Select Committee on Culture, Media and Sport Minutes of Evidence

Examination of Witnesses (Questions 283 - 299)




  283. Ladies and gentlemen, thank you very much, indeed, for coming. We are delighted to see you. We still have memories of the excellent session with you during our last inquiry. If you have an opening statement you would like to make we would be glad to hear it, otherwise we will move straight into questioning.

  (Ms Thomson) I think we will be very brief in our opening remarks. We have been very interested in the sessions that preceded us. I would just like to recite the fact that AOL Time Warner was founded on convergence, and was founded on the idea that the communication industry is converging and that that will bring about amazing consumer services in the future. We are uniquely positioned to bring, perhaps, a consumer perspective and would like to simply assert that there is substantial demand for broadband currently in the consumer market in the United Kingdom. There is, we believe, an over-focus on content issues at present and we would like to assert that there is still a major issue round access to infrastructure and the competition and price points that are all in broadband in the United Kingdom today, which are standing in the way of broadband Britain as we all hope to see it in the future.

Alan Keen

  284. Our job here is to look after the consumer, it is not always to look at the small side of things but to look to the future. You just heard us asking questions about competition, and I would like to continue that, if I may. We have two very powerful companies, Sky who achieved that situation in the industry by investing a lot of money where others did not, and we have BT, for historical reasons. We have also heard in the last few minutes that possibly ministers, not because they are not intelligent enough but because all politicians are driven along by demands on a day-by-day basis, and there is little time for politicians to look far enough ahead. Do you think we need a more powerful OFCOM, in that we really need the experts in technology and industry to get together to look forward to plan for competition? It is difficult to dismantle what BT already have. We have heard about the share holding in Cable & Wireless, there may be shareholders in BT who find their investment going down by 75 per cent if suddenly we came along and demolished the partial monopoly they have. Do you think we need a more powerful body than OFCOM looks like being?
  (Ms Thomson) I would just say a couple of things on that. In general we are looking for a Regulator that can respond to a very changeable and very complex market in a timely way. Many of the issues that we address in the industry we are finding for the first time are major issues emerging and essentially moving forward and we really need to be able to address those quickly within commercial time scales. Whether that is stronger than currently, there certainly is a more specific emphasis on the infrastructure component of our industry, which is really the gateway to other things that regulation is about or that the Bill is about in terms of content, et cetera.
  (Ms Gilbert) From the public policy and regulatory perspective when we think about how we would like OFCOM to look we tend to draw on our experience in the narrowband world, which is where there were long battles with BT using the Regulator for narrowband flat rates, which I think prior to their introduction many of us felt would revolutionise the way consumers use the internet. A lot of what we are hearing from BT now is really the same arguments that we heard then, there is no demand for broadband, and there is no demand for narrowband flat rate. The issue is with the competitors who are not competitive enough and are not investing. We have heard all of those arguments before and I think the lesson that we have learned is it took us 18 months of struggle and regulatory process to bring about narrowband flat rate. We have seen what has happened with the local loop unbundling. With OFCOM it is a question not only of preserving a well qualified expert group of regulators or a part of OFCOM that is focused on infrastructure but also to look at what has happened in the past and learn from those mistakes. How is it that we could have made the local loop on the bundling process more effective and more timely so that BT competitors would not have found themselves in the position that they are in now? Those are the focus and questions we think need to be answered when looking at how to structure OFCOM.

  285. Karen Thomson, you said that we need OFCOM to be able to respond quickly to what happens. The point I was really trying to make was with technology changing and people having great difficulty, even the experts in the industry, in anticipating really what is going to happen, I am talking more about looking ahead, do we not need a technical body that can look at what is going to happen to stop this monopoly situation occurring as we have now for two different reasons?
  (Ms Thomson) I think it is tremendously difficult to look ahead and predict what is going to happen. I can pull out lots of different quotes from a few years ago which show that very few people get it right. There is certainly an element of having to look at what the technologies emerging may well be and tapping into that.
  (Mr Hampton) If you look forward you are likely, if you are remotely optimistic, to come to the conclusion that competition is down the road and we will get there. The difficulty is that in due course we may find that we do not get that competition and then you are looking to take the wrong decisions. To a certain extent you have to play it by ear. There is a decision to be made almost at the moment, BT have announced they are going to lower their wholesale prices. Cable & Wireless, just a minute ago, said an earlier reduction in those prices helped them to pull out of unbundling. It does not look like unbundling was ever set to succeed. The response now and the way forward now is via a further reduction in BT's price, which we welcome. You have to recognise that the choice that is being made, even in acknowledging that, is that this is the potential sacrifice of longer term competition. We think actually if you create an open ISP market now and allow people to come in and start ramping-up that market that it actually creates a second chance for people to come in and start using unbundling services. There are a certain number of premise that have to be postulated here. This is quite a critical moment. One of the ways that Germany has got a lot further ahead in broadband is simply because they decided to hand the whole market to the incumbent. I do not think anyone wants to do that, but that is something to bear in mind.
  (Ms Thomson) One other point is that when you have issues here and now that affect the short and medium-term future, introducing too much complexity about what might happen really does play to the status quo and, therefore, I think it sometimes distracts us from dealing with the key issues we need to deal with now as an industry. It is all very well to talk about satellite etcetera, but, for example, DSL is a technology which is the most widely available and is the most likely to serve the mass audience in the UK. Those are the issues we have to deal with now rather than getting distracted sometimes by predicting what the future is going to be.

  286. What is your experience of the cable companies? As a subscriber I have been so disappointed that it has taken so much time for them to start advertising services for the internet and yet the heavy investment was in laying the cable in the first place. They still seem terribly slow to even advertise those services. What is your experience with the cable companies?
  (Ms Thomson) I can talk generally, something that happened over the last few years in the UK is that many companies saw the internet as a pure pipe, it is a connection to the internet and internet service, that is all that it is. We come from a very different perspective, which is that consumers are really interested in value added services, they are interested in broad based content etcetera, and that access is going to be a piece of that. That also relates to the broadband debate, which is you go to consumers and say, "Broadband, it is so exciting, there are so many things going to happen", and they look at you and say, "I have no idea what it is, I have no idea how it will get to me and what it will deliver to me but it is very, very expensive". People have underestimated what consumers want and what they want in terms of packages. For consumers and business—we speak more to the consumer side because we are a pure consumer business—it is really about much more than putting a pipe in and saying, "There is your access" because people really do not necessarily value simply pure access to the web. We certainly find that people are much more likely to be interested and responsive if they are seeing much broader opposition. On the cable side they have really concentrated purely on that pure access component, which I do not think is as fundamentally interesting to consumers as was, perhaps, thought a couple of years ago.

  287. You have direct competition. There are no restraints on the competition that you have. There are other problems of delivery, but you are competing mainly with other people providing the services that you want to provide, is that not true?
  (Ms Thomson) Essentially our competition comes from everyone providing entertainment services or anything that calls on people's disposable time. One of the reasons that television audiences are falling is because people are spending more time on-line and accessing different services. We would see ourselves being in the entertainment industry as much as the internet business, yes.

  288. Can I ask for an overview of how quickly and what developments you see coming in your own business over the next three years?
  (Ms Thomson) Three years, that is quite a long time scale! Certainly over the next year or so we think that development of flat rate internet access is still very powerful. We are still seeing huge numbers of people coming on-line for the first time, a very large part of people joining us each month comes from people who are new to the internet and new to the on-line world. We are building out services which are becoming much more market-orientated, whereas, perhaps, a couple of years ago they were specialists, they were more vertical content sectors. We are really seeing now the content is expanding across the mass market audience and the challenge, I think, over the next couple of years is to build into that experience a utility that consumers in the US currently experience so that as people build the experience into their daily lives, whether it is narrowband or broadband, they get more and more value out of the experience. They can do their shopping, they can bank, and those things should be very simple and easy and they should make people's lives better and should free up more of their time to do things that they want to do.

Mr Bryant

  289. Can I just check something first. You are AOL (UK)?
  (Ms Thomson) Yes

  290. And you are AOL (Europe)?
  (Mr Hampton) Yes.

  291. But AOL (UK) is part of AOL Time Warner, so you do not do Time Warner?
  (Ms Thomson) We are a division of AOL (Europe) which is a division of America On-Line which is then in turn a division of AOL Time Warner. However there are very close ties between the businesses.

  292. It is the close ties I wanted to ask you about because Time Warner has movie making, television programme making, television distribution, movie distribution, CDs, videos, all the rest. That is quite a lot of the value chain sewn up into one organisation. Is that not a competitive problem?
  (Ms Thomson) I think there are a number of distribution methods. In actual fact, if you look at AOL versus Time Warner, AOL is a direct consumer service whereas many of the Time Warner businesses are distribution to business. I think it would be an issue if, for example, you saw everything Time Warner did only available on AOL. That simply would not happen because it is not economic for a start. You need the broadest based distribution you can get. No Time Warner properties would be interested in purely distributing across AOL and also the talent and the people who create these properties would not be interested in that proposition. AOL Time Warner will only exist and be successful if it gets its artists out to the widest possible audience. I think the market itself demands the broadest based distribution of which AOL may be a part. But it is very much more broad based and the economics of the business demand as broad a based distribution strategy as you can.

  Mr Bryant: As I understand it, following the Napster legal decision, in terms of CDs and MP3s downloadable on web sites, the line is going to be that there will be two different sites which stick to the label that they have. I have never consciously wanted to listen to an EMI artist —

  Chairman: As such, I take it?

  Mr Bryant: Indeed, nor indeed have I ever wanted to read particularly a Faber book.

  Chairman: That is very bad!

  Mr Bryant: I am being heckled by my own Chairman.

  Chairman: You are being heckled by a Faber author!

Mr Bryant

  293. The reasons for not reading Faber books have just grown! Is this not a bizarre route to go down?
  (Ms Thomson) I think if it existed in quite the way you are describing but Clare has a perspective on that.
  (Ms Gilbert) I think you have almost answered the question yourself which is that you do not want to access content in that way and that is the way that the vast majority of consumers feel. I am not aware of the issue being as polarised as you are suggesting.

  294. As I understand it, that is the proposition that is being put forward. People have signed up the rights and that is the way they want to go in that sense.
  (Ms Gilbert) There are various different technologies which are in negotiation with the music companies but you would have to speak to the Warner people to get more detail about that. My understanding is that it is an open and competitive market and there are various platforms and technologies being developed and those entities are in discussions with the rights' holders. It is obviously in the consumers' interests to get access to as much of this great content on music and video as they can on-line through whichever brand or product they choose.

  295. Indeed, this is one of my slight concerns about all the internet providers. When you go to yours or Virgin's or whoever's home page there might be a section on shopping and then you go to the shopping section and there is a section on white goods, and you have 50 different companies which you can buy from. Who decides who is number one on that list? Is that a commercial agreement between you and them, because you are guiding consumers towards that company rather than any other?
  (Ms Thomson) If you look at something like shopping, for example, it is very specific but there is a combination of services. First of all, people buy space in a particular shopping channel, as you would in a retail mall, for example. But there is also complete and open access to the web and there are also tools like shopping search tools, etcetera, which allow people to go out and search. In terms of the retail opportunities that is quite specific. There are placements which are available. However, if you take the editorial content that wraps around something like a shopping service, then that is an editorial decision as to what the great offers this week are, etcetera, and that is driven by the editorial team. So I would put a real separation between the placement of the commercial opportunities and any editorial that sits around those types of services.

Ms Shipley

  296. I did PhD research on the British magazine industry and its use of advertising and the economic structure and how the advertising actually impacted on the editorial structure. I would disagree with what you have just said in that the editorial decisions are massively driven by the advertising decisions and commercial decisions and, in fact, virtually nothing that appears in the magazine industry is not commercially led. It is brave, brave editors who do something that is not commercially-led and the wrap around stuff is actually a vehicle for advertising all the time, and products being placed, and freebies, and you name it. There are so many different sorts of ways of doing it but virtually every line of editorial is driven by commercial decision-making.
  (Ms Thomson) I understand the analogy to the magazine market but if you are on-line and you look at a service like AOL, on the retail, on the side pure shopping channel side that is probably the commercially driven bit of it. However, the decisions about what is promoted are purely an editorial decision and they are not driven by the placement of particular partners.

  Mr Bryant: Can I push you on that. When there is a film—and it is not Lord of the Rings, that is what it was last week, it is a different film this week—and AOL is encouraging you to go to that web site, no money will have gone from potentially Time Warner to AOL to encourage you to put that advertisement there?

Ms Shipley

  297. Or freebies?
  (Ms Thomson) If it is an advertisement then certainly there may be a commercial agreement, the banner advert for example for a film.

Mr Bryant

  298. It looks editorialised, you see.
  (Ms Thomson) In general we promote an across-the-board range of film titles, for example, and music, and in both the on-line and the off-line world we will participate in promotions for both Warner Music artists and for other artists that are broadly appealing to our membership base. That is just something that we do. We look at what is interesting to our members and we test what is appealing to them. In the on-line world we have a slightly different scenario to the magazine world where you have to decide what goes into print and then you have to see what people like. In the on-line world it is perfectly possible to run different promotions, see what is most appealing and then promote them more extensively so more people get access to content or whatever. It is misleading to look at it in that sense. We will always work across a broad range of film titles and music titles and products, for example, and what we seek to do is to engage our members in the on-line experience. If we were to exploit that in a commercial sense where we simply promoted what we were being paid to promote, members would not spend time within our service. The proof of the pudding for us is whether people are interested and responsive to the content we provide to them. If they are not responsive then we do not run those promotions because we can see on a minute-by-minute basis what is appealing to our members.

  299. On a different bundling issue, most people when they buy a PC do not just want it to be a typewriter, they want some kind of internet and e-mail activity. So normally in the computer that you buy there is already some kind of ISP programme bundled in. In fact, if there was not, people might not buy it and life might be far too complicated. Obviously there is a danger that then you buy your way into a particular PC and that restricts people's access to the whole range of different internet service providers out there.
  (Ms Thomson) The vast majority of PCs sold will have a number of different providers on the desk-top ready for use. In our case I have to say the vast majority of people signing up to our service come from channels other than pre-loaded bundling onto computers. That is not necessarily the case with some other providers who have much closer links with retailers and computer manufacturers. For us we are an independent company looking for lots of different ways to market.

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