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Executive summary

1.1 The UK television industry generates annual revenues in excess of £9bn, and spends almost £5bn on programming – of this, around £2.6bn represents spending on original programming. This means that UK television viewers enjoy one of the highest levels of domestically originated content in the world.

1.2 The £2.6bn spent by major UK channels on original programming in 2004 comprised over 27,000 hours of new programming, made by a television production sector with over 800 firms around the UK. The amount of original television production has grown at an average rate of 4% per year over the past five years, with production companies also benefiting from new opportunities overseas and on alternative distribution platforms.[^(-1-)]

1.3 Ofcom has been conducting a review of the television production sector[^(-2-)], which has followed on from Ofcom’s review of public service television broadcasting (the PSB Review) carried out in 2004/5.

1.4 This document summarises Ofcom’s findings from the current review. We have set out the results of our analysis in full, with a view to developing the evidence base and informing debates in the industry. Whilst we find that there is no requirement for major revisions to intervention in the television production sector, we have set out options for change in some important areas. Alongside our proposed options for change, this document sets out a number of questions for consultation.

1.5 We now enter a period of formal consultation, which concludes on 21 March 2006. During this period, we welcome stakeholders’ views on the issues and options discussed in this consultation document. Following this deadline, we expect to issue a final policy statement in the spring of 2006. Further implementation work may need to follow this review – for instance in relation to the Codes of Practice governing the relationships between the main terrestrial broadcasters and independent producers. Any potential changes to the Codes could require a further consultation exercise with stakeholders, relating specifically to updating Ofcom’s guidance on the Codes of Practice. Moreover, if Ofcom recommends a change to the definition of a qualifying independent producer, this issue would be taken forward by Government.

The purpose of this review

1.6 This review concerns the key aspects of the television production sector, which comprises programme-making activity both within the main broadcasters (in-house production) and outside (external production – qualifying and non-qualifying independent producers[^(-3-)]). We seek to explore the key developments in the sector, and how the interests of television viewers – as both consumers and UK citizens – are met by the industry. Our particular focus is on the key production quotas, the operation of the commissioning system between producers and broadcasters, and the Codes of Practice.

1.7 The last major review of the sector was the Programme Supply Review, conducted by the Independent Television Commission (ITC) in 2002. As well as reviewing existing quotas, the ITC’s review recommended that Codes of Practice should be put in place between independent producers and the main terrestrial channels – who are licensed public service channels under the terms of the Communications Act 2003 (“The Act”). These recommendations were subsequently incorporated into the Act, and the Codes have since been implemented by the broadcasters based on guidance from Ofcom.

1.8 The timing of the current review is therefore driven in part by a need to conduct an initial assessment of the operation of the new Codes. However, Ofcom is also using this opportunity to carry out a more comprehensive review of the overall set of interventions in the production sector.

1.9 Ofcom’s general duties are set out in Section 3 of the Act, and these provide us with overall guidance in carrying out this review. However, we also have important duties relating specifically to the television production sector, as set out in Chapter 4 of the Act:

• Section 285 Code for programme commissioning by the main terrestrial broadcasters. This relates to the commissioning by licensed public service channels from independent producers, and focuses on the principles under which commissions are agreed upon
• Section 277 Programming quotas for independent production requires Ofcom to set quotas for the proportion of independent television production commissioned by licensed public service channels, and Section 309 Quotas for independent programmes applies in a similar way to digital television programme services which are not comprised in a licensed public service channel
• Section 295 Involvement of C4 Corporation in programme-making relates to Channel 4’s model as a publisher-broadcaster
• Section 286 Regional programme-making for Channel 3[^(-4-)] and 5 and Section 288 Regional programme-making for Channel 4 relate among other things to the proportion of programmes commissioned by these channels made outside of the M25 area.

1.10 Therefore, whilst we seek to take a broad perspective in carrying out this review, we are necessarily focused on carrying out our duties under the Act – as they apply in general and specific terms to the television production sector.

1.11 Figure 1.1 below summarises the framework that we have adopted for this review.

Figure 1.1: Ofcom’s approach to the television production sector review

1.12 Our overarching goal is therefore to define the appropriate extent and nature of intervention in the television production sector, taking into account our duties under the Act. This requires us to give consideration to a number of specific issues:

• The objectives that, if met, would enable us to conclude that the production sector is operating effectively
• The rationale for intervention in the sector – i.e. the factors that could mean that the objectives are left unfulfilled – and the specific interventions that have arisen in response
• The key developments in the market – both over the recent past, and in looking to the future
• The implications for intervention going forward – both for the overall rationale, and for the specific policy areas.

1.13 The rest of this section considers each of these issues in turn.

The objectives of television production

1.14 Ofcom’s starting point in this review is the interest of viewers. However, it is important to be clear what we mean by viewers. We see two perspectives:

• Viewers as consumers, who enjoy television as an entertainment medium
• Viewers as UK citizens, who are affected by television at a social level – relating to the viewing habits of all UK citizens, as well as their own.

1.15 Our objective is to ensure that viewers as consumers and UK citizens receive the types of television content that meet their underlying interests. Importantly, we believe that intervention should only take place if it is intended to secure benefits for viewers.

1.16 In our view, if the interests of viewers as both consumers and UK citizens are met by the programming output they see on their television screens, then we can conclude that the television production sector is fulfilling its purpose.

1.17 This approach requires us to define what types of content viewers expect:

• Ofcom’s audience research has firmly established that viewers as consumers see entertainment as a key purpose of television
• However, viewers as UK citizens are also aware of the impact of television on society – it is therefore important that this perspective is also considered in this review, and that we are clear about the link between the production sector and public service broadcasting (PSB)
• A healthy production sector is one that promotes and encourages creativity and innovation – our analysis in this area suggests that there is no one model that delivers creativity and innovation, and that both broadcasters and producers have an important role to play
• A mixed ecology of production is important in delivering diversity in programming – which is important for viewers as consumers and UK citizens. Diversity is important not just in programming output, but also as an input to the production of programmes. As an input, diversity in production has several aspects, whether:
• diversity of social, cultural and geographic perspectives;
• diversity of corporate scale and structure (in-house or external, large or small);
• diversity through a plurality of players in the market;
• diversity of channels; and
• diversity of commissioning within channels.

1.18 The Act obliges Ofcom to consider measures to ensure that certain aspects of diversity are reflected in the commissioning practices of broadcasters, and therefore within the structure of the television production sector as a whole. For example:

• Diversity of production suppliers in terms of in-house or external producers accords with Sections 277 and 309 of the Act (described above)
• Diversity of UK perspectives accords with Sections 286 and Sections 288 (described above) relating to the location of production.

1.19 It is important to note that we do not seek diversity, in its variety of forms, for its own sake. Rather, we are concerned with the contribution of each of the above characteristics to the commissioning and production of a range and variety of programme types that deliver on viewer interests. Moreover, our objectives are not to further industrial policy goals, although we recognise that some existing policy tools may have developed in response to industrial policy concerns. We believe that diversity in production is a means to the end of meeting the needs and interests of viewers.

1.20 It is important to be clear that this does not necessarily mean that more and more diversity is desirable. For example, whilst the location of production may be critical in delivering a diversity of perspectives, this does not necessarily mean that the distribution of production around the UK should be purely equitable. For instance, spreading production around the UK in proportion to population distribution may dilute the talent base in the production sector – a lack of critical mass in production centres would create a danger that ever-increasing dispersal could compromise overall programme quality.

1.21 Thus, whilst we believe in general that the production sector should function in such a way as to ensure that diversity is delivered, we recognise that too much emphasis on promoting diversity in the production sector could ultimately act against viewer interests. A delicate balance needs to be struck.

Intervention in the television production sector

1.22 Television is considered an important industry in the UK – from the perspective of fostering investment in creativity and creative talent, and given its significance as a medium of popular entertainment, provider of information and its overall influence within society as a whole.

1.23 In this context, a number of different interventions in the sector have been developed. It is therefore important to consider whether the sector – in the absence of intervention – would deliver on the interests of viewers.

1.24 In the PSB Review, we explained that this outcome may not arise in the UK television sector. It is often the case that markets routinely provide products that meet the requirements of consumers. However, the television sector has a limited number of free-to-air channels – each with their own different broadcasting objectives. This means that competition is not entirely effective – and so the main terrestrial channels may not deliver on viewers’ interests if left unregulated. This has important implications both at the broadcast and production levels.

1.25 We also established that – even if a competitive television market provided all the programming that consumers desired and were willing to pay for – it would probably not offer sufficient programmes that are valued by society as a whole or, in other words, by viewers as UK citizens. In the PSB Review, we explored the areas in which the market may under-deliver on particular public service objectives – for which PSB obligations on broadcasters should in the first instance act as a sufficient remedy.

1.26 However, these features of the TV sector as a whole also have implications at the production level. Three particular features of the television production sector – related to its market structure and the conduct of programme-buyers – may prevent viewers’ interests from being met. This may mean that, as well as intervening at the broadcast level for PSB and competition concerns, intervention is also needed at the production level. The following factors have been identified as driving the need for intervention in television production:

• Negotiating strength: there is a relatively small number of buyers of originated programming, but a very large number of producers. This imbalance is likely to provide broadcasters with a relatively strong negotiating position with producers. While this may deliver savings that can be passed on to viewers, the extent to which broadcasters take advantage of this position may be at the cost of producers and potentially viewers. Given the current market structure, it may not be possible to rely on effective competition to ensure broadcasters are incentivised always to use their negotiating strength in the interests of viewers – they may therefore damage the quality, diversity and plurality of external production
• Vertical integration: some broadcasters (notably the BBC and Channel 3) are considered vertically-integrated broadcaster-producers, in that they have in-house production units. Vertical integration is not usually considered a problem by competition authorities and regulators unless it is combined with market power. Without market power, broadcasters would be incentivised to serve the interests of viewers and therefore commission programmes that offer the best value for money. However, and as discussed above, the current market structure may not provide this incentive – and could therefore lead to a diminution in programme quality. For example, broadcasters may use the option to commission in-house in order to enhance their bargaining position with external producers. Moreover, given the limitations of effective competition between broadcasters and the existence of potential synergies – and therefore efficiencies – in producing in-house, there may be a natural tendency for vertically-integrated broadcasters to commission in-house. Whilst this may be commercially rational, it may ultimately damage the diversity and plurality of television production
• Geographic concentration: television production, commissioning and broadcasting tend to be concentrated in London – this may be the outcome of well-functioning market forces, but it may have a damaging impact on the diversity of content available. It could therefore be undesirable from the perspective of viewers.

1.27 These factors have given rise to a number of different interventions in the television production sector, in addition to the interventions at the broadcasting level. The presumption is that the effects of interventions at the production level will ultimately find their way through to viewers.

1.28 In order to address concerns over the strong negotiating position of broadcasters, Section 285 of the Act sets out a requirement for each public service broadcaster to introduce new Codes of Practice to govern the relationships between broadcasters and independent producers. The new Codes, which were introduced in 2004, sought to set a transparent basis for commissioning deals to mitigate the exercise of broadcasters’ negotiating strength. Ofcom is obliged to approve the Codes, and provide guidance on their development or amendment.

1.29 In order to address concerns over vertical integration:

• Channel 4 was established on a publisher-broadcaster model (i.e. without any in-house production capacity) – and, under the terms of Section 295 of the Act, Ofcom must approve any change to this model
• Under Section 277 of the Act, each of the main terrestrial broadcasters must fulfil a quota requiring them to commission at least 25 percent of their content from independent producers – this is the statutory independent production quota
• Definitions of qualifying independent producers have been put in place by the Secretary of State – in order to exclude those production companies that share significant common ownership with broadcasters.

1.30 In order to address concerns over geographic concentration:

• Under Sections 286 and 288 of the Act, and through the approach to Tier 2 regulation of the BBC, the main terrestrial broadcasters must deliver what Ofcom considers to be a suitable proportion of programmes made outside London – defined as quotas for production outside London – as well as a suitable range of production centres. For the BBC this is currently 30%, for Channel 3 50%, for C4 30% and for Five 10% of production
• These quotas are supported by Ofcom’s definitions of out of London productions. New definitions were put in place in 2004 to help ensure that out of London (OOL) production makes a significant contribution to diversity of supply.

1.31 A key question for the current review therefore concerns the extent to which these interventions are effective, and whether they remain necessary for the future.

Market developments

1.32 In order to ensure that our approach to policy proposals is robust, we have developed a strong evidence base regarding the television production sector – collecting data from both broadcasters and producers. Our analysis amounts to the first comprehensive statistical assessment of the sector ever assembled in the UK.

1.33 In relation to the production sector as a whole, and the importance of vertical integration, our key findings include the following:

• UK channels spent £4.7bn on programming in 2004. Excluding rights, programming spend has increased by 3% per year since 1999
• Total UK spend on originated programming has grown by 4% per year over the past five years, and amounted to £2.6bn in 2004
• Across the five main terrestrial channels, 56% of 2004 originations spend was in-house. Channel 4 and Five were the largest external commissioners in terms of hours.

1.34 Data on the size of external producers and the demand for external production provide insights into the relative negotiating strengths of broadcasters and producers:

• Demand for commissions from digital channels has increased. Excluding BBC digital services, spend by multichannel services has grown by 19% per year over the period. In 2004, multichannel spend accounted for £123m of total originations spend
• Nonetheless, the main terrestrial channels accounted for 87% of spend on first run originations in 2004
• Out of 200 respondents to the Ofcom/PACT Producer Census, accounting for £1.1bn of external production market turnover, 58 companies reported turnover of less than £1m. 25 companies reported total turnover of over £12m
• Based on our analysis of producer and broadcaster data, larger production companies, with turnover in excess of £12m, accounted for approximately 50% and 63% of external commissions for the BBC and ITV1 respectively
• Primary TV rights remain the largest source of revenue for external producers, accounting for 79% of total reported production turnover. £118m was reported as TV-related distribution and rights exploitation turnover, and 44% of this was accounted for by international sales. Interactive media production accounted for 18% of £72m of reported non-TV production turnover.

1.35 Our analysis also focused specifically on understanding the position with regard to production outside London. On this issue, our key findings included:

• In 2004, £941m of production was commissioned outside London, 77% of which was for network programming. On the main terrestrial channels, the value of out of London network production has grown by 8% per year since 2002 while out of London hours of production have grown at a slower rate of 4% over the same period
• Outside London, the BBC and ITV1 accounted for 80% of all network commissions in 2004. Channel 4 and the BBC were the largest commissioners of out of London external production, accounting for 40% and 35% of total out of London network external commissions value respectively
• 54% of £216m of non-network production for the Nations and Regions was accounted for by in-house commissions. Of the remaining 46% of external non-network production, 22% were commissions for S4C and 24% were other external commissions. S4C functions as a discrete network and Welsh language producers in Wales operate in a distinct “micro market”
• A total of £24m of external non-network production was reported in the census, representing 2% of total turnover reported. £1.6m of external non-network production was reported in the English Regions
• 85% of the reported external production sector turnover was accounted for by London-based production companies. Only 9 companies based outside London reported turnover greater than £4m.

1.36 In summary, our survey suggests that the current size of the market for UK-originated TV production is £2.6bn. 56% of the market, representing £1.5bn, is accounted for by in-house production, while 44% or £1.1bn comprises external production. 63% of all originated production, or £1.6bn, is based in London and divided relatively equally between in-house and external production companies at 55% and 45% of the total respectively. Out of London, 58% of production is accounted for by in-house production companies.

The implications for intervention in the future

1.37 We have also conducted forward-looking market analysis, in order to assess how the market might evolve in the future – and how the rationale for intervention may be affected. In particular, our analysis has focused on three sets of issues:

• What are the likely future trends in sources of demand for external production?
• How is the number and size of external production companies likely to evolve?
• What is the future outlook for production out of London?

1.38 We have found that the production sector is evolving rapidly – external producers are becoming increasingly mature, and new sources of demand are emerging. Our discussions with industry stakeholders have suggested optimism regarding the prospects for external production companies.

1.39 Overall, our analysis suggests the following:

• The sources of demand for external productions are growing – mainly from digital channels, but also some emerging demand from international markets and new distribution platforms. However, the main terrestrial broadcasters are likely to remain the main buyers of originated programming going forward – and so their negotiating strength will only be ameliorated to a limited extent
• The external production sector is likely to continue its growth, but we have found no evidence to suggest that external producers will grow to exceed the size of in-house production in the near future
• Growth and consolidation in the independent production sector are likely to be of particular benefit to the large producers often referred to as “super-indies”. We do not believe that this is a cause for concern – such producers are likely to bring to bear the benefits of scale and commercial experience. However, while we expect entry barriers to remain low, we recognise that Ofcom may need to monitor whether – in the medium term – the rise of the super-indie could have any adverse impact on the prospects for entry into the production sector
• There is little evidence that significant levels of production outside London would be provided by the market. We have analysed the factors that would be required to create sustainable production clusters outside London – and our analysis suggests that production would become even more concentrated in London if quotas were removed. As a result, intervention is still needed to deliver the diversity benefits associated with out of London production.

1.40 Overall, this means that the prospects for withdrawal from intervention are limited in the near term:

• There would need to be much more significant growth and diversification of the sources of demand before broadcasters’ relative negotiating strength weakens as an issue
• Vertical integration between broadcasting and production remains a significant issue – as long as this is the case, the independent production quota and associated definitions of qualifying independent producers are likely to remain necessary
• The market is unlikely to deliver much out of London production unless a significant amount of commissioning power and funds were moved away from London. Under current market conditions, therefore, we believe that intervention to secure out of London production will continue to be required.

Our key policy proposals and propositions

1.41 Ofcom has set itself the aim of being a light touch regulator, meaning that it will seek to take a deregulatory approach where appropriate. However, where a need for regulation is identified, Ofcom will seek to focus firmly on the underlying causes of concern.

1.42 We believe that there remains a rationale for intervention in the television production sector – negotiating strength, vertical integration and geographic concentration remain significant issues. This conclusion gives rise to a number of specific policy considerations, on which we have developed proposals and propositions for consultation.

The Codes of Practice

1.43 Our view – through discussions with independent producers and other industry participants – is that the Codes of Practice (and the associated new terms of trade) are generally regarded as working well in relation to scheduled broadcast television. They have been described as instrumental in shaping a more mature industry, and in introducing more constructive and professional relationships between broadcasters and producers. It is also felt that the new environment will make production companies more attractive to investors. As such, the Codes have helped to underpin growth in the sector.

1.44 There are, however, two main areas in which we have been asked to provide more clarity, and a possible regulatory response:

• The prices paid by broadcasters for programming
  Concern has been expressed about budgets and prices paid by broadcasters for programming. Ofcom has received a number of representations that suggest that budgets have been frozen or reduced
• The distribution of TV programmes on alternative distribution platforms
  We have been asked to clarify the position regarding the rights for cross-platform distribution and exploitation of content originally commissioned for television broadcast – both broadcasters and producers have told us that this issue has not been suitably resolved by the new Codes and the terms of trade. It is important to note that we have not been asked to intervene in the market for content generated specifically for new media platforms. Hence, our specific focus is on the distribution of TV programmes and programme content.

1.45 In respect of the prices paid by broadcasters for programming, we have examined this issue through data provided by broadcasters as part of the annual reporting requirements of the Codes of Practice. Using data for commissions in 2004, we have explored a number of different aspects of pricing: whether the prices paid by broadcasters were in line with their indicative tariff ranges; whether broadcasters were commissioning a range of programmes within those indicative tariff ranges; the prices paid for commissions from independent producers relative to prices paid to in-house production; and prices paid for returning series. We have not found any prima facie evidence that broadcasters have systematically been reducing the prices paid for programming, nor have we found any evidence that broadcasters are systematically favouring in-house production over external production. Rather, the evidence provided to Ofcom suggests that independent commissions are priced across the tariff range and that, where relevant, there is no obvious discrimination between in-house and external producers.

1.46 We recognise that this data represents a snapshot of the industry in the first year of the operation of the Codes of Practice. We therefore propose to keep the situation under review as part of the regular monitoring of the operation of the Codes of Practice – but we do not propose to take any action at this point in time.

1.47 We do recognise that there may be an argument for tariff ranges to be reviewed to reflect cost inflation. But, at the same time, efficiency considerations may suggest that cost savings should be sought rather than simply increasing tariff ranges in line with inflation. Over time, it is normal to expect prices to change to take account of changing market conditions. The matter of programme-specific pricing is a matter for commercial negotiation between broadcasters and producers, and not on an individual basis an issue for Ofcom.

1.48 In relation to the distribution of television programmes on alternative distribution platforms, we agree with industry stakeholders that more clarity is needed on the rights position. In attempting to deliver this clarity, we do not seek to propose a prescriptive solution to this issue. We believe that the detail of any solution should be a matter for commercial negotiation between broadcasters and producers, rather than a matter for regulatory intervention – the latter risks being pre-emptive, and the definition of specific terms is also outside the scope of Ofcom’s powers.

1.49 Moreover, we recognise that the Codes of Practice are still bedding down, and that it would not be desirable to change the existing Codes of Practice guidance unless absolutely necessary. There is already much uncertainty around new media rights – our concern is that an early change to the guidance would delay resolution of these issues into 2007, and could reopen broader debates between broadcasters and producers. As such, our strong preference is for the industry to resolve these issues by negotiation – without the need for intervention by Ofcom. However, if a negotiated solution is not found within a reasonable timeframe, we will have little choice but to intervene.

1.50 In order to assist in the process of securing a negotiated solution, this document sets out a possible approach that Ofcom might adopt were it required to intervene – by setting out this possible approach, our intention is to assist industry stakeholders by stimulating debate. We note that, as platforms and types of rights proliferate, a possible approach might involve a new definition of rights windows based on time, rather than platform. We seek views and reactions to this approach during the consultation period.

1.51 The option presented in this document suggests a new approach, which could involve two main rights windows:

• A “primary” window in which the rights acquired by a public service broadcaster apply across any distribution platform; across any wholly-owned channel; for a specified duration; and for free-to-view UK distribution
• A subsequent “holdback”[^(-5-)] period in which the broadcaster is able to apply a restriction in relation to the subsequent exploitation of rights by the producer. This restriction could be shorter than the current five-year holdback that forms part of the current primary licence; this could involve holdback against the transmission of the whole or any part of the programme on a scheduled broadcast service in the UK; and the broadcaster could retain an option to extend the holdback period on further payment.

1.52 At the end of the holdback period, the ability to control exploitation of the programme would then revert to the producer.

1.53 Ofcom considers the above approach to represent a potential framework for negotiation between broadcasters and producers – allowing the negotiating parties to define and agree the specific contractual terms. We emphasise, however, that these are initial thoughts that we now put to consultation – we are consulting on the principle of moving to a windowing system, and on the practical issues that may arise. We also raise a question about the extent to which the principles of a time-based approach might be incorporated into the existing Codes of Practice framework.

1.54 In terms of the nature of this discussion, and the process for taking these issues forward if necessary, it is important to be clear about the following:

• We do not seek to present a prescriptive ruling or decision in this document – but an outline approach for consultation. We will consider the consultation responses on this issue, following which we will set out our conclusions in our policy statement in 2006
• Specifically, we expect industry stakeholders to inform Ofcom by the end of the consultation period whether they expect to resolve these issues through commercial negotiation – so intervention by Ofcom would not be needed. We would also expect stakeholders to define a reasonable timetable within which these issues will be resolved
• If, by the end of the consultation period, it is clear that the industry is unable to agree that these issues can be successfully resolved, Ofcom will have little choice but to conclude in its policy statement that intervention will be needed through changes to the Codes of Practice. Under this outcome, a separate process will then need to follow
• Specifically, before the Codes could be changed, Ofcom would need to issue new Codes of Practice guidance. Ofcom would therefore need to run a separate and additional consultation process with stakeholders on any proposed changes to the guidance. Moreover, we highlight that Ofcom’s guidance will only contain general guidance – we will not dictate specific terms. If required, we envisage that the initiation of this separate process could coincide with the publication of our policy statement in 2006
• Amendments to the terms of trade between broadcasters and independent producers would only be necessary once any required changes to the Codes of Practice had been completed.

1.55 We are therefore seeking stakeholders’ views on this issue in the current consultation, and we would welcome a commitment from stakeholders that these issues will be resolved through commercial negotiation. We will set out our conclusions on this subject in our policy statement in 2006 – following which a further consultation may be required on revisions to Codes of Practice guidance.

The independent production quota and the role of the BBC

1.56 In thinking about the future of the television production sector, particular attention needs to be paid to the role of the BBC – there are strong arguments to suggest that the BBC should play a more significant role in the television production sector going forward, given its privileged access to public funding, and its key role in delivering benefits to UK citizens. There are therefore two key issues to consider in the context of intervention to address concerns over vertical integration: the BBC’s plans for a Window of Creative Competition (the WOCC), and the future of the independent production quota more generally.

1.57 The BBC has made proposals to improve access for external producers to the BBC commissioning structure. Specifically, in addition to an in-house guarantee of 50% of BBC hours, and the independent production quota of 25% of hours, the BBC has proposed that the remaining 25% of hours should form a contestable WOCC – i.e. the hours for which both in-house and external producers can compete.

1.58 We welcome the principle of the WOCC – we support the BBC’s intention to enhance creative competition and create a more level playing field for external producers. However, we believe that more work is still needed in order to ensure that the WOCC works effectively in practice.

1.59 Specifically, it is important that the BBC’s proposals ensure the commissioning process provides a sound platform for competition for the WOCC to thrive. For instance, the BBC and the Government may need to give further consideration to the separation of roles of BBC commissioning and production. In addition, more information is needed on how the operation of the WOCC will be monitored. The Government will finalise the details of the WOCC in the context of the BBC’s new Charter and Agreement. We make the following recommendations to Government:

• There should be more clarity on how the BBC’s commissioning structure will work to ensure a level playing field in competition between in-house and external producers
• The nature and scope of the review of the operation of the WOCC should be finalised and made public, along with the criteria that would define success for the WOCC
• Given that there will be some overlap of responsibilities between Ofcom and the BBC Trust in relation to production quotas, we believe that Ofcom should be asked to work with the Trust to define the terms of the review of the operation of the WOCC; and that Ofcom should be asked to conduct the review jointly with the Trust.

1.60 In terms of the independent production quota more generally, we have heard no strong case for a general variation in the level of the quota – whether an increase or a decrease. We believe that vertical integration remains a significant issue – and so the independent production quota is still needed. Similarly, the position of Channel 4 as a publisher-broadcaster continues to provide an important balance to the sector.

1.61 In our view, regulatory certainty in this case is more important than regulatory withdrawal. We therefore believe that the independent production quota should be held constant at current levels for all broadcasters – including the BBC.

1.62 However, we also believe that the Government should clarify what will be the backstop response if the WOCC does not achieve its aims. If the WOCC does not work, the Government should revisit the option of increasing the BBC’s independent production quota. But we recognise that the WOCC may need time to bed down before it is possible to reach a conclusion about its success.

1.63 In addition, we believe that the BBC should play a more significant role in ensuring a diversity of production outside London, given the BBC’s privileged access to public funding. While we welcome the BBC’s Out of London review, we also recommend that Government should ensure that the BBC’s plans work to secure production outside London for the future. In particular:

• We echo our view expressed in Phase 3 of the PSB Review, that it is reasonable to expect the BBC to increase its out of London commissioning of network programming. We believe that the BBC should aspire to reach a similar position to ITV1 over time, by setting a target for 50% of network production by volume and value produced outside London. We do not necessarily see this target as a short-term objective, but one that could be achieved over time
• At the same time, we suggest that Government should put measures in place to ensure that the BBC’s commissioning of out of London external production is maintained at least at current levels – and, ideally, the BBC’s role here should increase over time.

1.64 We recognise that the BBC’s out of London strategy is seeking to enhance the BBC’s role outside the M25 area – through, for instance, a commitment to increase the BBC’s spend and staff numbers outside London, increases in the BBC’s Regional Development Fund, and increased commissioning power outside London. We therefore note that the BBC’s current plans may indeed achieve the aims set out above. As such, we will closely follow the BBC’s actions in this area, and will seek a continuing dialogue with the BBC on these issues.

The future of production outside London

1.65 Without intervention, we do not believe that much production outside London is likely to be self-sustaining in the longer term. Our view is that intervention will continue to be needed to deliver the diversity benefits associated with out of London production. We recognise that an input-based quota for production outside London is a blunt instrument, but it appears to be a necessary intervention. In particular, we believe that intervention solely at the broadcasting level would not be practical or effective, given the difficulties in measuring the diversity of broadcasting output.

1.66 Our analysis also suggests, however, that the prospects for production outside London – particularly from external producers – may become more challenging in the future. This raises the question of whether additional measures will be needed to secure out of London production.

1.67 Our view is that the objective of any further measures should be to maximise the net benefit of production outside London, and that any measures should be implemented in as unintrusive a way as possible. We welcome Channel 4’s strategy for production out of London, and recognise the impact of the recent increase in ITV1’s out of London quota. We also raise a consultation question about the idea of requiring a major broadcaster or channel to move out of London – we welcome views about whether there are strong arguments for such a proposal, or alternatively whether this might be too intrusive.

1.68 Having considered the options for the future of production outside London, we continue to hold the view – as first raised in our PSB Review – that the role of the BBC in promoting production outside London is likely to increase in importance in the future. We welcome the BBC’s current plans in this area to relocate a number of its production divisions to Manchester, and its wider out of London strategy. However, we believe that there is a greater role for the BBC going forward – as summarised above, our recommendations relate to the BBC’s overall level of out of London commissioning, and its role in external production outside London.

The key definitions

1.69 The final area of policy proposals relates to the key definitions – which we have reviewed in three areas:

• The definition of qualifying independent producers – namely, those producers whose programming counts towards fulfilment of the independent production quota
• The definition of qualifying programmes – the hours that can be used to count towards all production quotas
• The definition of out of London productions – the hours that count towards quotas for production outside the M25.

1.70 Of the three areas, the definition of qualifying independent producers is the issue on which we have received most representations. Ofcom does not make decisions on changes to the definition of qualifying independent status – decisions regarding change are a matter for Government, although Ofcom has a role to play in making recommendations to Government.

1.71 The current definition of a qualifying independent producer excludes those production businesses that share significant common ownership with broadcasters. A number of options have been presented for revising the qualifying independent definition:

• Introducing a test of economic dependence on the parent (or co-owned[^(-6-)]) broadcaster – so a co-owned producer could qualify as an independent if only a small proportion of its revenue is sourced from the linked broadcaster
• Changing the restriction on ownership – so a co-owned producer could qualify as an independent when supplying programming to any broadcaster other than the one with which ownership is shared
• Revising the definitions of relevant broadcasters – such that the ownership restriction only applies to, e.g. English language or designated public service broadcasters
• Introducing a size dimension to the qualifying definition – e.g. a producer with significant common ownership with a broadcaster could still meet the qualifying definition, provided that the broadcaster or production business concerned falls below a pre-defined size threshold.

1.72 In reviewing these options for the purpose of this consultation, we recognise that the current definition of a qualifying independent producer may not be perfect – but the current definition benefits from being a clear, practical rule which has to a great extent withstood the test of time. We believe it is not possible to develop a perfect definition – i.e. one in which no perverse incentives are created.

1.73 Moreover, we note that any change in this area may only have a relatively limited impact – Channel 4 and Five already commission from external producers significantly in excess of the independent production quota; the BBC’s WOCC proposals seek to increase access for all external producers – whether qualifying or non-qualifying; therefore, the market most likely to be impacted by any change would be independent commissions for Channel 3.

1.74 We have not reached a firm view on these issues, but are at present uncertain that any of the proposed revisions are superior to the current definition. Our preliminary assessment of the options suggests that they all have drawbacks: some may risk damaging the diversity of programming available to viewers, by having a negative market impact on already qualifying independent producers; others may create perverse incentives for non-English language broadcasters to develop in-house production with qualifying status, or for broadcasters to retreat from PSB status; and the options may also present significant practical difficulties – which risk creating complexity and uncertainty.

1.75 In short, therefore, we are minded to recommend no change to the definition of a qualifying independent producer at this time. However, as part of the formal consultation on this issue, we welcome input from stakeholders – supported by detailed argument and evidence – on whether, and if so how, it is possible for the benefits of any of the above options to outweigh – or ideally avoid any – downsides, and on how the practical considerations might be addressed. In addition, we will consider other options and proposals for change in this area. We will take account of comments received as part of the consultation, and will reach a conclusion in our policy statement in 2006 about whether to recommend change to Government.

1.76 In contrast to the question of qualifying independents, the other definitions are largely uncontroversial:

• The definition of qualifying programmes has been drawn relatively widely, so as to capture as much origination as possible. We have had no representations from stakeholders on this subject, and so propose no change to the definition of qualifying programmes
• New definitions of out of London production were introduced in 2004. The general view is that the new definitions are working well. As such, we do not propose any change in this area.

Contents of this document and next steps

1.77 The rest of this document elaborates on the above issues in the following way:

• Section 2 reviews the objectives of the television production, focusing in particular on the centrality of viewers’ interests
• Section 3 considers the factors that may prevent these objectives from being met –and the interventions that have arisen as a result
• Section 4 assesses the current position of the sector. We do not draw policy conclusions in this section – rather, our focus is on presenting the evidence we have collected
• Section 5 considers possible future developments in the television production sector, and assesses the implications for the overall rationale for intervention
• Finally, the main body of this document concludes with two sections on the key policy options and proposals – Section 6 considers the issues surrounding the Codes of Practice, and the exploitation of programming on alternative distribution platforms; and Section 7 reviews the other policy issues, namely the production quotas and the key regulatory definitions.

1.78 This volume also contains a number of supporting annexes. Our work on this review has been informed by a far-reaching industry interview programme, and a series of consultation events around the UK – these are discussed in Annexes 5 and 6 respectively; Annex 7 considers the relationship between television production and the delivery of creativity and innovation; and Annex 8 summarises our review of the operation of the Codes of Practice.

1.79 As noted at the outset of this section, the publication of this document marks the commencement of a period of formal consultation on our proposed approach to intervention in the television production sector.

1.80 The consultation period runs until 21 March 2006. In developing a response to the consultation, we ask respondents to consider the details appended at Annex 1 to this document, and the questions for consultation – these are highlighted at the relevant points in the text of this document, and are set out in full in Annex 4. We also request that a completed consultation response cover sheet (see Annex 3) is included with all submissions.

1.81 Ofcom will review responses to these proposals following the close of the consultation period, with a view to issuing a final statement in spring 2006. The final statement will set out our decisions and recommendations regarding any changes that might be needed to the extent and nature of intervention in the television production sector. Depending on the nature of our conclusions, further implementation work may need to follow the completion of this review – for instance, any changes to Codes of Practice would require Ofcom to develop and consult on new guidance; and if recommendations are made regarding change to the qualifying independent definition, this issue would be taken forward by Government.

Footnotes

1.-The data in paragraphs 1.1 and 1.2 is drawn from Ofcom research conducted as part of the review of public service television broadcasting, for the Communications Market 2005 report, and for the current review.

2.-It should be noted that film production is outside the scope of this review. As noted in the terms of reference for this review, published on 11 May 2005, Ofcom does not have powers to intervene in relation to film production.

3.-In this document, we use the terms “external producer” and “external production” to refer to all production that is not in-house – and so the terms refer to both qualifying independent producers, and other external producers. We use the terms “independent producer” and “independent production” where we need to make reference solely to qualifying independent producers.

4.-The term “Channel 3” refers to the licences currently held by ITV plc, SMG plc and Ulster Television plc. We also use the term “ITV1” to refer to the services broadcast under the terms of the Channel 3 licences.

5.-“Holdback” is the right of a broadcaster to prevent a producer exploiting secondary rights within a fixed period of time.

6.-We use the term “co-owned” to refer to the circumstance where there is significant common ownership between a broadcaster and a producer – specifically, where a broadcaster has a significant ownership stake in a production business; or, vice versa, where a producer has a significant ownership stake in a broadcasting business.

The full document is available below:

Corrigendum - 02|02|2006

Figure 2.2 on page 24 of the original consultation document has been revised to clarify the data presented and amend a typographical error.

• Review of the television production sector [pdf]
  Full Print Version - Updated 02|02|2006

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