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A sustainable rationale for public service television

139. If we are to put forward proposals for maintaining and strengthening PSB in the future, we need to understand what purposes it should be serving.

140. When television was invented, politicians and broadcasters in the UK quickly recognised the power of the new medium. The limited amount of spectrum available, coupled with the absence of direct transactions between viewers and broadcasters, meant that a range of interventions were undertaken, aimed at meeting consumer and broader social goals. Intervention comprised not only regulation, but also public funding, public subsidy and public provision. Over time, the term 'public service broadcasting' came to refer to the whole range of terrestrial television institutions and content.

141. In the past 20 years, as the commercial sector has grown and evolved, the analytical focus has shifted to concentrate on market failures as a rationale for State intervention in television. The Peacock Committee (1986) emphasised the ideal of consumer sovereignty and saw PSB-style intervention largely as a temporary response to market failure in an age of limited spectrum availability. Public policy responses to these arguments, even those like the Davies Report on the Future Funding of the BBC (1999) that reached a different conclusion, have been proposed from a similar economic perspective.

142. As Figure 45 shows, the starting point for our definition of PSB is an appraisal of those aspects of television broadcasting which we think will remain vital, unique, and have something special to offer our society. This approach requires value judgements to be made about the desired role and remit of television in the UK - in other words, to identify what we believe to be a socially desirable outcome for television provision.

143. However, measures to secure public service broadcasting represent a potentially significant intervention in the market (whether in terms of subsidy, funding or regulation). We therefore also need a rigorous understanding of what the market, left on its own, would deliver - and of the nature and scale of the market failures that policy may need to address. Finally, we need to assess the likely effectiveness of a range of policy interventions available to address any enduring concerns.
Figure 45 illustrates our conceptual framework.

Figure 45

Conceptual framework for our Review

Click here to view large scale

144. There are six areas where an unfettered television broadcasting market might fail:

• Programmes are 'public goods'. The fact that programmes, once made and broadcast, can be consumed by additional viewers at little or no additional cost to the broadcaster causes problems for the market mechanism. It means that if the price of a programme is set to cover the (high) total production costs, a viewer may be excluded from watching it even if they value it more than the (very low) marginal cost of making it available to them. In economic terms, this is neither an efficient nor desirable outcome.

In addition, until the advent of encryption and conditional access technology, there was no way of limiting the number of people who watched a programme and thus no way of charging viewers only for the specific programmes they watched.

In such circumstances, the most efficient pricing approach may be a compulsory flat fee paid by all - along the lines of the licence fee

• The shortcomings of advertiser-funded TV. For some time, advertising was the only source of commercial income for TV companies. In this model, broadcasters are motivated by the need to deliver viewers to advertisers in sufficient numbers, not by satisfying the preferences of different groups of viewers (except when a certain group is particularly attractive to advertisers, e.g. 16-34 year olds). Where spectrum is scarce and there is a limited number of channels, this is likely to cause broadcasters to cluster in the middle ground, depriving viewers of the sort of range and balance they might want.

Even when there are more channels to choose from, the strength of preference that a smaller number of viewers have for a particular programme or range of programmes might not be captured by the price that advertisers are willing to pay to screen it.

• A tendency towards monopoly/oligopoly. Economies of scope and scale are inherent in broadcasting and will tend to encourage the concentration of ownership in large, often vertically-integrated companies. The result of an unregulated market might therefore be reduced competition, less choice for viewers and either higher prices or lower quality than would be available in a competitive market.
• A lack of consumer information. Programmes are 'experience goods' - it is argued that viewers cannot make informed decisions about whether to watch programmes they have not yet seen. Without regulation, broadcasters would tend to respond by supplying a narrow range of tried and trusted, immediately recognisable programme types rather than taking risks.
• The presence of externalities. An individual's viewing can have additional benefits for society as a whole, for instance through his or her engagement in the democratic process as a more educated citizen. However, each individual may not account for such benefits when making viewing choices. The market will therefore tend to under-provide programming that yields this kind of broader social benefit.
• The provision of merit goods. Individuals themselves can get more value from a programme, for example in terms of news and information, than they realise. However, because they do not always appreciate that value, they would not necessarily choose to pay for such a programme in an open market. Again, the market, left to itself, would tend to under-provide this sort of programming, since the individual does not recognise its full value when exercising consumer choice.

145. Looking at these problems together, PSB intervention over time can be seen to have had two main aims:

• First, to help the broadcasting market work more effectively to deliver programmes that consumers want to watch or want to have an option to watch.
• Second, to provide the programming that as citizens we want to be widely available for as many people as possible to watch. Such programming secures the wider social objectives of UK citizens by making available TV that has broad support across the UK, but which would be underprovided or not provided at all by an unregulated market.

146. The consumer-focused objectives of PSB have traditionally been to address the shortcomings of advertiser-funded TV, a lack of consumer information and the problems inherent in the delivery of public goods by ensuring that broadcasters deliver:

• a sufficient range and balance of programmes across all the networks;
• programmes which cater for minority as well as for mass audiences;
• competition for quality of content as well as for audiences and advertising revenues; and
• an efficient means of delivery, in the absence of mechanisms to restrict consumption.

147. The citizen-focused objectives can be seen as those measures needed to make sure television delivers sufficient positive externalities and merit goods, by giving all citizens access to programming of wider social value. There has been much intense debate about the precise nature and importance of these social purposes.

We suggest there are four core purposes at the heart of any enduring case for PSB:

• to inform ourselves and others and to increase our understanding of the world, through news, information and analysis of current events and ideas;
• to reflect and strengthen our cultural identity, through high quality UK national and regional programming;
• to stimulate our interest in and knowledge of arts, science, history and other topics, through content that is accessible, encourages personal development and promotes participation in society; and
• to support a tolerant and inclusive society, through the availability of programmes which reflect the lives of different people and communities within the UK, encourage a better understanding of different cultures and perspectives and, on occasion, bring the nation together for shared experiences.

148. To meet these broad social purposes, PSB programming needs to have certain characteristics. It should be widely available to all citizens. It should be innovative, original and of high quality. Aspects of it should challenge viewers. These characteristics are most likely to be delivered if there are a range of different providers - to encourage competition and to ensure we have access to a reasonable plurality of views and perspectives.

149. However, defining the objectives of PSB is different from justifying public intervention. Any large intervention in the market is likely to be expensive, to distort the market for commercial provision and to divert public resources from other potentially valuable uses. This perspective implies that intervention to support consumer and citizen interests must also satisfy the following criteria:

• it should result in programming that would not
• be delivered by commercial operators alone;
• the policy and regulatory tools available must be able to secure its provision;
• once provided, it must be effective (that is, enough people must watch and be influenced by it); and
• its costs, including costs due to market distortions, should not be disproportionate to the benefits.

150. Some would argue that public intervention in broadcasting has a third purpose, an economic rationale that goes beyond the interests of consumers and citizens: to support a healthy UK production sector. Our initial view is that a healthy UK production sector should emerge from a healthy TV broadcasting market with the appropriate public policy intervention. It should not be the goal of such an intervention. A healthy production sector might be a goal for publishing, the music industry or other sectors, but we do not direct large-scale public funding towards those industries.

The conceptual framework in a digital age

151. The digital revolution has the potential to transform the debate about the rationale for PSB intervention, and to address many of the market failures identified above.

152. In a fully-digital world, the arguments that the market is failing consumers will become far less convincing:

• The 'public good' problem can be largely resolved. Encryption and conditional access systems allow broadcasters to charge consumers directly for their television and to adopt more sophisticated pricing policies that can reflect the differing values that individual consumers put on individual programmes. For example, the first showing of premium content can be priced much higher than subsequent showings, bringing more viewers to the programme for each of the different release 'windows'.
• Advertising-funded programming should become more diverse. The problems of advertising funding are most extreme in a limited channel environment. When there is a wide range of channels, it will make economic sense for some of them to target niche audiences rather than aiming for the over-populated middle ground. The range of programming available should broaden.^(-30-)
• Information problems are mitigated. There are now very many ways for consumers to find out about a programme before they watch it - from guidance and criticism in the press, to dedicated listings magazines and the internet. On-screen electronic programme guides (EPGs), in particular, allow the viewer to actively search out new experiences, and will become more and more interactive and user-friendly as time goes on.

153. Recognising these trends, the Davies Report on the Future Funding of the BBC argued in 1999 that competition concerns would become more significant. It proposed that, even as spectrum became less scarce, a structural tendency towards monopoly would persist. While this may well be true and while it may have implications for programme quality, it is an issue best addressed by competition policy. If competition rules are properly applied, digital platforms will open the broadcasting market to far greater competition than existed before. Market concentration is not a justification on its own for large-scale PSB-style intervention.

154. After switchover, therefore, the economic efficiency argument for wide-ranging public intervention to support large-scale public service broadcasters, on the basis of supporting consumers' interests, seems likely to be weaker. Ofcom is committed to promoting digital switchover, in order to bring increased choice and competition to the market.^(-31-) At present, however, almost half of all UK households still rely on only four or five analogue channels. The process of transition from analogue to digital will continue for another five years at least. Until switchover has taken place, some of the consumer-related market failures will remain relevant. We need to address the issues surrounding continued PSB provision for this transitional period as well as preparing for a digital future.

155. Even after switchover, the broadcasting market is likely to exhibit market failures caused by the existence of externalities and merit goods. As a result, programming that has wider social value, and which most of us would like to see provided, would either be under-provided or not provided at all. Further, there is an argument that where the market delivered programming of quality, range and balance, much of it would probably be provided on a pay-per-view basis, only for those who could afford it. The free-to-air terrestrial channels, dependent on dwindling advertising income, might provide only the most mainstream forms of programming.

156. The rationale for a continued investment in PSB is that only with such an intervention would TV serve UK citizens adequately. PSB is important because television is uniquely placed to reach large numbers of people with great impact. If that is no longer possible in a digital world, of course, the case for continued PSB provision would be much diminished.

Implications

157. If PSB is to be maintained and strengthened, we will need to develop proposals in each of the following areas:

Purpose and definition

158. We will need to determine the extent to which television - in the digital age - can effectively deliver the purposes and characteristics of PSB outlined above. We will also need to identify the areas in which TV has a comparative advantage compared with other means of delivering similar goals.

159. If PSB is to be effective, we think that PSB values need to be reflected in a wide range of programme types, not just programming traditionally thought to be 'beneficial': citizens' interests can be met through many programme types and indeed may be most effectively met via programming which viewers think will entertain them as well as 'make them think'. The challenge for broadcasters will be to develop programming that is both challenging and accessible, and which engages large numbers of viewers, rather than small minorities.

160. We will also need to reach a final view as to whether there are continuing consumer market failures in a digital world, and what measures are needed to protect consumer welfare in the transition to digital. Our current view is that we should encourage a fast move to digital switchover and ultimately a reliance on competition law to address any remaining concerns here - but that the transitional period will require continuing support for range, quality and diversity on the main terrestrial networks.

Scale of intervention

161. The scale of PSB in the future needs to be examined carefully. Our current view is that PSB programming, if it is worth providing at all, should be available to a wide audience and be widely appreciated. With this is mind, our initial view is that the delivery of PSB purposes will still require a significant intervention in the market.

However, we recognise that the risks and costs of a continued large-scale intervention should be carefully weighed. In Phase 2 of this review we will model what the market would look like without intervention, to inform our assessment.

Delivery

162. We need to assess the best way of delivering PSB, given the changing economic and competitive pressures in the market. Our current view is that it will be important to ensure continuing plurality of provision of PSB. Competition for quality between broadcasters should continue to be encouraged.

163. Different channels have different core audiences which can help PSB reach the widest range of viewers. This should be taken into account in determining the most effective means of providing PSB to harder-to-reach audience groups.

Funding

164. In a tougher competitive climate, advertising revenue may fall if audiences decline and TV advertising becomes less effective. Alongside commercial pressures, the licence fee may face greater resistance as the market delivers more, and/or subscriber fees rise.

165. Our current view is that we need to ensure that adequate funding is available to support the continued plurality of supply and also to ensure that PSB provision is able to keep pace with market expectations. This suggests the need to examine divisibility and contestability of existing funding, as well as the potential for tapping into new or different sources of funding. We will also need to examine options for distributing funds directly to programme makers as well as to broadcasters.

Other forms of regulation

166. Alongside explicit funding of the BBC, we currently extract PSB obligations from commercial broadcasters in return for privileged access to spectrum. Our current view is that we will need to revisit the nature and scope of these deals in the near future - both to review the extent to which they are still economically feasible, and to assess how best to specify and then enforce the resulting contracts.

Consumer protection

167. The general public expressed a strong view about the need for a protected space for younger viewers, especially on the main terrestrial channels. Our current view is that this will remain an important part of the PSB framework. But audience attitudes to standards are more diverse than they once were. This suggests the need for a more flexible framework in future. For example, many channels might opt voluntarily to observe Ofcom approved standard codes of practice - and be recognised explicitly as part of a wider PSB family for doing so. Others might choose to opt out of the guidelines, as long as they observed clear procedures for provision of warnings and/or complied with requirements for restricted pin code access.

Transitional measures

168. We must also respond to the shortfalls identified in our assessment of current provision, against the background of the economic realities we have identified. Ofcom will need to examine the extent to which current licence conditions are adequate to ensure the continued effective delivery of
PSB in the commercial sector. Possible areas for consideration include: more focus for ITV1 and Five on those elements of PSB that matter most to viewers, including news, regional news (for ITV1) and original UK production, while recognising - for ITV1 at least - that high quality, popular drama and entertainment is its central contribution to the PSB mix.

169. For Channel 4, the challenge is to sustain a distinctive and innovative remit in a more competitive world. We will need to establish a continuing dialogue with the channel which ensures that provision. The particular responsibility of the BBC in extending choice should be reviewed and perhaps more tightly specified in the context of both its role as a standards setter for high quality PSB and of changing expectations for delivery of PSB in the commercial sector.

Costs and benefits

170. Finally, any proposals for intervention in the provision of PSB must as far as is feasible be guided by a clear understanding of the relevant costs and benefits. We must understand better what the market would provide in the absence of intervention, and ensure that the proposals for PSB are then proportionate to the benefits likely to be delivered. We must assess the costs that any intervention could impose on the market - crowding out private investment, for example, or inefficient production - and include this in our overall analysis. This will be an important element of our Phase 2 work.

171. In the executive summary to this report, we have drawn these implications out into some more concrete ideas about the immediate consequences and some propositions for development in Phase 2.

Footnotes:

30:- Although the interests of some core audience groups (eg those with low purchasing power or low propensity to consume) will never be of significant interest to advertisers. To the extent that they have different viewing preferences to those of more affluent viewers, these interests may be under-served by advertiser-funded channels.

31:- See Ofcom’s report on digital switchover to the Secretary of State for Culture, Media and Sport, ?? April 2004.

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