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Regulation of Television Advertising - Communications Committee Contents


Examination of Witnesses (Questions 460-514)

Mr Steve Williams, Mr Tom George, Mr Geoffrey Russell and Mr Andy Jones

30 NOVEMBER 2010

  Q460The Chairman: Good afternoon. Thank you very much for coming along. I am delighted to see that you have brought your own name tags, as well as those provided. We're double banked now, so there is absolutely no chance that we will misidentify you in the course of the proceedings. I wonder if you could introduce yourselves and just explain your area of expertise, because obviously it will be very helpful when we are addressing the questions to know where the thrust of them should go.

  Could I also apologise? I am really sorry that we were delayed but, as ever, we have internal deliberations to get through as well. So I am sorry for that.

  Mr Russell: If I could possibly kick off then. My name is Geoffrey Russell and I'm the Secretary and Director for Media Affairs at a body called the IPA.

  For those of you who have not come across the body before, the Institute of Practitioners in Advertising is the trade association and professional institute for UK advertising agencies. We have 263 corporate members who are primarily concerned with providing strategic advice on marketing communications, including the creation and the placing of advertising. These members are based throughout the country. They are responsible for over 85% of the UK's advertising agency business and they play, we like to think, a key role in advising the nation's companies on how they should deploy their total marketing communications.

  While the IPA membership comprises all forms of advertising agency, given the nature of the subject today we have representatives from our media policy committee, which is called the Media Futures Group. IPA media agency members will be responsible for planning and buying their clients' media budgets across all the different media in the UK, and the Media Futures Group represents their interests from large to small on matters of common concern.

  I'm a generalist and I will defer to my expert colleagues who work, as it were, at the coalface of media. So, I will start with Steve Williams at the end there.

  Mr Williams: Hello there. I'm Steve Williams. I'm the Chief Executive of OMD, which is part of the Omnicom Group in the UK. I sit as Chair of the Media Futures Group with the guys here. Through history, I'm a TV trader by background, and I now run the agency in a more general sense.

  Q461  The Chairman: Could you just explain what Omnicom does?

  Mr Williams: Omnicom is a global marketing services group.

  Q462  The Chairman: You are media buyers and so on?

  Mr Williams: Absolutely. A full range of marketing services—all the guys around the table work within that, but I work specifically within OMD, which is the media division.

  Mr George: Good afternoon. I'm Tom George. I'm the CEO of MEC UK, part of the WPP Group, which is also a global marketing services group. Again, in an earlier part of my career I headed up trading for a media agency, so was responsible for directly dealing with all the broadcasters.

  Mr Jones: Hello. I'm Andy Jones. I'm CEO of UM, which, like the other two guys at the end there, is a media communications planning and buying agency. Again, it's owned by one of the large advertising groups, Interpublic. And again, like Tom and Steve, my background originated in the TV trading side of the business. In fact, I worked at ITV on the sales side trading with agencies before I came over to the agency side, although that was many years ago I must admit.

  The Chairman: So I do not know whether you are a poacher turned gamekeeper or a gamekeeper turned poacher.

  Mr Jones: You decide.

  The Chairman: Very good. Geoffrey, will you help us direct the traffic? That might be necessary, I think.

  Mr Russell: Yes, indeed. It will be my pleasure.

  The Chairman: I think that to some degree there may be competition in answering the questions. We have a very competitive group here.

  Mr Russell: We did spend a little time divvying up responsibilities this morning.

  Q463  The Chairman: Good. That is very helpful. Thank you. Perhaps I could introduce the first question. Since the introduction of CRR the number of commercial impacts has increased by about a third. At the same time, the price per impact that advertisers are paying has fallen significantly in real terms, even after the recent recovery and even for ITV1 and Channel 4. Do you agree that advertisers are now able to buy many more impacts and are also paying much less for each impact?

  Mr Jones: Yes, that's true. Over the last six, seven years or so commercial impacts have increased by something like 35%, due to the extra channels that have come on board primarily. So, the price of airtime has deflated overall by about 16%, although interestingly ITV has only deflated by 6% so it's managed to stem the tide in many ways. There are a number of reasons why the price of airtime has come down. You have mentioned commercial impacts, but it's not just that and we believe that the UK digital economy is one of the biggest factors in this as well. A lot of money has gone out of television. There is a big e-commerce business in the UK. A lot of money has gone online or it has gone to search, so that has been a factor as well, but I guess increased supply of commercial minutage is significant.

  Q464  The Chairman: Is this post hoc or propter hoc? Is it just simply the result of the digital age or is it because of CRR being instituted in 2003?

  Mr Jones: No. I think since 2003 we have seen broadband penetration increase significantly in this country and, as I say, we lead the world in many ways in the online e-commerce economy. So a huge amount of money is being spent online by advertisers and that has had an effect on all other media, not just television.

  Q465  Earl Onslow: I am extremely confused by the system of discounts. Can you tell me if anybody ever pays the full market price?

  Mr Jones: Do you mean on television specifically?

  Earl Onslow: On television.

  Mr Jones: There are lots of advertisers who would pay, depending on what kind of airtime they want to reach, what kind of audiences.

  Q466  Earl Onslow: If somebody quotes £10 an hour, or whatever the figure is, media companies go round and negotiate a discount, but somebody will actually pay that £10, will they?

  Mr Jones: Or more. It depends, as I say, in which programmes you're advertising, on your selection of channels, when you book, if you commit late, what you commit to the TV stations in advance, whether you're prepared to guarantee them X or Y of your budget. There are a number of factors. Then quite often after campaigns have been booked, advertisers need to make amendments to those in the short term, for a variety of reasons, and that tends to get quite heavily penalised, particularly if you get close to the date of transmission. So there are a number of ways in which premia are paid, yes.

  Mr Williams: Without wishing to get too technical, there are a number of different target audiences that are bought within the TV market. So, a price for a spot in "Coronation Street" against target audience A, let's call it housewives, will be a very different discount to a target audience if you were buying ABC1 adults. There's a balancing act that goes on in terms of that whole mathematical equation, so you're right to ask the question.

  Q467  Lord Gordon of Strathblane: Just to supplement the question. My understanding is that the ratio of the top rate to the bottom rate for the same sort of spot is about 10 to one. Is that correct?

  Mr Jones: Do you mean some people pay 10 times more than others?

  Lord Gordon of Strathblane: Well, depending on when you buy it and this, that and the other thing.

  Mr Jones: I would imagine that if you book a late spot in the "X Factor" this weekend on Friday, compared to committing to a very cheap spot on a low-rating channel months in advance, yes, that is probably true.

  Q468  Lord Gordon of Strathblane: Just to pick you up on an earlier point you made, I rather got the impression that you thought there had been a transfer of business from TV to the internet.

  Mr Jones: Yes.

  Lord Gordon of Strathblane: I think a lot of evidence put forward by the advertising industry has suggested that TV is immune from the internet, and that therefore nothing has changed that would warrant changing CRR.

  Mr Jones: I don't think any media is immune to the internet at all. I don't think that's true.

  Mr Russell: I think it would be true to say, however, that certain media have been more vulnerable and if you were to look at, say, the regional press you would have seen that that had been very severely hit by the arrival of the internet, most notably in the loss of things like its classified advertising. Similarly, if you were to look at one or two—I'm just trying to remember the other areas; radio in particular—they have suffered very badly. Alongside that, television has probably suffered less.

  Q469  Lord Gordon of Strathblane: There is a general feeling that if CRR were removed the cost of airtime would go up. Is that your impression?

  Mr Williams: Yes. There's no doubt, in our view, that the costs would go up. As a generalisation, I think it's fair to say that if interested parties are looking to remove a control that would be for reasons of making more money. Our point is, there's no question that if control was taken away—in this instance CRR or whatever now may be put in its place, without getting on to a further question no doubt—that would have the effect of prices uncontrollably going up potentially, yes.

  Q470  Lord Gordon of Strathblane: So it's not a zero-sum game? It is not as though the removal of CRR would hit the other commercial channels? ITV would win over the other commercial channels, all boats would rise and the price of all airtime would go up, you would argue?

  Mr Williams: There is no doubt that with ITV's power it would stand to gain above other stations in that regard.

  Q471  Lord Gordon of Strathblane: But do you think the others would gain as well?

  Mr Williams: I think that would be a tough one for them, unless the general economy lifted to such an extent that that gave a greater opportunity for all, but if all things were equal, then I think that would put much more control back into ITV's hands to increase its prices over others.

  Q472  The Chairman: One of the issues for us is whether there is this idea of a kind of fixed pot for advertising budgets, and that is why Lord Gordon used the phrase "zero-sum game". But the issue is, as he said, whether it does make all boats rise in those circumstances, whether additional money could come into advertising, or whether all that would happen would be that ITV would benefit at the expense of other broadcasters.

  Mr Williams: Our view would be that there is a good chance that ITV would benefit over and above other broadcasters, in that scenario.

  Mr Russell: Basically, it would suck the money away from Channel 4 and Channel Five if CRR were removed.

  Bishop Liverpool: I think question 3 has been dealt with so I am going to pass on to question 4.

  The Chairman: Yes, okay. Move on to question 4, absolutely.

  Q473  Lord St John of Bletso: Many would argue that CRR should be scrapped because the whole TV market has moved on substantially since the days in 2003. Surely the preservation of CRR protects the status quo of the main three to four media agencies. As a supplementary to Lord Gordon's question, to what extent would the cost of advertising rise, or consumers suffer an increase in retail prices if CRR were to be removed?

  Mr Williams: Putting a number on exactly what would happen with CRR is a tough one because I think there are many plays here. There is the economy in general, obviously, if we look at what is going on. There is what is going on with the rise of procurement in our business in terms of driving prices down, which is a very real factor. It's not a moan but it's just a market reality for us there. There are the other options for our clients to take their marketing budgets on to other channels. Digitally, it is a big opportunity that kind of resets the frame, if you will, on the cost of marketing full stop at the moment. Putting a number on exactly what that would do to the TV market in terms of its cost is a tough one to say but—a personal point of view here—I would say within a range of 5% to 10% could be the number that we would look at.

  The Chairman: Sorry, could you say that again?

  Mr Williams: I would say that if we were to put a number on exactly what would happen with the price of television, with regard to ITV, that could be in the region of 5% to 10%. That's not a formula I'm playing back at you there, that is a sense, and it's very difficult for us to put a finite number on that.

  Q474  Lord St John of Bletso: What about the first comment that I made about those who would argue that CRR should be scrapped because the whole television world has changed substantially since 2003?

  Mr George: We sat before the Competition Commission in 2003 when the Carlton-Granada merger was proposed. Our view is that fundamentally the conditions haven't changed since 2003; and that is that ITV1 is still a very important channel.

  Q475  The Chairman: Despite what Lord St John said about the internet?

  Mr George: It's still a very, very important channel within TV. It has the unique property of being the only channel able to build mass coverage very rapidly, and that hasn't changed to any great extent since 2003.

  Q476  Earl Onslow: I have a problem when you say "our clients". It seems to me that you get paid both by the advertisers—or the media companies do—and those who place the adverts, because you get a discount if you use X% of your budget on somebody, which means you get paid to distort your own internal market for an individual client. We had a very intelligent—at least I thought it was very intelligent—description of how media companies work and this was a thing that jumped off the page. If you took X% of the broadcast time of your budget, you got a bigger discount from the company than you would if you got slightly less. That must mean it is saying to you, "Bring us the budget from your clients at the other end". That seems to me striking two ends against the middle.

  Mr George: Just to clarify, we make our income from the fees and the commissions that our clients pay us for planning and placing their advertising space. We negotiate discounts with media owners but those discounts are passed on in the form of discounts to our advertisers.

  Q477  Lord St John of Bletso: But is this necessarily in the interests of the advertisers? The point I am trying to make is that those who would argue that CRR should stay are surely the main three or four agencies. You almost have your own monopoly on prices.

  Mr George: It's true to say that there has been consolidation in media agency ownership over the last seven or eight years and I think the issue is, as it pertains to ITV in particular, that we represent hundreds of clients in our respective groups, and we respect their interests and their wishes. It's more of an implied leverage than being actually deliverable, because we have hundreds of clients who all want different things. If there were a replicable broadcaster to ITV delivering the sort of qualities that ITV delivers, then I would say that that would put us in an advantageous position. At the moment, there is nowhere that is a realistic alternative for ITV on advertising.

  Q478  The Chairman: Just following up Lord St John's point: are you not using the power of your clients to negotiate better terms with ITV?

  Mr George: We are trying to use the power of our clients' combined spend to negotiate better terms with all media owners, and we do leverage that with other broadcast channels and other media owners. The point is that with ITV there really isn't very much of an alternative for the majority of the moneys that it spends on ITV1.

  Q479  Lord Gordon of Strathblane: Just to be clear, the discount deals are between you, as media buyers, and ITV.

  Mr George: Generally, although there are exceptions where you do a deal with a single advertiser on behalf of that advertiser.

  Q480  Lord Gordon of Strathblane: That to some extent pre-empts my next question. I was going to say, is there not a tendency for that—which is no bad thing from your point of view—to lock in your clients to you, because it is through you they get those deals, whereas if they move to another agency they are starting from scratch?

  Mr George: It is part of the position—in a competitive position in the marketplace.

  Q481  Lord Gordon of Strathblane: No, but if I have a good deal, based on something you did for me in 2003, and I move to another agency, I might not get as good a deal. So I am kind of locked into you, am I not?

  Mr Jones: I think any advertiser that moves agency would ensure that it gets that covered off before it moves.

  Q482  Lord Gordon of Strathblane: And who do it negotiate that with then?

  Mr Jones: With the other agency.

  Q483  Lord Stevenson of Balmacara: I am going to change the line of questioning a little bit. This is more from the viewers' point of view, I think, and the consumers' side. Ofcom have given us an estimate that about £700 million of investment in original UK programming has been lost to free-to-air television as result of the fall in public service broadcasters' advertising revenue. You have said, and we would agree, that some of that is because of the recession, but ITV specifically attributes some of that lost investment to CRR. Channel 4 and Channel Five have a slightly different take on this. They argue that without CRR, total television advertising income could rise. I assume that is broadly not in contention but I wouldn't mind your comments on it.

  The specific question is, you presumably have a trade-off that you must think through, and I would like your thoughts on it: is it in the public interest to have slightly cheaper products as a result of all that or is it a better public interest case to have fewer higher quality television programmes?

  Mr Jones: I think that's something you can argue either way for both those questions.

  Q484  Lord Stevenson of Balmacara: I think there is a public interest question. If you can get away from that, is that possible?

  Mr Jones: I think everybody would have a different point of view. Do they want worse television or cheaper products? I don't know. I don't think anyone could answer that objectively.

  Q485  Lord Stevenson of Balmacara: Just to follow that through: you say in the postscript in your evidence on page 5 that you are not convinced that CRR is the break in creative programming that ITV has claimed. Could you give us a bit more on that?

  Mr Russell: Yes. I think the fact that CRR is, maybe, present during a time of reduced public service content or original content doesn't necessarily mean it's responsible for that trend. We've certainly seen no evidence to suggest that CRR is responsible for a reduction in public service content. If this were the result of constrained budgets, then we would suggest that the economic recession and the driving down of rates through the increased supply of impacts was far more important than CRR could ever have been.

  Q486  The Chairman: Can I just stop you there, Geoffrey? Are you saying that those reduced budgets, or whatever they may be, for programmes are purely in the last few years, during the recession; they don't date back to 2003?

  Mr Russell: No. We spent a little bit of time looking at this and we think that the attitude towards public service broadcasting could be broken down into what are called four phases. The first phase is from the establishment of ITV back in 1955-56 and will last through until the mid-1990s. This, if you like, is the golden age of public service broadcasting in the commercial sector. The reason for that is very simple: there is no other commercial competition. If ITV wishes to produce public service programming and it doesn't attract a large audience it doesn't matter because ITV has complete control over the prices that it charges. If it has a declining audience it can in fact increase the price of the airtime that it has available to it. There were, in fact, examples during the period from the 1950s to the 1990s where ITV was withdrawing airtime, reducing minutage, and as a result of that the ITCA introduced the selling-up rules that have recently been withdrawn.

  In the mid-1990s the world changed. It changed with the arrival of effective competition from Channel 4, from Channel Five, from the arrival of Sky, and from the arrival of the satellite stations. What that meant was that if your audience didn't want to watch commercial TV on ITV, it could go somewhere else. What we identified at that particular stage was a tightening up in ITV's attitudes. It became far more aggressive in its sales approach. There was lobbying beginning to reduce and remove PSB obligations. There was a move towards more populist programming.

  You will remember towards the end of the 1990s there was what was called "the battle of the bongs", which was the attempts to move "News at Ten" away from 10 pm. That was purely to enable the running of films uninterrupted by news from 9 pm right the way through until 11 pm. At the same time, you started getting the development of more populist formats, things like "Coronation Street", "I'm a Celebrity", "X Factor", "Britain's Got Talent" and so on. All that was taking place irrespective of CRR.

  Then we come to the third phase, which was probably from 2004 onwards; it was the arrival of the merged ITV and Charles Allen cutting costs. He cut headcount, and he looked very severely at his programming budgets, and you began to get pressure on regional programming, pressure to try and release ITV from public service broadcasting. At the same time you got pressure on original children's programming. This was really as a result of the unintended consequence of the ban on high fat/sugar/salt foods that meant that there wasn't advertising going around the children's area. As a result of that it didn't wash its face. As a result of that there was a cutting down of original production in the children's sector.

  It was only in mid-2007, when Michael Grade starting looking at refocusing, if you like, the output of ITV on quality of programming, that the concept of CRR being responsible for the diminution of original programming was first floated. We would cite that this trend started far earlier and was in fact the result of increased competition in the marketplace that caused ITV to begin to compete more strongly for its audiences.

  Q487  Lord Stevenson of Balmacara: That is very interesting. My final point on it, just to tie it up: if ITV was in a situation where perhaps it was free from CRR, we would still be faced with the problem of how to ensure for the public interest the quality of programming that was provided. Obviously as a commercial interest you want a range of diverse and interesting programmes, high value, low value, everything you can get in order to sell them, but in the public interest there is obviously interest about UK content and diversity within the programming. How would you approach a suggestion that might be made that ITV should be regulated by, say, Ofcom to achieve those better outputs?

  Mr Russell: Are we talking about the abandonment of CRR in that context?

  Lord Stevenson of Balmacara: I am saying you could move away from CRR to give you that freedom, but the quid pro quo the Committee is exploring is whether or not we would want to still impose slightly higher thresholds in such things as regional programming, or—

  Mr Russell: I would suggest that that would be a requirement, yes. You would lay that down as a requirement. I thought it was a very interesting statement that Adam Crozier made; that if CRR were abandoned, the moneys would go into programming. I suggest that the shareholders of ITV would be equally clamouring for some sort of reward, not having received dividends for some months or years.

  The Chairman: I don't think they were quite as explicit as that, strangely enough, but we had better look back at the transcript.

  Q488  Baroness Deech: Can I ask a supplementary? Why is it the case that UK content is always deemed to be synonymous with quality, or are we just talking about keeping our own industry going?

  Mr Jones: I don't think we've claimed that.

  Baroness Deech: No, you have not but it is generally accepted that UK content must be a good thing.

  Mr Jones: I don't necessarily think it is. You look at Channel 4, for example, and its track record of importing US comedies. They're not for everybody but I would argue the content has been of a high standard—they wouldn't succeed here otherwise—compared to some of the programmes that ITV, or in fact BBC, puts out that get bigger audiences. So I think, again, it's a subjective area. As advertisers, we would generally look at the quality, if you like, of the audience profile, and depending on which brand you're advertising, you're going to have a preference as to which target demograph, which people you want to reach. They will tend to normally have a high disposable income or maybe a younger profile, depending on the brand. So, I don't think necessarily mass ratings are the be all and end all.

  Q489  The Chairman: Do you define quality by the quality of audience rather than some sort of indefinable quality of programme?

  Mr Jones: Yes. To us, as advertisers, it's the quality of the audience that the programme reaches, rather than a pronouncement on the quality of the actual show.

  Q490  Lord Skelmersdale: But that said, you, as I understand it, place bookings for advertisements very many months ahead.

  Mr Jones: Two months ahead normally.

  Lord Skelmersdale: So, although you have a good idea of what the actual programmes are, you have no idea what the audience reaction to those programmes will be. There is an historical basis—for example "Britain's Got Talent", which we mentioned earlier—but there are other things where I suspect you have very little idea indeed.

  Mr Jones: Yes, you're right. There are some shows that will come on that are new that you can't predict. You can never predict exactly what a show is going to do tonight until tomorrow, until you know the result. It's not a prediction then.

  Mr Williams: That's why the trading mechanism is based around keeping an audience as opposed to buying the show, generally speaking. There are some differences at the very top end. Let's use "X Factor" as an example where ITV, for example, will sell that at what it calls a special rate. Completely understandably, arguably a quasi auction piece that goes on there too. But fundamentally the job of an agency is to achieve the right quality of audience for its particular advertiser, and that's what we buy and trade against as opposed to saying, "We'd like three X Factors and a Coronation Street, please".

  Q491  The Chairman: If you are not careful you will get us very excited because we want to talk about auctions later for special events and so on. That is very interesting that you are equating those very highly rated programmes to an auction process.

  Mr Williams: A different sort of demand, yes.

  Mr George: We generally buy audience rather than specific spots, but we will have a viewpoint on which are the most relevant spots for our brands.

  Q492  Lord Dixon-Smith: I am still trying to work out whether, in my mind, I see you as grit or grease. I suspect your advertising agency clients might see you as grease, but that the television companies might see you as grit. Is that a valid description, and if it is not why not?

  Mr Jones: You're probably right. I'm sure they do. We're there to negotiate on behalf of our clients, as Tom said earlier. We're paid by our clients to do a job and that job is to get them the best value we can for whatever their objectives are. That may not always coincide, or quite often doesn't coincide, with the objectives of a media owner, not just ITV but any media owner.

  Q493  Lord Dixon-Smith: What would be the effect if you were not there?

  Mr Jones: If there were no media agencies, I suspect that clients would pay a lot more for their media.

  Q494  Lord Dixon-Smith: That would, therefore, free up money for the television channels to spend on programming.

  Mr Jones: You could argue that but I'm not sure you can un-invent media agencies now.

  Mr Russell: Also I'm not sure that the inefficient use of advertising moneys would be of great benefit to those advertisers. They will be spending money unnecessarily, and as a result of that I suppose you'll get a filter through to the cost of products to the consumer at the end of the day.

  Mr Williams: If agencies weren't there, just to be clear, in my humble opinion, the clients that we're talking about representing here, would have to represent all that expertise inside their own organisations, which simply moves the cost, because it doesn't just happen.

  Q495  The Chairman: Well, Procter & Gamble for example.

  Mr Williams: For example, yes.

  Mr George: I think it's interesting that there are practically no clients in the UK who take responsibility for planning and buying their own airtime.

  Mr Williams: Not the whole piece, no. Procter & Gamble have a negotiation piece, absolutely, but the agency facilitates the remainder of the implementation.

  Q496  Earl Onslow: I still do not follow this. If I want to buy an insurance policy, which is in some ways just as complicated, I go to an insurance broker and he is my servant and my servant only. He is not the servant of Lloyd's or whoever it may be. He gets his commission, admittedly from a discount, from the broker. Why does this not happen in advertising? If I want to advertise Pepsodent, say, I go to advertising agency A and say, "Please, you know how to advertise Pepsodent. That is why I am employing you". What is the point of you, as somebody said of Lord Quickswood years ago? Why do you have to come in the middle? Why can't an advertising agency do it itself?

  Mr Jones: As a client, as an advertiser, you probably could book some TV. You can; no one is stopping an advertiser from booking its own media. I think we have a number of roles. One is that we will advise clients on how those different media work together and what is the best combination for a client, and we use our own research and the industry research that we buy into, that we pay for, to help us with that. Another is we have experts that are in the markets and we can negotiate deals that may be preferable to a client doing it on their own, for example. We have a number of ways in which we work for clients. We don't just book media; we do quite a bit more than that.

  Q497  Earl Onslow: But is that not what the advertising agency is supposed to do?

  Mr Jones: They make the adverts. We will advise them on—

  Q498  Earl Onslow: The advertising agency is the chap who reaches a million housewives every day.

  Mr Jones: The creative agencies. What a media agency will do is advise a client on who they should be trying to reach, when to reach them, how to reach them, by which medium, how much they should spend, what is the optimal level of spend and so forth.

  Mr George: I think very simply any client could do it. I think it would be absolutely cost prohibitive for them to achieve the same sort of value that can be delivered by media agencies.

  Q499  The Chairman: Thank you. I think we need to move on from there. In a sense, one could argue that there has been great consolidation in the media agencies, and what you are now butting up against is consolidation in the media sales houses. Is that not the reality of the situation? Is this not just a battle of the titans, and we have a bunch of oligopolies, really, operating?

  Mr Jones: Do you mean in regard to CRR specifically?

  The Chairman: Just in regard to the trading system generally, irrespective of CRR.

  Mr Jones: I think that is true up to a point. With CRR we think that ITV does have, as Tom said earlier, a particularly dominant position, an unsubstitutable position, and that's exacerbated in the UK TV market by the fact that the BBC is anomalous, compared to other countries. There is an equally large channel that you can't advertise on, so you can't take your money from ITV and put it in BBC1. At the outset of CRR, ITV represented 51% of TV advertising revenue and now it's 45%. So, it has slipped but it's still incredibly dominant.

  Q500  Lord Gordon of Strathblane: On the uniqueness of ITV, we are getting conflicting evidence. Granted that ITV can reach a lot of people very quickly, and if you are trying to advertise a Sunday newspaper scoop it is probably pretty well indispensable. But Adam Crozier stated that that represents only 1.65% of its business. Would you agree with that figure or would you give us another?

  Mr George: I think he is being selective with the statistics that he has chosen. I'd counter that with another statistic that says 96% of the top 1,000 advertisers in the UK used ITV1 in 2009.

  Q501  Lord Gordon of Strathblane: Can we just explore this? How unique is ITV?

  Mr Jones: There is no other channel that can deliver the speed of reach, the mass environment—

  Q502  The Chairman: So you dispute that percentage, basically?

  Mr Jones: I wouldn't dispute that percentage. What I would say, as Tom has just said, is that there is another 95% of advertising money that uses ITV1 to some degree, and the key attributes of ITV1 are fast cover build, mass reach and so forth. So that is primarily why you would use it.

  Q503  Lord Skelmersdale: Is that not just the point, to some degree? What we are trying to establish is what that degree is. Can you help us?

  Mr Russell: I think we would say to a very high degree. The fact is that being on ITV says something about you as a brand. If you are a new brand, you acquire status by being on ITV. If you are an established brand, you retain status by being on ITV. In addition to the straight numbers that we've been talking about in terms of the reach, in terms of speed of acquiring cover, ITV also has a whole load of what I'll call soft reasons why an advertiser would want to be there. Prestige I've mentioned and there is rapid sales. The fact that you'll get your message out there quickly means that advertisers can see that their campaign is beginning to work.

  It's also extremely important for trade distribution. If you are a manufacturer, you need to have your products out there in the marketplace. A retailer will want to know that if he takes your products into his shop they're going to go back out through the door. And they will go back out through the door if you advertise on ITV. They know that from history and they require that in order to take the stock in. On the back of that, the retailers will also grant you an appropriate number of facings in the store; they may give you a better position in the store. All those things you'll get through being on ITV that you would not get if you went on to a basket of satellite stations.

  Q504  Bishop Liverpool: Since the introduction of CRR, the monopoly, or the oligopoly, of the media buyers has gone up from about 50% to 75%. What is it about the CRR that has led you to increase your market share, or is there no connection at all between those two facts?

  Mr George: It's totally unrelated. It's nothing to do with the CRR. It's about the continuing consolidation of media owners and media sales force. It's a reaction to that so we can try to meet might with might.

  Q505  Bishop Liverpool: And has CRR not driven that at all?

  Mr George: No.

  Mr Williams: In our view, the 2003—when you talk about top buying points, I believe from previous video that we've seen, it's the top four that you tend to view. So, on my record 58% of the billings were through the top four agencies in 2003, and that has crept up to 66% this year to date.

  The Chairman: Is it 66%? We thought it was rather higher than that.

  Mr Williams: With the top four buying points. This is published information from Nielsen, by the way, so it's not real numbers, but it's as accurate as it can be in our market. So we have a 58% top four buying points to a 66%. So, yes, it has gone up for sure. Has CRR driven that? No, absolutely not. Has the need to deliver competitive advertising full stop for customers done that? Yes, it has. But it's not a CRR impact—

  Mr Russell: It's a general market force of supply and demand.

  The Chairman: What, the consolidation?

  Mr Williams: Yes, and the need for clients to get stuff cheaper, whether that's through the economies of big agents being able to do some work, or indeed prices.

  Q506  Baroness Fookes: Could we say a little more about the online auction, which was mentioned a little earlier on? Do you think it would affect ITV's revenues if that were to be introduced: up, down, the same?

  The Chairman: Can I just, by way of background, say that we do find as a committee the trading system incredibly arcane. It has probably existed for 50 years and got quite a lot of barnacles on it, but one of the areas that I think we are attracted by is this idea of auction that Lady Fookes has mentioned.

  Mr Jones: We would agree it's an interesting idea. To your point about the trading system, we've been saying this system has to change for 20-plus years and nobody has yet come up with a better system. And I don't think that's for lack of trying. There have been attempts to trade in different ways, fixed price, volume deals, and we end up with this system because—

  Q507  The Chairman: How have you tried?

  Mr Jones: There was a sales house in ITV, probably 15 years ago, that sold airtime for Yorkshire and Tyne Tees. It came out and said that it only going to trade on volume. The sales house went under within 18 months because it had overtraded, it had promised too much and couldn't deliver it. Channel 4 came into the market with a slightly different take on trading. It was fixed prices but with an impact adjustment. It has been out there. Anyone can trade in any way they like but, generally speaking, this is the most straightforward way to trade that we have against a sort of station price or something along those lines.

  Q508  The Chairman: You are all part of global groups; WPP, Omnicom. None of your colleagues in continental Europe, for instance, operates on the same trading system, does it?

  Mr Williams: There are different trading mechanics but nobody operates on an online auction model.

  The Chairman: That is not the answer to the question. The question, or rather the observation, was that none of your colleagues operates on the same trading system as we have in the UK.

  Mr Williams: Some of them do, yes. There are parts of eastern Europe that have taken on, ironically, the UK trading mechanism over the last five years.

  The Chairman: You probably taught them everything they know about an advertising trading mechanism.

  Mr Williams: They believed it was better than what they had before, and who are we to judge. I'm not an expert on Hungary.

  Lord Razzall: Fiji probably does as well.

  Mr Russell: It has many pros and cons but, as Andy has said, nobody has come up with a better system and that isn't for the want of trying.

  Q509  Baroness Fookes: May we assume then that the idea of the online auction does not appeal to you individually or as a group?

  Mr Jones: It has an appeal in a way. As Steve said earlier, there is almost an online auction with certain highly demanded programmes at the moment, specials as ITV would call them. I wonder whether, if I were a media owner, I would want an online auction, because that would take the control of my inventory away from me. I definitely wouldn't want it if I was a media owner.

   Mr George: Let's not forget that there used to be an auction system in place in the UK for airtime and, again, that stopped.

  Baroness Fookes: It stopped?

  Mr George: Yes. It was the pre-emption system, where there was a price for a spot, and if somebody was prepared to pay a higher price you lost that spot.

  Mr Williams: And advertisers felt that was a very inappropriate way to be able to control their advertising message going out, because of the coming and going, of spots in and out.

  Mr George: If I was a media owner I would be very reticent. I think it's an interesting idea. I'd be very reticent about taking control of my inventory to a free market, particularly across the last few years where we've seen heavy recession. Don't forget that media owners also conditionally sell their inventory as well. So one could argue there might be a marketplace for the very, very best spots; one could argue that the market price for the less highly demanded spots would fall off a cliff as well.

  Q510  The Chairman: But on the other hand, if you have a virtuous circle of more investment in programming, and therefore more impacts and so on and so forth, then if you are a media owner you have, maybe, an incentive to introduce a different system.

  Mr George: I think theoretically it has some interest. I think the practicality is the fact that, when you start delving into the difficulties of selling individual spots on an auction system, you can't have competing advertisers in the same break, and the fact that you are leaving it open to market forces. I'm not so sure that media owners would vote with their feet for that system either.

  Mr Jones: I think if we go back to the pre-emption system that we discussed you can see the same issues arising from an online auction now. Advertisers spend a lot of time building other marketing activity around their TV campaign. So if you've done a lot of marketing work and you find out that on Friday you don't have the spot on "X Factor" that you thought you did, and you can't get back in there, then you've got a bigger problem to contend with. So, it's impractical.

  Q511  Lord Skelmersdale: You could stop that overnight by banning resale.

  Mr Jones: Well, if it's an auction then—

  Lord Skelmersdale: No, if it is an auction, an auction comes to a full stop when the gavel goes down. What you are suggesting is that once it has come down, the company could resell that particular spot if it was suddenly offered more money.

  Mr Jones: That's how the pre-emption system worked and I—

  Mr Williams: Every advertiser would want that gavel to come down at a very different time as well. So, if you were an advertiser that needed to get late into the market for whatever reason, maybe the day before, then the gavel is down and you can't get in.

  The Chairman: Sadly, I do not think we can go further into this great new world of auctioning but your reaction is extremely interesting. Thank you.

  Q512  Lord Razzall: I want to change the subject to two other areas really: the Airtime Sales Rules, and the Code on the Scheduling of Television Advertising. As regards the Airtime Sales Rules, I won't rehearse what they were because you would be more expert than us, but they were dropped. The first question is: have you noticed any difference in the way advertising is sold as a result of the dropping of those rules? Secondly, were we minded to recommend that CRR should go; one option would be to restore some of the Airtime Sales Rules. Do you think that would be a good thing and if so which rule? Then, thirdly, as regards the Code on the Scheduling of Television Advertising, we have had an awful lot of views regarding the seven minutes and the nine minutes. Assuming they go, do you think everybody should go to nine minutes or do you think the nine-minutes people should come down to seven, without getting tautological about whether that is up or down? Three questions.

  Mr George: On the first point, you're talking about the removal of the need for broadcasters to sell all their minutage, aren't you? And then you're talking about conditional selling. The honest answer is that we've seen absolutely no difference in the way that airtime is sold with the removal of those rules.

  On the first point, the reason for that is in a CRR environment there is no incentive for any broadcaster to depress the amount of commercial impacts by reducing minutage. We would have a different point of view under a non-CRR environment. Before CRR was in place and before there was a requirement for broadcasters to sell their advertising minutage we did see manipulation of minutage that artificially forced the price up.

  Q513  Lord Razzall: So, were we minded to recommend the abolition of CRR you would want restoration of at least the minutage?

  Mr George: We would probably want restoration of that, yes. On conditional selling, the honest answer is of course that we support the principle that airtime should not be conditionally sold. On a practicality, it is just the thrust of trading. It's the ebb and flow of trading that airtime is conditionally sold. We conditionally buy as well. We're sort of grown-ups on this. So, the theory we support; on the practicality, we know it really doesn't operate that way in the marketplace.

  Mr Williams: On your last point with regard to up and down—

  Q514  Lord Razzall: That is the question: are you up or down? Are you seven-minutes people or nine-minutes people?

  Mr Williams: We'll go the middle, thanks. I think it's a well trodden path. The bottom line is that it's a legacy position now in terms of the minutes per hour, per advertiser. In the first place it's anomalous. It was a leg-up for the multi-channel environment that came into the market many years ago. That's not the case now. There's much more equilibrium in the marketplace, there's no question. Would we want everything to come down and artificially suppress the market to make it more expensive again, one of the points here? No, of course we wouldn't. Do we think there's a happy medium in there? In other words, are the general public really going to be very concerned at possibly another minute on their terrestrial channels and thereby making, if there's a difference between nine and seven, eight the mid-ground, from a sensible point of view? No, I don't think we would have a problem with that.

  The Chairman: That's great. Thank you very much. I will take away that phrase "the leg-up for the multi-channel environment".

  Mr Williams: A long time ago.

  The Chairman: Definitely we will have to consider that very carefully. Thank you very much indeed for giving evidence today.


 
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