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17|07|08

Some inconvenient truths

David Currie, Ofcom Chairman

Introduction

Good morning. I am grateful to London Business School for hosting this morning’s event. It is the first in a series of Ofcom talks leading up to the publication of Ofcom’s Phase Two report on Public Service broadcasting in late September.

Today is an opportune occasion: Ofcom is publishing a 20 page summary of the voluminous responses we have received to our Phase One report from over one hundred and fifty organisations plus numerous individuals. This is an unusual role reversal: usually it is Ofcom that publishes the 700 page version and you that come back to us on twenty pages. Still, if we have got the summary right it should spare several more small coppices of trees being felled in the interests of knowing what people think about PSB.

Perhaps unsurprisingly, most of the responses were drafted very much from the perspective of those submitting them. Fair enough: if you do not argue for your own interests in your submission no one else is likely to do it for you.

But that leaves us with a challenge. There is a wide range of mutually exclusive views and propositions about the current, let alone future prospects for public service broadcasting in the wider market place. And, to be fair, some at least of the comments may be based on an imperfect understanding of some imperfectly expressed thoughts on our part from Phase One.

So, this morning, let me clear up a few of those; challenge some of the other propositions that have come in to us; set out a few truths, I believe incontrovertible, even if inconvenient; and chart a way forward to the sort of dispassionate but comprehensive analysis and options that Government and Parliament will need in order for them to be able set the right framework for strong public service broadcasting and public service content in the post digital switchover world.

Areas of Agreement/ Interesting Ideas

Let me start with the limited but nonetheless solid ground where there is a wide measure of agreement in the responses.

The first is a wide recognition of the role that the market now plays in the digital environment; and the broad range and diversity of services that purely commercial digital channels now offer. That is not simply an assertion from those you would expect to make it – Sky, Discovery, the SCGB etc - but also from the established Public Service Broadcasters.

We are now truly in a mixed economy for digital content. There is a considerable body of material produced by the market that meets public purposes. And by no means everything that the “public service broadcasters” put out does so.

Herbert Morrison argued that “’Socialism’ is what the Labour Party does at any given time”; the main networks used similarly to argue that “Public Service Broadcasting was whatever the public service broadcasters transmitted”. It wasn’t true then; in the spotlight of wider market provision it is evidently not true now. That has a bearing on the ecology of a new public service model which I will come to shortly.

Imported digital content too has its part, and not just in showing us how good some overseas broadcasters can be at drama or comedy: imports can also meet at least some of the public purpose of explaining the world around us also, whether in history, performing arts, science and natural science programmes.

I say this to clear up one misapprehension, which is about the importance we have attached to UK origination. It is not an end in itself as if it were a piece of industrial policy. It is a means to an end – the delivery of public purposes. Not the exclusive means but a vital one nonetheless – most of the public purposes of audio-visual content can only be met through originated content.

As we suggested in our first PSB report, market provision may now be such that the consumer market failure arguments that sustained the old rationale for PSB, have been superseded. We are left largely with the citizenship arguments. Some stakeholders have argued persuasively that this means that we need less intervention to meet public policy goals- a point we will return to in our Phase 2 Report.
Some, like Sky argue for the “ever increasing” role of the market. Would that that were true. In distribution and technical coverage innovations the market and Sky in particular continue to excel, though the publicly funded BBC has been no slouch with the iPlayer (enabled, we should remember, by the huge strides in broadband deployment over the past few years).

But in content provision the evidence is that the market has reached a plateau. That is the first inconvenient truth that polemic will not wish away.

Some submissions argue that this is because of crowding out by the PSBs. This is implausible. The PSBs total share of viewing and the direct and indirect level of inputs to the PSBs have shrunk in recent years. If crowding out were the issue, market provision would have filled the gap. It hasn’t.

It is the very channel and audience fragmentation that challenges public service broadcasting that militates against the growth of market led origination. The Discworld dramas that Sky point to, with justifiable pride, may continue to be the exception not the rule. Absent movies and sport, the four public service broadcasters still account for 90 per cent of UK origination.

Which takes me to the second point of agreement in the responses. That is about the role of a strong BBC as the cornerstone of public service broadcasting. It is welcome that this was, if not absolutely , a very nearly universal view in the responses. (There was one, in green ink, that differed.) Welcome, because there are still noises off, including recent pamphleteers to free-market think tanks who argue that British broadcasting would somehow be richer or better with a minimalist BBC.

Our view is straightforward: you do not strengthen public service broadcasting by weakening the BBC.

Of course, the mixed market puts a premium on a BBC which is true to its purposes. A crucial role for the BBC Trust, as is their part in managing the debate at the margins, when the BBC Executive wish to launch new services. All processes are imperfect but the Public Value Test has proved an appreciable improvement on what went before. And the good collaboration between the BBC Trust and Ofcom over our role in conducting Market Impact Assessments has helped – so far – to ensure that the BBC’s new services condition the market not foreclose it.

There are too some potentially interesting ideas in the BBC’s response about using BBC assets and expertise in collaboration with other public service broadcasters; though it is important to distinguish collaboration in distribution and technological advances from content issues where editorial independence is essential if plurality is to be maintained; and to recognise that such collaborative ideas on their own would not fill the emerging gap in the sustainability of commercially provided PSB.

The third area of broad agreement is that online content will become increasingly prevalent and important in the mix. And that there is a substantial amount more online content that meets public purposes than anyone thought likely when we produced the first PSB Review three years ago. The issue with it is, in an inelegant word, “discoverability”. Many individuals do find this material but, by comparison with the mass medium of television, the numbers who navigate to them remains small in the overall plethora of internet content.

In that context, the idea from both the BBC and Channel 4 that the publicly-owned PSBs can play a role in partnership with other providers of public purpose content, providing a mass access shop-window, cross promotion and signposting, is an interesting suggestion and one that bears fleshing out in the weeks and months ahead.

Areas of Contention

So much for the solid ground where there is broad agreement. Let me move on to the marshier areas of contention. There are four broad areas here.

Firstly, an argument over means and ends with plurality, universality and origination.

Secondly, the sustainability of commercial public service broadcasting provision.

Thirdly, the relative role of institutions and competitively tendered contract in securing public service content.

And finally the future funding of public service broadcasting, both the quantum and the method.

Let me take these in turn. A few submissions argue that with the enhanced provision from the market there is much greater diversity, so plurality is much less important; and it should only be a means to an end alongside innovation and distinctiveness.

To confuse ‘diversity’ and ‘plurality’ is like confusing share and reach. You can have some diversity, in the form of a family of programmes and channels covering different genres or topics but the same authorial voice behind all of them. You can have diversity in the form of much different imported programming; but a diversity that says little about the society the audience inhabits.

Nor does distinctiveness simply happen. It is the product of different cultures, different commissioning bases - plurality in other words.

Plurality is valuable both as a means to an end- competition for quality- but also as a value in itself in a diverse democratic society and market economy. The questions are how far the market can deliver plurality in PSB objectives without intervention; and if intervention, is a BBC-only model the right or best one.

There may be areas where plurality does not matter that much. Audiences tell us for example that they are less concerned about plurality in religious programmes. But there are genres and areas where distinctive voices remain vital.

Some argue that a focus on plurality in PSB comes at the expense of reach and impact, as a fixed quantum of intervention is fragmented between different organisations.

The fact is that different organisations with different cultures, brands and remits can enhance the reach and impact of public service broadcasting by reaching different audiences: Channel 4, for example, has been more successful than the BBC in reaching young people and ethnic minority groups.

A more sophisticated version of the argument is that form follows funding and that intervention in the form of public funding is best channelled through the organisation whose form has already been shaped by public funding i.e. the BBC. Empirically, there is some force in this argument; though it is not a show-stopper. What it says is that great care needs to be taken in the form any public intervention takes and in the remit, design and accountability of any privately- funded body in receipt of that intervention. That this is at least possible is shown by the existence of S4C.

There were few takers, either in the responses or in our research, for a BBC-only model of PSB. But those who privately – for whatever reason- would not mind such an outcome need not nail their colours to that mast. All they need do is argue for an evolutionary model, while denying the necessary means to sustain it.

So let us have a clear-sighted debate about where plurality will or will not remain necessary in the new PSB model and, where it is necessary, how best it can continue to be delivered.

Turning to the issue of universality, Sky argue that the concentration on free-to-air is a shibboleth; that voluntary subscription is at least as valid as the compulsory subscription that the licence fee represents; and that to get on-demand services like the i-Player a subscription to an ISP is a prerequisite, so what are the odds?

These arguments deserve to be addressed seriously. Sky have a point when their arguments apply to the old ‘consumer’ market failure rationale.

Universality is not an end in itself but a means to an end: successfully meeting the citizenship rationale for public service broadcasting. That requires reach and impact. As an empirical fact, reach and impact continue to be delivered best on the universal free-to-air networks. The figures speak for themselves: a hard-edged high public service piece of investigative journalism like Channel 4’s Undercover Mosque gets “only” 1.4 million viewers on its first showing. But by contrast the most popular show from all of the multi-channel universe that week (excluding time-shifted editions of network soaps) got an audience of less than half of that figure. In total, channels run by the four networks account for 16 per cent of the total television output today but 70 per cent of the viewing. (That may change over time but securing reach and impact is one of the challenges identified for the pure competitive funding scenario for future PSB delivery).

I have already touched on origination where the PSB’s produce the lion’s share.

However, as the economic pressures in the commercial PSBs intensify, the incentives are to originate over a narrower range of genres; to originate more narrowly within genres like drama – so innovative one off dramas like The Government Inspector become increasingly rare, or higher production value series like Kingdom, Foyle’s War or Doc Martin give way to cheaper, more routine police procedurals. And indeed that the overall level of originations declines.

In their otherwise upbeat response, five note the pressure on origination. Michael Grade simplifies ITV’s proposition to: “lift all regulation from us so we can continue to originate and give the public good programmes”.

The BBC’s optimistic view of the Commercial PSBs’ prospects appears to be based on a misunderstanding. It confuses changes in ITV’s total revenues with changes in the net costs and benefits of PSB over what is in ITV’s pure commercial interest – ie what they would show anyway – an entirely different calculation.

ITV may overstate the costs and understate the benefits. What is beyond doubt is that the value of PSB benefits drops rapidly and the point at which the costs of the public service obligations in a Channel 3 licence exceed the benefits will occur well before 2014; earlier in some C3 franchises notably Scotland. In these circumstances ITV plc’s relationship with the Nations poses particular challenges.

Political wishful thinking will not change those facts. That is the second inconvenient truth. But that penny has not dropped until now, and not just in relation to ITV but to the advertiser funded broadcasters as a whole.

People confuse Ofcom the Messenger with the message. They assert we are ‘letting ITV off’ or have been hoodwinked. Far from it. We would be delighted if the numbers looked different. But they don’t. The current down-turn will accentuate the pressures.

So we need a clear-sighted view of what the public policy priorities are in relation to ITV. Whatever the future compact it will need to be much more limited, explicit and transparent than hitherto.

And flexible. Tying regulatory benefits- spectrum assets - for years on end to an institution with fuzzy and meaningfully unenforceable public obligations seems a poor model for the rapid transition we expect in the media landscape over the next decade.

The same goes for five.

As for Channel 4, the concern from other broadcasters about the terrible damage that would be done to C4 if it were to receive a penny of external funding is almost touching. And the proposition that one should have a clear and defined remit first then work through how to fund it is evidently sensible. It is a pity how few followed through the logic of their proposition by commenting in any depth on Channel 4’s vision which is at least an attempt to propose a clear role and remit for the period ahead.

As with ITV, the precise point at which the current PSB-funding model for C4 becomes unsustainable is uncertain. Channel 4 can do more via self-help- and probably more than they believe they can. But even with vigorous self-help cross-over is likely to occur within the timescale of the current PSB Review. To pretend there will be no problem is wishful thinking. To conclude that C4 must settle for managed decline in its public purposes is a dispiriting and ultimately futile course to chart for an organisation whose raison d’etre is to be innovative and distinctive.

Of course any change to C4’s funding model may produce changes to its DNA, and changes that would be undesirable. That is a danger we must be alive to; as we must to the state aid dimension of public funding, outside the current licence fee model, directed at any provider.

For a variety of reasons and interests only a limited number of respondents, such as Discovery, argued for competitive funding. The BBC argued that ‘direct interventions like contestability should only be used where institutional delivery is not feasible’.

The BBC focus on the “bureaucracy” involved. In economists’ speak that is transactional costs. But in competitive markets dynamic benefits often if not usually outweigh transactional costs. In this market too there are the benefits of transparency and accountability- an organisation that wins competitive funding needs to show efficient and suitable use or risk losing it next time around.

The BBC do however have a point that in certain circumstances an institutional model can deliver better than a competitive model. When the institution has the right incentives, capability and accountability, it can deliver objectives that are difficult to specify in contract or where contract terms can be easily gamed.

We may need a mixed approach. Tying all the intervention to a very limited range of institutions through very long-term licence, charter or statute may prove too inflexible for the rapidly changing media ecology we can expect.

On the quantum and method of future funding models most responses were very clear on what they did not want. Fewer on what would work. With the exception of the BBC’s audience survey which put forward Lottery Funding – itself a subset of our “Direct Funding” category – no one suggested a method we have not already canvassed.

The potential value of regulatory assets appears slightly higher now than at the time of our first Review. Even so, those assets, plus the BBC’s current spending would mean a significantly smaller quantum of intervention than we have been accustomed to in the past.

That would impose sharp choices on public policy priorities. But if Government and Parliament want any more than that they should have an honest and clear choice of the options open to them.

Which leads to my third inconvenient truth which is that one of their funding options is the digital switchover surplus. Some have argued that this does not exist.

It does and I will explain it as simply as I know how. There is a sum of £800 million over the lifetime of the current licence fee settlement which is not within the BBC’s baseline but which is administered by the BBC to help fund Digital UK and the switchover help scheme for the elderly and vulnerable.

The Licence Fee is not expressed in terms of so many billion pounds a year. It is set by Parliament each year in a Statutory Order as so many pounds and pence per Licence Fee. By 2012 the Pounds and Pence figure will have that £800 million factored in.

From 2013 switchover will have been completed and the annual expenditure that the £800 million funded will no longer be incurred. There is thus a switchover surplus. Government and Parliament have three choices at that stage.

They could reduce the Pounds and Pence figure in the 2013 Statutory Order – in effect giving the surplus back to every household in Britain through a lower licence fee.

They could put the money into the BBC’s baseline for the BBC to spend as it sees fit for example on new BBC services.

They could apply it to another purpose, including the funding of public service content by other organisations.

The BBC response asserts that the switchover surplus does not exist because it is already being applied to their sixth Charter purpose ‘building digital Britain’.

That assertion confuses two separate propositions:

• One, will the surplus exist? – to which the answer is yes.
• Two, is it right for the BBC to apply it pre-emptively to a new category of BBC activity? – to which the answer is no or certainly not without considering the alternatives fully first.

To deny the first proposition is simply to refuse to have the debate.

To argue about the best use for the surplus that will exist post-2012 is a wholly legitimate debate.

The key point is that the decision belongs to the Government and Parliament not to the BBC, not Ofcom, not anybody else.

The second substantive argument advanced is that using the switchover surplus for anything except the BBC would undermine the ‘unique link’ between licence fee payers and the BBC. The research evidence to back this proposition appears to rest on one quantitative survey question:
‘Because the public pays the Licence Fee, I feel more strongly about the BBC and its programmes and services than other broadcasters- agree/disagree’
Unsurprisingly most respondents agreed. But you do not need a doctorate in market research to spot some evident leaps in the argument to go from that to the ‘unique link’ proposition. It is like arguing proof of the link between the NHS and National Insurance by asking people whether they care more about the NHS because they are paying National Insurance.

There is a prior question: do people, unprompted, fully understand what the licence fee is used for?

Deliberative research suggests that awareness about what the licence fee is used for is low. Quantitative research shows that, even when prompted, while 80% think the licence fee funds television programmes on BBC 1 and 2, only 60% believe it funds the BBC’s digital services, 50% its radio services and only 40% BBC Online; and a significant minority believe that it currently funds commercial public service broadcasters. That is in line with the BBC’s own research from some years ago.

More research is on the way; for now the ‘unique link’ appears to be more an article of faith than an evidenced reality. But these are fine arguments about mechanisms- means not ends.

We do not want the debate to be about this issue alone. We have made clear there are several potential options for funding, including direct funding, industry levy and regulatory assets. I have focused on the licence fee issue today because it has been an issue of controversy. But not because we have ruled anything in or out - yet. If I may loosely quote that central bank wizard of ambiguity, Alan Greenspan, giving evidence to a Congressional committee: “If you have drawn a firm conclusion from what I have said, then you have misunderstood me”. Ofcom’s thinking is very much open, and what we want is a full and vigorous debate around the issues raised in our first PSB document.

Conclusion

Let me conclude on an optimistic note. We are in the midst of a revolution in the way our audio-visual content is delivered. Digital switchover has de facto occurred. Mobile broadband take-up is growing exponentially. And our already very competitive fixed broadband market is now going to the next stage, with Virgin Media’s roll-out of their very high speed broadband this Autumn and BT’s announcement earlier this week of a £1.5 billion fibre investment programme.

New forms of delivery create opportunities to beget new forms of content. And if we can help get the framework right, over the next decade Britain’s consumers and citizens will enjoy an audio-visual content environment that gives them greater choice, diversity, and plurality and which satisfies their needs for content that meets public purposes.

I hope that in this morning’s talk I have given you, if not answers – for we are not yet at that stage of our Review – at least a sense of how we see the landscape and what is important:

• A market playing a vibrant role in a mixed economy but not one that will magically deliver all public purposes.
• A strong BBC as the cornerstone of PSB.
• Plurality at least in several key genres and areas.
• Real pressures on commercial PSB and origination requiring a sharper focus on what we really want them to do in the ecology and a much more explicit and transparent public service compact.
• The need for a new model of funding, contract and institution for public purposes that is much more flexible than the traditional one, to rise to the challenges and take advantage of the opportunities that the rapid evolution of content and delivery in broadcast and broadband will throw up in the coming years.

Thank you.

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