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23|05|05

Beyond Advertising - Keynote Speech to New Media Markets Conference, 19 May 2005

Robin Foster, Partner, Strategy and Market Developments, Ofcom.

Introduction

Across the industry, you can take your pick from a spectrum of views about the future funding of TV. These range from impressive optimism to almost suicidal gloom. On the one hand an industry about to tap into many new sources of revenues, or on the other hand an industry about to face a funding crisis. I would like to take the opportunity to stand a back a little, and ask - from my regulatory perspective - whether it matters, and what – if anything – can be done about it.

After all, we live in a world in which markets are changing all the time. Governments and policy makers now largely steer clear of intervention in market developments – remember Rover and recently Marconi? Why should anyone get too exercised about the commercial TV market? Even if there are radical and difficult changes about to occur, isn’t it best to leave the future to take its course. Some players will survive and prosper, others will fall by the wayside.

My conclusions will be

it does matter to the general public, and therefore should matter to us, as regulators, – but perhaps not as much as most people here would like to think
and the regulator can do something to help – but again, not as much as you would all like to think.

More importantly, the challenge is for the industry itself to recognise fully the changes that are already underway, and to find its own solutions. Those solutions will need to be examined soon, and will need to go far beyond any of the relatively modest regulatory adjustments which may be in our gift.

Does it matter?

Why is it a matter of public interest that the commercial TV market should be able to rise to these challenges?

First, TV is special It isn't just any other ordinary consumer product or service. Survey after survey shows that TV is not just a source of entertainment – it has important public or social purposes too. A wide range of high quality TV can only be provided if there is a healthy industry to support it, with access to enough funding to make it happen. Advertising helps ensure that programming is universally available and free at the point of use.

Ofcom's own PSB Review identified two key aspects of the UK system, which help secure the delivery of high quality content.

First, plurality of supply (which has benefited viewers by encouraging competition between the BBC and commercial broadcasters to provide good popular programming) and
Second, the different sources of funding available to UK broadcasters - advertising, subscription and the licence fee - support a better range of programming than probably any other system in the world.

This mix of funding has been critical to the success of British broadcasting. We have a real interest in making sure, as far as we can, that it is sustained for as long as possible.

Advertising is an essential part of the mix. It provides the huge benefit of popular programming, free to everyone. In fact, one big difference between Britain and other TV markets around the world is the key role that the commercial PSBs – like ITV – have been able to play in investing in UK- made dramas, news and entertainment, and then broadcasting them free to air, to everyone. All funded by advertising. At its best, advertising supports big events like Pop Idol, which bring the nation together, and the popular soaps, which help underpin our sense of social and cultural identity. If that capability is substantially weakened, then the system as a whole will be weakened. And just look at the success of Freeview to see another role for advertising funded channels – many viewers quite clearly prefer not to enter into a continuing subscription contract for pay TV but do value more channel choice – for them, advertising funded channels like ITV2 and E4 are providing real and new benefits.

However, we shouldn’t get too carried away. Advertising-funded TV is in the public interest, but perhaps not as much as commercial broadcasters would like us to think. As any broadcasting economist will tell you, it also creates a very imperfect market. The programming it funds will tend to be made to appeal to mass audiences at the expense of minority tastes, it will tend sometimes to be bland rather than controversial, in order not to put off viewers. It risks encouraging programming which appeals to a lowest common denominator.

The alternative, direct payment, or subscription – deals with many of these concerns. It allows viewers to express direct preferences, via the payments system, about what they choose to watch. Programming decisions are not driven by what advertisers want to see on screen, but what viewers want to watch, and are prepared to pay for. Direct payment mechanisms are getting more sophisticated, too – we will soon see much more widespread use of micro payments, which will enable more on demand access to individual programmes or to smaller packages of content. This creates an opportunity for the development of many more niche content services – tailored to smaller communities of interest than has ever been possible through advertising financed programming. Direct payment and subscription may be much more suited to the new broadband world – in which viewers are able to ( and seem to want to) exercise much more direct choice and control over the material they access.

And of course, public funding is still a key part of our system. It allows the BBC to set standards and to create space for risk taking. Ofcom’s PSB review recognised the continued role for public funding, even in the digital world, and argued that such funding should be made more widely available – perhaps to help Channel 4 meet its PSB obligations in future, or perhaps to fund a new Public Service Publisher.

The point is, while it would be good to see advertiser-funded TV retain an important role in the television system of the future, many new benefits will come from the introduction of new funding sources, and they will play an even more prominent role as we move into the fully digital and broadband world.

As I said at the start, the future health of ad financed TV does matter, but perhaps not as much as many industry players would like to think.

What are the risks to advertising funded TV?

The problem for advertising funded TV is that it is under threat from a number of directions. Fragmentation of audiences, the effect of PVRs, alternative and more effective advertising media and so on. These have already been described by previous speakers today, so I will restrict my comments to a brief assessment of how real I think those risks are.

At the macro level, prospects don’t look too worrying – at least initially.

To get a better feel for likely future trends in TV advertising, Ofcom commissioned a heavyweight study of the market last year. We used consultants PwC, the best economists such as Professor David Hendry, and some eminent industry experts like Paddy Barwise and John Billet. And we examined the approaches taken to predicting advertising trends over the past 20 years, to make sure we had the best possible model to use this time around.

The results were as follows;

Total TV NAR is likely to continue to grow in line with the rest of the economy (e.g. in line with GDP) for some time to come
We produced a couple of illustrative forecasts which showed a range of between 2.1% a year annual growth rate and 2.3% - in real terms - i.e. above inflation.
Interestingly, most of this growth is likely to be with the new digital channels rather than the old networks such as ITV and Channel 4

But how robust are these projections, given the changes that could be occurring in the market place over the next 10 years?

The answer, I think, is quite robust for the 5 year horizon, but harder to predict beyond that period, when a combination of digital, broadband and PVR-type usage could have by then a more radical impact on how we access and use TV.

Take PVRs for example – as Tess Alps pointed out in her analysis earlier this year at the IPPR Oxford Media Convention:

Her research showed that PVR owners currently watch around 40% of their TV in pre recorded form, and fast forward the ads 77% of the time they are watching
If, by the end of the decade, around one third of households have PVRs, then this suggests that the decline in impacts will be about 10%. At this level, we might well see the price of airtime rising to offset much of the drop in impacts, with very little overall effect on the commercial TV market.
Once all households have PVRs, however, this would suggest a loss of around one third of all commercial impacts – with a potentially serious negative effect on the value of TV airtime, and a more fundamental threat to the sector.

Take broadband – already with 6 million connections and rising, and available speeds rising all the time. But signs so far are that broadband is used mainly for faster access to the internet, and for communications services – not for viewing of high quality video content. Again – although conventional TV is relatively safe for a few years yet, the longer term threat is clearly there, and needs to be planned for.

Finally, take fragmentation, - as digital channels become more successful, our modelling suggests that they will help the market to grow faster, by creating more cheaper airtime, and helping to deliver more targeted audiences to advertisers. In this world, the main networks may find the going tougher, but the new channels will benefit.

So can we, as the sector regulator, sit back and relax?

Well, not exactly. The key to a successful system so far has been the ability of a small number of well funded commercial broadcasters prepared to invest considerable sums in high production value programming, because they have had access to the revenue streams to make that possible. If the trends identified put those revenue streams more at risk – and there is a chance that they could do so – then the delicate balance of the broadcasting system could be affected. This is a risk, not a prediction, and one which the main networks can obviously take action to address, but nevertheless one which we all need to be aware of.

What can we do to help?

Given this background, what can we, the regulator, do to help?

First, we need to be sure that we understand the issues and the challenges - so we have set out in our annual plan the intention of an important piece of work on sources of TV funding, looking at advertising, sponsorship and product placement - with a consultation planned for the autumn.

Second, and informed by this work, our promise is to work with the industry to allow advertiser-funded content to evolve to meet viewers’ needs, and to continue to fund high quality programming for as long as that makes sense.

This means removing any unnecessary barriers to raising funding for programme investment.

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

Allowing channels to be sponsored, relaxing the rules on the content and length of sponsor credits, and widening the range of programmes that can be sponsored will all help – without causing any significant loss to viewers.

Advertiser funded channels also offer scope to help expand the market - as long as viewers understand what they are getting, our inclination is to allow further developments in this area.

What about product placement? Or its variation, product integration?

Product placement involves the use of an advertiser’s product in a programme with clear visibility – for example designer clothes in Footballers Wives, or Evian water on the table in front of Richard and Judy. [Note, in some cases, there are instances of negative product placement – paying for a competitors’ products to appear in an unfavourable setting].

Product integration is where a product is integral to the programme – for example, Amstrad products in Alan Sugar’s the Apprentice.

At one level, it ought to be relatively easy to have some simple rules here. If it’s an entertainment programme or drama, why not? (viewers will be aware that some product placement could be taking place and will vote with the off switch if they dislike it). If it’s in factual, consumer, news or educational programming – not a good idea – viewers will not be able to judge for themselves whether to trust what is being said in the programme, will be less clear about whether they are being sold to or being offered independent advice.

In practice, given the blurring of genres in television, it might be rather more difficult than this to decide what is acceptable and what is not. But that is not an excuse for not thinking about the issue and hoping it will go away.

We want to welcome new advertising techniques, including interactivity, because we believe they could help fund content that will benefit the viewers. 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.

After all, increasingly this will be the way of the world in the broadband environment. This is the way that a wide range of future broadband content will be paid for. Just as now in magazines, in which there is a mix of subscription, display advertising, and clear paid for promotional copy, so broadband content providers will be looking for ways of accessing a range of funding options. Good magazines make clear the distinction between editorial and promotional copy, so will good broadband content providers. Think about Google now – it wins your business because it offers fast and independent search, but it also places paid for promotions on its front page. Both services are of value – but only because they are clearly identified as being different. If Google lost our trust in its independent search, it would quickly lose our custom. Audiovisual content delivered via an enhanced “Google – type interface” will look to develop similar funding models. We need to be ready for those changes.

How much difference will it make?

If we take these relatively modest steps, will we solve all the commercial broadcasters’ problems? Probably not.

The fact of the matter is that, even in the US, product placement is generating only around $1.9bn a year. Sounds a lot? Not compared with total TV ad spend of 55bn. (i.e. about 4% of the total). In the UK, we are probably not talking about much more than £100m a year in total. And not all of this will be a net gain – some will be displacing traditional advertising spend. But it is expected to grow, and could certainly help broadcasters at the margin, faced with pressures from PVRs and other competitive challenges.

Likewise, sponsorship – currently worth in the UK around 3% of total airtime sales. Again, relaxation of sponsorship rules may not deliver big new revenue flows, but could help shore up declining revenues across the business.

As I said at the start, we can do something to help, but not as much as you would like to think.

But in the longer run, as this conference is suggesting, the future beyond advertising will depend much more on what the broadcasters can do themselves to generate new income sources, than on what the regulator can do to help protect the old ones. Whether it is interactive revenues, or micropayments, or a new credit card, more radical options need to be pursued, and they need to be pursued urgently.

Our job at Ofcom is twofold – first, not to get in the way of new developments, where they can benefit viewers, and second to help out with the existing rules where we can – always balancing the interests of viewers with the health of the businesses we regulate.

We are about to publish our new broadcasting standards codes, which will – after extensive consultation – update our codes on sponsorship and commercial messages, as part of a much bigger overhaul of the codes.

Over the next few months, as mentioned, we will carry out detailed research into trends in broadcasting funding sources, so we can be in the best possible place to take decisions about funding rules, as the market evolves. This will include a detailed look at product placement.

In the early part of next year, we will be reviewing the advertising market more widely, as a precursor to a review of the CRR, and advertising minutage rules.

If we get all of this right, - and we will take this at a measured pace with a full consultation - we should have a competitive framework which helps support a strong commercial TV sector for some time to come – to the benefit of broadcasters, advertisers and, most of all, viewers.