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Newspaper Society Annual Lunch, 17 May 2005

David Currie, Ofcom Chairman

Thank you for inviting me to speak today. I would like to say something about the creation of Ofcom, describe briefly our main strategic objectives, touch on our limited advisory role with respect to media mergers, and then look forward to some of the challenges that will change the nature of business and regulation in the electronic communications sector.

Introduction: Establishing Ofcom

There is understandably in many quarters concern about excessive regulation, and a wish to see regulation rolled back. I think it is important to see the creation of Ofcom in that perspective: as a rationalisation and simplification of regulatory structure. We merged five separate regulators into one. And in the process we have got smaller. We now have 32% fewer people than the predecessor organisations and lower running costs. We said we would take 5% out of operating costs on the merger of the five predecessor regulators. We did so. We promised we would take a further 5% out in 2004/5. We have done so. And we have promised to take a further 5% out in the coming year. Our budget is set to do so. We are set to be an RPI minus regulator going forward. This comes from our genuine desire to deregulate where we can. So although we are sometimes referred to in the press as a “super-regulator”, a phrase that I dislike, we are and will continue to shrink, subject to one important proviso: that our Parliamentary masters do not give us more things to do.

I mention that because the Communications Act – the handbook we must follow –doubled our statutory duties when compared to the five legacy regulators. So we are, as an organisation, required to do more, while being fewer in number and costing less. And we’re even managing to absorb some £8 million of VAT that we are required to hand over to Gordon Brown that the old regulators did not have to pay.

Ofcom also aims to be genuinely different from its predecessors. We have recruited 200 new staff from the City, from the businesses we regulate and the private sector more generally. Three quarters of our senior staff have been so recruited. That creates a genuinely new mind-set, with a strong experience and knowledge-base which is practical – not theoretical and which is, I believe, unashamedly technocratic and – for good or ill – more commercially focused than were the previous regulators.

Ofcom’s involvement with the Press

Especially with this audience, it is important to emphasise that our responsibilities do not include oversight of the newspaper industry - and rightly in my view. However, in one area - and one area alone - Parliament has given us an area of statutory responsibility which is of interest and importance to the industry, relating to our work in media mergers. For completeness, it is worth my explaining our role in a newspaper or cross-media merger - and, more importantly, explaining what we do NOT do.

The first and most important point is that our involvement is at the discretion of the Secretary of State for Trade and Industry. If he believes that a proposed merger raises questions about plurality, Alan Johnson can issue an Intervention Notice requiring Ofcom to conduct a public interest test. However, without an Intervention Notice, Ofcom has no role whatsoever beyond specific requirements related to broadcasting if one of the parties is a television or radio licensee.

The second important point to note is that our role is advisory only. We conduct research and make recommendations to the Secretary of State; however the decisions are his alone. In that sense, our role mirrors that of the OFT in competition matters. To be clear, we do NOT have a veto, nor do we seek one.

Finally, should the Secretary of State choose to refer the merger to the Competition Commission, it is the Commission which would assess both matters of public interest and matters of competition. Its final decision would be binding upon the Secretary of State on the competition aspects, but would take the form of a recommendation to the Secretary of State on the public interest aspects. Again, the final decision on the vital public interest points would rest not with the regulator, but with an elected representative.

Ofcom’s Regulatory Approach

My experience is that people’s reaction to regulation can vary enormously. Some fundamentally reject the whole idea of nannying protection by a regulator. I suspect that many of you here – newspaper proprietors and journalists from a powerful and important tradition of press freedom in which professionalism and self-regulation are paramount - share that view of regulation as anathema. However, at the other extreme, others look to the regulator to control everything and to ban anything that they do not like. My own view is, not surprisingly, somewhere between those two, but somewhat closer to those who want regulation out of the way.

At Ofcom we believe that effectively functioning markets, rather than regulation, are the mainspring for the delivery of innovation, quality and choice for consumers and for citizens. Ofcom’s interest is therefore to support the growth of a healthy and dynamic communications sector, to assist markets to work effectively through competition and informed consumers; and to protect consumers from demonstrable abuses of the market.

We have set ourselves core principles for how we will act. The overall effect of those principles can be encapsulated in the term a bias against intervention - quite a difficult thing to achieve with more than 250 statutory duties to honour. “A bias against intervention” certainly does not mean regulatory roll-over; instead, we see ourselves, in intervention terms, as a place of last resort, not least because of the doctrine of unexpected consequences.

Ofcom will not intervene where the functioning of a truly competitive market is already meeting the appropriate needs of citizens and consumers. If Ofcom does need to step in, we will, first and always, seek to facilitate a quick outcome with the stakeholders concerned rather than resort immediately to detailed regulatory measures. If intervention is required, we are committed to ensuring it is fair, prompt and effective. This may mean the timely and proportionate application of our powers as the regulator. It may also mean an attempt to facilitate a resolution by encouraging greater negotiation between the parties to a complaint or dispute.

Similarly, we strive to be evidence-based and transparent and to better understand evolving markets. We work hard to avoid devoting too much time with the “big guys” in the industry. We frequently spend time meeting new entrants and smaller companies, who have often proved to be those with innovative ideas and approaches.

We want our regulatory approach to maximise certainty for our stakeholders. And we also want to be ahead of the curve on changes in technology, expectations and public policy. We certainly don’t want to end up with Parliament and Europe in a frenzy of moral panic on any communications issue in the absence of considered debate, informed by evidence.

A good example of this is considering what should Ofcom’s regulatory approach be to the increasing capability for delivering television content over the internet.

The Communications Act and the creation of Ofcom were posited on this coming convergence between broadcast and broadband, and the need therefore for regulation to respond to this. If broadcasting – and indeed the printed press – is colliding with the internet, must their regulation also collide? And, if so, how and in what direction?

Maybe even three years ago the position was clear: television content was regulated; the internet was unregulated and never would be. Now many different sources, especially in Brussels, are questioning that view when considering television over the internet.

The Communications Act, rightly, in my view, gives Ofcom no powers over television content delivered over the internet. It follows inexorably that when your TV programme can be delivered via broadband alongside the conventional broadcast signal, Ofcom’s powers to regulate must fade.

However, there will be, and should be, a lively debate about whether content regulation of the kind that we are used to in broadcasting should extend to internet content. To fully inform that debate, in the year ahead, Ofcom will ask the following questions and will research the answers:

• firstly, is regulation of TV content over the internet practicable?
• Secondly, are there effective alternatives to direct regulation?
• And, thirdly, is regulation, on balance, desirable?

While I don’t want to say in advance what the research is likely to show, my hunch is that the answers will be:

• On the practicability of regulation of TV over the internet – probably not;
• On whether there are effective alternatives to direct regulation – definitely;
• And on the desirability of direct regulation – almost certainly not.

Even if feasible, my own view is that extending direct regulation is absolutely not the right response. It would give enormous succour to oppressive regimes around the world which seek to censor what their peoples can access. I do want to see parents given the knowledge and the tools to protect their children against inappropriate content. The need for such protected walled gardens is very high on the list of concerns that people have about the digital age and the internet sector is already responding to that need.

Subject to that, I think that the direction of travel should be towards better navigational devices, allowing people to find the content that they want, and avoid the content which offends them. Google meets Sky Plus with child protection. Smart navigators will be personalised, responding to our preferences and tastes, and will learn from the choices of others of similar outlook, as we are seeing in a rudimentary form on some websites.

The Next Five Years - Technological Change

So what is the communications landscape to which Ofcom will be applying its regulatory principles going to look like over the next five years? I have already mentioned the increasing reality of the convergence of broadcasting and broadband. Consumers are embracing new technology, craving more choice and control, and the market is delivering.

This is being aided by technology change in the network infrastructure – moving from analogue to digital. Currently, urban consumers can realistically expect broadband speeds of 4Mbps, allowing convenient and fast data downloads. Most estimates suggest that in 2010, over half of all UK households will benefit from blended average speeds of 10Mbps, making them video capable. However, universally available high-speed broadband that would be capable of supporting TV quality video will require the roll-out of fibre deeper into the network and this process, I suspect, will still be ongoing in 2010.

A by-product of this broadband roll-out will be the rapid growth of WiFi penetration and VoIP, the latter offering an appealing reduction in voice tariffs for consumers, but at the same time posing a worrying challenge to the pricing policies of infrastructure owners, especially incumbents. We might also expect to see commonplace public W-LANs in hot spots; the launch of Digital Multimedia Broadcasting; and digital video broadcasting for handhelds might make mobile television widely available.

In broadcasting in 2010 it is likely that we will be just two years away from complete switch-off of the analogue television signal. Consumers will have more choice and access to content than ever, and importantly, consumers will be in a much more powerful position to decide what to watch and when to watch it. At the moment, Personal Video Recorders are used in about 2% but in 2010 that number is likely to be more than 20% of homes, allowing viewers to manipulate traditional linear broadcasting into an on-demand and self-scheduled format.

This has major implications for the traditional advertiser-funded model of broadcasting, for rights management, and for regulation. A recent report suggested that the PVR is going to cost the ad industry around £500 million. Advertisers will therefore have to find new ways to reach customers, such as interactive, personalised, and location based advertising. This will not only be a challenge for advertisers, but for Ofcom too. We need to work with the advertising industry to ensure that advertiser funded content is universally available in the years ahead, and we will need to give serious consideration to the various options available to maximise those revenues. Sponsorship, advertiser-funded channels, and product placement are all mechanisms that we will consider developing to facilitate new revenue streams.

For the content providers, the increased variety of platforms in the future will open up many opportunities: advances in digital technology will reduce the cost of production; it will allow global distribution at minimal cost; it will enable more revenues to be obtained from archived programming. However, piracy will be a most worrying challenge for content providers to tackle in the future. Digital rights management systems should hold the solution to this increasing problem, but the greater challenge is to find the solution quickly.

Essentially, over the next five years we will increasingly be able to receive previously separate services that have been delivered on separate networks through any device over any network. As a consumer, this excites me. But as a regulator, this is a challenge.

Throughout this transition, Ofcom will apply the regulatory principles I outlined earlier. In practice a “bias against intervention” means that we will try to get out of the way. I have also said that we must encourage innovation and investment in the sector, and the best way to achieve this is by being somewhere else. In essence, an effective regulator must aim to regulate itself out of a job. This withering of regulation will be seen by some as a threat. But I see it as a proper ambition. The sector will be like the birth of the newspaper industry, full of vitality.

Finally, may I conclude by thanking you for the regional press coverage of Ofcom in the last couple of years. It has been fair, thoughtful and, on the whole, not too bad. We would prefer, in an ideal world, however, not to feature at all, because regulation should be like drains – if it is working, you should not hear, see or smell them. Our ambition is to be truly as unexciting to all of you in this room as you believe good regulation should be.

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