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09|10|03

The Communications Act: Myths and Realities, Thursday 9 October 2003

Stephen Carter
Chief Executive, Ofcom

I’d like to start by making an observation. I am struck by how often, in recent weeks, when I have said to someone how a particular section of the Communications Act works, there is often a reaction of disbelief.

In some ways that is understandable as fortunately for most people in the media and telecoms villages, they do not have the time or inclination to have followed every inch of the tortuous route over the last three years from White Paper to Enactment. Instead, a bit of rhetoric here, or a myth there, lodges in the mind and becomes the perceived legal reality. My first piece of advice is therefore, read the Statute.

Ofcom is a creature of Statute. In many areas we have wide discretion. But where the Statute says that something must be done and lays out the process, then that’s what we have to do and how we have to do it. That may sound obvious. But we are at an inflection point: from one where public policy was plastic and could be moulded in debate and through lobbying, to one where - for good or ill - we have the Procrustian Bed that is the legislation. The debate has gone on so long, that some people cannot quite accept that it is over. So let me unpick a few of the myths that I believe are still around.

Myth one: many still subscribe to the original billing for the Act that it would be a light touch piece of legislation. It may indeed have started out that way in the politicians’ minds and Ofcom as a body will indeed aspire to be a light touch regulator; but it is certainly not a light touch piece of legislation. Instead, as it went through Parliament, an almost unspoken bargain emerged. To paraphrase it: “ownership and control will be liberalised; but as a counter-weighting safeguard we, Parliament, will actually increase the detail and demands of regulation”. So all of us end up, in television in particular, with a range of tough new quotas on originations, regional production and regional investment – a very intrusive intervention in normal commercial decision making. In radio, it means more prescriptive controls on changes to format and the new localness rules.

Myth two: the Act has replaced fluffy subjectivity with rigorous, market-based disciplines. Partly true. But at most only partly. Let me give you a topical example. Last week the Radio Authority awarded their last-but-one significant analogue local radio licence. It was for the West Midlands, and EMAP was the lucky winner. Several otherwise knowledgeable people in the radio industry have asked me ‘why doesn’t Ofcom simply auction these licences – it would be a much more certain and objective process?’ Indeed it might. But, Parliament has consciously re-affirmed the 1990 subjective ‘beauty parade’ process for awarding them. So that is what we will have to make work in today’s very different market circumstances.

Myth three: the Act has designed Ofcom to be (depending on your starting viewpoint) primarily to safeguard the citizen interest against the ravaging forces of the market; or – Ofcom is in danger of being a technocratic economic regulator for the consumer, which needs to be reminded sternly from time to time of its wider duties to the public and the media’s role in the democratic process; or, yet again, Ofcom is designed to be a ‘triple play’ regulator but it will be seduced totally by the flashy charms of the media sector, to the neglect of the more complex but financially important worlds of telecommunications and spectrum.

Ofcom will be none and all of the above, as this is one area Parliament rightly took pains to get right and resisted last minute suggestions to unravel. We are all of us both citizens and consumers. In some activities we are more one than the other. But the interests of the citizen-consumer are an integrated whole. To attempt to separate them or rank them would be both artificial and wrong. So it will be against that combined citizen-consumer interest that we will benchmark all our key decisions. There is no doubt however, that in time terms, Ofcom’s regulatory role will be to oversee the transition from analogue to digital, from narrowband to broadband, and from an economy of provision to an economy of demand. The fact of these inevitable, largely desirable, changes will mean that the environment will demand a different culture and approach from the regulator.

Ofcom and the Ofcom Content Board

Ofcom has been structured to be fundamentally different to that which has gone before. It is a board like a plc board, with a mix of full and part-time members. I am not the regulator - in the way that David Edmonds has been the telecommunications regulator. I am the Chief Executive, but only one out of nine members of the Board with collective responsibility for our decisions. Gone too is the staff/member divide and the cadre of Commissioners that has characterised all the broadcasting regulators. Instead, we are structured in governance terms to be like the best of the industry we regulate.

Because we are meant to be different from what has gone before, we thought it right to set out publicly the key principles to which the board will operate. That is set out in the Ofcom Foundation and Framework booklet.

Ofcom has also been given a superstructure of other boards and advisory bodies. This can be mildly confusing to the casual observer. Some of them Parliament has asked us to have - like the Advisory Committees for the Nations and Regions and for the Elderly and Disabled People. At least one - the regulatory assessment committee - we have chosen to have. It is something that works well at the Financial Services Authority. A group of economically and financially literate practitioners from the industry who can review the outcome of our decisions and provide valuable feedback on the impact our decisions have had and, hopefully, lessons to be learned for the next time.

Then there is the Consumer Panel which is not designed to be adversarial but it is designed to be genuinely at arms’ length, providing independent advice to Ofcom on consumer - but nota bene not on content - issues. It will be the conscience of Ofcom, not the creature of Ofcom.

Then there is the Ofcom Content Board. It is not an ‘advisory body’ in the way that the others are. It is, in constitutional terms, a committee of Ofcom. In the same way as other Board Committees like Finance or Remuneration. It has, of course, a higher public profile, and, it is the only Ofcom Committee that has a statutory existence. Let me start by saying what it is not. It is not the ITC, or the BSC re-born by the back door. Nor is it a ‘state within a state’. Like the main Ofcom Board it is a mixture of full-time and part-time members. It is bound within the overall collective responsibility of the Ofcom Board. Of course, it will provide advice and recommendations to the Main Board - for example on the new Programme Codes or on the Public Service Broadcasting Review. But it will also be a delegated decision-taking body, mainly, though not exclusively, in the broadcasting field.

The underlying principle is that content-based decisions are delegated to the Ofcom Content Board except where the decision:

1. Would have a significant economic impact on the whole industry, or a significant section of it or
2. Have a direct effect on the value of an individual licence or
3. Relates to Ofcom’s own business of governance.

To give a practical example, the issue of new licences to ITV or Five would be a matter for the Main Board. The setting of the quotas for originated or regional production would be for the Content Board to decide.

So that stakeholders are clear which decisions will get taken where, we will publish a guide on this during the month of November after both Boards have discussed and approved the detail.

Content Board decisions will inevitably involve a greater degree of subjectivity than many of those which the Main Board will face. But they will follow the overall style of regulation which we are adopting which should make those decisions as rigorous and objective as possible, and minimise regulatory intervention wherever possible.

Ofcom’s style of regulation

In terms of how we will go about our business, we will follow five guiding principles. In order to determine these, David Currie and I have spent much time listening to stakeholders, consumer groups, discussing and debating with other board colleagues and significant time with regulators from other fields both in the UK and overseas.

The first principle is a bias against intervention. Regulatory forbearance is in our view, a very desirable thing. This does not mean regulatory roll over, and we will be very alive to those people or organisations seeking to game the regulator, or foster an ineffective culture of time- consuming complaints of limited substance or validity. We see ourselves, in intervention terms, as a place of last resort, not least because of doctrine of unintended consequences.

In this country the retail price caps on BT are probably a good example of this. An intervention originally designed to safeguard the consumer after privatisation and to ensure that BT sweated its assets. But that same intervention put a ceiling on the returns that competitors could earn in retail markets. So you get the paradox that regulation can actually slow down the development of competition. Oftel have now largely unwound the Retail Price Caps, but it has been a seventeen-year journey.

Our second principle is, where we do intervene use the least intrusive method; but be swift and decisive. This will apply both in economic and content regulation. In economic regulation, where good consumer information can do the trick, then that is often better than detailed price regulation. It has fewer side consequences. Similarly in content, the so-called new-media, are putting more and more choice in the hands of the informed viewer and listener. We will wish to encourage and develop that trend. Creating an informed citizen-consumer will be a key part of Ofcom’s media literacy programme. Where we cannot yet de-regulate, we will encourage the industry to take more responsibility for policing itself. Later this month we will set out and consult on the basis on which we will accredit industry bodies to assume self-regulatory powers with Ofcom acting as backstop. And broadcast advertising will be the first media example.

As to ‘swift and decisive’, many of you will share my view that often regulatory intervention was like one of those great dramatic moments in ER: ‘The operation was a great success, but I am heart-broken to tell you that the Patient has died’.

Ofcom will aspire to be different. But – and it is a big but – any operator against whom we seek to act has many more routes of recourse against us. ‘Due process’ and the appeals routes have been both strengthened and lengthened, in the Communications Act. As Practitioners, you rightly care about the process and your client-interest, rather than the outcome, which is our ultimate concern. But there is no such thing as a free lunch. Together, we need to find ways of combining speed with due process and fairness; without allowing the incumbents to exploit it to kill the small, the new or the vaguely threatening.

Our third principle is that Ofcom will be an evidence-based rather than prejudiced based regulator. That sounds like motherhood. But there is, frankly, a lot of myth and unjustified assertion in the industry - probably more so in the media side of it. We will unpack and question those assertions wherever we find them. And we will be wary of Regulatory capture by the Regulatory Professionals. We will avoid getting trapped into spending too much of our time with the big guys in the industry. They often have legions of regulatory, strategy and corporate specialists who will try to engage us; do too much of that and one ends up seeing the world solely through their eyes.

David Currie and I are acting on this, with what I have (slightly grandly) entitled a ‘Discovery Programme’ consciously seeking out, and at least once each week spending time with, new entrants and smaller companies; those with innovative ideas and approaches. We find that it is a very useful antidote.

Our fourth principle is one of transparency. Again, easy to say but harder to practice. I know from previous experience how opaque the regulatory process can seem. Personally, I think that Oftel has scored pretty well, certainly in terms of international comparison, on this front; but it provides only a platform, on which we should wish to build. The Ofcom Foundation and Framework Booklet includes a guide to the Ofcom consultation process which I believe will be integral to this.

Fifthly, I would like to return to the principle of Constructive Disruption. The creation of Ofcom is a once-only chance to do it differently, to roll the stone over, to ensure challenge to the ‘it’s always been done this way’ culture. I have said to all my colleagues at Ofcom, that I am not approaching this job with the assumption that all that is, and has been done, in the five existing regulators is wrong, but I am equally unwilling to accept that we can not do many things better.

Let me give you an example that brings together several of these strands. Radio Licensing. I think the Radio Authority can be fairly proud of the legacy it bequeaths to Ofcom. But they will not be in business at the end of the year. We will. So there needs to be an Ofcom process for doing this. We should not blindly follow what went before. (Constructive disruption). So there will be a – short – pause while we undertake a review of the system. Look at what lessons can be learned and then consult. The Statute defines the bounds of what we can do differently as I have previously said. But our aim will be to make the process as transparent as possible, less onerous for the bidders – and move towards a more objective, evidence-based test of local demand, providing more certainty for bidders about what is needed.

Current Media Issues

There are a dozen substantive issues on which we are or will be consulting over the next few weeks and months. Again, they are listed in the Book, so I am not going to go through them here. But in view of this week’s announcement and the interest the whole media ownership debate prompted at Cambridge, I will say a few words about how it is going to work.

But prior to ownership and the plurality test, it would be odd for me not to comment on the Competition Commission findings and the subsequent announcements. Like the ITC we at Ofcom were supportive of a merger of Carlton and Granada, recognising the public interest in a strong and coherent, commercially funded public service broadcaster. However, we too recognise the possible anti-competitive consequences in the down stream advertising air time sales market. As a consequence of Tuesday’s decision we and the ITC, in partnership with the OFT, have much work to do to fill in the details of the proposed remedies, select and appoint an adjudicator, and put both in place in time for this year’s dealing season, namely by early December.

In addition we also announced on Tuesday a five week consultation on the existing ITC air time sales codes, openly seeking responses to the questions around appropriate and acceptable configuration and the role of ex-ante versus ex-post regulation in this area.

These are all significant changes. Well handled and well regulated they could and should result in a commercial sector which is more coherently managed within an appropriate programme and investment framework; able to build a popular, commercial, public service schedule, with a powerful well funded news-gathering network; in a regulatory regime that frees up the smaller players to investigate and explore other commercial partnerships in the air time sales market; and one that, hopefully, reinvigorates the advertisers’ interest in and enthusiasm for mass broadcast television advertising. All of this now needs to be underpinned by a set of hard-edged rights, that will prevent any advertiser being worse off, or indeed disadvantaged, through any ongoing and disappointing performance by the combined ITV.

On our website there is a very useable briefing document on the CRR remedy and of course a copy of our consultation document on air time sales codes.

Now, as for when the predicted spate of take-overs will take place, your guess is as good as mine. Though the speculation may be a little fevered. As Mel Karmazin said at Cambridge, he, and others will, look carefully at both the asking price and the income growth rates for a particular media asset; and only if the sums stack up, will he make a bid. There are plenty of City analysts, who are saying that, for most of the relevant broadcast media assets, their market price already factors in a bid premium on the back of the Communications Act’s liberalisation. But whatever the pace, the direction towards consolidation is clear and the Government will shortly publish their guidelines on how the plurality test will be applied. Let me say a few words about that.

First, it almost invariably involves a merger or acquisition. So, it is very likely that the Competition Commission and the OFT will be engaged. Secondly, it will be the Secretary of State’s decision on a public interest test whether to accept the bid on plurality grounds, to impose conditions or require undertakings, or to reject it. Ofcom’s role is to advise the Secretary of State, on the plurality test, against the three criteria the Act sets out.

But first, where will it apply? Parliament’s logic is clear: there is a floor which is the statutory ownership controls which remain; there is a ceiling: media assets which were unregulated in public interest terms before the Act came in and remained unregulated. So, the test applies in that room in the middle, where ownership has been liberalised.

As to the three tests:

• Is there a sufficient plurality? That is, in the main, a numbers game, nationally or locally. It is conceivable that you could have seven players in a market; say, five with 2 per cent each; the other two with 45 per cent each. In such circumstances, share of voice too would be a material factor But in those same circumstances, I would be surprised if the Competition Commission did not pick it up. But if they didn’t, the plurality test is there as a back-stop.
• Secondly will the merger or acquisition so affect the broadcasting ecology that ‘taken as a whole’ there is an appreciable risk of detriment to range and quality? That is possible in the case of a bid for a single ITV. We will look at that; and again it is a backstop measure of security.
• Thirdly, will the new owner ‘demonstrate a genuine commitment’ to the standards Codes, in particular to the impartiality and accuracy that the UK media market has come to expect? In giving advice to the Secretary of State, we will be evidence-based. What has the prospective owner done with existing media assets in the UK and elsewhere? How have they complied with local laws where they already operate? What have they said, publicly, that might cause us to ask some searching questions? We will approach any application without bias or prejudice, but equally without starry eyed naivety. I observed at Cambridge that in this country people have a habit of approaching successful US businessmen, particularly media moguls, with a mixture of cultural contempt and commercial adoration. Personally I think neither is appropriate.

Conclusion

Ofcom is still at the stage of process and promise. You will rightly judge us by our actions.

You are entitled to ask, as I often do: ‘so, what does ‘good’ look like?’

My answer to that is prompted by an article last week by Anatole Kaletsky. It was a bit gung-ho. But its central thesis was that the UK economy is, currently performing, for its size, among the best of the G7.

That is not a bad benchmark for Ofcom in 2006: ‘is the UK communications sector performing amongst the best in the G7?’ If the answer is ‘yes’ then we will have succeeded. We should not expect to get much, if any, credit for that. But I am relaxed about that. It is results not credit that get me up in the morning.

The really interesting point in Anatole’s article was that the result was not an accident. It had come about because successive Governments had followed the right policies, despite all the brickbats they had got at the time. First, the Conservative Government’s reforms of the supply-side to create competitive markets. Second, the Labour Government’s modestly redistributive policies to maintain social cohesion – an intervention in the ‘citizen interest’. Third, macro-economic stability from the independent (note that: independent) Bank of England and MPC.

Many of those conditions: supply-side reform, intervention in the Citizen’s interest and an independent regulator - Ofcom - apply in the Communications Sector. Our job is to help the sector to flourish. By that are we happy to be judged.

Thank you.

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