Joint Committee on The Draft Communications Bill Minutes of Evidence

Examination of Witnesses (Questions 409 - 420)



  Chairman: Good evening, this evening's session is to discuss issues relating to the spectrum and we will start off with questions on the valuation and value of the broadcast spectrum.

Lord Crickhowell

  409. Perhaps I should start by declaring the interest that I am a former colleague of Clive Jones in the days when I was chairman of HTV but no longer, so I do not think I have any current interest. I am a bit worried about opening the questioning because I am conscious of the fact that we have four different organisations and reading your evidence I think there are different views about the subject I am going to ask questions about, but do not hesitate to come in with answers; that will illuminate the proceedings, not the reverse. Do you agree with the proposal in the White Paper that the spectrum used by broadcasters should be valued? What are your own views on the likely value of the spectrum you use based on an alternative use and how does this compare with your current total transmission costs? I think we want to get an idea of valuation and how it relates to your total costs.

  (Ms Thomson) I will start from the BBC and my colleagues can add from their perspective. The BBC and all broadcasters share the Government's objective that spectrum should be used as effectively as possible, but we have to say as much as we respect Martin Cave's reputation in general as an economist we think his report takes a rather theoretical approach to the subject, with little understanding of how it would impact in the real world. First of all, it is right to say I think that contrary to some views we as broadcasters have every incentive to maximise the efficient use of spectrum. First of all, it costs us a lot. Simply the electricity costs of transmission are very expensive but, secondly, the broadcasters represented here all have a public service obligation to have universal coverage and to reach every viewer and listener in the country, and that of course determines how much spectrum we use. So we are not sitting on large amounts of spectrum which we could easily give up. There is an inefficiency in the current system but it is the only real inefficiency and it is in television transmission where the use of spectrum is enormous compared with radio transmission; the BBC uses more than ten times as much spectrum transmitting television as it does radio. One of the reasons why we use ten times as such is because we are simulcasting at the moment in analogue and digital, and that is doubling the costs of our transmission, and we would dearly love to get to analogue switch off. There is a big inefficiency obviously in that double use, double transmission. Will spectrum charging help us to get to analogue switch off? We think the answer is a resounding no. First of all, it is the Government who determine the date of analogue switch off and they will not let us do it until we have met certain criteria which the Secretary of State set out two years ago. Secondly, if we are charged for spectrum use, actually it will divert resources which we would otherwise be spending on developing digital transmission and, crucially, investing in really good digital television, which we believe are the important things to drive digital. So we think that is a big inefficiency and we would love to get there but charging us for spectrum will not help us.

  410. Can I ask a supplementary before I ask the others to come in. I have the Cave Report in front of me and we will come on later to phased introduction. I suppose we, dealing with a piece of long-term legislation, should be looking not just to the immediate effects but the long-term benefits which come out of it. Of course, the Cave Report says that you made all these points to him pretty effectively but then proceeds, equally strongly, to say that nonetheless Professor Cave thinks there would be efficiency gains from imposing a spectrum charge. I am looking at paragraph 125, "The review has considered this argument carefully but considers that spectrum charges on these broadcasters are justified." What I think you have to do is reinforce to the Committee the arguments you have put and suggest to us why you think you are right and Professor Cave is wrong.
  (Ms Thomson) Obviously others will want to come in here. Martin Cave of course is perfectly entitled to his views and we sought to persuade him and clearly failed, partly because I think he, for understandable reasons, was coming at it very much as an economist rather than from practical use and was, for example, thinking that always the most efficient use of spectrum would be to use the minimum amount of spectrum. That is, unfortunately, not always the case in broadcasting. For example, with digital terrestrial television at the moment one of the problems with DTT has been that we have tried to plan an awful lot of services trying to use the spectrum as efficiently as possible by getting a lot of services in, and the result was the service was only available to 40 per cent of the population and of those 40 per cent half of them got it in inferior quality. It is actually now the view of most people who have submitted applications for the new digital and terrestrial licensing round that a more efficient use of spectrum for DTT is to use more space for each channel because that way you will reach more people. So spectrum allocation is a highly complicated area and it is not one that is naturally susceptible in the way other things are to market forces.
  (Mr Scott) I have made the point that the spectrum planning process is done independently of the broadcasters so the analogue spectrum as it was originally planned was done by the Radiocommunications Agency, the IBA and by the BBC technical planners. So from Channel 4's point of view we do not have the option of how we use the spectrum, we have been allocated it through an independent planning process, and it has been planned on the basis of getting a signal universally around the country of a decent quality. On the analogue service, there is absolutely no prospect of using less of it and keeping to those Government objectives. Also the way the system has been planned with this interleaving relates then to the equipment manufacturers and the equipment which they have sold to put into people's houses. Whilst one could theoretically reduce from 8 MHz down to 7 MHz, which in engineering terms is possible, that would have huge consequences on consumers who would have to replace the receiving equipment in their homes. So there is no prospect of getting efficiencies out of the analogue space. I absolutely agree with Caroline's point that the big efficiency to be gained is when you get to digital switch-over but that again is a process which has been planned independently. I think that the priority must be to get to a decent signal quality to be able to make a success of digital terrestrial television and I do not think that is an economic function but very much a technical, engineering, planning function.
  (Mr Jones) As the one company represented around this table which effectively pays the spectrum tax we have quite strong views on this. We are paid, I do not know, £300 million in net advertising revenue a year in terms of quoting for our analogue spectrum. Nonetheless, I do not disagree with my colleagues. There is an economic rationale behind spectrum pricing. All users of spectrum should be aware of its true value and use it efficiently and the Government should know the cost of its public policy but that is as far as it goes. For public service broadcasters, and all three of us fall into that category, the efficient use of the spectrum does not mean maximising payments to the Treasury. We are measured by delivering high quality, universally available public service broadcasting, whether through the BBC, Channel 4 or ITV. Any spectrum pricing regime cannot therefore be based on the opportunity cost of the spectrum because as public service broadcasters we have no ability to put it to an alternative use, we have to fulfil our licensing requirements, so that is the key element there. There is a problem going forward. We pay a spectrum tax, it is not for me to address the clear disparity between public service broadcasters, that is for this Committee and the Government, but it would seem logical to either level down or abolish ITV's payments going forward when the new digital licences are issued, because there is an inequity between ITV paying so far £3 million for the new licensing regime spectrum and Channel 4 and the BBC not paying at all. That said, I agree with the principle that this is a wrong set of charges to introduce on public service broadcasters.

  411. Of course, Cave again recognises the special requirements of public sector broadcasters and also recognises the point you have made, that the ITV companies are already subject to an implicit spectrum charge, and of course we have noted your evidence that Channel 4 and the BBC should be subject to spectrum pricing in order to level-up the field, which is why I thought there might be some disagreement between the witnesses. Can I put the final point. You have tended to answer the question in terms of what the present situation is, or perhaps during the switch, if it happens in the reasonable future, from analogue to digital, but again what Cave basically says is you ought already to be taking account of the future value of spectrum and looking ahead as markets do, not to make judgments about the present value but to make judgments about the future which will influence the decisions you take in the future. Is that a fair comment?
  (Mr Scott) Perhaps there are three different phases which we should be looking at. There is the analogue world which will continue until we can move on from it, and I think we are all keen to move on from it because of the duplication and the doubling of our transmission costs. There is the first 12 year period of the digital licences, three of which are now a number of years into that period, and it was specifically stated at the outset there would be no charges during that first 12 year period, and through those licences which the ITC is in the process of awarding at the moment it is again making clear there will not be charges for their first 12 years. It is probably going to lead in the second 12 year period, I suspect, certainly for the first licences, to when we will get analogue switch-off, and in planning the extent of the digital network and in planning the services which are on digital, which is what will attract the viewer—it is not the technology but the programming and the services—and to look at the economics of broadcasting we do need some certainty. We need certainty of the planning process, which will enable us to see the number of channels, the amount of spectrum which can be used for planning the provisional terrestrial network, and there is good work going on at the moment with the spectrum management consultation which has gone on and some decisions which we hope Government will announce shortly in terms of the amount of spectrum on which DTT transmission should be planned. When we have that certainty, one can plan it and then one can implement it, and leaving notional charges up in the air for any length of time is going to seriously hold back that process. What we have got here is a conflict between two different processes really. We have the managed process and spectrum management and the digital action plan and trying to get on and get some very complicated engineering decisions made, and overlying that we have, if I may say, the slightly theoretical review which is coming at a completely different end to tackle what is actually a very complicated technical and engineering challenge.
  (Mr Rasul) Generally speaking, yes, from S4C's point of view we concur with Channel 4 and the BBC's views. We have various common objectives. To bring forward some of the technical issues, reference Professor Cave, one of the issues here is that broadcasting is very different from some of the other communications technologies both in spectrum use and because the economics of it are very asymmetric, the costs are always heavy at the broadcaster end and made as light as possible at the consumer end to enable easy take-up. That often precludes major step changes which one can then implement later on; once you start rolling out the platform technology you are very often stuck with it come what may. So that is one thing in terms of making future efficiencies which tends to stop you. The other area is that because of the European and Ireland frequencies we are very much locked into a frequency band which means there is very little manoeuvre, if any at all, to go and set out our frequencies for future use in terms of making other use for all sorts of services.

Paul Farrelly

  412. From the evidence and what we have just heard, it does seem in the real world, because of the investment effects, you are saying spectrum charging might actually be a barrier to digital switch-over but that depends on the level of charges and the timing at which any charges might be introduced. Are you saying that under all circumstances spectrum pricing would be a disincentive and a barrier? Or, to take, Mr Scott, your three periods scenario, if there was a reasonably well-known target date for switch-over and a level of charges known in advance which would be introduced were that digital switch-over not accomplished before that date, would that in those circumstances not be an incentive?
  (Mr Scott) One needs to be very careful if one overlays this with other objectives. We are fortunate in this country to have a very high quality system in technical reception into people's homes. I am not clear that charging and making it clear now there will be charges for digital terrestrial later, is going to align itself with the main objective of getting universal coverage of a good picture quality. I do not think it would be welcome to any members of your Committee that bits of the United Kingdom stopped being covered easily by television.
  (Ms Thomson) Certainly the BBC are arguing two things. First of all, that any charge would be a disincentive to investment in key things which would help us drive digital. Secondly, that charging is not anyway an effective mechanism for making us use the spectrum more efficiently. If we were charged, we do not have the tools at our disposal to use the spectrum more efficiently, for the reasons Clive and David have been describing. We are obliged to have universal coverage. Equally, we cannot switch off analogue until the Government tells us we can. In a sense, you only have to look at the position of ITV where they have been paying a spectrum charge and say, "Has it made their behaviour any more efficient or any different from the rest of us", and the answer is it has not because they cannot because we are all obliged to broadcast in the same way.
  (Mr Jones) The key to genuine efficiency savings is digital switch-over, that is where we are going to get the most optimum use of the spectrum. We would rather not have spectrum charges. If we were to have them, I suppose you could devise spectrum pricing to incentivise take-up of equipment but, frankly, it is not proven and we would rather not go there.

  413. Clive, I hear your perfectly understandable calls for a level playing field on charging, but in the real world that does not take into account at any particular time the way different broadcasters are funded, nor their financial strengths at any particular time, and that in itself might be unjust to some people, to level the same sort of charges and pricing on the BBC compared with S4C or other smaller broadcasters. What comments do you make on that?
  (Mr Scott) I totally agree with that. Channel 4 is commercially financed and it is our ambition to spend as much as we can on providing our programme services. With the present state of advertising it is very hard for us to maintain and grow our programming and any charge which came in would mean an immediate reduction of the funds which we have available for that service. Just to put it into context, our programme budget is of the order of £400 million, and I think Professor Cave has informally indicated that below tens of millions would be the sort of value which might relate to the Channel 4 spectrum. That sounds to me like it may be 10 per cent of our programme budget which would be devastating.
  (Mr Rasul) Looking geographically at Wales, for instance, if we were to achieve the same percentage population coverage as other parts of the UK, we would be fundamentally penalised by a tax, and we would use more frequency and more in-fills to achieve that same goal.
  (Mr Jones) I think this is quite a difficult area because we are dealing with different broadcasters who have different timescales. We went through a licence renewal and (inaudible) and we did it at the height of the advertising market so it was set at the very high price of 3 per cent real growth in advertising over ten years—please God I look to see that now—but Channel 4's settlement was at a slightly different time, the BBC's settlement was in a bit of a trough so they have lots of money and David and I have less. So there is a problem here, whether it is 2003 or 2006 when the charge is done, in terms of public service broadcasters, and we all have to be treated fairly to support the general ecology. But there is a difficulty here because of different timings and different renewals of licences.

Lord McNally

  414. In that case, if the Government were to press ahead with spectrum charges, would you want to see that introduced at the same time across the board, or would you prefer to see it staged as Cave is suggesting?
  (Mr Jones) If it was in 2006 when the BBC is to be renewed, then it would be fine because my charges would wither away in the next three years.

  Lord Pilkington of Oxenford: I do see the problem, you are paying and they are not paying—and we are seeing Professor Barendt later on—but surely the answer would be to hand OFCOM control of both public service and independent broadcasting, and they could then be the balance between the two. Why do you oppose that? The second question I would ask is on the transfer from analogue to digital. If you charged for spectrum they could give the whole public a free box.

  Chairman: Could I just say that it is absolutely a legitimate question but it really is a question for Thursday. We have flagged that up for the BBC. It is not strictly a spectrum question.

  Lord Pilkington of Oxenford: Could I press it? I would like their opinion on it because money is involved in this, and on Thursday we are going to talk about philosophy. Today we are talking about the real nitty-gritty, which is how much the BBC and Channel 4 pay as against others. I would like to press you, Chairman, just to hear what they think. Would it make it easier?


  415. I am a pushover when it comes to money versus philosophy!
  (Ms Thomson) On the money rather than the philosophy, of course the proposal is that OFCOM will take over the role of the Radiocommunications Agency and the ITC in the allocation of spectrum, and that is not something which we are resisting, as indeed, as you well know, we are under OFCOM in Tiers One and Two already, and there is the initial Tier Three which I am sure we will have lots of opportunity to discuss on Thursday.
  (Mr Jones) I support Caroline's view that the detailed spectrum planning should be devolved to OFCOM, however I think it is vital that ministers retain the ability to allocate spectrum specifically for broadcasting purposes for the BBC, Channel 4, Channel 5 and other public service broadcasters, because it is available for auction, and we cannot match what others can pay and if you want public service broadcasting then ministers need to continue to have a role in crucial decisions and preserving some parts of the spectrum for broadcasters.

Lord McNally

  416. I am interested in the view that the key to this is the speed with which we reach digital switch-over. I was wondering what you thought was the main momentum driver to digital switch-over, is it technology or is it programming?
  (Mr Jones) The Government setting a date.

  417. Regardless of how many people have converted?
  (Mr Jones) If the Government sets a date, whether it is 2006, 2008 or 2010, every manufacturer would be motivated to provide digital sets and every broadcaster would be motivated to provide digital services and achieve the transmitter roll-over as necessary, and everyone in the country would be aware of the date of the switch-over. Until the Government sets a date, there is no real opportunity for analogue switch-off in this country.
  (Ms Thomson) I would not disagree with the importance of the date but I do think if we are ever to get the date practical we have to develop systems which will work for second and third sets in particular in households, and the future of DTT is absolutely crucial to that. So I would add that we have to get DTT sorted out as well.
  (Mr Rasul) The engineering is crucial as well. You have to show the system works and is actually deliverable to the viewer. They also have to get there willingly, that is the key.

Mr Grogan

  418. Two questions, Chairman, which I hope are Monday questions. You have said that you think the Government should have a role in the allocation of spectrum for public service broadcasters, what about the final decision of charging? I think Clause 117 of the Bill says that if the Government response to the Cave Review is in terms of allowing charging, it should be OFCOM which would make the regulations and final decisions regarding charging. Should it be OFCOM or should that be the Secretary of State as well?
  (Mr Jones) We are pre-supposing as a public service broadcaster we get it free anyway. Ultimately, I suspect, we would prefer, if there was spectrum charging, probably OFCOM rather than the Secretary of State.
  (Mr Scott) I think one should follow through the logic. If one is trying to find efficiency in the allocation process, the question is, if there is to be a charge, who should receive that charge, and it seems to me that the people who should receive the charge if there has to be one are the people who are actually making the decisions on what spectrum to allocate, and that is not for broadcasters.

  419. What about satellite broadcasters and their downlink in the spectrum? Clive, you said that clearly the ITV companies make a payment at the moment for spectrum. One of the arguments in the White Paper and indeed of Professor Cave is that at the moment satellite broadcasters make no payment at all. Would you be quite so generous to them in terms of free use of spectrum or do you think it would level the playing field to make a charge there?
  (Mr Jones) It is certainly true that Sky and the satellite channels make no payment for spectrum. The only point I would make on that is that it puts satellite in an advantageous position compared to those others of us who work in commercial television, but again they are quite complex arguments to terrestrial spectrum and digital satellite transmission and their use of spectrum.
  (Ms Thomson) I do not myself quite understand, although other people do, how the idea of charging satellite would work technically, and in particular the question of charging it as a platform provider or a service provider. If you are charging it as a platform, we as the terrestrial broadcasters using that platform would just pay again because Sky would just pass the charges on to us. So it is a complicated position which you would not want to go down too fast.

Anne Picking

  420. What are the technical barriers to the commercial or non-commercial development of the spectrum available to you for non-broadcast purposes?
  (Mr Rasul) The actual possible uses of this spectrum, when we are talking about the actual spectrum which has been allocated to broadcasting, is actually rather limited. We can put on there various data services, data streaming of various sorts, but overall if you are going to have the service you want of the quality you need—and bearing in mind how much you do need for reasonable quality video—there is not much left for the other services.
  (Mr Scott) Due to the interleaved nature of the way the system has been planned, it is not possible to use frequencies without them interfering with people's television sets. So it might look in any area as though there might be a channel capacity which is not being used, but it is not being used in order to avoid interference.

  Chairman: Thank you very much.

previous page contents next page

House of Lords home page Parliament home page House of Commons home page search page enquiries index

© Parliamentary copyright 2002
Prepared 12 July 2002