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09|03|05

ISBA Annual Conference Ofcom 2 Years On

Good morning. The last time I stood on an ISBA platform was in July 2003 at ISBA’s annual lunch. It was the first speech I had given as Ofcom’s Chief Executive.

Quite a bit has changed in the nearly two years since I last spoke. So this morning I will try to answer the question set: Ofcom two years on; but also to look at developments in the market and the challenges that we collectively face over the next few years.

Ofcom Two Years On

The last time I spoke, the Communications Bill was still in its final throes. It was a world of possibilities. We could have got away with saying almost anything (and looking back at my previous speech I think I tried to!).

How well have we measured up to the comments I made then?

First, I warned, as David Puttnam had done in the House of Lords only days before, that if Parliament kept ordering up extra items from the menu – doubling our duties compared to the old regulators - then the bill when it came would be larger than people expected. So it proved.

We said, however, that we would take 5% out of operating costs on the merger. We did so. We promised we would take a further 5% out in 2004-05. We have done so.

We have promised to take a further 5% out in the coming year. Our Budget is set to do so. By the end of the coming year, we will have absorbed the extra costs of our new statutory duties and the £8 million of VAT which Ofcom has to pay but which the old regulators did not. And thereafter we will be an RPI -minus cost regulator. Some of that comes from process and back office efficiencies. But some comes from our genuine ambition to deregulate where we can. We have already started to do so.

Secondly, I said that Ofcom would aim to be genuinely different from what went before.

For one thing Ofcom has only two thirds of the staff of the old regulators. And of those 200 are new blood. And, significantly, nearly three quarters of the senior management group are from the communications industries and the private sector more generally, not the old regulators. That creates a genuinely new mind-set.

It is, I believe, unashamedly technocratic and - for good or ill - more commercially focused than were the previous regulators.

We have set ourselves four core principles for how we would act: firstly, a bias against intervention. Regulatory intervention is always tempting; a case for ‘something must be done’ can nearly always be made. But regulatory intervention by its nature distorts the play of the market. It usually produces unforeseen consequences. And it is hard to unwind; not least because it will have created a set of beneficiaries from that intervention who will lose out when it is unwound.

Secondly , that we would be evidence-based. That sounds like motherhood, and, to some extent it is. But this job has taught me that (a) people are often happier, in the interests of speed, to jump to an intuitive solution rather than take the time to get the evidence; and (b) the lengths people will go to in order to deny the consequences of evidence that unsettles their prejudices. That is very strongly, though not exclusively, a feature of our broadcasting responsibilities.

Thirdly , where we find that we do have to act, to do so swiftly and decisively: to balance due process with due pace. Vital in a fast moving market like the communications sector. Examples include the reductions in shared local loop prices for broadband, which have made UK wholesale prices among the most competitive in Europe, the alignment of all the Channel 3 licence valuations, alongside the digital switchover roll out plan, our conclusions on ITV’s PSB obligations and within 12 months the introduction of a traded market in wireless spectrum.

Closer to IBSA’s home was Ofcom’s first practical test, the proposed merger of Carlton and Granada to form ITV plc. We supported the merger in the interests of creating a commercial FTA broadcaster of scale that could compete with Pay TV and meet the public interest alongside the BBC. We recognised the downstream competition issues and therefore helped devise the accompanying competition remedy to protect advertisers in the airtime sales market: the so-called Contract Rights Renewals remedy and made the appointment of the independent Adjudicator, a professional who knows as much as anyone about how the airtime sales market operates in practice and in detail. In essence the CRR is a ratchet mechanism to ensure that ITV’s air-time charges are directly correlated with their performance in terms of TV impacts. A means of allowing all the other benefits of the merger without allowing unfair advantage to flow from their market power in air-time sales.

I had some sympathy with many in the advertising industry, ISBA included, who were sceptical that a remedy put together at the speed it was would prove robust in practice. They were being asked to put a lot of faith in an untried regulator. And, though many knew and rightly respected the person of the independent Adjudicator, David Connolly , no one knew how the function of this new office would work.

Well, we are now coming to the end of the second full deal season since the remedy was put in place. We have, perhaps, been fortunate in that total TV NAR has been on a strong cyclical rise, which has meant that the cake has got larger for everyone, but the evidence to date has been that advertisers have developed increasing confidence in using the advantages of the CRR to take ad holidays or to shift their advertising to keep campaign prices keen. ITV’s top line revenues grew to £1670m in 2004, an increase of 2.5% on the previous year – assisted in part by the growing success of their multi-channel strategy. Channel 4 and Five (and the multi-channel operators) have all seen their revenues rising strongly by 8% and 9.6% respectively in 2004. The revenue of all TV was £3380m in 2004 – an increase of 6.7% from the previous year.

David has had to adjudicate a few disputes, but in the main, his role so far has been that of a successful facilitator of a market that is working.

So far, we seem to have found a workable solution. As you know, we have said that we will undertake a full review of the airtime sales market, once the CRR remedy had settled down. In the light of progress to date, our current inclination is to let the market continue to evolve and to undertake such a Review next year when we all have one more deal season under our belt.

The second issue I want to highlight is the digital switchover programme. Today, we can truly call it that. 18 months ago, switchover was an aspirational ‘target window’ discussed in Whitehall Committees with input from stakeholders.

Today we have a specific, region by region, proposed switchover timetable, starting in 2008 and finishing in 2012. We have nearly completed the detailed consultation on coverage and transmission power levels, which will give the broadcasters the firm metrics they need to complete their long-term digital contracts with the transmission companies. We have hard-wired the end date of 2012 into the ITV, C4 and Channel Five licences. We have the autonomous implementing organisation - Switchco - up and running in shadow form. The Executive Search is on for a Chief Executive of the real thing.

In short, the operational measures have been teed-up. The ‘go-button’ awaits a political decision later this year. We welcome the firm proposal in the Government’s Green Paper on the BBC (on which more in a moment) that the Licence Fee should be used to establish and fund schemes to help the vulnerable sections of society to make the transition to digital.

I need hardly say why this matters to advertisers. The rise in digital penetration to 60 per cent plus today is already altering the dynamics of the air-time sales market. In analogue homes, Channel 3 has a 31%viewingshare; Channel 4, 14%; and Five has 8%. In Freeview homes, Channel 3’s share drops to 18%, C4’s to below 10%; while Five’s rises to nearly 9%. In cable homes Channel 3 share falls to 15%; C4’s share to just under 6% and Five’s to 5%. Those falls are even more marked in Satellite homes.

Thus, the pace and nature of switchover between platforms has a major impact on where advertisers place their air-time investments - and what they get for them. Of course there is stickiness in the system. The Delta for the traditional broadcasters’ change in impacts versus change in NAR is continuing to rise: or put another way the unit costs for access to a mass audience are continuing to rise – perhaps not surprising given where inflation has been for the last few years.

When will the tipping point come? I don’t know- nor is it our job to. Our job is to think ahead to the consequences and the ability of broadcasters to muster a critical mass of advertising to continue to fund high-production value, originated UK content. That, Ofcom is very alive to.

The third issue, though the first chronologically, was Ofcom’s pledge to practice what we preached on subsidiarity. That is, to create the conditions whereby we could transfer external regulation of broadcast advertising to self-regulation by the industry itself. We set out two years ago our view that, in advertising, the interests of public policy and consumer protection and the incentives for advertisers were aligned. Legal, decent, honest and truthful were what both needed. As John has said the industry should be able to police its own affairs in broadcast advertising just as it has for many years in all other media.

I was genuinely delighted when, on 1 November last, that vision came to pass. There were legitimate consumer concerns that needed to be addressed. There were logistical hurdles a-plenty; and not least a full blown Parliamentary process requiring debate and approval in both Houses. It is greatly to the credit of Malcolm and, in particular to Andrew Brown, Chris Graham and their colleagues on the advertising task force, that we now have a working model of co-regulation in broadcast advertising and, in the ASA, the consumer has a one-stop-shop service.

That leads me to my fourth issue: unfinished business that we need to hand over to Broadcast ASA. These were the twin ‘Dangerous Dogs’ Act’ issues which blew up in 2004. The first was the rapid escalation up the social and political agenda of obesity, and particularly obesity in children. The second was teenage binge drinking. And in both cases the role, or otherwise of advertising in contributing to – or helping to resolve- those problems.

As a parent I share the concerns about childhood obesity. As a citizen I deplore the consequences on our streets of teenage binge drinking. But as a regulator, I have to be sure that the measures we take will actually contribute effectively to solving the problem and will not have a disproportionate effect on people trying to run an honest business, and indeed we are required to balance this duty with the requirement of ITV to produce UK originated children’s programmes.

On the obesity issue, the conclusions of our research were straightforward. There is a genuine generational problem – in part driven by prosperity and lack of self-knowledge and self-restraint; cheap calories and rising incomes. Solutions will need to be multi-faceted: moving forward in only one area could give the illusion of progress rather than the reality. Broadcast advertising has a modest direct effect on children’s and parent’s food purchases. A total advertising ban would be disproportionate. But turning the advertising volume down on HFSS products is a likely outcome as are some other specific measures. We will take those measures when there is an effective consumer nutritional information system in place; and as part of a wider front of activity to make a real difference.

If the creativity of the advertising industry is put to good use - and the food manufacturers recognise that there is a real issue which they must help to address then I am optimistic that a sensible solution will ensue.

As to binge drinking, turning sensible intent into detailed Code recommendations proved quite tough. There was a brief moment when the drinks industry could legitimately accuse us of taking pot shots, out of season, at The Famous Grouse. But I think we have got there. In advertising, we have a Code that the industry itself describes as ’firm but fair’. Collectively, we

have made a proportionate response to people’s concerns. Again as John has said, we have taken the industry at its word and it now needs to fill in the detail of delivery and create a framework of rules that works on both counts.

The fifth issue is an indirect one, but an important one nonetheless. That is, the future of commercial public service broadcasting. Ofcom’s Statutory PSB Review is important to advertisers: the future of a major set of outlets for advertising has been at stake.

In doing the review, we looked at what was most important to viewers. Their answers were that competition for quality and plurality of supply still mattered. They wanted well funded commercial networks, producing high value, UK-originated content, in a variety of genres, universally available, free to air (that means advertising funded, not subscription funded).

No reference to Public Service Broadcasting would be complete without the BBC . I have already touched on one conclusion from the Government’s Green Paper. Like most, Ofcom is still digesting it; and it is too early for others to give detailed reactions. Although we welcome a fully-funded public-service focused BBC.

The emphasis on the public purposes and characteristics is good; it echoes much that was in Ofcom’s Phase 1 report on Public Service Broadcasting. We have very much welcomed the appetite the BBC has shown to advance that in the BBC ’s Building Public Value. Cynics have argued that this is simply the BBC (in the words of their own DG) ‘re-discovering old-time religion’ as the end of the current Charter looms. I think this is too cynical a view. In the BBC much depends on the character and temperament of its Chairman and DG.

And I, personally, believe, that on both scores, Michael and Mark are genuinely committed to a BBC which is distinctive and true to its public purposes. The issue is whether the governance structure that is set in place locks in distinctiveness and a commitment to make the good popular and the popular good in the future under different chiefs and immune from political interference.

Whether the Government’s Third Way approach combines the merits of both the Grade and Burns models, without importing the disadvantages of either, only time will tell. Fortunately that is not Ofcom’s call.

Other crucial issues - in the shorter term, oversight of the competitive impact on the market of the BBC ’s activities and conduct; and in the medium term, the issue of contestability for the Licence Fee - are, perhaps understandably, un-decided now; but, rightly, remain on the table for debate and we will continue to make our case on both of these points.

The one aspect where, today, I might take issue with the Green Paper, is the assumption that the question of alternative revenue streams to fund the BBC ’s public mission is something for a decade hence. I think this timescale is very over-optimistic. The pace of on-demand use, felt today in audio and shortly in video, is going to accelerate much more rapidly than most expect.

The economics are fundamentally different And their impact on the BBC will be profound. It is used to the economics of high fixed cost and zero marginal cost. Broadcast economics. But on-demand economics are volume dependent. In other words, the more viewers you have the more it costs you.

Market Developments

So much for the past year. What of the future?

As I have implied, the short-term future is fairly rosy. TV NAR is on a strong cyclical upswing. It rose by over 6% in 2004. It is forecast to rise by 5% in 2005. And estimates vary from 4% to 5.5% to the end of the decade. When this happens, everyone - broadcasters and advertisers feel good.

And, although advertising was overtaken for the first time last year by subscription revenues, this is no cause for concern. Consumers are simply prepared to pay more for their entertainment, education and information. TV revenues have grown from £6.5bn in 1998 to £9.5bn in 2003, and estimates suggest that this figure was over £10bn in 2004. All revenue streams are growing. Each adds to but does not entirely cannibalise the other.

For how long will this happy state persist? It looks as though interactive and enhanced TV revenues are simply a net add to consumer spending on television. That is good because they are growing exponentially. From almost zero when Ofcom came into being, they are worth £575m this year and will be worth £2bn by 2008. The third largest commercial channel in revenue terms after ITV and C4 is not Five but Sky Interactive.

What are the worms in the apple?

The first is fragmentation. Digital, internet/broadband and new media mean that, today, for the first time advertising in the broadcast and newspaper media has dropped below 50% of total advertising.

The second is the shift from command and control: the linear schedule to on-demand. A more serious concern. The PVR is, today, a minority pastime. But all who have it say it revolutionises their viewing habits. Several respectable estimates put PVR penetration at 15% by the end of this decade. Personally, I think that substantially under-calls it. If a PVR Freeview chip and hard-disc becomes standard and free in higher end TV sets, and set top boxes and I believe it will, that figure may be exponentially higher.

Thirdly, broadband – my own personal obsession. We have got used to always-on, convenient data and radio downloads. It will not stop there. Most estimates say that broadband will, by 2010, be available in more than half of British Households at a blended average speed of over 4Mb: in short, video capable broadband.

Fourth , I warned when I last spoke to ISBA of the impact of Peer to Peer file traffic in video. Then it was a cloud no larger than a man’s hand. Today, hundreds of thousands of users are pirating American shows like Friends, Desperate Housewives and 24. Sad but true.

If they can they will. DiVX, Bit-Torrent and their successors will do to video content what Napster did to audio content.

Ofcom’s response: Ad-Funded TV in the future

Ofcom does not have the capacity, the hubris, or the remit to think that it can address all these challenges.

But today I can give you a sense of direction. First point, we believe that advertiser funding is not simply an economic good but also a social good in making quality content universally available.

We will work with the advertising industry to allow advertiser-funded content to evolve to meet viewers’ needs in the years ahead.

In terms of sponsorship, we recognise that UK rules have been more restrictive than European rules allow. So we have consulted on liberalisation.

Allowing channels or stations to be sponsored; relaxing the rules on the content and length of sponsor credits; and widening significantly the range of programmes that may be sponsored by betting and gaming companies: using interactive revenue sources to fund mainstream broadcasting.

Some answers to our consultation have suggested we could go further within EU rules. We will look carefully and sympathetically at those representations. Our two core questions are these: ‘is it allowed within EU rules?’ And ‘will the viewer know what they are getting?’ If it passes both tests, our temperamental inclination is to say ‘yes’.

Next ‘advertiser-funded channels’. Again, our instincts are to say ‘yes’. The principles, again, are evident: a ‘Cadillac Channel’ funding Top Gear could be problematic. But a Cadillac Channel per se is less so.

What about product placement? We have had it for years in films, without viewer detriment. No one watches a Bond movie and (unless they are very rich) rushes out to buy the latest Aston Martin. So, in principle, why not in television?

In principle it is easy: yes, in entertainment; no in programmes which seek to inform or educate. In practice it is a bit harder, because the genres blur more on television than they do in cinema. Clearly, we need to have a discussion about how this might develop.

We want to welcome new advertising techniques because we believe they could help fund content that will benefit the viewer. That is the core criterion on which we will judge proposals, balanced against the public interest and the need for editorial independence and viewer/user knowledge of what they are watching and when they are being sold to.

I hope that I have given you some idea this morning of where Ofcom is at and that in the period ahead we will continue to enjoy the productive and constructive relationship with the advertising industry that has developed over the past two years and I am happy to answer questions.

Thank you.

Tuesday 8th March 2005
Hilton London Metropole
Edgware Road
London, W2


Stephen A. Carter
Chief Executive, Ofcom

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