UN CORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 743-iv

House of commons

oral EVIDENCE

TAKEN BEFORE THE

Culture, Media and Sport Committee

Support for the Creative Economy

Tuesday 18 December 2012

Patrick Bradley, Dr MARTIN Smith and Martin MILLS

Simon Milner and Sarah Hunter

Evidence heard in Public Questions 288 - 388

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Oral Evidence

Taken before the Culture, Media and Sport Committee

on Tuesday 18 December 2012

Members present:

Mr John Whittingdale (Chair)

Mr Ben Bradshaw

Angie Bray

Conor Burns

Paul Farrelly

Steve Rotheram

Mr Adrian Sanders

Jim Sheridan

Mr Gerry Sutcliffe

________________

Examination of Witnesses

Witnesses: Patrick Bradley, Director of Ventures, Ingenious, Dr Martin Smith, Special Advisor, Ingenious, and Martin Mills, Chairman, Beggars Group, gave evidence.

Q288 Chair: Good morning. This is a further session of the Committee’s inquiry into support for the creative economy. For our first session, I would like to welcome Patrick Bradley, the Director of Ventures at Ingenious, Dr Smith, the special advisor, Ingenious, and Martin Mills of Beggars Group. Could I ask you to begin by setting out a little bit about your involvement with the development of creative industries, the contribution you make and what you think are the motivations behind that?

Dr Smith: Good morning, Chairman. Good morning, Committee. Can I ask Patrick to kick us off on that question, please?

Patrick Bradley: I head the venture capital division of Ingenious. What we do, each and every day, is look at investment in the creative industries, right across the broadest definition of that sector. We include fashion design, media, entertainment, television and theatre. We look at businesses on a multi-stage basis, from very early seed through to later-stage investment. We are a very active investor, in the sense that we sit on the boards of those companies and are very active in terms of executing their business plan. We are a long-term investor, in the sense that we are there until the right time arises to sell the business when we realise our capital and, hopefully, provide good returns to our investors. I would say that the two main streams of activity are: one, trying to raise sustainable sources of investment for all of those stages of company development; and, on the other side, finding the companies to invest in.

As a general opening comment, I would say that there have been some very good moves from the Government, in terms of increasing the availability of finance to early-stage investment, particularly the seed investment scheme and EIS. The changes made there are excellent, and I think they are making change in terms of increasing the flow of investment into that sector. There are some uncertainties around that because of various consultations going on, in terms of who you can market EIS to and so on, but the general statement there is that what has been done in those sectors is extremely helpful, in terms of getting more cash investment into those businesses. For later-stage investment there is still an issue with institutional investors, in terms of how many of them are really knowledgeable about the media sector in the UK. One of the points that we make is that it is worth around £58 billion, of equivalent size to financial services in this country. It is dynamic, it is growing and it has the potential to grow further.

Certainly what we are hearing back from many of the companies we are looking at investing in, particularly in fashion, is they are thinking about bringing manufacturing back to the UK. So there are lots of benefits in the creative sector, not just at the creative end but also design and skills. Time and time again, we find the institutional market’s view of the creative industries-which is not a phrase that I particularly like, I prefer to talk about media business-is they think of it as being people with pigtails in garden sheds beating out bits of jewellery, not as a grown-up business in the way that they would look at the media business in the United States.

So as an opening comment, I would say, some very good moves at the lower end. We are seeing some better businesses coming through. More people seeking an entrepreneurial path are coming out of universities, in the sense that they do not want to be lawyers and accountants anymore; they want to be the new Facebook. We welcome that. Over the last 13 years we have seen a real change there. There is still a shortage of skills and business knowledge, but it is improving. SEIS and EIS are definitely a very positive move but, at the later stage, awareness of institutions, in terms of this sector, is still lacking.

Martin Mills: I am Martin Mills. I run the Beggars Group of record labels, which I started back in 1976. With the sale of EMI to Universal I think we are now the largest English record company, although we are much smaller than the majors. We have had extraordinary success over the last year or two with Adele. We are an unusual success story these days.

Q289 Chair: Thank you. Mr Bradley, would you say that there are more projects that you would like to invest in than you have money available to invest, or would you say that you are constantly looking round, that you have more funds than you have viable projects?

Patrick Bradley: I would say at the moment there are probably more projects we could invest in than we see. If we could raise more finance we could fund more projects. The projects are out there, but I do not think there is a sufficient flow of capital at this point in time.

Q290 Chair: The challenge is persuading investors that the creative industries are a viable, good investment to back.

Patrick Bradley: Yes. Particularly with SEIS, at that very early seed stage, what you start to see is that journey through all of the different stages of investment. We need to see how that scheme works, in effect. It is very early days. But at the moment we could do more if we had more capital. There is no doubt about it.

Dr Smith: Can I add to that? This is really where we came in. How do we connect with financial audiences, building bridges between them and creative audiences in order to bring in more investors? We came into this in 2007 when we put an event together with the DCMS and the DTI, as it then was. The Minister was the Right Honourable Gentleman for St Helens South. We put together this seminar, which was then published by us with the DCMS and the DTI, and the headline was "Sustainable Investment for the Creative Industries". If you look at this, it was the first systematic effort to try to bring creative people into a room with business people, entrepreneurs, producers and financiers. We had bankers there. We had UK music there. This is what we now need to do much more of. In public policy terms, one of the things-we might talk about this a bit more later-is that we feel that there have been some missed opportunities here. There have been initiatives taken.

For example, the Right Honourable Gentleman for Exeter will remember the Cabinet, which he was a keynote speaker at, which we were also very much involved with. A lot of initiatives have been taken in Government but not followed through systematically. That is one of the themes that we would want to stress.

Q291 Chair: Thank you. Mr Mills, you represent one of the most successful home-grown music groups. How difficult was it for you to raise the money you needed to expand the business? Did you have to persuade investors that you were a serious operation?

Martin Mills: We have never had investors.

Q292 Chair: You have never had investors?

Martin Mills: We have never had investors. We started 35 years ago, and we banked with Lloyds Bank on a corner in Earls Court Road. The bank manager would not give us an overdraft at the time, for which I am very grateful because it has meant that I have never borrowed money. As the company has grown it has had financing within the record industry. For example, we have done licence deals with larger companies over the years, for different markets in the world, and we have been able to grow slowly. The challenge for a company like us is-and I think you referred to it in some of your notes-how do you find the finance to grow, without parting company with your rights to the extent that it dilutes what you are. That is the fundamental difficulty. We managed to find our way through that. We managed to get a bit of funding here, a bit of funding there, from bigger record labels releasing our records in, for example, America, without ceding control of the business. That is probably almost impossible to do now. What I did over the last 35 years is probably not doable now, because the market was healthier when I started. It was easier to make money and to reinvest the money, which is what I have done all along. I do not think it could be done today. The investment gap is really crucial today, in a way that perhaps it was not in my early days.

Q293 Chair: The fact that you did not have external investors, and you did not have an overdraft, did not prevent you from doing what you wanted to do?

Martin Mills: No, it did not, because we simply spent the money we made and we always have done.

Q294 Mr Bradshaw: One of my bugbears is policymakers constantly reinventing the wheel. It would be very helpful if you could provide us with-not now-a note, based on that document, as to what has been followed through, what has been implemented and what has not and still needs to be. But are there any good examples of big financial institutions that get it that are doing this, are forward-looking and engaging and, if so, what are they?

Patrick Bradley: In terms of investing into the creative industries?

Mr Bradshaw: Yes.

Patrick Bradley: I am not aware of any.

Mr Bradshaw: That is very depressing.

Patrick Bradley: We have been talking to placement agents and other financial intermediaries in the institutional market recently, and the feedback has been, "That is a bit ritzy", or "That is a bit unusual, isn’t it?" and that is the end of the conversation. You have to spend a lot of time finding the investor who gets it. If you talk about tech, that is different, and I think there is some confusion in the market as to what is tech and what is creative industry. If you talk about tech, you have lots of investors in the institutions. If you talk about creative industries, they think we are all rather odd.

Dr Smith: As far as the banks are concerned, we have gone backwards since 2008. I do not think there is any question about that. For example, there were banks that were seriously in the business of film financing but they are not any more. There is a more fundamental point that, since the end of the dotcom boom in 2001, there has been an enormous chasm between the financial markets on the one hand and the media and creative sector on the other. That is a serious problem. In our view, it should not be beyond the wit of policymakers to at least bring these communities to a point of mutual understanding. It is not an easy thing to do, but it is a process that we must kick-start. Otherwise, the shortage of investment at certain points in the cycle, which Patrick refers to, will continue to be an issue.

Q295 Mr Sanders: How can dialogue between policymakers, creative industries and investors be improved?

Dr Smith: That is an interesting question. It is something that we at Ingenious have been committed to making a contribution to, hence the 2007 document that I referred to. What we see at the moment is the establishment of the Creative Industries Council, which is an effort by the Government to enable such a dialogue to take place.

Q296 Mr Sanders: You are members of that?

Dr Smith: Yes, we are, and I have attended meetings of the council. I would say two things on that. There is a huge challenge for the Creative Industries Council to identify a common ground; issues of sufficient commonality of interest to enable minds to come together, analysis to be agreed and remedies to be prescribed in a collective way. Why is that? If you look at who is around the table, you have a lot of organisations with conflicting interests. The tent has been made very large indeed. You have Google in there with Amazon, the BBC, the Arts Council, the CBI, Creative England, and Uncle Tom Cobley. What they have in common is an interest in creativity at a very high level of abstraction, and that is the basis for bringing them round the table. They are not homogeneous in their objective interests; in the way that would be true, for example, of the Automotive Council or the Aeronautical Industries Council on which they are modelled.

Q297 Mr Sanders: How would you slice it up into the different interest groups? It is fairly easy to do with manufacturing, but how would you do it within the creative environment?

Dr Smith: What we have tried to do in our submission-this is fundamental to our view of the world-is to make a distinction between different kinds of creative enterprise. We call them "demand-led" and "non-demand-led". What we mean is that there is a core of content industries that are non-demand-led, in the classic sense, that nobody can predict the success or failure of the song or the book or the game that is being produced. It is that classic remark by screenwriter William Goldman, "Nobody knows anything". What he means is not literally that nobody knows anything, but that nobody can predict whether a given film or record is going to be a success or not. They have a different risk profile from the advertising industry, the design industry and PR industries. Those are services businesses that have a different risk model. They are demand-led, in the sense that they do not spend money unless they have a client to pay for it.

To come directly to your question, our view of the world would be that the greatest commonality of interest is shared by these content businesses in film, music, publishing and games. Far be it from me to advise Secretaries of State on how the council should be constructed, but, for the purpose of moving public policy forward, what we need to do is focus on content businesses and industries. That is what we are good at in this country, and that is what drives our creative sectors.

Q298 Mr Sanders: Has this been raised within the council? Has there been a proposal to split off a subgroup and enter dialogue independently of the council as a whole?

Dr Smith: No, not to my knowledge.

Q299 Mr Bradshaw: Do you think Google and Amazon should not be on it?

Dr Smith: I think they have a different interest, if I may put it that way. Certainly you could not accuse either company of being content creators.

Q300 Steve Rotheram: There are obviously issues within the structures of the council, Mr Smith, but you have described a commonality of interest on a number of occasions. Therefore, how relevant and effective do you think the CIC is specifically in supporting the creative economy? Apart from Ingenious, of course, who else do you believe should have a seat around the table or within a revamped or restructured CIC?

Dr Smith: That is a very difficult question to answer. As I have suggested, I would like to see sharper focus on content creators. For example, you might say an organisation like Animation UK, representing creative businesses that are very important to our creative ecology, whose voice has not been heard very strongly in policymaking in the past. I would look to people like that to come together so that there can be, as I have described it, a common content-based, content-development, focused approach to inputting into policy.

Q301 Steve Rotheram: Therefore would you look at it as a sort of Sports Council model, so you will have a football element, a rugby element, a cricket element, but then the umbrella organisation would be the CIC?

Dr Smith: That is a possible model. Mr Rotheram, to be honest, I have not given it as much thought as your question deserves. I think it is probably fair to say that the council is in an early stage of development. It has only met two or three times. It has done some very good work on skills, which is one area where there is more commonality of interest between services companies and content businesses. I think that was a very good piece of work. You would expect that with creative skill-sets sitting around the table. The challenge beyond the skills agenda is to identify issues where all these companies can come together, and that is a very big challenge for the council as it is currently constructed.

Q302 Chair: Mr Mills, you have served on the BPI Council and you helped set up the Association of Independent Music, both of which have given evidence to us. Do you feel that there is sufficient input from your industry to Government policymakers? Have you ever had any contact with the Creative Industries Council?

Martin Mills: Not personally, but part of the purpose of AIM is that I do not have to and that they do it for me. The connection between those bodies and Government is very strong these days. The communication is probably better than it has ever been. From our point of view, the concern is that we always seem to be fighting the lobbying of technology companies like Google. We are hampered in that through a previous preference for those companies over what we do.

Chair: We are seeing Google in the next session, so if you have any thoughts during the course of this one, which you would like us to raise, please feel free.

Q303 Angie Bray: Looking at what I suppose is really desirable, which is to get more long-term finance into business, you talk in your written evidence about the biggest challenge being ways of helping significant numbers of very small businesses in the creative sector to scale up. But you talk about a second challenge, which is to discourage entrepreneurs from selling up at an early opportunity. What more do you think can be done to encourage more long-term financial support?

Patrick Bradley: It falls into a number of categories, because our businesses generally tend to sell out at sub-scale sometimes. We tend to be very good at generating independent creative businesses. The main buyers for those businesses tend to be the American conglomerates that come in and make a strategic acquisition. Some of the best known labels out there belong to American studios, like Working Title, for example, which is part of Universal. There are some ways that entrepreneurs can sell part of their business, but I think it is finding a way to encourage entrepreneurs to stay longer term in the business to grow it to scale.

There is one important point to be made about scale for UK businesses, which is that we are a small market. Certainly when we look at our investment criteria, every business that we look at has to have an international aspect. It has to have the potential to grow internationally, because the domestic market generally is not sufficient to grow our businesses to scale. If you look at the US businesses, which have massive capitalisation, they are in a very large market, where the foreign market is a nice-to-have but not a must-have. We are not in the same situation. That is something to think about as well, in terms of how we can fix that market failure for the UK, in the sense that we are a very small domestic market. Scaling to a size has its limitations unless you can grow internationally. The Americans have a very large market. They are very well capitalised, which gives them a lot of market power, in terms of what they do with rights and so on. So there is a disparity of market power.

Q304 Angie Bray: Do you think more can be done with the tax structure that might encourage a longer-term approach to investment?

Patrick Bradley: It is a mix of the tax structure and the way in which investors perceive when returns will come. Under the EIS structure you have to hold those shares for three years, which is a good thing. Certainly what we work hard at is educating investors not to expect a return after three years, because that is not always rational. You have to wait much longer. It is part of the educational process for both investors and entrepreneurs to be long-term investors in the business. For example, VCT allows dividends to be paid in a tax-beneficial way. EIS does not. Perhaps one thing we could do with EIS is look at dividends that could be paid in a tax-beneficial way, so that people stay longer. They can take returns in terms of dividends as opposed to just looking for a capital exit.

Q305 Angie Bray: Do you think the creative sector is good at talking to investors?

Patrick Bradley: Talking to investors?

Angie Bray: Do you think they are good at talking to investors and explaining what needs to be done, and why, and why it might be advantageous to stay with them a little longer? Is it a good conversation, or do you think more could be done by the creative sector to up their game, in terms of how they communicate their needs and how it might be quite beneficial to investors?

Patrick Bradley: Absolutely, we need to do that. We certainly do a lot of that. We have knowledge-based seminars. We go out to speak to investors. I think there is a growing awareness of the sector, but not an awareness that allows them to engage in it. I was talking to an institutional investor the other day. He was of the view that creative industries were a type cottage industry that they were not interested in. I asked him to circle the number of articles in the FT that morning that related to media and entertainment, and I think he was surprised at the number he found. We have to keep driving that message that these are real businesses that generate employment and value for this country.

Angie Bray: And returns.

Patrick Bradley: And returns, which are dynamic, because it is a continually changing market, new things coming along, so it is something they should look at.

Dr Smith: Can I just add something here? It comes back to the point I was making earlier about initiatives not carried through. The Right Honourable Gentleman for Exeter will recall that, when Lord Carter was Secretary of State, there was an exercise called Digital Britain. Chapter 4 of Digital Britain was about the digital and creative industries. It is a piece of work that has almost been forgotten, strangely enough. There was piece of analysis done for the Government during that exercise, which is published in Digital Britain. It is a flow-of-funds analysis of the creative economy in 2008. That is where the figure of £55.6 billion comes from. What I am staggered by is, having gone so far down the road of identifying the size of the thing, and also through this analysis of being able to track funds-how much of it comes through customer payments, how much of it comes through procurement-that work was not continued with and developed by anybody. Coming specifically to the point of your question, if that kind of analysis was done in a more consistent way it would help people in the financial sector to understand that this is a serious business.

Q306 Angie Bray: Yes, exactly, I understand that. On another point, you say in your written evidence that the Enterprise Investment Scheme is-to use your words-gummed up. Do you want to explain that a little further?

Patrick Bradley: It comes back to my opening remarks, in terms of there are a lot of consultations going round, in terms of how EIS could be marketed, in terms of HMRC and in terms of looking at how clearances will be provided. I do think it is improving but there is still some uncertainty in the market there, which has not been helpful.

Q307 Angie Bray: You talk about a disconnect between Treasury intentions, the will of Parliament on the one hand and the day-to-day practice of HMRC on the other. You are saying it is getting better but are there still problems there?

Patrick Bradley: Yes. I think there are still problems there.

Q308 Jim Sheridan: Could I rewind slightly, Patrick? If I caught you right, you are contemplating bringing manufacturing back. Back from where?

Patrick Bradley: Back from the Far East, mainly, for a number of reasons. One is because the cost differential of manufacturing in China has now swung the other way. When you take into account labour and transportation costs, it is now looking more attractive to manufacture closer to home. There is also a creative issue there, which is being close to your product in terms of quality control. Certainly what we have heard from a number of fashion designers in the UK is that the "Made in Britain" label is something that definitely sells internationally. We are certainly seeing a number of them setting up that labelling in England and in Scotland because it has a perceived value in international markets. It is not a flood of manufacturing coming back, but we are certainly hearing that comment made more often in meetings.

Q309 Jim Sheridan: I do not know if any of you have any interest in Creative Scotland or indeed have any clients up there, but there is a potential rebellion going on with some senior leading artists and writers, including the Queen’s composer, Sir Peter Maxwell Davies, and other well recognised people-such as Sir Peter and Ian Rankin-about the running of Creative Scotland and their spending. One of the spending commitments is causing some problems. There was anger when it emerged that Creative Scotland had given grants for ludicrous schemes, including kite flying and a song for Edinburgh’s pandas. That calls into question the whole running of creative Scotland. It poses the question: should the people running the business up there, or indeed throughout the UK, have a better understanding of the creative industries in order to lead the industry?

Patrick Bradley: It depends on the specific agencies. I am not going to name the ones that I do not think are doing very well, but I think the British Fashion Council in particular is very good. I think they are commercial. Others are not as good. It comes down to the knowledge and experience of the people running those agencies, in terms of: do they have a background in the creative industries? Do they have a background in business? It is uneven across the country.

Q310 Jim Sheridan: Those examples I cited about panda bears: is there an equivalent in the rest of the UK, in England?

Patrick Bradley: In terms of panda bears?

Jim Sheridan: In terms of the ludicrous spending of the money. Is there an equivalent anywhere? Can you identify any?

Patrick Bradley: I cannot identify anything that extreme. Certainly we have come across money being put into businesses on a regional basis where we thought, "There is no way we are going to invest in that", where we think it was put there just to support employment, full stop, not to create sustainable businesses. That is certainly true.

Dr Smith: There is an important point here about public agencies being invited to take on responsibilities for which they are not equipped, in terms of their resources and expertise. In the great saga of public policy initiatives from, say, 2007-2012, in my experience, the most disappointing unfortunately was the Creative England document that came out in 2008. It was fantastically good on the supply side, skills, training and what Government could do. It said nothing at all about markets. It said nothing at all about competitive strengths and weaknesses, but here is the point: it contained in it the suggestion that Arts Council England might become a source of venture capital for the creative sector. That is the most extraordinary suggestion. I am sure, if he were here, Alan Davey would tell you that nobody was more surprised than he was to read the suggestion. I do think that it is unfair on some of these agencies to ask them to take on things that they are not equipped to do. Of course politicians are perfectly entitled to do that, but if you will the end-and this is my point-you must will the means. That is, you must give them the resources that they may reasonably request to carry out the duties imposed upon them. So I have some sympathy in some instances.

Q311 Jim Sheridan: I am tempted to ask do you think there should be more public money invested in creative industry, but I guess I would know the answer. How would you justify any public money being invested in creative industries? What would your argument be for money going back into the creative industries?

Dr Smith: Public money is involved in all kinds of shapes and forms in the wider creative sector. For example, take the film industry. In the course of any one year, if you add money from lottery funding to the film-production tax credit, to money spent by BBC Films and Film 4. If you add the totality of public funds going into the film sector, in a good year that would be around £300 million. That was last year. It might be as low £120 or £130 million. In my view that is money very well spent. It pump primes. It helps to seed projects where major commercial organisations can come in and make hits.

The question that is prompted by your point-and it is an extremely important one that has not been discussed with sufficient rigour by anybody-is this: what is the relationship between the role of public money and private money in growing the sector? We have said this in our submission: I am slightly concerned about what happens now in terms of arts funding. It is not equally true of all the sectors, but certainly in theatre, certainly in film, certainly in classical music and some other sectors, if you cut back public investment in the creative arts, you risk damaging the commercial sector down the road. We have so many examples where you can see how this works; War Horse, for example. War Horse is a great British international success story in America. It would not have existed without public funding going into the NT Studio. That kind of relationship of public money taking creative risk, which then attracts private money to take something and build it into a big hit, we need to understand much better, within Government and right throughout the sector, how that works. If we do not, I think our global competitive presence and strength-which we unquestionably have at the moment-could be undermined by a shortage of investment in those parts of the creative economy where people take real creative risks.

Q312 Chair: If War Horse had not worked, then you would have had criticism-rather like Jim’s-about giving money to pandas, saying that this was a completely ridiculous waste of public money, the idea that anybody would ever want to go and watch some people prancing around on the stage pretending to be a horse. As it happened it worked, but you can quite see the danger.

Dr Smith: Of course. That is why the notion of risk in the sector is so important. We are in a hits and misses business. One cannot overstress that. This man runs one of the best-if not the best-independent record companies in the UK. He has a big hit on his hands with Adele. I can tell you, if you look up and down the music business, up and down the country, there are lots of record companies that are finding it very difficult to stay in business, because the hits are not as big as they used to be, for reasons that we understand. It therefore becomes much more difficult to run a sustainable business. It is all about risk and how you manage risk. My point here is that we should recognise that public investment in creative risk-taking is essential to keep the flow of hits going throughout the sector, which gives us such wonderful export figures, for example. We must not put that at risk.

Chair: Ben, Creative England was not yours by any chance, was it?

Mr Bradshaw: Not that document; it was before my time.

Chair: Oh, I see.

Q313 Mr Bradshaw: You have expressed frustration-and this is an important point-at the number of good policy initiatives that have not been followed through. What is your explanation for that? Is this a machinery of Government problem, a loss of historical institutional memory, or is it a political priorities problem? Because this is fundamental.

Dr Smith: It is, and I would answer it in this way. First, I would pay tribute to the work of the hon. Gentleman for Wantage. Through his enthusiasm for the sector, he has kept a lot of people in the creative industries, in all those sectors, engaged with Government. He continually encourages the sector.

Chair: Dr Smith, before you go on, you are ahead of a number of Members of the Committee, in terms of your knowledge of constituencies. It would help us, and certainly the people listening behind, if you referred to them by name.

Dr Smith: Mr Vaizey.

Chair: Oh, I see.

Dr Smith: I do apologise, Chairman. I would summarise the overall position as this: that, in relation to the creative economy, we have a vision of sorts but it is not clearly articulated. We do not have a strategy. We do not have a plan, and we have very little resource in Government for making these plans happen. If you look at the people who are employed in the DCMS in creative industries, there are very few. There is no senior resource. There is a little more in BIS. But to come to your question, it is certainly a shortage of corporate memory. You will find it very hard in DCMS to find anybody who remembers back to Creative Britain or the creative economy programme, launched by Mr Purnell in 2005, where extremely good work was done, but somehow it disappeared.

For example, I remember, as part of that, there was work done on competition and intellectual property. It was done by Lord Eatwell and Professor John Bates of the London Business School. It disappeared. For some reason, it was not covered in Creative Britain at all. So my answer would be that, if we want to be world leaders-as I think we all aspire to be-we should do two things. First, we should be clear about what the policy goals are. I would suggest that, as a policy goal, we would like to increase our share of the global market for cultural goods and services. That would seem to me to be a reasonable policy goal, based on the work done by EUDAT, which describes the way the global market is growing very quickly. Then we should work back from that to ask: what are our strengths? What are weaknesses? We know what our strengths are. We have fantastic creative people in this country. We have fantastic technical skills, but we are not so good at building sustainable businesses. Why? We need to understand that better.

So we need clearly articulated goals. We need to be clear what we are good at and what we are not so good at, and then we need to address those strengths and weaknesses in Government, address the weaknesses and encourage those things that give us strength. It does not help when we have three Secretaries of State in three years or five Ministers in three years.

Q314 Mr Bradshaw: Plus two Departments; what about the two Departments?

Dr Smith: Absolutely. That is very frustrating for people like us, as you can probably tell. We try to be helpful to Ministers and officials, and it is very dispiriting when you have to start all over again after six or nine months. We need consistency, and we need to take policymaking in this area more seriously throughout the public policy environment. If we think this is an area that, in the future, will give us competitive strengths in the global economy, surely we need to properly resource the way in which we make that happen within Government.

Q315 Chair: Mr Mills, you have been sitting quietly. Going back to the issues we were talking about, about long-term finance and selling up, presumably you have had lots of people come and look at your company and offer you very large sums of money. You were not tempted?

Martin Mills: No. They gave up a long time ago because they realised I was not about to. They all said, "Call us first, if and when it happens".

Q316 Chair: If you had had investors, then you might not have been able to do that?

Martin Mills: Exactly. If I had had investors I might not have had the choice, but because I own the company myself I had the choice. My choice is to carry on doing it because that is what I want to do.

Q317 Chair: You said that what you have succeeded in doing, you could not do today because the climate is now different. What would your advice be to somebody starting out now?

Martin Mills: It is difficult to start doing what I did for the purposes of making money. You have to do it because you love it, because, as we’ve been talking about, the risk is on such a different scale from anything else. So I think you have to do it for love, and if you make money, then that is a happy accident.

Picking up on something that has been talked about here, one of the problems is, if you are looking for investment in creative industries, you need to believe that there is Government support for the creative industries, and there is reason to believe that that support is not there as much as one would wish. When you look at how long it has taken to implement the Digital Economy Act, when you look at what has been proposed with the copyright exceptions at the moment, when you look at the influence that technology companies have with Government against the creative industries, you have to think that Government is more swayed towards those industries than towards ours, and that militates against investment, which I think is a real problem.

Q318 Paul Farrelly: You took my opening line there, which was to ask Martin how many venture capital companies and merchant banks have queued up at his door over the years.

So to Patrick Bradley, there is a lament in your evidence that picks up on the point you made about scale, that we do not have the likes in the private sector of the Bertelsmanns and Vivendis in this country. That poses the question: if that is seen to be a good thing, how might it be encouraged? Because one thing we saw here, when the position in terms of intellectual property was more favourable to the independent TV production centre, and times were booming, they made more profits and then they sold out; for good sometimes and for ill, if you take the case of Corian, and similar things have happened in EMI and the music industry. That can only have been encouraged by the baffling reduction to two years from 10 years, of tapers on capital gains tax relief, which encourages short-termism rather than long-termism. So, after a long preamble, my question is what practical changes could we make to the taxation system that encourages people to hold on longer, even if those suggestions might not be in the interests of your investors?

Patrick Bradley: I do not have any specific recommendations on that, in terms of what you should specifically do with the tax legislation at the moment. But I do agree that if you can incentivise people to hold longer, I think that is a good thing because it will change that behaviour. I go back to my earlier point, if people can take out dividends and income streams, in a way that is equally as tax efficient to taking out capital gains, then that may also change that behaviour. To be absolutely honest, I think it is for investors themselves to think about how they can invest on a longer-term basis as well. You are right that, if Martin had had a venture capital fund sitting inside his business, they would have been pushing for an exit.

Q319 Paul Farrelly: Martin, what would encourage more people to adopt a frame of mind more like yours, if not having a personality transplant? What practical measures would help a more long-term view that would not at the same time encourage massive rampant tax avoidance?

Martin Mills: The problem is that independent companies tend to struggle financially, that tends to be the nature of the game, and they tend to sell because they are struggling. We have been fortunate in that we have not been in that position. I am involved with AIM, and you spoke to Alison a couple of weeks ago. There are hundreds, approaching thousands, of labourers there who are all short of money, all short of investment and all full of ideas, and hopefully the ideas we are talking about here will help them.

I am not sure if there is an answer. From my own personal point of view, I built a successful business, and it employs other people. It pays a lot of tax, and I am very proud of that and I am happy to continue doing it. I have no wish to stop and sit in the south of France worrying about what I am going to do with the money I get. I want to carry on doing what I do. I would hope that people in the creative industries are doing it because they are passionate and want to carry on doing it.

Q320 Paul Farrelly: Again starting with Patrick, a final question on tax. Setting aside the overarching framework of dividends and capital gains, and getting incentives right, we have seen the success of the Film Tax Credit, according to independent surveys, and the Government is moving towards high-end TV animation and, again, bringing back video tax reliefs. Assuming that those are measurable and well-targeted, are there any other specific measures along those lines that you would like to see that could generate returns for the tax reliefs that are given?

Patrick Bradley: I am of the view that the tax reliefs that are there at the moment, in terms of credit and also SEIS and EIS, are moving in the right direction to encourage investment. I think that is fine. There are some changes to the EIS scheme that I think should be looked at, in terms of the fact that you can only invest through equity, you cannot take any form of preference shares or loan notes. That means that investors going into those companies, if they are alongside what I would call a professional venture capital fund, who normally will come in through a structure of equity and loan notes, find themselves probably at a greater risk than the VC, because they are subsumed below that. That is something I think we should look at to try to equalise that. Going back to the point about scale if I may, your point about the television production companies I think is right, because that addressed a market failure, in that it allowed those businesses to have mandatory buyers in the market for their creative content. It has been successful in that sense in terms of the independent quota, and those businesses have been able to grow because they have been given some way of fighting against market power that is coming out of the States. I think that that regulatory intervention did succeed. If you put that alongside the tax credits that you have, you may see more businesses setting up and beginning to get scale in the UK, because they can sell their creative content into their domestic market as opposed to trying to compete with very large US studios that have a huge amount of capitalisation and distribution.

Martin Mills: If I could add to that, I think the tax credit system in France, which I presume you have heard about, which essentially encourages investment in recording, is very effective.

Q321 Paul Farrelly: Is that something we should definitely look at?

Martin Mills: I would think so. Have you not been told about this?

Q322 Paul Farrelly: No. We will collect some evidence on it. The UK Music came and said, "Why just look at film? We do similar investment in A&R". That is research and development, so looking for something similar to encourage the music industry is very important.

Martin Mills: Yes. In France you get a staged tax break for investment in recording and also in marketing, which I think does encourage France’s very flourishing industry, apart from the piracy problems that obviously France faces.

Q323 Jim Sheridan: I am pleasantly surprised that you have not mentioned the potential for a cut in VAT tax for the music industry. If you look at the recent Autumn Statement, there was a 25% tax break for computer games, animation and television; why not music?

Martin Mills: We have been fighting for that for a long time without getting very far. There have been plenty of people arguing for that, at a European level, but it does not seem as if it is going to get anywhere.

Q324 Jim Sheridan: You have come along here today and no one has mentioned that. Why?

Martin Mills: I think we should have. We will. Please can we have a tax break?

Q325 Jim Sheridan: Martin, I do not want to be intrusive, but have you ever found it necessary to take your production offshore, or to another country, to avoid paying tax?

Martin Mills: When I started my company in 1976, the legal advisers who helped us set up told us of the options that there were at that point. Our view was, "It is too complicated. It is not worth it. If we make money we will pay tax". I am proud to say we pay tax at the full rate. We paid £11 million worth of tax last year, which is more than Apple, more than Amazon, more than Facebook, more than Google, which is pretty outrageous when you think about it. Again, talking about the lobbying that Government faces between technology companies and creative companies, when you are talking about legislation, it creates a value shift from one to the other. I do not see why it is in the public interest for a value shift to move away from taxpaying companies and towards tax avoiding companies.

Jim Sheridan: I wish we had more like you.

Q326 Mr Sutcliffe: I want to move on to intellectual property and the issues around that, but before I do if I could pick up on the "Made in Britain" comment. What impact do you think that the Olympics and the Paralympics had, and is having, on the Made in Britain brand, from the creative sector point of view? Have you noticed any betterment because of what happened?

Patrick Bradley: I think that it reinforced the belief outside this country that this country is uniquely placed in the creative industries. There is no doubt about that. The worst offenders for not recognising it are sitting within this country, in the sense that we do not have the confidence sometimes to state how good we are. What happened in the Olympics proved, to a global audience, that this is the place where innovation happens and this is the place where cool things happen, which people around the world recognise. It was great for us, and I certainly think the appetite in international markets for British-made goods, with that British feel and look, is increasing. I am sure it has been driven in part by the Olympics.

Dr Smith: And we are very happy to be funding Danny Boyle’s next film.

Chair: It is probably not the riskiest investment.

Q327 Mr Sutcliffe: Moving on to intellectual property, and to all three of you, but perhaps you first, Martin, the issues out there at the moment in terms of intellectual property, the importance to small creative artists and small companies; where do you think we are at and what worries you about the issues at the moment?

Martin Mills: Intellectual property underlies all creative business. If there is no protection for property, and there is no copyright, then there is no reason to invest because you are never going to make your money back. All our industries depend entirely for their survival upon the intellectual property framework being strong. We have been fighting over the last 10, 15 years against piracy. Piracy obviously has always been a problem and is always going to be a problem when you are selling monopoly goods at a premium price, which is obviously what you have to do to recoup your investment. It is on a very different scale to when we grew up taping Top of the Pops off the radio, to the ease of digital piracy these days. We have really suffered.

From my point of view, I see the number of records we sell compared with the number of concert tickets my artists sell. There used to be a very firm correlation between the two. When an artist was growing, they grew in parallel: their record sales grew and their concert sales grew. It does not happen anymore, and you can see the effect of piracy and the effect of people not buying records but still being fans of artists. That is even more acute in a country like Spain, for example, where we can have an artist who will sell 200 albums and 2,000 concert tickets. So that is a real problem. We have to look to Government to protect that property. We have to look at ultimately the implementation of the DEA. We need to look at the search rankings on Google, which I am sure you have talked about. If I Google "Adele MP3", it will probably be halfway down the second page before I get to a legal site. One of the other problems with those search rankings is that it is very hard for honest people to tell what is a legal site and what is not a legal site. I think that some kind of traffic light system, which has been talked about in the past, that identifies legal sites and promotes them, and identifies illegal sites and moves them down the listing, would be really important. I think a lot more people want to behave honestly and perhaps do behave honestly but it is simply hard to tell these days.

Patrick Bradley: Copyright is absolutely essential, and it is essential in the sense-certainly for investors-that I could write an article here and say it is copyrighted, but you need someone to pay for the marketing, someone to pay for the distribution, potentially to retail it. That means that investors are putting money into creating their property. Copyright comes alive because of the other things that are done around it, in terms of distributing and marketing it. If you are going to say that investors, whether they are individual entrepreneurs or whether they are funds like ours, can put money into something and then watch it effectively stolen with nothing paid for it, that is a problem for the creative industries. Because when we sit in front of investors they will say, "I would rather put my money into clean energy or something else, not this because you cannot make any money out of it".

Dr Smith: According to Ofcom, 30% of all films consumed by adults online are consumed illegally. One only has to think that through, in terms of its impact on revenues, to understand how alarming that is. Of course, with ever more super, superfast broadband that becomes easier. It is a huge challenge to legitimate business models, because there is a sense in which you cannot compete with free. You only have to look at the number of video on demand-VOD-businesses that have gone down in the last two or three years to understand that point. It is absolutely crucial to our business. No protectable creative assets, creative IP- no business essentially; it is as simple as that.

Q328 Mr Sutcliffe: How optimistic or pessimistic are you about the Government resolving the issue, in terms of Hargreaves and the issues around all of that?

Martin Mills: I am not particularly optimistic, to be honest. I am more optimistic about the public mood. I think the trend within the public is away from stealing and towards paying, so I am more optimistic.

Q329 Mr Sutcliffe: I agree with you, but how do you think that has happened, Martin?

Martin Mills: It is hard to tell. I think it is just one of those sociological shifts that you see going on. The understanding that it is as wrong to steal music as it is to steal petrol from a petrol pump is just edging forward as a concept, but it could certainly use encouragement.

Q330 Mr Sutcliffe: Martin and Patrick, are you optimistic or pessimistic that Government will get it right in terms of outcomes on IP?

Dr Smith: I think it is very frustrating that things move so slowly. That is the first thing to say. The work that Richard Hooper is doing on the proposed Digital Copyright Exchange is very interesting and is potentially very important. There is no question but that, from the perspective of setting up businesses, creating new projects within businesses, licensing content is often not that straightforward. In a digital age, through tagging of IP, use of metadata, anything that enables businesses to be created more quickly and more cheaply would be good news. The practical difficulties facing Mr Hooper, and those people who are trying to progress this idea, are considerable. We should not underestimate them. There are a lot of very big vested interests in this area. In principle, personally, I think the proposed DCE would be a very good thing if we could deliver it.

Patrick Bradley: If I could add, and I support Martin’s comment, that I think that behaviour is beginning to change, which is good, and we need to keep moving forward on that. We can also see that YouTube and others are now beginning to invest in original content. A few years back we were all talking about user-generated content-that was the King Content-but a lot of the big US businesses are now seeing original content is what drives viewers, what drives advertising revenues. That is a move in the right direction, which may enable the issue to be resolved as opposed to just Government intervention.

Q331 Conor Burns: In my constituency, I have Bournemouth University and Bournemouth University Arts College, who produce some of the brightest graduates in digital animation, in fashion and in design, and we lose a large number of those graduates every year to abroad, to foreign companies who recognise their latent talent. This year with the Olympics, and everything that Gerry touched on, we shone a torchlight on to the creative industries in this country and the talent we have, but it just strikes me-and this is not a criticism, more a comment-that we hear a lot complaints, things that could be done. We hear complaints about the lobbying power of Google. What are you guys doing to get together to form a counterweight to that imbalance in the Government’s ear?

Patrick Bradley: I think coming here today. We talk to DCMS and other Government officials on a regular basis. We try to talk to institutional investors and others, as much we can, to encourage knowledge of the sector. It is an ongoing dialogue. I have to say that it is frustrating; that it is a solo profile. Certainly, in this particular Government, the feeling-whether it is right or wrong-is that the creative industries are not as important to the overall agenda as it was in the previous Government.

On your point on talent, you are absolutely right; the talent is entirely mobile. If you look at Jonathan Ive who has gone off to Apple to be their designer, our best people will go to where the opportunities and the jobs are. Clearly, if we can bring more investment to bear, if we can build more businesses, we can keep more of our talent. We need to wed that creative talent with business talent. Actually, where the shortage is in this country is not the creative talent. We have bags of creative talent coming out of universities, colleges, council estates, you name it, but we do not have the business talent. That is what we need to work hard on, because the best creative businesses are the pairing between the creative person and the person who looks after the money.

Dr Smith: We need to identify and encourage more entrepreneurs in this sector, and we need to produce more producers. Specifically in answer to your question, Mr Burns, we try to do our bit outside the range of our own commercial operations. For example, we have partnered with the National Film and Television School. Next month will start what I think is the world’s first course in entrepreneurial producing for the creative industries: the National Film and Television School Diploma in Entrepreneurial Producing. We are paying for that for the first two years. There will be 15 students, all post-graduates. The course will be taught entirely by practitioners in music for games etc.; people like Ian Livingstone in the games industry. So very senior people who are as passionately committed as we are to growing the sector. I think that is a very practical thing for us to have taken on. It is one of the ways in which we try to act as missionaries-supporters of the sector as a whole.

There is no question, you are right: it is a two-edged sword. When we produce talent, which we do-fantastically impressive talent-because talent is mobile, as Patrick says, we will always lose a lot of it. There are 80,000 Brits living within 25 miles of Hollywood; 80,000. That is extraordinary. At the same time, we should not be too self-satisfied about this. I am very interested in your point about Bournemouth and video games and special effects. It is true that, through that university and about 20 other universities around the country, we do produce graduates in games, for example. It is very instructive to look at the experience of a business like Double Negative, which is one of the world’s leading special effects companies based here in the UK, growing incredibly fast, run by one of the people who wrote the report, Next Gen, which was a skills analysis of the games and special effects industries, where they show that we are not producing the right combination of skills for some of these industries at the very fast, high technology end. Double Negative will tell you that they cannot recruit enough people in this country with the combination of artistic skills and technology skills, basically writing code, that they need to be able to grow, going forward. They have to recruit abroad.

It is a kind of mixed message. We produce lots of talent, some of which goes abroad, some of that will be inevitable, but we should not kid ourselves that there is not still a lot to do. What is disturbing to quite a lot of people is this growing sense that we should focus on STEM, the science, technology, engineering and maths bit of the education system, and leave out the A. What we need is STEAM-in a metaphorical sense-and we need the arts and creative education placed firmly in the middle of the science technology and maths. That is what industries like Double Negative need going forward. I hope that in Bournemouth and elsewhere that this point is taken on board, because there is no point in producing lots of graduates in subjects that sound great, but where industry and businesses are saying, "It is not right for us".

Conor Burns: Bournemouth has among the highest employment rates for graduates of any university in UK, so they are obviously getting something right.

Dr Smith: Excellent.

Q332 Conor Burns: My final question is this: the point was made that these industries are on the scale of financial services in this country, in terms of their contribution to the economy. I have asked the Chancellor to come and visit Bournemouth to see some of the digital animation stuff, and he is coming down early next year. If you could ask him to do two things what would they be?

Patrick Bradley: To put the creative industries at the top of his agenda. To be a missionary, in terms of going around and talking to the City and institutional investors to make them understand how important this business is to the UK going forward. Secondly, I would say keep on doing what you are doing in terms of encouraging money for growth, in terms of SEIS and EIS. Keep doing that. Those are the two things.

Martin Mills: If I can come back to your previous question, I think there is a difference between the nationality of the talent and the nationality of the business that is exploiting the talent. For example, a singer like Emeli Sandé is English, but she signed with Universal Vivendi, which is a French company. I do not know where Universal pays the majority of their tax, but I would imagine it is probably not in the UK. Whereas in my company, for example, at least half of the artists signed to my company are not English, probably about a third of them are American. An artist like Vampire Weekend, which had a number one record all around the world-all of that revenue accrues in the UK, even though the artists themselves are American.

Chair: Thank you. That is all we have. I thank all three of you very much.

Examination of Witnesses

Witnesses: Simon Milner, UK and Ireland Policy Director, Facebook, and Sarah Hunter, Head of UK Public Policy, Google, gave evidence.

Q333 Chair: I welcome to our second session this morning Sarah Hunter, the Head of UK Policy for Google, and Simon Milner, Policy Director at Facebook.

Angie Bray: Can I start by asking you both to outline the ways your organisations contribute to the UK creative economy? I do not know which of you would like to go first. Sarah, would you like to?

Sarah Hunter: Hello. Thank you for having us. It is probably worth saying at the outset we think of ourselves as a consumer facing engineering company, rather than a creative company. Putting that to one side, I think we make a very strong contribution to the creative companies and the creative economy in this country. There are a lot of different ways that our products do that. For example, creative people can make more content cheaper than ever before because of things, like camera phones, that have created system journalism. That is one way we contribute. Another way is through our platforms, so YouTube and Google Search. Basically, creative people can put their content up on YouTube for free, reach new audiences, make money from the advertising, and similarly using our products like AdSense as well. Then finally things like Google Play. We have recently launched Google Play in the UK, which is like an iTunes store for creative content, so magazines, books and music can be sold. Again, the revenue is going to the creative sector.

Q334 Angie Bray: Effectively, not creative as such, but more of a facilitator?

Sarah Hunter: Exactly. There is quite a long tradition of technology working with creative companies, creative people, to distribute and enable more people to get that content but also to make money. For example, the video has led to a huge growth in the film industry but was actually a technology innovation at the outset. There are lots of examples like that, and I think the products we make are the most recent examples.

Simon Milner: For ourselves, we are also a technology platform. As you may have read recently, we have 1 billion people who are using our service to connect with people they care about, but also things they care about. Much of the content on Facebook is generated from our users, so around 300 million photos are uploaded to Facebook every day and Facebook neither owns nor creates that content. We are used on any internet-connected device and increasingly on mobiles, so around 600 million of our users are using Facebook on mobiles. The openness of our platform means that thousands of organisations and businesses can effectively offer a service via Facebook. That includes many creative organisations and artists who are doing that in the UK and around the world, because once they are on Facebook they can reach 1 billion people. Obviously, some of them are reaching many millions of people through the services they are offering on Facebook. There are lots of examples from across the UK creative industries, from music to the arts, to galleries to television, to the Olympics, to games, of people using Facebook as a platform. We are not creating that content; they are, and they will continue to own that content on Facebook.

Q335 Angie Bray: You say that social media does have an important role to play in fostering creativity?

Simon Milner: One of the main ways in which artists-whether they are music artists or fine art, whatever type of artist- particularly gain traction is through word of mouth. What our platform offers them is word of mouth at scale. Often we will come across new bands, new artists or a new piece of television, through recommendations from our friends, but typically we may not see those friends for weeks or months at a time. Because of Facebook, we can now know what people are watching, what they are reading, where they have been, what music they are listening to, and that can create word of mouth at scale for artists, and all for free.

Q336 Angie Bray: Presumably the advertisers that you carry generate a lot of money as well?

Simon Milner: Most of our revenues come from advertising, and there is a lot of creativity there as well. That is certainly one of the creative industries we have not spoken about today, but I imagine it will probably feature during the course of your inquiry. That is an industry that is certainly making great use of digital platforms, in terms of coming up with innovative ways of connecting people with brands that they love and also brands that their friends love.

Q337 Angie Bray: It is very niche?

Simon Milner: Actually it is not niche. It is growing as an area for advertisers. They are beginning to recognise the power of platforms that could enable them to very carefully target their advertising messages, so typically there is much less wastage on a digital platform than there would be on standard television or billboard advertising.

Q338 Angie Bray: Ms Hunter, can I ask you what you think the justification is for Google to have a seat on the Creative Industries Council, given that you have just said that, in a sense, you do not see yourselves as being creative yourselves?

Sarah Hunter: I do not know why the Government asked us to do that, although it is very nice that they did. Matt Brittin, who is our Northern European VP, has attended a number of times. I have been involved in creative industries policy for about 15 years now, and every Government, of whatever ilk, has had some sort of place where business people from across the creative industries can meet Ministers. I think this is just the latest iteration of it, to be honest.

Q339 Angie Bray: Given what you said, do you think that social media companies are adequately represented on the council?

Sarah Hunter: Matt has gone along but I have not been to one, so I am not sure who else is on there. Going back to my earlier point, I do think there is an almost symbiotic relationship between creative content creators and technology. Increasingly it is very important for innovations and technologies to be understood and utilised by creative content producers, so having those environments for the two different types of innovators and creators to come together is important, and for the good of the British economy as a whole, to be honest.

Q340 Angie Bray: I imagine there are quite a few issues that Google has with some of the other members on the board, in terms of the ongoing issues on creativity.

Sarah Hunter: Sometimes we are doing deals with a lot of the other companies. I mentioned our Google Play store. We sell the records, the books and the magazines of many of the content creators in this country, and we have commercial relationships with them. Sometimes there is an inaccurate characterisation of the different perspectives between technology and content creators. You can grow the pie for everyone; you can grow the economy for technology start-ups, as well as for creative companies. I do not think it is an either/or, to be honest.

Q341 Mr Sanders: Is there anything that the Government could do to enable you to contribute more to the creative economy?

Simon Milner: One of the things that they could help us with is around some laws that are going to matter for all industry in the UK, including the creative industries, around the use of data. I cannot think of any company in any industry, or any artist, who would not benefit from having more data about what people enjoy, about the content they are producing, how they use it and how they share it, and to make use of that data in more imaginative ways. There are things coming down the track, particularly from Europe, around data laws. For platforms like ours, and also many other businesses that are built around platforms like Google and Facebook, it will be difficult to innovate in a too restrictive environment. One of the ways that Government can help-and indeed is helping already-is to say, "Let us not have overly restrictive laws around data, and the way in which companies handle data. Let us get the balance right between privacy and innovation". So the Government is making that case, and we hope it will continue to make that case next year, which will be an extremely important year for data privacy regulation in Europe.

Q342 Mr Sanders: How would you maintain the trust of your users, who would be deeply sceptical of how that data is used?

Simon Milner: We do not find that. We do not find that users are deeply sceptical at all. What they find and appreciate on Facebook is the fact that, although they get advertising, typically it is highly targeted towards them, so they are not seeing adverts that are irrelevant to them. Indeed, if something does get through the system that is not relevant they can very easily say, "I don’t want to get adverts of this type or from this organisation". Once they do that, they should not be seeing any more adverts like that. People appreciate clever use of data to enhance their experience of our platform, whether they are consuming music via our platform or engaging with retail brands, or just engaging with their friends, or indeed engaging with public figures, including politicians.

Q343 Mr Sanders: How do you explain the storm of protest about Instagram today who have taken the decision to use people’s data, to provide it or even monetise it, sell it, to advertisers?

Simon Milner: Most of our services-and certainly all Facebook’s-are provided free to users, but they do not cost us anything. It costs us something to run a platform that enables 1 billion people to use it every day; on-the-go, a super-speedy service with an instant ability to see what their friends are doing around the world and to upload very high-quality photos. That costs money. We have to pay for it. The way we pay for that is advertising. That involves innovative use of the data that people provide to us, but always complying with data protection laws. We are regulated in the US. We are regulated in Europe by the Irish Data Protection Commissioner, who has recently conducted a major review. So we are always compliant.

Q344 Mr Sanders: You have just argued for that regulation to be looser?

Simon Milner: No, absolutely not. We think that the European Data Protection Framework works reasonably well at the moment. Certainly our experience of having a thorough review of what we do by our regulator in Ireland, over the last year, has helped us achieve best practice in terms of what we do around handling data. We are not suggesting it should be loosened. What we are saying is, as it is modernised for the new age-and after all this is a law that has not been reviewed for a long time-we need to get the balance right, between enabling people control, absolutely; transparency around how their data is used, clearly very important; and proper accountability of companies that are handling data. We absolutely support all those things. If you apply overly restrictive requirements around, for instance, saying, "Every time you want to use somebody’s data for another thing you must get their explicit consent", that is a bit like the e-Privacy Directive on cookies. The thing we all see now when we go to a new website, a banner around cookies. What we are finding is instead of that helping customers understand the way cookies are used, most people are just ignoring it. What really helps people is privacy controls and information about privacy that is relevant.

Last week we announced a new approach to privacy. We will provide a privacy shortcut on every page on Facebook, where you can see, "Who can see my stuff?" and the next post you make, "Who will be able to see that?" You can review everything you have ever done on Facebook and the audience for it. That is not because we are regulated to do it, but because we think that is a much better way of helping people understand how we use their data.

Q345 Mr Sanders: Presumably that has come from feedback from your own Facebook community?

Simon Milner: It is also about us recognising that people want to know, at certain times, "What is happening with this piece of data that I am sharing?" Rather than going back to the terms-which they can always do, they can click through to our data use policy from any page on Facebook-they want to know, "This particular picture, who can see it?" On every single thing they post, there is something they can click on that says, "This is who can see it", and they can change it. If they say, "I don’t want that to be public. I want only my friends to be able to see it", they can change it, and then it will be changed.

Q346 Chair: Can I pursue it a little? Both the companies you represent make a huge amount of money out of advertising in the main. Some of the Committee went to visit the Advertising Association about two weeks ago, and they expressed real alarm about the data protection directive coming out of Europe. In particular, they raised the personalisation of currently anonymous data, the requirement not just to opt in to receive targeted advertising once but, potentially, to have to do so repeatedly if a right to forget comes in. If these requirements are imposed from Europe, what effect are they going to have on your businesses?

Sarah Hunter: The ASA are pretty vocal about that. I think the challenges it will provide are for the advertising industry and for the people who advertise, and let us not forget that they are British businesses. British businesses who want to get new audiences will be the ones who suffer. The general mood of data protection is to minimise the amount of data that is held on individuals. There is a very mainstream Continental European view about that. There may be a different agenda that we should be talking about in the UK, which is about the growth of British businesses and the reliance they have on data.

There was quite an interesting piece of research a couple of weeks ago by NESTA, which was about the extent to which companies use the data that they are generating from people visiting their website. You can tell what country they come from and what time of day they came. You can learn quite a lot about your business. The NESTA research showed that: first, very few British companies are using their data. They do not have the skills to analyse data or even know what this data means; but second, those companies that do use the data grow faster and employ more people. They are the success stories of tomorrow. I think that economic benefit of data is something that perhaps the UK should be bringing to the table in this debate.

Simon Milner: I would echo that. We should worry less about companies like ours. We invest heavily in privacy. We have teams of experts who work on any new product that Facebook is producing, and will design in privacy to ensure it complies with both US and European law. But if you are starting a new business, say, you are in a tech or creative industry, and you start a new business, all of which are involved in using data in imaginative ways, you have to have a particular type of officer who is responsible for data protection, almost before you get going, required by European law. You have to ensure that all your contracts with any platform that might possibly connect with you-and of course the internet is all about connecting-that you have the ability to ensure that any data that gets shared can be deleted through contracts. All these things will add hurdles for new businesses wanting to start in this area. That is something we should be concerned about. It is not about platforms like ourselves, it is more about the ecosystem of companies around us. Certainly for both our companies, and many other internet companies, there is this incredible ecosystem of small businesses that are using these platforms. It is those guys we should be worried about, and that is the heart of where growth will come from in the tech and creative industries in the UK.

Q347 Chair: Thank you. Can we move on to the knotty subject of intellectual property rights? Both your companies host a huge amount of content. Are you confident that you are doing enough to ensure that the rights owners are getting the remuneration to which they are entitled?

Sarah Hunter: I can talk about YouTube for a moment, if that is helpful. You are right that lots and lots of creative content is hosted on YouTube. I think 72 hours of content are uploaded every single minute onto YouTube. It is just mindboggling. We could not watch it all if we tried. We have invested a lot in that system, such that content creators can feel confident, not only that when their content is there it is being protected but also that they can make money from it. We have spent tens of millions of dollars on a system called Content ID, which enables content owners to give us a copy of the file, say their film. Then every time more content is uploaded onto YouTube we can scan against that original file and see if anyone is trying to illegally upload a copy. When they do we can contact the rights-holder and say, "Hey, someone is trying to upload an illegal copy of your film. Would you like to block it, or would you like to run adverts around that illegal copy and gain the revenue from those adverts?" Interestingly, most content owners choose to run adverts around illegal content.

It is a quite a nice way to show how content creators are getting benefits from technological innovation, actually going back to the original topic we were talking about. They also get the majority of advertising revenues that they earn from their content. It is an advertising funded platform, and I think content creators are happy with what they get, because frankly I do not think they would put their content up there otherwise.

Q348 Chair: You would say that amateur video makers, who may have an ambition to become professional film makers, are managing to get some revenue from their early efforts, which otherwise they would not?

Sarah Hunter: Absolutely. What is interesting about the development of the internet more broadly, and not just YouTube, is that for the first time content creators can get an audience without having to go to a middle man. In the past they had to get a film studio to take an interest and then get the funding. It is very complicated and long. Now they can literally make a film from their mobile phone, which is often free, and get an audience straightaway. That is generating a whole new generation of new creators, who could then go on to get a film deal. There are a number of very well known artists. For example, Justin Bieber started off as a YouTube artist and then got a record deal from YouTube. Also existing arts organisations or broadcasters are using YouTube to gain new audiences and earn more money. It seems to work for every content creator.

Q349 Chair: Facebook does not give any proportion of your advertising revenue to the people who own the rights and the material put on the website?

Simon Milner: No. If people use our platform, for instance, to deliver games that include payments, they will get the bulk of the revenues from those payments. We have a different approach. We do not allow unlawful content to exist on our site once we are notified of it. Indeed, we have a five-point programme that deals with issues around IP infringement, because we do not want our platform to be one in which people think that unlawful content can be uploaded or hosted. It is not what our business is.

So we start with our policies, we have very clear policies for our users, in terms of saying, "You cannot upload unlawful content or content you do not have the rights to". We do extensive education in our help centre, both for people who are using Facebook and also for rights-holders, about what to do if they come across a post that they believe is infringing their copyright and how they can notify that. We have some voluntary measures. For instance, we use industry-standard technology to scan every video that is being uploaded to Facebook, and then we will block anything that is on our files as being a piece of copyrighted content. So obviously not things that are user-generated content in your holiday video but any attempt by anyone to try to upload a video that is copyrighted will be blocked and they will not be able to upload it.

We have a notice and take-down system. If you go on to Facebook and try to report anything, one of the questions you will be asked is, "Does this concern your intellectual property?" Once you tick that, then you will be taken through a process that enables you to verify who you are, explain what the issue is and then we can deal with it very quickly. We have teams around the world, multilingual teams, who will do that. Then we will also take action against offenders. One of the things we will certainly look out for are patterns of behaviour. The 17-year-old who might do something that they had not realised was wrong or thought would be a bit of fun is different from somebody who is trying to do things on a commercial basis. We look out for those kinds of people and we want to get them off our service, and we will co-operate with law enforcement and rights-holders in doing that.

We believe we have a thorough process. Certainly my engagement during this role over the last year with rights-holders: one, it has been much nicer than when I worked for BT; and second, in general, there is a sense of they agree we are doing a good job. Of course they would always look for us to do more and we are always looking for ways in which we can improve our processes, but I think on this one we are doing a good job.

Q350 Chair: Sarah, you will be aware we heard from Andy Heath at UK Music recently, who talked about the way Google helps people steal his music, and you heard Martin Mills earlier this morning talking about directing people to illegal sites, making available Adele downloads free. Do you think you are doing enough to address those concerns of the music industry?

Sarah Hunter: I do. I think we have done a lot. Goodness me, we are in almost monthly meetings chaired by Ed Vaizey, where the rights-holders and ourselves and other technology companies discuss this issue. We put more money and effort into solving this problem than pretty much any tech company. We have basically built a system that enables rights-holders, when they find an illegal URL, to tell us and we remove it within hours from Google index search. It is still on the web, just so we are clear. Google is not the internet. This content is still hosted, and if they are not able to reach the person hosting it originally then it will remain up there whether it is in the search index or not. When they do tell us about finding illegal content we remove it straightaway. I think last month we removed 9 million URLs from our web index. Just as a matter of scale, a few years ago there was in the tens of thousands in a year, and now it is 9 million in a month. So this system is going a long way to meeting the concerns that they have.

Q351 Chair: I understand that when you are notified of a URL, of a piece of content that has been distributed illegally, you take that down, but within a few minutes, another URL goes back on the same site to deliver the same piece of content.

Sarah Hunter: There are people making money from hosting illegal content, and I am sure they are incentivised to come up with new ways to do it. We did a piece of research with PRS for Music a few months ago, which looked at the problem of pirate sites and looked at the characteristics of these sites. What this research shows is that these sites are making money. They are hosting advertising-not provided by Google, I hasten to add-and if you really want to stop the problem of piracy, you need to go to the source of the problem. We need to stop these companies making money from content.

Q352 Chair: Simon described how, on Facebook, if somebody is shown to be regularly breaching copyright law, they have their account removed. We have a list of sites like filestube.com, which has had 2,221,000 notices relating to it sent to you, or torrenthound, which is nearly 1 million. Why do you not just say, "These are clearly sites that are simply in the business of distributing content illegally, therefore we are not just going to remove the URLs of specific tracks but just block access to that site" or not have it come up in your search tags?

Sarah Hunter: A few months ago we did tweak our algorithm to recognise the number of what they call DMCA notices, the number of take-down notices that individual sites have received. That is recognised in the search rankings and I think if you were to search for "Adele", for example, what you would see nowadays is an almost exclusively legal set of search results.

Q353 Chair: You heard Martin Mills say that it would take to get to page 2 before you came to a legal site, and we were told that on page 1, if you search on "Adele" and "B3" nine illegal sites come up.

Sarah Hunter: It is just worth saying that "MP3" is a very specific search term that refers to a download. If you were to search "Adele MP3", you are excluding Spotify or YouTube, because those are not download sites. It is a very narrow search term.

Q354 Chair: It is not that narrow.

Sarah Hunter: It is, and I think what is suggests is that-

Chair: Most people now get their music through downloads. So, putting up "Adele" and "download" does not seem to me to be that narrow.

Sarah Hunter: If you were to look at the Google Insights for Search page, where it is free to even look at what people are searching for, it shows that most people will search for "Adele" or for a song. If I hear a song on the radio, I will search for the artist and maybe the name of the song. I do not go as far as to say "MP3" or "download". Again, if you look at Insights for Search, it shows that the number of people who search for this site is very small. The MPA, who are the movie producers’ trade association-their list of sites that they recognise as being infringing sites-I think only 15% got there through search. Most people do not access these sites through search. They access them through sharing links with their friends or through recognition on Facebook. People are not using search, in the main, to access these sites. As I said earlier, if you want to get to these sites and you want to tackle the problem and go to it at source. Get these sites, and stop them getting money.

Q355 Chair: I entirely accept that we should attack the problem through attacking the sites themselves, and also that not everybody will access them through search, but there are some people who are finding illegal content by putting "Adele download" into your search engine and nine illegal sites come up. Surely it would be quite easy for you to say, "Here is a site that plainly is distributing illegal content. It is not going to feature in our rankings any longer".

Sarah Hunter: It is not that easy. It may sound implausible, having heard the other evidence. For example, if you look at a website it is impossible to say, from looking at it, whether it has a licence. Google does not know whether the rights-holder has sold the licence in Russia or globally. It is just impossible to tell just from looking at the content. We need the rights-holder to tell us, and when they do tell us, yes, we take it out of the index. Nowadays it is within hours that we take it out of the index.

Q356 Mr Bradshaw: Why do you not do what the Chair has suggested and block the worst offenders? That is what we do not understand.

Sarah Hunter: Again, if you look at the Copyright Transparency Report, we have a full list of who we take content out of. The number of actual URLs on that domain is less than 1%. A lot of the pages within this domain are hosting legal content. I know a number of filmmakers who choose to use BitTorrent sites to distribute their content because they want to get a wide audience for free. It is not the case that these are necessarily hosting-

Q357 Paul Farrelly: You have here, "filestube.com, 2.2 take-down notices". By that analogy, if that was a site that only had 1%, by de-listing them you give them incentive to make sure that they have their act totally cleaned up.

Sarah Hunter: But there is a lot of legal content on that domain.

Paul Farrelly: But tough.

Q358 Angie Bray: If they are breaking the rules even just in 1%, they are breaking the rules. I think Mr Farrelly’s point is that you could make sure they do not break the rules by taking them down, being tough, possibly being a little unfair in the overall sense. But then the fact is they would clean up their act and they would come back with just the legal material minus the illegal material.

Sarah Hunter: I think we do a lot, I have to say. The scale of takedowns that we have made nowadays, the amount of money we invest in the system, we are doing a pretty good job in trying to take down these sites, but fundamentally-

Q359 Conor Burns: The Chairman is giving you examples of sites that are regularly providing illegal content that still show up on your search engine. Why do not you block them?

Sarah Hunter: When there is an illegal page we take it out of the index. That is all we can do. If there is something illegal we will take it out and we do it much quicker than anyone else.

Q360 Chair: It is not all you can do. I hear what you say about the reasons you do not, but it would be possible for Google to say to a site, "We have had so many complaints about the amount of illegal content. Until you can assure us that you have removed that we are going to remove you from our search engine".

Sarah Hunter: As I said earlier, we have adjusted the algorithm so these sites do come up much lower in the-

Q361 Paul Farrelly: What do you do with child pornography?

Sarah Hunter: We are a founder member of the Internet Watch Foundation.

Paul Farrelly: Do you block those sites or do you just take a view, like you do with music and film, that if one site only has 1% of child pornography, it is 99% legal?

Sarah Hunter: The IWF gives us a list, which they update twice a day, of sites that are hosting child sex abuse imagery and, yes, we take them out of our index. That is the only content for which we do that, and there are two reasons: firstly, in the creation of this horrible content there is a crime happening every single time it is viewed and at every stage. It is illegal in almost every country in the world. The second reason-

Paul Farrelly: So, music is only a little bit illegal?

Sarah Hunter: Sorry, shall I carry on about the child sex abuse? The second reason we do it is because it is very easy to tell when you look at it if the stuff is illegal. It is not easy to tell if copyright content is illegal. It is almost impossible to tell where the licences are and if they are up-to-date. We rely upon the rights-holder to tell us.

Q362 Paul Farrelly: But you have indications, as the Chairman has told you, of these sites with 1 million take-down notices.

Sarah Hunter: Often these sites have thousands and thousands of pages on them. It is not the case they are all hosting illegal content. Just to be clear: if they are, we will take it out. I do not quite see what else I can say.

Chair: I am starting to see why you have regular meetings.

Q363 Mr Bradshaw: You are a former No. 10 policy person. You understand the importance of a company’s reputation and their image in terms of public policy. Is there any concern among those higher up in Google that you are now public enemy No. 1 as far as the creative industries are concerned?

Sarah Hunter: I do not think that is how we see it. You are right; our reputation is important to us, largely because we are a free platform and it is incredibly competitive out there. If our users do not like our services there is lots of choice for them to go somewhere else, and we do take it seriously. But with most creative companies and creative industries we have commercial relationships. It is not the case that we are the bogeyman. Martin Sorrell described us as a "frenemy". On the one hand we represent disruption; on the other hand, we are making them revenues.

To be honest-and disagree with me if you think I am wrong-Google is often seen as a proxy for the internet, and the internet is incredibly disruptive. It has disrupted sections far wider than the creative industries. For people in positions, where they have a comfortable commercial business model, it can be threatening. I completely understand it is a frightening world to be in, if you see your business being knocked asunder by the internet. I think Google is the proxy for everything the internet is bringing, but we are trying hard to create business models and revenues for those creative industries.

Q364 Mr Bradshaw: Your bosses may not think that is an accurate perception. Every single witness that has come before this Committee as part of this inquiry from the creative industries has said that in as many words. Are you not worried about the consequence of this? If you do not respond to that level of concern and anger, and the importance of the creative industry to this economy, public policy will change and probably to your disadvantage. It is much better for you to have a constructive relationship and engage with it as a problem and do what you can do, including do a bit more, to block these sites.

Sarah Hunter: I agree with you. We want to have constructive relationships. As I said, our chairman spends half his time trying to do deals with record companies and content producers the world over. I think the only way this is going to be solved is by creative companies starting to see that the internet is an opportunity, rather than a threat, and work with us in a way that many of them already are.

The other suggestion I would make is to have the broadcaster perspective here, because broadcasters are the interesting bit of the creative industries. They are still the largest part of the consumer creative industries and they are looking like they are doing pretty well in terms of the global advertising revenues. They stay steady at about 35%, and they are innovating with technology. The BBC iPlayer is rather impressive, and so is all the Sky investment in technology. That would be an interesting perspective to add here, because their voice would benefit.

Q365 Paul Farrelly: The other area where you have been foxy, but you have been joined by others as public enemy No. 1, is on tax. You are an employee of Google UK Limited. How many employees does Google UK Limited have currently?

Sarah Hunter: About 2,000.

Q366 Paul Farrelly: If I am an ad agency based in the UK and I want to advertise on Google, who do I contract with and pay?

Sarah Hunter: You contract with Google Ireland.

Q367 Paul Farrelly: Google Ireland? Why?

Sarah Hunter: Because that is where the products are sold from.

Q368 Paul Farrelly: But if I am an ad agency and I say, "I would like to contract with Google UK Limited", can I not do that?

Sarah Hunter: No. We provide marketing and engineering R&D services to Google Inc.

Q369 Paul Farrelly: Your position in the market is such, your terms and conditions, that you can turn me away and say, "It is not possible for you to contract"?

Sarah Hunter: We would give you the number of the people in Ireland who do sell product.

Q370 Paul Farrelly: How does Google UK cover its costs?

Sarah Hunter: I have to say I think this was covered in quite a lot of detail in the Public Accounts Committee. I do not want to go into too much additional detail than we did there.

Paul Farrelly: How does Google UK Limited cover its costs?

Sarah Hunter: We charge Google Inc for the services we provide basically.

Q371 Paul Farrelly: So you take a commission?

Sarah Hunter: I cannot remember if it is commission or it is-

Q372 Paul Farrelly: I do not want to go over all the ground that was given to the Public Accounts Committee or that has been covered in the press. We can look at the press for your latest accounts and what has been paid in tax or not. For the benefit of this Committee, it turns out that Google Ireland Limited does not pay much tax either because, as I understand it, it pays royalties to Google Ireland Holdings but not directly, indirectly through Google Netherlands Holdings. Hence the terms "double Irish", with two Irish companies and "a Dutch sandwich". Then there are further amounts that are remitted to Google Bermuda. For the benefit of this Committee, could you say whether that is an accurate reflection, and also tell us the primary purpose of that structure, those transactions and those transfer pricing decisions? What is the primary purpose?

Sarah Hunter: I am not an accountant, and I am not in a position to go through these kinds of questions in detail. What I said-and I will say it again-is that we pay all the taxes that we are asked to pay in this country, and we abide by all the laws in this country and other countries we operate in. I will happily share with you the transcript of the PAC hearing.

Paul Farrelly: We have seen it.

Sarah Hunter: Did you enjoy watching it, then?

Q373 Paul Farrelly: As a non-accountant, what do you gather then is the primary purpose of that structure?

Sarah Hunter: I am not in a position to go into a lot of detail. If you have actual questions that you want me to go back and ask our accountants to answer I will happily do that.

Q374 Paul Farrelly: Do you recognise concerns that have been voiced by people like Vince Cable, for example, that in minimising your tax to such an extent that, to quote Vince a few years ago, "Google is ducking its social responsibility"?

Sarah Hunter: A lot of the session today has been about the contribution we make to the UK economy, and I genuinely think we make a substantive contribution. What we have talked about today is the creative economy, but the wider British economy-there are thousands of British SMEs making businesses on the back of our free platforms. If you are a bag company, you can reach an audience in this country and overseas and sell your bags in a way that it just was not possible even five years ago. The contribution we make through these platforms in enabling British businesses to grow is an important part of this debate. We have talked a little bit about Tech City, but we have opened a seven-storey multi-million pound building in East London for the start-up community, where we mentor British start-ups and we provide free services for them. That aspect of the role technology plays in the British economy should be included in this discussion.

Q375 Paul Farrelly: Last week Eric Schmidt from Google was on the record making some comments that perhaps you could get a comment on. He was quoted in the press as saying, "I’m very proud on the structure that we set up. It’s called capitalism. We are proudly capitalistic. I am not confused about this". Then relating to the Starbucks partial penance, he had the following comment in ruling it out, "To go back to shareholders and say, ‘We looked at 200 countries but felt sorry for those British people’, there is probably some law against doing that". As a former special adviser to a Labour Prime Minister, how does that make you feel? To what extent are you comfortable with Google’s position?

Sarah Hunter: I am very happy with the contribution made to the UK economy. As I said, I do not think I would be sitting here now talking about it if I was not, but it is way above my pay grade to be commenting on my chairman in this setting.

Q376 Paul Farrelly: I have to be fair here, Simon. Facebook has a similar structure. I do not know whether you have a Dutch sandwich, but I understand you have a double Irish and, in your case, it is the Cayman Islands rather than Bermuda that is an intermediate tax haven, the holding company. Is that correct?

Simon Milner: If you want to pursue the detail of our structure, I would be happy to write to you on that. We did not have the pleasure of the PAC hearing. I expect that is because we are a much smaller business. We employ just over 100 people in the UK and, frankly, we have not been here for very long. Yes, you are right. We need to operate in a tax-efficient way because our mission is to deliver a platform for free that billions of people can use and, in order to do that, we need to be a very efficient business. We comply with all applicable tax laws in the UK and around the world, but if you want any more detail than that, I would have to write and give it to you.

Q377 Paul Farrelly: I would be very happy. Again, to cut a longer series of questions short. How do you feel? Do you feel comfortable in having a full-page spread, headlined, "The antisocial network", in The Sunday Times and one commentator, Richard Murphy of Tax Research UK, categorising your contribution to UK taxes as tantamount to the UK being taken for a ride? Are you comfortable in that space?

Simon Milner: I am incredibly proud of the company I work for-and I mean that seriously-in terms of the quality of the people, their commitment to our mission and what we do for the people in the countries where we operate. We have over 30 million in the UK using Facebook for free and also many of them using it to small businesses. A recent estimate suggested that around 18,500 jobs have been created, in terms of small businesses around the Facebook platform in the UK. I spent much of my summer travelling around the UK doing small business roadshows with local Chambers of Commerce, from Birmingham, to Glasgow, to Folkestone, to Manchester, to Sheffield; all over the country. I met people who were eager to use our platform, often for free, or using our highly targeted pretty cheap advertising services to build their businesses. That makes me feel very proud, as a British person working for this international global company.

Q378 Paul Farrelly: I have one final question on this track for both of you, Sarah and Simon. It is relevant because the overall tax take affects what the Government can do to help, for example, the creative industries. At the moment, in one particular sector, which is the gambling sector-remote gambling-the Government is moving towards a point-of-consumption-based tax, where the revenue is taxed where it generally arises. Clearly gambling has a licensing aspect, but it not beyond the wit of man to construct a tax code with appropriate international tax treaties that can treat revenue the same. How would each of your companies react to Governments moving towards that point-of-consumption-based tax system, given the structures that you have adopted?

Simon Milner: Facebook does not operate gambling services, but there are-

Paul Farrelly: No, my question is not about gambling.

Simon Milner: There are two companies that do now offer gambling in the UK only via Facebook. I think it is really up to them and the gambling industry itself to comment.

Paul Farrelly: No, you are misinterpreting the question. My question is not about gambling. It is about the model being a point of consumption-based taxation being applied to your companies. How would you react to that?

Simon Milner: We always comply with local and international law. International tax law is something I am not expert in. You need other people here to help you with that, but if Governments around the world decide to change the rules that is something that we, as an international company, would have to ensure we comply with.

Sarah Hunter: I think I would echo the same. If the OCD, or whoever is in charge of this, decides to change the laws we will do the same.

Q379 Conor Burns: Sarah, can I take you up on your offer to go back to your accountants and then write to the Committee and to ask them this question, which I am sure they will know the answer to because they will have made the calculation. What would be Google tax liability in the United Kingdom if the revenue generated in the United Kingdom were paid to Google UK as opposed to Google Ireland?

Sarah Hunter: I will ask someone clever to find out.

Conor Burns: Thank you. We will look forward to the answer.

Q380 Jim Sheridan: I know you are not an accountant and you are not responsible for the detail of the accounts, but just following on from Comrade Farrelly, you are a PR person, and I want a comment from a PR perspective. Would you advise your chair or anybody else in the company to make a comment like that?

Sarah Hunter: I think this is very similar to the comment I gave to Mr Farrelly. It is above my pay grade to advise the chairman about what he says.

Q381 Jim Sheridan: I have to say there is a touch of déjà vu in this Committee today, because there is a parallel I can see between what Google is doing and the activities of News International, and we will get to the end of the road some day. I can see that coming along the road if you do not change your ways.

Sarah Hunter: I have to say News International has been accused of illegal activity.

Chair: I think that is a little unfair. We are inviting them to talk about the creative industry, rather than tax.

Q382 Jim Sheridan: The final question that I ask: by not restricting access to the copyright infringements, you are undermining the very good work of the celebrities and, indeed, the dignified Members of this Committee, and the Hillsborough song that has been released, because people are now downloading it for free thereby denying them money and resources for the victims of Hillsborough.

Sarah Hunter: If you want to send to me the list of sites that are hosting your content, we will make sure it is taken out of the index straightaway. Just for the record, we have no interest in assisting people pursuing pirated content. It is not in our interest to do it. As we have heard through a number of the questions today, it is in our interest and Google’s interest to ensure there is great-quality content on the internet, and the only way that happens is by creators being paid for that content. We understand that. It is part of our business model to ensure there is good quality content on the internet, and I think we play our part.

Q383 Jim Sheridan: Do you see that as a problem for the people trying to raise money for the Hillsborough victims?

Sarah Hunter: Absolutely. As I said, if you want to send me the links to who is hosting this content illegally, then I will make sure it is taken down.

Q384 Chair: You heard from Martin Smith earlier about the difficulty that some industries have, in that the universities are producing graduates who do not have the skills that are necessary. You said that Google employs 2,000 people in the UK and Facebook maybe not quite so many, but nonetheless you are a technology company. Are you satisfied with the supply of skills here and what are you doing to try to improve it?

Sarah Hunter: Last year our chairman, who has been reproached already today, made a speech in Edinburgh where he lamented the lack of computer science in British schools. We have done quite a lot of work with the British Computing Society and the various curriculum reviews to try to get this back on the agenda. We are partnering with Teach First, and we are paying for 100 computer science teachers to be trained and go into UK schools. We have been quite vocal about the quality of computer science education, and I am pleased that it looks like the Government is listening.

I think there is another set of skills that have yet to be tackled, which is the issue of data analysis. I was talking about the necessary research earlier. Data analysis and understanding what data can give to you. It is not about being a coder. It is not about being an engineer of the type that Google employs. It is about seeing the kind of people using your services, and changing your decision-making and your products as a result of that. That sort of data analysis is something that I think we need to have taught in our schools and in the jobs as well. I am probably of the generation, in that terrible transition, where I was not brought up with computers but now I am expected to use them all the time. My data analysis skills could be a lot better, and I think that is true of much of the British workplace at the moment.

Simon Milner: For ourselves, we are very pleased to see the Government taking the issue of computer science education seriously, and we have been part of a recent Department for Education roundtable with the Minister and the Minister for Skills looking at the new computer science curriculum. We very much hope that as the curriculum for secondary schools is developed over the next year or two that this becomes a central part of it.

In terms of what we are doing as a company ourselves, we have partnered with an organisation called Apps for Good that you may be aware of. They are a charity that develops courses to be used in schools and outside of schools, to help people develop their skills around developing apps. We have run a couple of courses for young people aged 18 to 24, many of whom were struggling to kind of find a role in the world. Not only did they learn new skills around coding but are also doing market research presentation.

I am very pleased to be able to tell the Committee-indeed we have not talked about this much until today-we have also partnered with them to run pilots in schools. In the next couple of terms, six schools from Cumbria to Brighton will be undertaking the first ever Facebook app-building courses in schools, obviously only for children aged 13-plus. We hope that will be a great way of engaging the enthusiasm many of them have for using Facebook, to realise this could be an area where, if they develop the right kind of skills, they could work for not only companies like Facebook, but, frankly, lots of other companies that are developing great businesses off the back of our platform.

Q385 Chair: I should declare and thank Google for the fact that a Google Juice Bar is coming to my constituency of Maldon on Friday to advise companies. I would say to Facebook that if they were looking for another school, I am sure I could come up with some, or indeed all my colleagues around the Committee table, I suspect, but that is encouraging.

Sarah Hunter: For all the Members of the Committee who do not know what a juice bar is, it is quite an interesting experiment. We are basically sending digital experts into places around the country saying, "Look, if you have a business that wants to get online and make the most of their website, we will come and train you for free". It has been incredibly popular. We are always oversubscribed when we arrive in a town.

Q386 Chair: Why are you doing it; just out of a sense of social responsibility?

Sarah Hunter: No, it started about three years ago. It is called Getting British Business Online. We now run it globally, but it started about three years ago because we realised that if you get a website you are more likely to buy a Google advert; very straightforward. It was from our Marketing Department. It has proved so popular we have spread it out globally.

Q387 Chair: We also referred earlier in passing to clusters, to Silicon Roundabout or Tech City or whatever you want to call it. How important do you think it is to create this grouping and for companies to be able to spark off each other?

Sarah Hunter: Clustering in the technology sector has traditionally been very important. There is a strong history of technology innovators working together and sharing ideas. It is a very open culture, and the Silicon Valley cluster is over 100 years of technology companies growing in the Valley. Now it is over tens of miles wide. It is not a tiny little area any more. Our view is that the East London technology cluster around Old Street is a very exciting opportunity. The campus I mentioned earlier that we have recently opened there is the only one that Google has done globally. Actually, that is not true. Last week we launched one in Tel Aviv as well; another very interesting technology cluster.

The fact we did it in London is quite revealing, because we do see it as a real opportunity globally. It is a quite serious cluster in that respect. I am very excited by the opportunities there and I would encourage all of you to come and visit if you can.

Jim Sheridan: To Tel Aviv?

Sarah Hunter: You can come to Tel Aviv as well. No, East London. It is less glamorous, I am afraid.

Jim Sheridan: But you do not do it in Palestine, do you?

Sarah Hunter: We do it in Tel Aviv. There is a well-known technology cluster there, and we have opened an office there to help train the staff.

Simon Milner: From our perspective, Chairman, we were delighted, but sad, that our MD for Europe, Joanna Shields, was recently appointed as the CEO for Tech City. That is a great testament to her and the contribution she has already made to the UK digital economy. It is sad for us because she was a great leader for us here, but we think it is terrific for the country.

Q388 Chair: I have been doing this job for so long that I can remember Joanna Shields giving evidence to us when she was working for Bebo. Whatever happened to Bebo?

Simon Milner: The less said the better, I think.

Sarah Hunter: It is an indication of how fast the technology sector moves, I think. I would just add on the East London thing, the tech cluster there is as much a creative tech cluster as it is a pure technology one and I do think, in terms of this Committee’s inquiries, it would be worth a visit.

Chair: We are intending to.

Sarah Hunter: Good; excellent.

Chair: We are hoping to go to East London to visit Modern Jago, but we will perhaps drop in on Google at the same time.

Sarah Hunter: I will happily put you in contact with some of the SMEs there, because I think it would be interesting to hear their perspective.

Chair: Perhaps we could discuss that. That would be helpful.

Simon Milner: It would be great if you could go there when Joanna has taken over in the New Year. I am sure she would love to meet you.

Chair: That is all we have. Thank you both very much.

Prepared 4th January 2013