Media convergence - Communications Committee Contents

Chapter 6: Competition

Ofcom's competition powers

183.  Any competition regime must be capable of keeping pace with a changing competitive landscape. This is a perennial challenge for competition policy across the board, but it is especially pronounced in the media sector on account of the extraordinary technological innovations that have been witnessed over recent years. In many ways, convergence brings benefits in terms of potentially enabling more competition to emerge, more open markets and lower barriers to entry, which should help innovation and bring better value for consumers. But there are also risks associated with market concentration and monopoly power. Moreover, converged markets are much more complex and pose bigger conundrums to competition authorities than the single media markets of old. During this inquiry, we heard calls for more effective "ex ante" (literally—before the event) broadcast-specific competition powers to be given to Ofcom. In essence, Ofcom's existing media competition powers, it was argued, should be strengthened to match its powers in telecoms markets.

184.  Ofcom has extensive ex ante powers in relation to competition in telecoms markets. It also has more limited ex ante powers in relation to competition in licensed services, though these are not often used. The latter, specified in Section 316 of the Communications Act 2003, allow Ofcom to impose on licence holders (i.e. only those that hold broadcast licences) any conditions that "Ofcom consider appropriate" for securing "fair and effective competition in the provision of licensed services or of connected services."[88]

185.  Ofcom explained the status quo as follows, essentially outlining that their powers to intervene in media content markets are considerably weaker than their powers to intervene in telecoms markets:

    "The ex-ante telecoms competition regime (determined by EU legislation) requires specified markets to be reviewed every three years, and requires the regulator to impose remedies in response to a finding of market power in order to promote competition …

    (whereas …)

    The ex-ante broadcasting competition regime is different in many respects. For example, the legislation includes provision for the regulator to take action when a licence holder engages in a 'practice' which would be 'prejudicial to fair and effective competition'"[89]

186.  In essence, the ex-ante broadcasting competition regime does not provide Ofcom with an obligation to conduct a periodic market review and impose remedies (even if market power is undisputed) unless a licence holder is thought to be engaging in practice prejudicial to fair and effective competition. In telecoms, Ofcom can arguably use its powers to inject competition into a market—for example by promoting competitive entry (to counter the bottleneck power of an incumbent). In contrast, ex post competition powers tend to be more about ensuring that the process of competition is working effectively and is not distorted by the actions of one or a group of market players. Ofcom's Section 316 powers arguably do not provide as much scope for promoting competition (in broadcast markets) as its telecoms powers (in telecoms markets) do.

187.  Evidence to this inquiry has parted on the question of whether the ex ante regime for telecoms, which seems to have people's confidence, should be transposed to the broadcasting regime. Powerful and influential voices were heard on both sides of the argument. On the one hand, BT, for instance, made the case for a new model of regulation that applies across media and telecoms:

    "BT believes the focus of the next Communications Act should be to fulfil the promise of the last Communications Act: to deliver a properly converged regime to reflect the realities of the converging elements that form today's communications industry.

    We believe that to do this requires adopting measures that ensure the regulation of media sectors is consistent with the model of regulation applied to the telecommunications sectors …

    To align this [telecoms] regime to the media sectors would simply involve copying the powers that Ofcom has for telecommunications and applying them to media: the powers to define markets, identify market failures (including, but not limited to, market power), and the design of remedies to promote effective competition and provide a consistent level of protection for consumers."[90]

188.  On the other hand, as Professor Tommaso Valletti told us, market power may be transitory rather than persistent and you should be cautious about being too interventionist ex ante:

    "In the markets, any time there is innovation … in policy terms you want to be very careful … because you would expect the new Google, the new innovation, the new thing, and you prefer to back off and wait for things to happen instead of being too interventionist ex ante, which is a big risk for innovation."[91]

189.  Some concern has been expressed that ISPs and bundled service providers may abuse their control of audience's internet access to their own advantage. Convergence has resulted in people often buying bundles or a range of services (telephony, broadband, TV) from the same supplier. While landline and broadband packages remain the most popular type of bundle, 19% of UK homes have a triple-play bundle of fixed voice, broadband and multichannel TV (up 3% on 2011).[92]

190.  The reason this is considered an issue arises from the fact that, even though the triple-play bundle presents a single proposition to the consumer, its constituent elements (broadband, telephony, and premium TV content) are regulated in different ways, and different treatment of competition issues in the broadcasting and telecoms sectors, it is argued, may risk distorting competition for retail bundles of services.

191.  An additional concern was expressed over the effectiveness of competition in the market for premium content (sports and in particular first-window pay TV movies), particularly as market power here may be used to attract customers to bundled services where other elements of the bundle are subject to different competition. Again, some witnesses argued for new powers to be awarded to Ofcom to investigate and/or intervene in this market.

192.  In evidence to us, Ed Richards, CEO, Ofcom, called for Ofcom to have a general duty to promote competition across converged media markets in place of their current broadcast-specific duty under Section 316. Ofcom claims to have experienced problems with Section 316 due to a lack of clarity in the drafting and because it applies only to companies which have broadcast licences, and so misses out many parts of the converging audiovisual sector (as discussed above):

    "Our regulatory duties need to be updated to cope with convergence. There is no question about that at all in my mind …

    We do not need many new powers. It is not about a huge swathe of new powers. We need clear powers that are able to deal with the relevant markets and we do not have that at the moment, so Section 316, which deals with fair and effective competition, is just not clear enough and it is not clear enough for us, it is not clear enough for the companies, it is not clear enough for anybody. If I had said that to you a year ago, you might have said, 'Well, maybe he would say that, would he not?' but we have since had a court case in which a judge has looked at it, and he described it—in words that I will not be able to remember, but I will happily send to you—as 'tortuous' and 'capable of being interpreted in completely different ways by two different parties', so it just is not clear …

    I think we should have a very straightforward duty to promote effective competition. Then everybody knows where they stand …

    The second to mention is what I call scope, where it is more detailed, but you need to make sure that the scope of that duty to promote competition meets the relevant market, and the relevant market is exactly as you suggested in your question, the converged markets. The area where people are buying bundles of telecoms and TV services, pay TV, free TV, upgraded pay TV, broadband, superfast broadband, telephony. It needs to be able to cope with that converged market. More and more people are buying that bundle of products together and the regulatory system must be able to address that competitive dynamic …"[93]

193.  BSkyB have expressed considerable concern about the change proposed by Ed Richards:

    "The change proposed by Ed Richards would give Ofcom significant new powers to intervene in markets where it believes that significant market power exists, regardless of whether it has evidence of abuses of a dominant position or whether firms have engaged in practices which Ofcom considers are or would be prejudicial to fair and effective competition …

    This would be the application of a form of regulation that was specifically designed for the telecoms sector, which is typified by dominance by former state monopolies, slow or no innovation, high barriers to entry and, importantly, slow growth. The UK broadcasting sector shows none of those characteristics. In fact it evidentially delivers excellent outcomes for UK consumers, is growing strongly, providing funds for rapidly growing investment in high quality original UK television programmes, and resulting in the creation of new jobs at a time of significant economic difficulty …

    Providing Ofcom with the additional powers that it seeks to intervene in the sector is unnecessary and risks having a significant negative impact at a time when UK media companies face substantial threats from global competitors."[94]

194.  We have not had the time to carry out a comprehensive review of broadcasting competition powers (which would be a lengthy undertaking). Nevertheless, it is clear to us that Section 316 of the Communications Act as currently drafted is flawed, and hence requires either clarification or modification in any new communications Bill. In particular, we think that the following issues should be considered:

·  the scope of Ofcom's media-specific competition powers—should they apply only to broadcast licensees, or more widely as Ofcom has suggested?

·  the nature of those powers—the extent to which they should be extended to the promotion of competition;

·  when those powers can be used—in particular, can greater certainty be given to the sector by making it clearer when Ofcom can (and cannot) use ex ante powers of this nature?

195.  While not reaching a view on the answers to these questions, we note that if Ofcom's competition powers are extended in any way, such an extension should be accompanied by a clear and high hurdle before they can be used, possibly along the lines of the approach taken by the European Commission in establishing criteria for the use of ex ante powers in telecommunications markets. Following this approach, the use of ex ante powers would be justified only in markets:

·  Characterised by high and non-transitory barriers to entry;

·  Where market structure does not tend over time towards effective competition;

·  Where competition law by itself is not sufficient to deal with market failures identified.[95]

196.  Adopting this sort of language in a revised Communications Bill would arguably offer greater clarity and certainty to the industry than is currently the case with Section 316, and safeguard against Ofcom using ex ante powers excessively and without proper justification.

197.  We recommend that Government should, in the forthcoming White Paper and communications Bill, consider clarification of Ofcom's existing ex ante competition powers for the audiovisual sector. The aim of such clarification should be to enable Ofcom to take effective action where necessary, but also to ensure a high hurdle before an ex ante approach can be adopted.

BBC's economic impact

198.  The BBC represents a major market intervention. It receives a significant injection of public funds, and inevitably has a major impact on the creative economy. Much of its impact is overwhelmingly positive—helping to promote innovation, investment and support for a thriving independent sector—but there are also risks. In particular, it was brought to our attention that the presence of the BBC could in some circumstances act to dampen prospects for innovation and growth in the private sector (known as 'crowding out'). In evidence, the Telegraph Media Group (TMG) wrote about their transition to a 'multimedia digital business,' and suggested this might have some impact on the nature of their product and market:

    "The reality of this transition is that the Telegraph is now fighting for both national and international audiences from 'traditional' TV stations; as well as other newspapers; and other online offerings. In return, we also see them competing for our audiences."[96]

199.  TMG argued that licence fee-funded online content services create a market distortion responsible for limiting innovation from the wider media landscape:

    "This market distortion demonstrates itself in many ways. For example, any organisation that wished to create a paywall for their content—which, of course, content has significant costs of producing—is undermined by the existence of, shielded from commercial risk. Another would be the sharing of content of BBC News (funded by the Licence Fee) to"[97]

200.  In times when the newspaper industry is struggling, and newspapers are focusing on enhancing their online offerings, it would be a cause for concern if the BBC's online services were, in some circumstances, limiting innovation from the wider media landscape and, in particular, jeopardising the development of online newspapers and mobile applications developed by newspapers. And yet, we also acknowledge that is a much cherished and valued online source, which provides an excellent service for the nation and beyond. It is, in our view, a prime example of the way in which the BBC provides reliable and engaging news and services for citizens, and demonstrates why the BBC is such an intrinsic component of our democratic well-being.

201.  The BBC's service to the public and its support for the UK's creative economy is vitally important, and the BBC should be encouraged further to enhance the support it provides, and not scale back its activities as matter of principle per se. A more strategic approach by the BBC in support of economic growth would be welcome. However, to reassure the industry, it should ensure that effective safeguards are in place to address crowding out concerns as they may arise; the future of newspapers matters as well.

  1. In the run up to the next BBC Charter Review, we recommend that the Government invite the BBC Trust to consider how best to make progress on two fronts: enhancing the BBC's overall economic impact, and reassuring the market that there are effective safeguards in place, possibly through the use of periodic and independent market impact reviews.

88   Communications Act 2003, section 316 (1) Back

89   Ofcom Back

90   BT Back

91   Q 67 Back

92   Ofcom, Communications Market Report 2012, July 2012, p. 4. Available online:  Back

93   Q 611 Back

94   BSkyB 2 Back

95   EU Framework Directive Back

96   Telegraph Media Group Back

97   Telegraph Media Group Back

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