Joint Committee on The Draft Communications Bill Minutes of Evidence


Memorandum submitted by Channel 4

1.  EXECUTIVE SUMMARY

    —  Channel 4 welcomes the overall intentions of the draft Bill and, in particular, the definition of the Channel's remit and powers.

    —  The Channel is actively preparing for the future as an innovative public service broadcaster in a more open and competitive commercial market.

    —  The Channel can only sustain its ambitious remit to be innovative, experimental and distinctive if it can also sustain the commercial dynamism and scale necessary to pay for it.

    —  It is essential to maintain a genuinely competitive advertising sales market between the commercially-funded free-to-air broadcasters.

    —  It is essential to maintain a genuinely competitive programme supply market. We suggest this may be assisted by controls on intra-group trading, minimum thresholds for UK-originated content and reciprocity requirements for non-EU based buyers of major UK media assets. As well as protecting the range of programming Channel 4 can offer the public, these measures would reduce the risk that consolidation poses to the UK production sector.

    —  Channel 4's licence obligations and investment in digital services more than pay for the value of any spectrum used for transmitting its analogue service.

    —  The must offer/must carry provisions set out in the draft Bill require further strengthening.

    —  The draft Bill fails to recognise the actual and potential significance of platforms as a definable and discrete market to be ranked alongside newspapers, radio and television.

    —  Further thought should be given to (a) the general public service broadcasting requirement, (b) the proposed extent of "self-regulation" with regard to content and (c) the relationship between the OFCOM main Board and the OFCOM Content Board.

    —  Channel 4 proposes a specific threshold for investment in training by all licenced broadcasters.

2.  A DRAFT BILL WHICH ADDRESSES A RAPIDLY CHANGING ENVIRONMENT

  2.1  Channel 4 welcomes the draft Bill:

    —  in its recognition that convergence demands a single unified regulatory structure for all communications media;

    —  in its drive toward economic regulation by means of competition law;

    —  in its drive toward self-regulation and "light touch" as the keystones of content regulation;

    —  in its strong endorsement of the continuing importance of public service broadcasting.

  2.2  Channel 4 particularly welcomes the definition of Channel 4's remit offered in the draft Bill and the definition of its powers proposed in the accompanying policy document. Both are a positive and emphatic affirmation of what Channel 4 is and does.

  2.3  Other aspects of the draft Bill which Channel 4 supports include:

    —  plurality of news provision; lifting of ownership limits on nominated news provider from 20 per cent to 40 per cent; requirement that ITV nominated news provider be adequately funded;

    —  retention of 25 per cent independent production quota;

    —  renewed commitment to nations and regions;

    —  a strong consumer panel with its own research resources;

    —  further moves to bring BBC within the ambit of OFCOM;

    —  the acceptance of the need for must offer/must carry rules for satellite as for other platforms;

    —  OFCOM powers with regard to code of practice for EPG operators.

  All of these proposals can help Britain's broadcasters and content creators move forward into a digital multi-channel, multi-platform world in which pay services will increasingly compete with free to air services and in which vertically integrated trans-national media giants are likely to become the dominant reality.

3.  THE CONTEXT: CHANNEL 4'S STRATEGY FOR THE FUTURE

  3.1  Channel 4 is already implementing strategies to meet the rapidly evolving world which the draft Bill foresees, not only through its main channel service but also through its new subsidiary, 4 Ventures.

  3.2  Channel 4 has been a consistent force for innovation in British television throughout its 20 years:

    —  providing diversity and quality in every genre of programming;

    —  sustaining Britain's creative economy by leading the development of an independent production sector and by continuing to commission hundreds of independent programme and service suppliers;

    —  complementing the "market failure" public service broadcasting provided by the BBC with an innovative, experimental public service ethos which gives a platform to new voices, new ideas and new companies;

    —  providing public sector competition for the BBC;

    —  reaching new audiences (the young, ethnic minorities, &c) with public service programmes from comedy and drama to news to education.

  3.3  But the Channel has not rested on its laurels. Over the past four years, it has developed a strategy to transform itself from a single analogue service into a digital offering that extends across multiple channels and platforms in ways which support Channel 4's values and creative mission.

  3.4  The strategy is already beginning to bear fruit:

    —  Channel 4 has created a new company, 4Ventures, to give greater focus and commercial discipline to its new businesses, to foster new strategic partnerships and, in time, to contribute to the core Channel's revenues—without fundamentally changing the nature and structure of Channel 4. Despite the severe downturn in the market in 2001, 4Ventures exceeded its targets.

    —  E4 is the most successful new pay channel launched by a terrestrial broadcaster. Only 18 months old, it is already the third most watched digital entertainment channel in Britain, and second most popular amongst 16-34 years olds. It is significantly ahead of its business plan, which foresees break-even in 2005. With a third of its budget devoted to original material, six of its programme ideas have already proved sufficiently successful to be migrated to the main channel.

    —  Channel 4 has led the way in developing interactivity and sophisticated cross-platform initiatives, from Big Brother to Test Cricket to Kumbh Mela, and in exploring ways of developing new revenue streams from them.

    —  Although it comfortably exceeds its required level of original UK production (82 per cent in peak-time against a licence requirement of 70 per cent) Channel 4 has also pursued an outward-looking acquisitions policy, systematically bringing the best of US entertainment to British audiences and creating the only dedicated foreign language film channel in the English-speaking world.

    —  4Learning not only makes consistently high quality television (winning seven of a possible eleven Royal Television Society awards last year, currently with 16 of a possible 33 nominations this year) but it has pioneered interactive on-line learning services from Homework High to Grid Club and the Black and Asian history map, and has won international recognition for doing so. It sees learning as a vital component of its public service remit but, equally, a key driver for its commercial future.

    —  Channel 4 has re-interpreted the best values of traditional public service broadcasting for a generation which is overwhelmingly sceptical about the very idea of public service. Last year Channel 4 News, the only regular hour-long news and news analysis programme in peak time, was also the only TV news programme to significantly increase its audience amongst 16-34 year olds. 85 per cent of the users of Channel 4's confidential on-line health counselling service are under-25 and the service works in close co-operation with the drama serial Hollyoaks to give prominence to health issues which are likely to be of particular concern to young people.

4.  CHANNEL 4'S CONCERNS ABOUT THE DRAFT BILL

  4.1  The draft Bill makes it clear that the government recognises Channel 4's unique contribution and wants it to continue to thrive. But Channel 4 can only fulfil its ambitious remit to be innovative, experimental and distinctive if it also retains the commercial dynamism and scale to pay for it. The Channel interprets the draft Bill's proposals for self-regulation and co-regulation of content as an intelligent framework within which the flexibility to achieve this can be managed.

  4.2  The delicate balance between economic regulation and content regulation, which lies at the heart of OFCOM, is especially important for Channel 4. There is a risk that while the Bill sets out an ambitious remit for Channel 4 it also creates a commercial environment in which it becomes impossible to sustain that remit—a case of willing the ends but not the means. This is the source of most of the concerns about the draft Bill which are set out in this section of our submission.

  4.3  The first set of concerns relates to the changes to the rules on ownership which the draft Bill envisages. While the proposed legislation would leave the BBC and Sky essentially unchanged, the draft Bill exposes Channels 3, 4 and 5 to the possibility of rapid and radical change:

    —  by allowing Carlton and Granada to merge (subject to competition law);

    —  by opening up the possibility of US ownership of Channel 3 and 5;

    —  by allowing the possibility of the dominant pay TV provider acquiring a free-to-air terrestrial broadcaster, Channel 5

    —  by allowing Channel 5 to combine with Carlton or Granada or, ultimately, both.

  4.31  It is important to emphasise that our concern is not about ownership per se, but about the potential for ownership changes to distort key markets on which Channel 4 depends for its commercial and creative success.

  4.32  The first of these markets is the advertising sales market. This is a market which Channel 4 inhabits alongside Channels 3 and 5 as well as numerous smaller digital players—a world of commercially-funded channels in which programme budgets are dictated in whole or in part by the ability to win a smaller or larger slice of a single advertising revenue cake.

  As a proportion of total display advertising in the UK, television advertising remains remarkably stable. It was 43 per cent of the total in 1993 and 43 per cent of the total in 2001, with little variation in between. New owners, new investment and major consolidation are unlikely to increase the size of the cake but will almost certainly alter the division of slices.

  Evidence from the United States suggests a growing trend towards long-term, multi-platform advertising contracts between major advertisers and major media organisations. One of the largest advertisers in the world, Procter and Gamble, estimate that up to 40 per cent of all advertising expenditure in the United States may become packaged in this way. The recently announced four-year £320 million agreement between ITV and Unilever indicates that Britain is not immune from this trend. The Joint Committee may want to consider the need for OFCOM to have the powers to cap the size and duration of such deals to guard against market distortion.

  Channel 4 is concerned:

    —  about the potential impact of further Channel 3 consolidation on the UK advertising sales market;

    —  about the impact on the advertising sales market if part or all of Channel 3 or all of Channel 5 is owned by an advertiser (as the draft Bill makes possible) or by an international media player with both extensive cross media assets and powerful global advertising interests.

  We therefore believe that there may be a case for increasing OFCOM's proposed powers to police and guarantee a free, fair and open advertising sales market.

  4.33  The second market which Channel 4 believes could be adversely affected by the change in ownership rules is the programme supply market.

  Consolidation of media assets in the hands of a few vertically-integrated multi-nationals may have the effect of shutting Channel 4 (and other broadcasters) out of some key markets for new content; for example, the markets for feature films, US television series and sports rights.

  Evidence from around the world suggests that large-scale vertically integrated content owners are beginning to both integrate in-house production with their broadcast businesses and buy rights across pay and free-to-air platforms, in both cases using their terrestrial channels as shop-windows and marketing tools for the brands they own and which they can exploit commercially on other platforms. A major consequence of this integration is the removal of major content brands from the open market as they are retained for in-house distribution.

  The Joint Committee may wish to address this issue by considering the benefits of a specific competition rule to require prior approval for any intra-group licensing of free to air rights to Channels 3, 4 or 5. This would benefit viewers as well as broadcasters by assisting the continuation of genuinely competitive programme supply in what will, in any case, remain a highly regulated part of the market. It would not impede the normal operations of the market but would prevent a major global content owner effectively denying UK terrestrial broadcasters the right to bid for key programme rights.

  4.4  A further and related concern is that the change in ownership rules allowing Channels 3 and 5 to become part of vertically integrated global media businesses might have an adverse impact on the UK production sector.

  4.41  Channel 4 is committed to a strong production base in the United Kingdom, with a mixed economy between the large in-house operations of the BBC and ITV companies and a healthy and growing independent sector. The Channel's unique contribution to the UK's media economy has been to champion the growth of the independent sector which now makes a major contribution to domestic viewing and to the UK's success in the international programme and format sales markets. The Channel intends to continue working with PACT and others to ensure that independent producers can enjoy the rights and terms of trade they need to remain a vibrant and sustainable force in the content market.

  4.42  The potential ability of non-EU (in effect, US) majors to buy into the UK market is therefore significant. All the likely US buyers own very substantial libraries of audio-visual content in English which is eminently saleable to a UK audience. For obvious commercial reasons, they may be tempted to increase the proportion of such content on their UK channels to drive down costs and increase competitiveness, as well as to build the brand value of such programmes with UK audiences so as to increase their value in secondary markets such as video, DVD, merchandising and publishing.

  4.43  In their introduction to the policy paper which accompanied the draft Bill, the two Secretaries of State claimed that their proposals would create the right conditions for "high levels of employment". It is difficult to imagine a scenario in which consolidation and foreign ownership would not lead to a reduction in employment in the production industry unless there were specific safeguards with regard to content originated by UK producers.

  4.44  The UK production focus of US parents is also likely to change, with a greater priority being placed on formats which can be exploited globally, rather than simply in the UK. The potential loss of content with local relevance and diversity, let alone the loss of minority interest programming, is therefore also of real concern.

  4.45  The Joint Committee may therefore wish to consider thresholds and qualifying criteria for origination, perhaps related to share of advertising revenue, as a further effective, non-discriminatory and transparent way of helping to sustain the dynamism of UK production.

  4.46  The Joint Committee may also wish to propose amending the Bill so that any change in the rules governing non-EU ownership of free-to-air broadcasters would require reciprocity between the EU and the country in question.

  4.5  For the reasons set out above, we believe that the Channel's revenues could be put under unexpected competitive pressure before its own digital strategy has had time to take effect.

  We therefore believe it is particularly important that other unnecessary pressures should not be brought to bear on the Channel's finances. This is especially relevant in the consideration of potential spectrum charges.

  4.51  Channel 4 has argued consistently that it already provides full value for its use of analogue spectrum through its public service obligations. For 2002 the Channel has budgeted over £150 million to meet the costs of education, news, training and talent development, regional development, film production and the other services which form part of its public service obligations. Channel 4 endorses the observation made at para 23 of the ITC's Memorandum to the Joint Committee that this investment should not be put at risk because of spectrum charges. Furthermore, until analogue switch-off there is no perceptible gain to be achieved in terms of spectrum efficiency by the Channel. The allocation of Channel 4's spectrum is by administrative means, designed to ensure universal coverage and is outwith the Channel's control. Channels 3 and 5 benefit from a ``digital dividend'' in recognition of the fact that by encouraging conversion to digital they (in common with all terrestrial broadcasters) weaken their long-term market position. It could be argued that Channel 4's contribution to driving digital take-up should be recognised in a comparable way (Channel 4 currently has about 12 per cent share of audience in five channel analogue homes, but less than 7 per cent share in multi-channel digital homes).

  4.6  Channel 4 welcomes the commitment to the principle of must offer/must carry for public service channels which is set out in the draft Bill, but questions the clarity of the proposals with regard to satellite conditional access systems. The Bill makes clear that, at switchover, public service broadcasting channels must be made available on satellite platforms at no additional cost to viewers, but at the cost to the broadcasters of the necessary smart cards for those satellite viewers who do not wish to pay for subscription services. At present, the pricing of these smart cards is entirely at the discretion of the satellite operator, leaving public service broadcasters vulnerable to open-ended charges.

  4.61  The Joint Committee may want to consider the lack of a level playing field in meeting the costs of universal access for public service broadcasters. The terrestrial broadcasters have already incurred substantial costs by investing in digital terrestrial television, as they were asked to do by government. Cable operators have also incurred costs because they have always been obliged to provide public service broadcasting channels free to viewers. There seems little logic in leaving satellite as the only platform with not even a modest obligation in this regard (the draft Bill does not even specify any responsibility on the satellite platform to ensure an adequate inter-face between electronic programme guides and other support services offered by free to air public service channels and similar services supplied as part of the main platform). Alternatively, it is worth considering whether the government itself might shoulder some of the burden of advancing digital take up since it will be the beneficiary of proceeds from any released spectrum. To create a genuinely level playing field in terms of must offer/must carry this issue should be addressed.

  4.7  The final issue which relates to the issue of ownership and market dominance is that of platform ownership. In its submission to the DCMS consultation on media ownership issues held in the run-up to the publication of the draft Bill, Channel 4 expressed the view that: "Platform ownership should be recognised as a form of media ownership, akin to newspapers, television and radio and should, like them, be taken into account when assessing levels of market influence." The Channel 4 submission went on to say "Channel 4 sees merit in the proposal for a ``plurality test'' and in OFCOM being responsible for publishing guidance and reviewing it periodically." The collapse of ITV Digital only serves to emphasise the significance of platforms in the digital world and Channel 4 hopes the Joint Committee will wish to consider ways in which this principle might be included in the final Bill.

  4.8  OFCOM will be a regulator of unprecedented size and power. Transparency of process and clarity of purpose will be vital in ensuring that it delivers the strategic intentions of the Bill. There is some way to go in guaranteeing those outcomes.

  4.81  The first issue is whether the general Public Service Broadcasting remit is sufficiently explicitly defined. Channel 4 agrees with the ITC's view that "there could be a mismatch between expectations and what is possible in a commercial environment" (ITC Memorandum to the Joint Security Committee. Para 16). In particular, Channel 4 is concerned that the specific remits of the other commercially-funded public service broadcasters should be clear enough and specific enough to guard against the possibility of a gradual degradation of public service—or the attempted migration of public service responsibilities from Channels 3 and 5 to Channel 4. As suggested above, one way of guarding against this would be to allow OFCOM to relate levels of origination (and perhaps other public service obligations) to advertising revenue share, increasing the requirement for Channels to invest in creative and innovative programming and training in line with their ability to afford it.

  4.82  Channel 4 welcomes the Statement of Promises as a means of encouraging broadcasters to think imaginatively, rather than mechanically, about delivering their remits. However, the requirement on broadcasters to consult OFCOM before making any "material change" to their Statement of Promises (Policy paper, section 8.2.3.6) threatens to reduce ``self-regulation'' to a meaningless aspiration. At worst, it could create a situation in which the promised ``light touch'' regulation became an addition to the present detailed content regulation of public service broadcasters, rather than a replacement for it, in effect collapsing the distinction between Tiers 2 and 3. OFCOM should be required to comment retrospectively and annually on the broadcasters' delivery of their remit and, similarly, should be required to make an annual report to Parliament on the fulfilment of the remit, perhaps with a dedicated Parliamentary Committee to consider this and the other aspects of OFCOM's work.

  4.83  Channel 4 welcomes the proposed Content Board and its role in representing a broad range of public and regional interests. Channel 4 welcomes the proposals to delegate powers from the main Board to the Content Board, but retains some concern that the relationship between the Content Board and the main OFCOM Board should be close enough and substantial enough to ensure that content issues are properly considered at the level of the OFCOM main Board in the discharge of its broader economic and competition responsibilities.

  4.84  Channel 4 has argued consistently that in a talent driven industry like broadcast television, a highly trained work force is vital, both in terms of the domestic UK audience and in terms of international competitiveness. The Channel has argued that its own licence requirement to commit a minimum of half of one percent of revenue to training should be set out in the Bill as an industry standard for all licenced broadcasters.

June 2002


 
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