Examination of Witnesses (Questions 515-563)
Mr John Billett, Mr Steve Hewlett and Mr Ray Snoddy
30 NOVEMBER 2010
Q515The Chairman: Can I welcome you very warmly
to the Committee. We have, in a sense, three for the price of
two, I think, today. I have the biographies of two of our witnesses
but not the third. I am going to ask you to introduce yourselves
anyway, so no bones broken. We have roughly 50 minutes, I think,
to go of evidence. I do not know who would like to introduce themselves
first. You are all independent witnesses, I think, from different
backgrounds. So, Steve, do you want to go first?
Mr Hewlett: I write a column in the Guardian,
consult on media around the place and present a media show on
Radio 4. Prior to that I was the Director of Programmes and Managing
Director of Production at Carlton Television. That's before it
became part of ITV. Prior to that I had senior roles at Channel
4, the BBC and in independent production.
Mr Billett: Thank you. I've had 45 years in
this advertising media business as media director of agencies,
founder of media independent buying companies. I've run media
buying companies, and most recently set up and established the
major media auditing company that bears my name. I've been a consultant
at times to Ofcom, during the set-up of CRR in particular, and
I'm now a consultant to a number of media owners, advertising
agencies and advertisers.
Mr Snoddy: I've been a journalist mainly specialising
in the media for many years: 20 years on the Financial Times,
eight years as media editor of the Times, now freelance
and writing about issues surrounding the media, and also presenting
the BBC's viewer access programme NewsWatch.
Q516 The Chairman: Okay, let's crack
on. First of all, since the introduction of CRR the number of
commercial impacts has increased by about a third. At the same
time the price per impact, which the 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 Billett: Yes. You've summarised it exactly.
Q517 The Chairman: Do you think that
is relative to 2003 when CRR was introduced and, if so, do you
think that is because of CRR or entirely independently?
Mr Billett: I think it's independent of CRR,
and the reason for that is that advertising money is spent for
reasons separate from the value. Advertising in television is
a relative rather than an absolute price mechanism. Advertisers
decide to buy a certain quantity of advertising, and if they can
buy it more cheaply they will do so and then divert other resources
into other activity. Unfortunately, the relationship between advertising
expenditure and effectiveness is not an exact science and, therefore,
there will always be enormous room for variability in the relationship
between advertising effect and price.
Q518 The Chairman: So it is all a
bit hit and miss really, is it?
Mr Billett: I wouldn't say that it's hit and
miss. I would say that the metrics for measuring it are about
relative efficiency rather than effectiveness.
Q519 The Chairman: How, therefore,
do you know that it is not because of CRR?
Mr Billett: The relationship between advertising
expenditure and value for money has been tracked for some 40 years
to my certain knowledge. The work we did to look at the effectiveness
of introducing advertising on to the BBC, and what that would
do to advertising price, proves quite conclusively that advertising
pricing moves in relationship to audience and economic factors
such as company profitability, such as consumer expenditure, and
those dominate the agenda far beyond the effects of any restrictions
or creations such as CRR.
Mr Hewlett: The other thing is that from 2003,
but before that, we've entered the world of multi-channel television.
Multi-channel penetration is now at 90% but it was a lot less
than that then. We've just been through a period where the number
of channels and the amount of viewing has continued to rise, and
understandably the number of commercial channels has risen very
significantly. Understandably, therefore, the amount of commercial
impacts available, the amount of commercial hours available to
watch, has gone up and the number of commercial impacts has, therefore,
gone up with it. So, the market is being inflated or diluted by
the emergence of lots of new channels and more viewing of new
channels. So, once upon a time ITV was the only one, then there
was Channel 4, then there was Channel Five, then there were all
the Sky channels.
Of course, I'm sure you've heard this many times
before and, having read what your previous discussants have had
to say, I'm not sure there is very much I can personally add.
But it strikes me that one of the more bizarre aspects of the
CRR mechanism is that ITV should offer it up at a point when—
The Chairman: Sorry, say that again?
Mr Hewlett: One of the more bizarre aspects
of the CRR mechanism was that ITV should offer it up at a point
when—there are few certainties in this world but one of
them was this—ITV's share of commercial impacts would drop
like a stone as digital penetration increased. The one certainty
was that ITV's share of viewing would drop. It was almost the
only certainty, but it was a certainty. And offering CRR with
an automatic ratchet mechanism that reduces your revenue in proportion
to that when you know it is the only thing you could be certain
of happening is, frankly, bizarre.
Q520 The Chairman: But you do not
think, as such, it has had an impact on pricing?
Mr Hewlett: There is a consensus, as far as
I can tell. I'm a journalist, I don't work in it anymore, but
I think there's a consensus among the people I speak to in agencies—I
speak to people across the business on all sides—that CRR
has had a deflationary effect. The reason for that is that in
so far as it reduces ITV's effective price, although by a complex
mechanism, everybody else, certainly when I was at Channel 4,
prices off ITV. So everyone else's pricing is discussed in the
business as being up or down on ITV's price. ITV's is the base
price. So, if ITV's price drops, which because of CRR it has done,
other prices will come to reflect that. It's not an absolute relationship
but the likelihood is—the consensus would be I think it's
fair to say—that overall CRR has deflated the market. It's
not the principal cause of deflation, however, because that's
about there being more impacts, more viewing and more—
Q521 The Chairman: You see I am sure
Jimmy's expression was all boats floating, in a sense. The reverse
could, therefore, be true that if CRR is taken off—and I
think, Ray, you are looking as though you want to say something
on this—then effectively that would raise everybody's boat.
Mr Hewlett: Well, if all you did was take off
CRR, that's right. If, however, there were to be a more fundamental
change in the way that advertising was sold, then in the end prices
would come to reflect more accurately the value that advertisers
could get specifically from the places that they advertised in.
I'm conscious I'm speaking to the converted already. If you maintain
the share of broadcast—
The Chairman: Well, you probably heard
what we said about the trading system, yes.
Mr Hewlett: If you maintain the trading system,
the share of broadcast in exchange for share of ratings system,
then take off CRR, expect ITV to increase prices. That's what
they'll do. They're a commercial business. Of course they will.
It's the only reason they will do it. They will jack up their
prices. If they jack up their prices, you would expect the market
to inflate. However, one wrinkle here is that one of the impacts
of CRR, of the share of broadcast system, should I say, is that
while it prevents ITV in the short term from premium pricing its
premium products, it can't spot sell. For all the press you read
about the price of "X Factor", "X Factor"
was sold last year. It can't spot sell in the context of the deals
it has with the agencies which consume nearly all its airtime.
So, those deals are already done. There is probably an impact
of the share of broadcast system of maintaining an artificially
high value for off-peak airtime.
The Chairman: Jimmy, you can pick your
choice, basically, because we have had an amalgam of two and three.
Q522 Lord Gordon of Strathblane:
Well, it's very interesting the debate as to whether it is a zero-sum
game or all boats would rise, and we have had conflicting evidence,
as you can imagine, from a lot of people in the advertising industry.
But if we assume for the moment that all boats rise, do you think
ITV would rise disproportionately and would it be at the expense
of other commercial broadcasters?
Mr Billett: Since CRR, ITV has gone from scarcity
to almost ubiquity and you've now got a situation in which ITV
is fully substitutional. With the exception of a few large housewife-focused
advertisers, it is now perfectly possible to launch major brands
without using ITV. And we now have the situation in which ITV's
premium pricing is sustained because of the emergence of a new
phenomenon, and that is that there are now five major media buyers
and they are almost now acting as media owners. This is the biggest
change since CRR was introduced.
And remember that the CRR does not protect the
advertisers, because very few advertisers have media buying contracts.
It protects the agencies because they are the people who hold
the pot and create the media deal. So we now have a situation
in which the price of television is being determined by the agencies
which are then allocating internally among their various clients
who gets what part of it.
Q523 The Chairman: And they are keeping
up the prices, are they, that way?
Mr Billett: Yes.
Q524 Earl Onslow: Can I come in on
this because this is the bee that I have got in my bonnet? It
strikes me the media companies are not acting in the interests
of their own clients. If I want to sell Pepsodent, say, I go to
an advertising agency. The advertising agency goes to the media
company, who has actually got more than one interest. He wants
to support a high price from the media thing, so he does that,
and he wants to get the best deal for his advertising agency clients.
It seems to me that they are not being as directly clear in their
line of responsibility.
Mr Billett: So when you say "media company"
do you mean the media owner or the media agency?
Earl Onslow: I do not mean ITV and I
do not mean Sky. I mean the media buyer. Until about 10 days ago
I knew absolutely nothing about this and it may be very apparent
that I still do, so I apologise, but these are the things that
have struck somebody who has come in literally from the outside
to look at it. We had an extraordinarily good paper explaining
to us how it worked and that was what jumped out of the paper
at me: the media buyers were not acting for the person who I would
assume they should do, which is the person who wants to advertise
Pepsodent or whatever it may be.
Mr Billett: It would be incorrect to say that
they are acting against the best interests of their clients. I
would not support that comment. What I would say is that their
principal objective is to satisfy themselves before they satisfy
their clients.
Earl Onslow: Yes, that is how I would
interpret it.
Mr Billett: And the evidence for that is that
the amount of commission that they are paid or fees paid by their
advertiser clients has reduced and the amount of performance-related
fee that they are paid has increased significantly. That performance-related
fee is not based on the cheaper absolute price, which we talked
about earlier, but on the discount from the relative price that
is being charged.
Q525 The Chairman: And the share
of budget that their clients are putting forward? I do not know
whether that—
Mr Billett: That could be true. So we have a
situation in which an advertising media agency can get paid because
it increases its discount to 10% from 5%, but if the base price
has gone up, it is not in any way limited by that. So it is being
remunerated on discount from a variable norm rather than absolute
price and change year over year.
Earl Onslow: I thought that was what
I understood and I now understand it. Thank you very much indeed.
Q526 Lord Gordon of Strathblane:
Would it also be true to say that the impression is given to clients
that everyone is getting airtime at a discount better than the
average, which mathematically must be an impossibility?
Mr Billett: Correct, and the way that works
is because you set prices for different target audiences. So,
a discount for reaching upscale men is a far higher price than
the discount for reaching low income families. The internal machinations
of the agency allow them to move the airtime around, which is
why you see different sorts of advertisers at different times
of day.
Mr Hewlett: I was going to say the concept of
a discount on the share of broadcasting sale system is not an
obvious one. It's not like I'm selling potatoes and if you buy
10 bags I'll give them to you cheaper than if you buy one bag.
That seems obvious, but it isn't like that. Discounts in the share
of broadcasting system have to balance, and that's because I've
only got 100% of ratings and if I give them to you I can't give
them to him. So, discounts in the first place in this system are
not based on price at all. They're based upon the ratio of the
share of broadcast spend by the agency to the share of ratings.
So, it doesn't turn into a price until after it's all happened.
Only then do you know how much cash there was and how many—
The Chairman: That is why we find it
somewhat arcane.
Mr Hewlett: It is bizarre. Can I just say one
other thing? I think it's just for the record. It wouldn't be
accepted by lots of people in the advertising industry that ITV
is fully substitutable. A lot of people still say, and they must
have said to you, no one else gives you 10 million quite like
that, no one else gives you the "X Factor"; no one else
gives you that sense of occasion. ITV, of course, has argued both
things and I would commend—
The Chairman: Yes, we noticed that.
Lord Razzall: It argued that that is
only about 1.65%.
Mr Hewlett: If you go to the Competition Commission's
report, appendix D called—well, it's about quality of impacts,
there's a great story in there about what ITV told its investors
about how it was not substitutable. When questioned by the CC,
ITV went on to say that its "research was only undertaken
for marketing purposes. It had significant methodological flaws.
ITV used the results that are most favourable to ITV. ITV submitted
that most results of its research in fact showed that, when compared
to other commercial channels, ITV did not have a more engaged
audience". I won't bore you with it, but essentially you
will find on the record ITV saying both things very definitely.
On one hand it is entirely unsubstitutable—that is what
it says to its clients—and on the other hand it is entirely
substitutable, which is what it will want to say to you.
The Chairman: Thank you and we will come
on to ask you about whether or not it is conceivable to have a
different trading system when we have just heard a rather different
answer from that one as well. With apologies, Bishop, I am going
to go this way round the table.
Q527 Earl Onslow: Do you believe
that ITV airtime will become significantly more expensive if CRR
were removed? By what sort of figure would you expect prices to
increase if you do? Would this be for airtime across the channel
or just around specific programme and times? And to what extent
would the cost of advertising rise or consumers suffer an increase
in retail prices if CRR were to be removed?
The Chairman: Whoever would like to answer
that?
Mr Snoddy: Well, I will make a beginning. It
would almost certainly rise and, not just that, everyone in the
industry believes it will rise. There was a straw poll, a show
of hands, at a conference I chaired on Thursday of 150 people
from the industry, and the overwhelming majority, like only two
or three against, said they believed it would rise. While it's
not a zero-sum game, I think money would flow from other broadcasters
like Channel 4.
The Chairman: It would flow from?
Mr Snoddy: Yes. They've been doing, I believe,
rather well on the basis of the rigidity in public on the CRR
system.
Q528 The Chairman: So you are a bit
of a CRR fan, are you?
Mr Snoddy: No, that's not entirely true, but
there are a few basic truths, which you're all very well aware
of, so I will not belabour them. There would have been no Granada/Carlton
merger without it. It's not nearly as bad as ITV implies it is.
Some people argue it actually helps to keep ITV prices fairly
high, actually, in the relationships with the media buyers. I
absolutely believe it needs to be reformed and made more flexible.
This may not be the appropriate time, but what
I wanted to argue before your Lordships today was that one of
the useful things you can recommend, I believe, is that what is
needed is a voluntary system of reform. No one in my experience
in the industry wants a complete three to four-year study of the
entire advertising market. Everybody would run a mile. While ITV
is 49% of the commercial advertising market, in any market that
has to be a dominant position. And that's why the advertisers
do not want to let it go.
Secondly, I would agree with not John Billett
but Steve Hewlett. Indeed, I would argue more forcefully that
ITV is in an extraordinarily strong position for now going into
the future, and much of what it does is not substitutable by any
other broadcaster.
Q529 The Chairman: So, with CRR,
it is still in an extraordinarily strong position.
Mr Snoddy: Yes, indeed, but I think that the
system is unnecessarily rigid. The world has changed and I think
what is necessary is—the ideal solution for me would be
for all sides of the industry to get together and hammer out a
voluntary agreement, possibly monitored by Ofcom. I like the idea
of Lord Bragg before your Lordships that some sort of deal could
be done, relax CRR for more public service. The problem is monitoring
it and how you actually get them to do that, not just take the
money and run. However, I'm absolutely convinced that CRR should
be relaxed, but the best way forward is a voluntary agreement
between all the parties because they have a common interest in
making this more flexible.
Q530 The Chairman: There is the power,
of course, to take undertakings. You could do better than that
in terms of taking undertakings, but nevertheless, even in the
face of the ability to take legally binding undertakings, you
would say it would be better to have a voluntary agreement.
Mr Snoddy: Yes, indeed, and again at this conference
last week people were starting to say that. I interviewed Adam
Crozier for half an hour and even he was starting to say, "Well,
look, there might be a way forward. There are talks going on between
ISBA and ITV". There are quite a few things going on in the
undergrowth. Nobody, nobody, nobody wants a huge inquiry. They
know the Competition Commission is not a viable route, but people
do want change.
Q531 Earl Onslow: What did Adam Smith
say? When two or three people of the same trade or profession—
Mr Snoddy: Of course.
Earl Onslow: —nothing but the public
interest do suffer.
Mr Snoddy: That is the danger.
Q532 Earl Onslow: It strikes me that
that is called a monopoly, is it not?
Mr Snoddy: Yes.
Q533 Earl Onslow: Not only our own
Monopolies Commission, but also the European Commission people
would be coming down on their necks like a tonne of bricks, wouldn't
they, or not?
Mr Snoddy: Well, except, very briefly, there
are clearly different interests served, from advertisers to media
buyers to ITV. Of course, they can't go and have some sort of
cartel. Each side should hurt and the ultimate result should be
something that benefits the public, which is what Lord Bragg was
hinting at.
The Chairman: Yes. At least we do not
have vertical integration yet in quite that way.
Mr Billett: Could I pursue this substitution
issue? The discussion so far takes substitution without introducing
the critical element of price. Of course, parts of the ITV audience
are not substitutional, but if you are buying ITV currently at
a premium of 26% to the norm of television and you can buy other
channels at an index of 50, nearly a third of the price, you get
to the point where you can now reach more people without ITV1
than you could with ITV1 at the time that CRR started for the
same cost. Every time you do an analysis of audience, you have
to introduce cost in order to be able to say, as I do, that for
most circumstances ITV is fully substitutable. Of course, it's
not on an "X Factor" night. Of course, it's not with
"Downton Abbey". But as your colleagues observed, that
is under 2% of the schedule.
Mr Hewlett: Forgive me, then you'd have to explain
why more money hadn't gone out of ITV to Channel 4, Channel Five
and elsewhere.
Mr Billett: Because the media agencies—
Mr Hewlett: Because the buyers don't think it's
substitutional.
Mr Billett: No, because the media agencies like
the status quo. They have a vested interest in retaining CRR because
it's a vehicle which guarantees their value, which insures them
against default and which is easy to administer.
The Chairman: And they are in their comfort
zone in this trading area.
Mr Billett: You're in a comfort zone, and Steve
Hewlett said a few moments ago that the deals were done a year
ago. Precisely. The deals for 2011 have been done.
Q534 The Chairman: So, unlike Ray,
you do not think that abolishing CRR—give or take other
forms of regulation or undertaking or whatever, but just all things
being equal—would make a great deal of difference?
Mr Billett: That is correct and that is a completely
different view than I held when I was a consultant to Ofcom in
2003 at the time that the CRR was invented.
Q535 Earl Onslow: Having charged
it a large sum of money for giving it the wrong advice?
Mr Billett: The advice was the right advice,
sir, at that time. The world has changed since 2003.
Earl Onslow: I am only teasing.
Lord Gordon of Strathblane: You are going
to get fewer Christmas cards this year.
Mr Hewlett: Having worked at ITV and knowing
a fair bit about the way that that company functions, and still
knowing people involved in it, I have no doubt at all, however
it's settled out in the market in the longer term, the first consequence
you would see of lifting CRR but leaving the share of broadcast
system in place would be that advertising agencies would have
their arms put up their back and would be told, as historically
they always were, "Give me X% of what you spend on broadcasting
or you're not coming on ITV". So, ITV will use it to put
up its prices, unquestionably. Now, whether in the end—partly
the discussion we've just had about substitutability—that
market is sustainable or whether the market might settle out so
that they jack their prices up so other things become more attractive—
Q536 The Chairman: Do you agree with
this substitutability?
Mr Hewlett: I think it's a multi-faceted question
because it depends which way you look at it from. Strictly speaking,
of course you can generate similar numbers of impacts and so on
and so on and so on by moving your money around through cheaper
channels to get to the same effect, but you can't do it as efficiently;
you can't do it at the same time. There are reasons why advertisers
believe that ITV is unsubstitutable and I think on balance they're
probably right.
Q537 The Chairman: They are slightly
creatures of habit, though, are they not, in that sense?
Mr Hewlett: Well, but it's not just the agencies
that think this, it's the advertisers that think this.
Mr Snoddy: I would just simply emphasise my
view at least of the larger market developments that have happened
since 2003. Yes, there have been all these hundreds of channels,
but there are some people who treat all channels equally. They're
not. Some of these channels have tiny, tiny audiences. They may
amount to businesses for those who are actually broadcasting them,
but they're of very little interest to advertisers.
Also, you shouldn't neglect the ease with which
an advertiser can reach a huge audience and—Steve Hewlett's
point—at the same time. If you're launching a new brand,
you want impact; you want word of mouth throughout society. Yes,
you could ignore ITV and over a period of months maybe reach the
same proportion of society, but it would not have the same impact
and, therefore, I believe there's no easy substitution.
The Chairman: Well, we have a very interesting
tension between the members of the panel, do we not? Tim, it is
probably five and six, I suspect.
Q538 Lord Razzall: I think yes, quite.
I am going to merge two questions together, really, and I suspect
I know what you are going to say so you do not need to go into
a great long answer, but it would be good to have your response
on the record. As you know, the management of ITV when they came
before us got into trouble externally by telling us that the CRR
had led them into a rat race of dumbing down programming, which
of course was slightly unfortunate just as they were getting maximum
ratings on "Downton Abbey". I suspect their editorial
and production staff were not happy with them.
First of all, I assume you do not agree that
CRR has had that impact on ITV to the extent there has been dumbing
down—it has come from other factors, but disagree with me
if you want.
Secondly, if we do get slightly cheaper products
as a result of CRR, as a result of some element of dumbing down,
is that actually in the public interest to have slightly cheaper
products even if there is less high quality programming? I suspect
you do not think there is less high quality programming, so the
second question may be irrelevant.
Mr Hewlett: Those are theoretical. I think ITV
overstated its case, and I wrote a Guardian column about
just this, because someone in the advertising business said, "They've
just hit their—"
Q539 The Chairman: Can we have a
copy?
Mr Hewlett: You can. But ITV overstates its
case. While there is a theoretical possibility that at some point
the requirement to maximise share to avoid the ratchet-reduction
mechanism might lead it to commission this sort of programme rather
than that sort of programme. There's a theoretical risk of that.
However, look at it this way, the Competition Commission looked
at this in considerable detail, including one of ITV's own consultant's
reports by my reading of what it said, and it could find no evidence
that CRR per se had impacted directly on ITV's programming decisions.
In other words, there's a theoretical possibility it could have
happened, but no evidence that it actually has. As you point out,
to come up with "Downton Abbey" at the same time as
saying, "We've been forced down; the rat race has forced
us down" is slightly perverse.
Lord Dixon-Smith: Can I just pursue—
Q540 The Chairman: Sorry, just one
point, Bill, actually CRR has benefited ITV quite a lot actually
as a result of programmes like "Downton Abbey", has
it not? The ratchet effect—
Mr Hewlett: No, because the thing is CRR is
irrelevant. ITV exists primarily, remember, to deliver profits
to its shareholders. Nothing wrong with that; perfectly proper.
Actually, its shareholders have been squeaking because of the
lack of such delivery for an awful long time. They're long-suffering,
ITV shareholders. So, ITV exists to deliver profits to its shareholders
and it does that by making programmes for people to watch whose
eyeballs, if you like, it can then sell to advertisers.
So, ITV remains incentivised to invest in programmes
that people want to watch. The suggestion that it left you with—that
if you took away CRR it would take off all these programmes that
people want to watch and replace them with programmes that, frankly,
people don't want to watch—is ludicrous. That doesn't mean
that there might not be—and also ITV is still incentivised
to produce programmes of the highest quality. "X Factor",
love it or hate it, is an exceedingly high quality programme.
Q541 The Chairman: Exactly. The one
thing we have discovered during this inquiry is how elastic the
term "quality" is.
Mr Hewlett: But you know a bad one when you
see it.
The Chairman: Exactly.
Q542 Lord Dixon-Smith: I must try
to understand the process. Because if I have understood the way
advertising is being sold, all the advertising space in "Downton
Abbey" would have been sold well before anybody realised
that "Downton Abbey" was a hit.
Mr Hewlett: Yes, because—
Lord Dixon-Smith: So how does the market
affect that?
Mr Hewlett: Here is what happens. In year one,
let's say, ITV delivers all its programmes and generates ratings
and so on. So at the end of year one, we sit down to talk about
the deal we might do for year two. So I say, "In return for
X% of what you, the agent, are going to spend in broadcasting,
I'll give you X% of my ratings". Now, it's a more complex
discussion than that because you don't just want any old ratings,
you want 16-34s, you want housewives and children, you want over-75s.
That is because you've got your clients, Coca-Cola, BMW, whoever
else you've got, and you know what they want. So you're negotiating
with me for the best package of ratings I can give you. That's
what we agree. We don't agree about programmes; we agree about
delivery of ratings.
Now, when I have a number of really top programmes
like "X Factor", which have run for a number of years,
you might say, "And as part of my package, in addition to
these, I want to be in these three slots", for the World
Cup Final, for this, that and the other. So, it's not sold separate
from this; it's part of our discussion. Now, what I'm not doing
is selling you individual programmes primarily, I'm selling you
packages of ratings. The programmes deliver the ratings and I
then optimise my schedule by putting your adverts wherever I can,
subject to our agreement, in order that at the end of the year
I have delivered to you the package of ratings that you bought.
Q543 Lord Dixon-Smith: So it is nothing
to do with the programme, you are actually selling the time.
Mr Hewlett: No, if I turn out a set of rubbish
programmes, in the end there will be a thing called "deal
debt", which is this: I have sold to you; you've given me
your money in the expectation that you'll get a certain amount
of ratings; I won't have delivered them; and then we'll have a
big row about how we resolve that. So, it's slightly complicated
because in principle I'm selling you ratings, not programmes,
but of course it's more complex than that because there will be
particular programmes that some of your clients really want. They
won't have known about "Downton Abbey" primarily because
it hadn't happened when it was sold.
Q544 Lord Dixon-Smith: Well, I am
very grateful for having it explained, because I could not get
a connection between what the viewer actually sees and what the
advertiser purchases by way of times.
Mr Hewlett: It all comes down to the share of
broadcast, selling a share of ratings, a percentage of ratings,
for a percentage of spend on broadcasting. That's the essence
of the deal.
Q545 Baroness Fookes: Would I be
right in assuming from what you have already said that you do
not think that the abolition of CRR, were that to happen, would
have any effect on the amount of UK-produced programmes or quality
programmes? I do not know whether those two terms are synonymous.
Mr Snoddy: I think it would have an effect,
but not an absolutely huge one. I think the two drivers of ITV's
relative lack of success over the last three or four years has
been the subjective losing their way creatively and, secondly,
the impact of advertising recession. A lot of people argued that
television advertising was dead, channels were dead, the advertising
would never return. We now know that a very high percentage of
it has returned. But in a curious way they don't seem to be able
to predict from one year to the next. The CRR should be a rational
system, but Channel 4's advertising head, for instance, predicted
that it would be down 6% this year. It is actually up 16%. He
just sort of joked, "Yes, no, I don't actually know",
so that would imply to me that whatever is happening is not all
down to a single mechanism like CRR.
But on the lack of creativity side, ITV throughout
the recession managed to stay very close to spending £1 billion
a year in programmes. I think part of the problems came from how
it spent that money, and advertisers were not best pleased. They,
of course, want the big "X Factor" mass market programmes,
but in my experience they also want to reach the light television
viewers, the people who are more affluent in society, the ABC1s,
and until "Downton Abbey" reversed that trend they just
hadn't done that. For instance—I'm sorry Lord Bragg. I'm
rather glad Lord Bragg is not here, actually, because I want to
say it was a complete outrage that ITV closed down his programme.
It was completely unnecessary and it narrowed the range of ITV
programmes in a completely unnecessary way. It had the money;
it could have kept on doing that. So there's been a lack of ambition,
which I think might be—there are some signs of it—being
put right now.
Q546 Baroness Fookes: There is no
way in which one could nudge it, I think, in the right direction,
is there?
Mr Snoddy: Well, Baroness Fookes, I'm sure you
could nudge it very well indeed, but history shows it does more
or less what it wants. But certainly I think there is a public
element. It could be shamed into doing better, and I hope your
Lordships will do precisely that.
Q547 Baroness Fookes: That is the
most likely mechanism, is it?
Mr Hewlett: ITV has proved historically to have
been reasonably shameless, I'd say. Well, it certainly was when
I was there. But can I just say about lifting CRR and investment
in UK programming, it is complicated and it's complicated because
you don't just have to consider what happens to ITV; you have
to consider what happens elsewhere. Now, it is a fact that Channel
4 in particular but also Channel Five have benefited from CRR
because advertisers have been able to get their ITV airtime for
less of their total spend. So they've had more money to spend
and that has no doubt spread out. It's particularly spread out
within television to other broadcasters.
So, if you lift CRR and the reverse were to
happen—supposing the TV advertising market, for argument's
sake, stayed about the same size roughly, the reverse happened
and money was sucked back into ITV because advertisers were forced
to pay higher prices, they might spend less on Channel 4, less
on Channel Five, and that would then concomitantly have an effect
on the commissioning of UK content by those other broadcasters.
So it's not just a question of what ITV would do with the money.
Whether or not you think it could be shamed, persuaded, engaged
in some way to spend more of its own money or the money it would
get on UK broadcasting rather than give it to the shareholders—
Q548 The Chairman: Although there
is a difference of view on the panel, I think, probably, even
on—
Mr Hewlett: I think the key factor in terms
of ITV's programme investment actually has not been CRR at all,
it's been the recession.
Q549 The Chairman: John, you would
probably have a slightly different view?
Mr Billett: Yes, I do. I have no view on the
quality of programmes. I think my colleagues are in a far better
position to comment on that. I want to put it to you, sir, that
the CRR has had unintended consequences and it's now delivering
distortions that are of a deeper significance than was the threat
from ITV dominance when in 2003 CRR came about. On this notion
of ITV forcing price increases, there is now an audit system well
established in the marketplace. There is no way that ITV could
force price increases into this market given what has happened
since 2003.
I would put it to your Lordships that what has
happened is that CRR has made it easy for the very large media
buying companies, which you've recently seen, to become even larger.
It's now a barrier to entry for smaller media companies. Very
few contracts, as I said earlier, are in the name of advertisers;
they are in the name of agencies. And you now have a situation
in which it is becoming quite common for media owners to be paying
media buying companies commissions and additional discounts in
order for them to make the right sort of investment.
If you didn't have CRR, we would have a much
more open trading situation. It would be far harder. People would
have to work harder. It wouldn't have this insurance policy around
it. But my judgment is that advertisers would benefit because
the art of media planning, the art of creativity, would come back
into the advertising process in a way that it now is quite impossible
to do in a situation dominated by CRR where media buying has become
commodity trading rather than advertising effectiveness.
The Chairman: Thank you.
Q550 Lord Dixon-Smith: I was going
to say I have heard what we have got to do away with. I am not
quite sure whether I am clear about the issue of whether there
should be some other form of protective mechanism that you could
suggest, which would perhaps alleviate to a degree the absolutely
open market situation and regulate it so that there was an element
of stability without the flaws, if you like, of CRR, which clearly
exist.
The Chairman: Is there a halfway house
from total deregulation?
Mr Billett: I think Steve Hewlett and I would
perhaps agree on the next stage, which is that if you abandon
CRR you have to change the share of broadcast within the whole
process. You cannot retain share of broadcast deals without something
like CRR. Is that correct?
Mr Hewlett: I agree with that. If you had an
open trading system of some sort such as you would find in the
US and other places where people bought slots either in an auction
or in some upfront process or whatever, then the broadcaster can
say, "Unless you pay this price for this programme, you're
not getting that slot". But they can't say to you, "If
you don't buy this programme, you're not having that programme".
So at the moment, because of the share of broadcast, that's where
their leverage comes from. There's a lot of bad feeling about
this—you'll no doubt have picked it up—going right
back to the beginning of ITV. The sales houses inside ITV, when
it was the only broadcaster, were all incentivised about taking
a share off each other.
Q551 The Chairman: So rules for the
protection of advertisers, taking into account that very point.
Mr Hewlett: Yes. So, if one was able to have
a more open market, then one would need fewer rules to protect
anybody. It would be my take on it. I'm an amateur, but that's
my guess. If you have a system such as the one that exists now—the
advertisers I'm sure will have told you this—there is a
real risk that advertisers will end up being worse off if ITV
is allowed to operate its existing system without some form of
protection.
Q552 The Chairman: But then the media
houses, we have heard, essentially are part of that same system.
Mr Hewlett: They are, although there is an interesting
twist. Again, if you go back to ITV, and I was in the company
at the time, when the Competition Commission accepted CRR as the
price of the merger, ITV was cock-a-hoop. Apart from—leaving
aside the lack of foresight as to what would happen to its own
ratings, it had a certain amount of hubris about what would happen
in a merged company. But the other thing that it was so excited
about was that share of broadcast was traditionally the way that
ITV had held advertisers' or agencies' arms up their backs. That's
how ITV had played the bully—when it was the only player
in it. That's the mechanism by which it did it. That's how the
big companies overhauled the small companies. That's how the system
worked. So it was thrilled to have got the CC to agree to let
it keep the share of broadcast system. In the back of ITV's mind
was the prospect that it might have to forfeit that share.
Spool forward to the most recent Competition
Commission and OFT review and you find that ITV is now saying
it wants to be free of share of broadcast in order to premium
sell its premium programming; in other words, to spot sell "X
Factor", "Downton Abbey" and so on. It would like
to get away from share of broadcast. Paradoxically, it's the regulator
that says, "No, no, no, share of broadcast is now protecting
otherwise vulnerable advertisers who without share of broadcast
won't be able to get access to your premium slots". So, look,
they'll all have their own reasons for saying this, but consideration
of CRR as distinct, separate from, the trading system that it's
meant to regulate, I would suggest respectfully, is not the right
way of going about it.
The Chairman: You have to view the two
together.
Mr Hewlett: Correct.
Q553 Earl Onslow: With modern technology,
there is no reason why ITV should maintain that particular share
of broadcasting. Is there no reason why another group of investors
might not come along and say, "We could produce basically
a generalist high quality channel"? After all, Sky News did
it against BBC 24-hour news. Is there any theoretical reason why
another totally free, private ITV should not be put on air by
somebody?
Mr Hewlett: Theoretically, no, but "Downton
Abbey" and "X Factor", I can tell you—I've
been working in this business for nearly 30 years—do not
drop off trees.
Q554 Earl Onslow: 6 million?
Mr Hewlett: But also they're very, very expensive.
You need a business generating very significant revenues before
you can even contemplate—
Q555 Earl Onslow: I absolutely understand
that, but there is no theoretical reason why it should not.
Mr Hewlett: Theoretically, no. Theoretically,
we could start a channel together and if we were very lucky and
had enough money to spend, we could have a major hit on our hands.
Q556 Baroness Deech: On the number
of minutes of advertising, do you think that the rules about this
should be harmonised and, if so, should it be upwards or downwards?
Mr Billett: Well, we have done research that
demonstrates that the higher the volume of advertising transmitted
the lower the effectiveness of the advertising. Advertising clutter
is an issue. That's why being first or last in a commercial break
is seen as valuable and a premium is charged. Higher ad minutage
generates higher levels of exposure among the heavier viewer and
the higher channel loyalist. The problem we have is that the pricing
mechanism works on the basis of them selling all of their airtime.
And one of my real concerns is that, even if you have harmonisation
of minutage, unless there is the recent decision by Ofcom to relax
the necessity to sell all of that minutage, you will then destroy
the pricing mechanisms that exist.
So, my answer is in two parts: I think there
should be harmonisation, but there should also be a requirement
for the media owners to sell all of their minutage and allow market
forces to determine the price, rather than what has happened in
the past, which is ITV forcing price increases by closing down
breaks.
Q557 Baroness Deech: From what you
have said, I take it that you would favour harmonisation downwards.
Mr Billett: Yes.
Baroness Deech: Fewer minutes. Thank
you.
Mr Snoddy: Very briefly, I agree with that.
I've just come back from a stint in New York where television—I'm
sure all of you who've been there will know—is almost unwatchable
because everything is routinely interrupted by advertising. If
it takes regulation to make sure that that doesn't happen in the
UK, I'd very happily have that regulation. But John has just given
you the economic argument why it's not even a very good idea.
Q558 Lord Stevenson of Balmacara:
I think most of it has been covered, particularly the economic
argument, but what is the consumer argument? Do we have any evidence
of that?
Mr Billett: The consumer argument seems to be
that, if you leave aside facility breaks, they actually like fewer
breaks. Let me correct that. They actually like shorter breaks
rather than longer breaks, and there is very good evidence that
that keeps the audience; that the audience is then less likely
to channel switch. So from a broadcaster's perspective, it can
be very valuable to have shorter breaks.
Mr Hewlett: Anecdotally, one knows, because
it happens in my own living room, that excessively lengthy ad
breaks, especially on ITV1, drive you a bit nuts. So I'm sure
if you ask people the question, and I read what Diana Guy—
Baroness Deech: You get up and make a
cup of tea, don't you?
Mr Hewlett: If you ask people what they want,
they'll say they want fewer adverts. If you look at what they
do, I think it's a bit less clear, to be honest.
Q559 Lord Stevenson of Balmacara:
Our household tends to watch everything time shifted by half an
hour so we can skip through the breaks. Does that matter?
Mr Hewlett: If it catches on, it doesn't half
matter, yes. Because you don't count as a commercial impact if
you've gone through at times 16.
Mr Billett: But the current evidence is that
not too many people do.
Mr Hewlett: Well, generally speaking, people
don't, but when people have Sky Plus, V Plus, PVR content, they
zip through quite a lot.
Q560 Lord St John of Bletso: We have
covered this already, but a fair market price for airtime on ITV
could be determined through an online auction. Do you think it
would be possible to introduce a so-called system?
Mr Billett: Let me share with you that I'm fortunate
enough to be consultant to Rupert Murdoch's newspaper organisation
and we've had a look at that. The worst possible thing we could
do is to auction the newspaper space in the Sun and the
News of the World and the Sunday Times. Because
they are in demand, they can get a far higher price than would
ever be available through that sort of thing. Applying that to
television, I'm pretty sure that an auction system would work
extremely well for those myriad small channels which Ray Snoddy
referred to. I think it would be an unmitigated disaster as a
trading mechanism for ITV, Channel 4 and the major channels and
major media generally.
The Chairman: Thank you for putting your
views in such a moderate way, if I may say so, John. Excellent.
Q561 Lord Gordon of Strathblane:
I recognise that we are out of time, Chairman, but I was hoping
that perhaps our witnesses might be prepared to submit something
in writing to us. All the advertising industry people we saw this
afternoon were saying, "We don't like CRR either. We think
the present trading system is hopeless, but we've been trying
and we can't find a better one". Can you help them to find
a better system, either collectively or individually? Is there
a system you would suggest, and could you write to us?
Mr Hewlett: The Competition Commission has been
saying since 2000—it's said it three times now to my knowledge
and probably more often than that if ever it's been asked—that
there needs to be a proper review of the television advertising
system. It's so complicated. It has so much history built into
it, so much established practice and, as a result, so many vested
interests. It seems to me, in my own personal view again—I
stand outside of this; I wave a flag for no one—it's very
difficult to disentangle the bits of this without a thoroughgoing
inquiry.
Now, does everybody want to wait three years
for it? No, because we'll all have dropped off the perch in the
process. But if somebody could come up with a shortcut, using
all the work that's already been done in various places to produce
a workable review of the system in a reasonable timeframe, that
would be a very good starting point.
Q562 The Chairman: I am going to
give the final word to Ray.
Mr Snoddy: I simply want to follow on from that,
which is an exposition of where I was heading. I think the way
forward is to have a very small, informal, specialist committee
chaired perhaps by Lord Bragg or Professor Barwise, and with no
more than five people from different sides of the industry, to
explore within a timeframe of no more than three months whether
there is a more flexible way that everyone would accept which
does not—taking your Lordships' point—amount to a
breach of creating a new monopoly. There has to be a way but I
do feel, in my very final word—you've already realised this,
I think—that this is a bit like the Schleswig-Holstein Question
and just when you think you've grasped it, it disappears into
the fog again.
Q563 The Chairman: That is a very
good note on which to end. I think we will live with Schleswig-Holstein
for a little bit.
Baroness Fookes: One's dead and one's
forgotten.
The Chairman: Exactly. Thank you very
much indeed. Thank you for handling your differences in such a
civilised way as well and for helping us think the unthinkable.
Thank you.
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