bigger owner operating a radio station. Would that be fair?

  Mr Harrison: That would be true. The overall size of the commercial radio sector is actually relatively small. The total turnover for the sector is about £600 million across these 320 stations. So this is a very small sector of the overall media world. Johnston Press alone, the local newspaper group, turns over more than all of commercial radio. On average you have 320 stations and £600 million turnover. On average each station is a small business turning over less than £2 million. Typically they tend to employ about 10 people locally and they will be run very much as small self-contained businesses because, even though they may be part of a bigger holding group, the way the regulation works on local production and studio location and so on and so forth means there is not a huge opportunity to consolidate and aggregate up a lot of the operations. So what you tend to have is a holding group with a string of small stations but they are all run as individual small businesses. That is one of the issues that make the sector very vulnerable because all of these small businesses are struggling to survive in today's multimedia world. I guess the other point to observe in this context is that while there is a degree of consolidation in the sector, the absolute amount of consolidation and the absolute size of the businesses are still relatively small. For example, the 320 stations are consolidated into about 70 groups. We are still talking about pretty small media businesses. You will all be aware of the current news and so on in the press about GCap. GCap is the biggest commercial radio operator; it is about 35% of the market. The current bid on the table for GCap is around about £300 million. This is still a small business, particularly in a media context, competing with the sort of owners that you have running television stations or press organisations or on-line businesses which are much, much bigger concerns.

  Q2027  Lord Maxton: If you take Smooth Radio, which is one of the local ones, that is owned by the Guardian Media Group who run local newspapers and I think are involved in television as well, are they not? It is not quite as straightforward as saying that they are simply radio companies.

  Mr Harrison: That is correct. The only pure radio company is GCap. Bauer, the number two in the market, has clearly been sold and broken up, but it did have magazine interests and so on as well. Yes, they are part of bigger parents. None of them is owned by the bigger media players in the market and certainly not by the bigger private companies who have the funds to invest in the sector in terms that we would all be familiar with, ie Google, Microsoft, Yahoo, Sky and News Corp. None of those is in the sector.

  Q2028  Chairman: Tell us briefly what you would want to do to reform the position because you obviously feel strongly that it does need reform.

  Mr Harrison: The key thing that we feel strongly about, my Lord Chairman, is that the current rules that require this two plus one media ownership in a local market is outdated given the way that we now have to compete for revenues and for listeners across a multitude of media platforms. We think in any local market it would be entirely appropriate for that to be one operator plus the BBC. There is already, as you will all know, a significant market intervention into commercial radio, it is much more significant than any other sector of the media industry because of the huge scale in investment of the BBC. The BBC has four of the five national FM stations, Radio 1, Radio 2, Radio 3 and Radio 4. The commercial sector has only Classic FM on the limited FM spectrum. We struggle to compete at a national level purely on spectrum allocation. At a local level, there is a BBC local service in each of the local markets as well funded as part of the overall BBC licence fee. Our belief is that in order to continue to provide the diversity of output and the valuable services that we provide to a local community then the ability to consolidate ownership at that local level a little more would enable us to get more scale at a local level and therefore secure the profitability of these small local businesses.

  Q2029  Chairman: The inevitable impact of what you are saying would be that there would be a process of consolidation of ownership throughout the industry, would there not? What would happen is that one company that owns one station would make a bid for another company and so it would go on and deals would be done.

  Mr Harrison: I guess logically that is right, yes. At the moment you have 320 stations and 70 owners. You can imagine a process over time where people would trade and swap licences and move their businesses with the expectation that you would end up with clusters of stations that would make it much easier for these small commercial radio businesses to survive. In the background to the "Future of Radio" report which Ofcom has just concluded they estimate 40% of local commercial radio businesses are unprofitable at the moment. We believe that is in part due to this fragmentation of ownership, the regulation that requires small businesses based in local areas without the ability to consolidate and get some of the structural saving that we think would make these businesses viable.

  Q2030  Lord Grocott: You described Birmingham and the variety of stations there are there. Unless I have misunderstood something, there is nothing in the rules of ownership that would prevent those stations consolidating under the present rules. They are well in excess of what is required under the ownership rules, but apparently they are not doing that, are they? I am slightly baffled by the economics in any case because there seem to be so many stations. I would love to know what sort of listening figures they get on these smaller stations. Am I right in saying that in a sense where there are no constraining rules of ownership, as in a big city, it does not seem to be the case that they automatically consolidate?

  Mr Harrison: I think that is right. Where there is a metropolitan area with lots of stations there is an opportunity for certain of those stations to come under a common ownership. If that does not happen, our judgment is that is because the market was naturally working pretty well and pretty effectively. Most of the major radio groups in commercial radio, for understandable reasons, will want to have a presence in the major metropolitan areas. Most of the major groups have a presence in London: Global Radio has a presence with Heart, GCap with Capital, the Bauer Group with Magic and Guardian Media Group with Smooth Radio. None of those groups would want to lose a presence in London. Those London licences they would consider as valuable. I think there is a natural dynamic in the market with the way that licensing works that quite naturally provides for plurality anyway. Our contention is it is an anachronistic to have set specific rules for radio that continue to apply in any area this two plus one ownership regulation when that is not something that affects any other media sector. In local press or in other sectors there are the natural tests that apply for market competition and consolidation from either the competition rules or indeed the Secretary of State's ability to intervene in cases of special public interest, but there are no monospecific regulations. I think our contention is that those regulations that were established in a different era, when radio spectrum was scarce and there were very few other sources of news provision, are perhaps somewhat anachronistic in today's multimedia age.

  Q2031  Chairman: The other side of the coin is that in the smaller areas you are going to have local monopolies, are you not?

  Mr Harrison: Our contention would be that radio is not a monopolistic provider of media services or news in those local areas. There are cross-media ownership rules around securing plurality. In most local areas now citizens and consumers in those areas may listen to local radio, may read the local paid for newspaper, may read the free sheet, may go on to local community websites or may access the local council website. There is lots of opportunity for them in the modern age to receive news plus there remains the BBC as well in every market.

  Q2032  Chairman: Your two colleagues have been remarkably restrained. I do not know if they want to add anything to what has been said.

  Mr Story: We feel that there is a new dawn here. We are seeing convergence of the media and the platform is not as important as it once was, it is becoming less important. We were discussing this yesterday and saying that the BBC is not in local newspapers. Last night I had a look in several local areas at the BBC local radio site versus the local newspaper site and their news provision was virtually identical. So they may not be in the same business right now but they are veering towards that as we get there. The convergence means that regulating radio in a separate and different way is putting an undue strain on radio. All of our groups have radio stations, we are the second largest group in the UK and we have certainly got radio stations inside our company which are not profitable and, frankly, are unlikely to be profitable and yet their existence is dependent on being part of a group which has profitable radio stations.

  Q2033  Chairman: Could they be profitable if the rule was lifted?

  Mr Story: We would want to run those stations at a certain level. We would want to run them with news and with content which we thought was valuable to our listeners and to our advertisers. I guess we could turn them into jukeboxes but that is not the business that we are in in local radio. The two drivers of audience for us are a strong sense of locality through the news and through involvement with the community and personality, who they want to listen to.

  Q2034  Chairman: Mr Bruce, is there anything you want to add?

  Mr Bruce: Obviously Mark is speaking for the second largest group in the country. The CN Group owns all but nine radio stations, the majority of which have broadcast areas of less than a quarter of a million people. When those radio stations operated in a standalone environment prior to acquisition by the CN Group they were operating in very challenging circumstances indeed and profitability seemed like a distant dream on the horizon. We have already benefited extensively from the previous relaxations in ownership rules and being able to own radio stations where their areas are conjoined in terms of sharing resource and capitalising that. Ofcom has granted permission to allow us to co-locate a number of our smaller radio stations in the Midlands which will save us a considerable amount of money but will also secure the long-term viability of those local services. Within that there has to be a degree of self-regulation on the part of the service provider in terms of the relevance and the distinctiveness of the local input they would provide under that market.

  Q2035  Baroness McIntosh of Hudnall: You are obviously very keen to loosen up the rules and let the market do the work as it were. Is there not a danger that if you do that then the most expensive and difficult bit of providing content, which is the provision of news, is going to become less attractive? Can you just tell us how, broadly speaking, the `localness' of what you provide by way of news is both collected and edited? How do you get your local news and how do you determine what you are going to make available to your listeners?

  Mr Harrison: Our contention would be that the amount of news provision and the way that provision is required to be gathered locally and presented locally is covered within the format regulation when a licence is granted. So it is nothing to do with the ownership of the stations. The requirements on news provision are part of the licence regardless of ownership and we can talk about how that is then done.

  Q2036  Baroness McIntosh of Hudnall: I think you said that it is difficult for smaller stations to make the necessary investment. You were talking about the benefits of larger ownership groupings within which it would be possible to invest and one of the ways in which that investment might be directed would be, for instance, towards news gathering and journalism. It is partly about ownership, is it not?

  Mr Harrison: It is. The reason they are related is as I have said, there is a requirement as part of the regulation when you are granted the licence as to how much content and so on you need to produce and where studios need to be based and so on and so forth. In practice, that has created the current patchwork that we have of 320 stations covering 320 different areas across the country. If at the same time you then layer on top of that licence requirement format requirements separate and additional rules on ownership you actually end up with an inadvertent consequence in a lot of local markets where two or three small stations have quite onerous format requirements on news gathering and no opportunity to consolidate in ownership terms with their neighbouring or nearby station. As a result you are building an awful lot of cost into the business model, studio time, quite small, tightly defined areas for journalists to do coverage and so on that we believe could much better serve listeners if you could create local hubs, if you could create co-location stations and where we have got examples of that we are beginning to see the benefits. If you think of today's story about the earthquake on the east coast, which is a classic example of where local radio news provision is absolutely at its best, that is a story that breaks at 1 o'clock in the morning. You need to be a 24-hour local station to cover it. It is probably after the deadline when most local press has gone to print for their morning editions, if there is a morning paper in the area, but in nice time for the local breakfast shows. The local stations in those areas, be it Lincolnshire or Humberside or whatever, will have a format in the licence that requires them to cover the stories and how they might go about it. The question is how economically viable that is if they also have different ownership. Would you actually get better coverage of that story if you had a group that could own the station in Grimsby and the station in Lincoln and the station in Market Rasen and be able to cover the story properly with hub resource or do you get better coverage having different owners in each of those towns?

  Q2037  Baroness McIntosh of Hudnall: If that story was covered from one hub and Market Rasen and Grimsby and all of those places were served by one single provider, how easy or difficult would it be for that provider to differentiate between the impact of that story in Market Rasen and the impact in Grimsby, and would they care to do so?

  Mr Harrison: We have a great example. Maybe you could talk about Coventry Airport because it is very interesting in this context where we have got exactly that situation.

  Mr Bruce: The news hub concept has evolved by Ofcom where permissions were granted to companies such as ours to run a news hub originally and currently maintains the requirement for professional news gathering resource to be available and dedicated to each geographical area within the broader hub network. So the way that we deliver that at the moment is we have a news hub in Coventry for five radio stations.

  Q2038  Chairman: How far away is that?

  Mr Bruce: From?

  Q2039  Chairman: From where you are operating.

  Mr Bruce: We have a radio station in Coventry and then we have radio stations in Stratford, Rugby, Banbury and Tamworth and they are all currently served by these hubs. Perhaps I could transfer the earthquake point to Coventry for the purposes of this answer. Each of those individual stations and broadcast licences has its own professional news gathering journalist, it is just one person and they work pretty much Monday to Friday, nine to five and they are responsible for the initial nuts and bolts of the news gathering process for that particular station. Then the news bulletins are produced centrally and the editorial process happens centrally with a team of three editors in the middle. In answer to the differentiation between content and its relevance for different audiences, we were discussing an example from our own hub in the Midlands whereby Coventry Airport came under quite a lot of scrutiny three or four years ago when it decided to reintroduce low cost budget flights. Our station in Coventry and the Coventry city community developed a very positive approach to this and was very supportive of Coventry Airport's proposals, but the radio station in Stratford whose broadcast area pretty much conjoins the Coventry station's broadcast area at the airport developed a rather anti-Coventry Airport agenda. Now, because we had the expert news gathering staff in each of their respective patches they were able to skew their agendas accordingly to what was happening in local communities. It was largely to do with the way the civil authorities were responding to this particular situation. Within that it also allows us to deliver more impartiality as well. If you had a standalone station in Coventry that was developing a very pro-Coventry Airport agenda that would potentially undermine the impartiality of that news coverage, as would be the case with the Stratford station in developing an anti-Coventry Airport agenda, but because that content from both sides of the fence is more widely available, there is more news covering resource dedicated to that one story, we were able to skew it accordingly with ensuring that impartiality was delivered at the same time. There is an awful lot to be said under the news hub model for maintaining that local `in patch' news gathering journalist or professional dedicated resource.


 
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