TEMPLATE

REGULATING COMMUNICATIONS IN THE AGE OF CONVERGENCE

Richard Hooper
Chair of the Radio Authority

14 February 2001

presented at a lunch at the Institute to Economic Affairs

It is an honour for a non-economist to be invited into these numerate portals.

In the fifteen minutes available I propose to address one question concerning the regulation of communications – a live subject with the consultation having just closed two days ago following the publication of the Communications White Paper in December. This one question yields some interesting dilemmas of special interest to economists and your counsel concerning them will be appreciated in the Question and Answer session that follows.

Why regulate radio (or any other) broadcasting in the 21^st Century ?

I find it a weakness of much current debate that the fundamental question Why regulate in the first place? is often glossed over, indeed forgotten. Now, my professional interest is in the regulation of commercial radio. That is why the Radio Authority exists, and has done so since it replaced the radio functions of the old Independent Broadcasting Authority a decade ago.

I have no doubt that the principles which underpin my answer to the question Why regulate? will be the same for all media, although for reasons that I hope will become clear, the answers may be different for each. But the same questions yielding different answers should come as no surprise to a roomful of economists.

It is interesting to note that, as we approach Ofcom, the unified and converged regulator envisaged in the Government’s White Paper, the reasons for regulating telecommunications are very different to broadcasting. The telecoms regulator is there to simulate market forces in the presence of incumbent telcos starting out with 100% of the market.

Why regulate broadcast media?

In our submission to Government in advance of the White Paper, published last July, my colleagues and I (that is to say the Members and Staff of the Radio Authority) were at great pains to explain the continuing need for some regulation of radio, albeit within a programme of reducing regulation.

Terrestrially delivered radio should be regulated for three reasons. (This thinking maps across to television as well, but I will focus on radio).

Radio broadcasting uses a scarce resource – the spectrum
The spectrum belongs to the public – it is a public resource
Thirdly, broadcast radio is intrusive - it intrudes at the touch of one button into the home or car

Spectrum is scarce

In the press, the conventional wisdom resounds: "the digital technology revolution ends spectrum scarcity". Well as far as radio is concerned it doesn’t, or at least it hasn’t yet, and will not do so in the foreseeable future.

Today we do not have enough spectrum to move all our analogue licensees to digital radio frequencies. Many parts of the UK have no early prospect of receiving their valued local radio services by digital transmission at all.

And there remains tremendous interest in the little that is left of the analogue spectrum. We have just awarded a regional analogue licence in the West Midlands for which twelve companies competed. It was awarded to Saga Radio which plans a radio station for the over 50s, who make up over 40% of the region’s population.

There is, of course, no spectrum scarcity with the internet. That is why in our submission to Government ahead of the White Paper last summer we said we would not wish to license internet radio stations - there are some 9,000 currently webcasting from all over the world, getting a 1% radio audience share in the UK and around 4% in the USA.

If you have spectrum scarcity, someone somewhere has to decide who should broadcast, either via cash bids (national commercial radio) or beauty parades (local and regional commercial radio). The beauty parade system for awarding local licences is guided by four main statutory criteria. The Authority awards licences to those applicants whose proposals best meet the criteria. The decision is often a difficult one. If we receive a good standard of applications, then one criterion such as broadening choice might be the clinching factor – hence the award to Saga Radio.

Spectrum is a public resource

Secondly, the spectrum is a public resource. Thus in many countries spectrum brings with it some public obligations – essentially, to broadcast in the public interest. Note that this includes, but is not limited by, the group of services called 'public service broadcasting'. Public service broadcasting (PSB) has been a key part of the UK broadcasting scene since the establishment of the British Broadcasting Corporation in 1926, and the White Paper makes it clear that PSB must continue. Everybody appears to have their own definition of PSB, usually one which suits their own corporate aims!

We define the public interest pragmatically as:

Diversity of choice for listeners in all demographic sectors across the UK in both speech and music, including the provision of reliable and impartial news and information
local stations to reflect genuine localness and regionality
fair and effective competition between stations for the benefit of listeners
appropriate pluralism of ownership
quality in radio output
reasonable access to both listen and to broadcast
radio content to meet prevailing standards for the protection of human dignity and the prevention of harm
the disciplined use of the radio spectrum
the maintenance of a healthy radio industry

We feel that if you pay for your spectrum in radio, then the public interest is to a large extent served by the resultant Treasury income generated (£10.4m last year from the three national commercial stations, Classic FM, Virgin and TalkSport). If you do not pay for spectrum, then the regulator requires that you have care for the public interest alongside (and overlapping with) the commercial interest of building shareholder value. For example we are required by the Broadcasting Act 1990, as already mentioned, to encourage choice and quality in radio through a system of controlling formats of radio stations (speech, classic hits, dance, adult contemporary, rock, jazz etc).

We are absolutely clear that, when you have only a limited number of outlets - back to spectrum scarcity again - Hotelling's effect applies, and left to themselves operators will seek the centre ground. The centre ground of commercial radio focusses on overlapping popular music genres for the 15 to 35 year olds whom advertisers so ardently desire to reach. Thus, as the White Paper acknowledges, you need to regulate for plurality when the circumstances of limited spectrum exist. Choice and quality would not necessarily happen if market forces tempered by competition law alone ruled.

This is where media regulation differs, again, from telecoms regulation – in telecoms, pursuit of competition delivers by itself the public interest. The proposed convergent regulator OFCOM will have to be careful about this important distinction.

You may very well argue that radio does not constitute a proper market in that the listener does not pay for his or her stations. If the market wasn’t mediated through a third party – the advertiser – then it might behave like a more normal market under circumstances of proper competition. There are signs that this could be happening with pay television. Unfortunately there is not much evidence yet of a market for pay radio.

It is interesting to note in Australia (which I have just visited) and the USA, two countries where spectrum is less scarce because of geographical distance from other nation states, the debate rumbles on as to whether competition by itself, in a country with many more outlets, much more spectrum, will yield diversity and choice for the radio listener (or television viewer). I am not aware of any really definitive research on this fascinating and important economists’ question. Our current view, based on the rather scant evidence we do have, is that competition even with lots of stations in a market does not yield the totality of the public interest and therefore some kind of external sectoral regulation is required.

There is a related argument that if radio ownership is further consolidated as has recently been allowed in the USA then owners with five or six stations in a market will not compete against themselves and thus greater station diversity will happen. Again the research on this that we have seen is not altogether convincing. Indeed in the USA, the FCC under Clinton was pushing, against vehement opposition from the industry, for new low power licences because of the FCC’s concern about the decline of localness following ownership consolidation. Perhaps we could tease these dilemmas out more during questions.

Before I move to the third reason for regulation, I would like to mention a further dilemma on which you may also have views. What should the regulator do when there is no spectrum scarcity as in less populated parts of the UK, further away from the continental mainland, eg west Wales. We recently awarded a licence for which there were two applicants even though there was sufficient spectrum to give licences to both. The argument goes as follows.

On the one hand, if there is no spectrum scarcity which is the fundamental reason for regulating in the first place, and if there are good men and women and true with sufficient funds who wish to run a radio station, then the regulator should be cautious about making market decisions and saying the spectrum should remain silent because the market in question cannot take another outlet. If the resultant station or stations go bankrupt, that is not the regulator’s responsibility.

The opposing view, which currently has the upper hand amongst my well informed and committed Authority of three women and five men (all good and true!) goes like this. The spectrum in west Wales may not be scarce but it is still public. Therefore, rather than licensing two inadequately funded and poor quality stations, it is better to make a market judgement and say only one station can be justified. The industry would no doubt add – you the Regulator should always have care for the health of the radio industry and not license too many competitors for a relatively fixed pot of advertising gold and audience ears. I have to admit as Chair, I get nervous at about this time in the argument when the regulator is being encouraged to protect licensees from competition.

Radio broadcasting is intrusive

Finally, irrespective of whether the spectrum is scarce, radio broadcasts are intrusive. Therefore there should be some content regulation that is in line with commonly accepted standards. A very obvious aspect of the public interest argument. The White Paper uses the phrase "community standards" which leaves us uncomfortable. You could imagine all sorts of 'communities'; even, say, of child abusers. We prefer the term "society standards". It is, if you go along with Max Weber, "Gesellschaft" rather than "Gemeinschaft". All this used to be called more prosaically taste and decency!

Conclusion

So I have set out the three reasons for regulation of broadcasting, and identified two economists’ dilemmas – in a market with many spectrum outlets, mediated by the advertiser, would competition by itself yield the public interest? Should the regulator make market decisions and ration licences where there is no spectrum scarcity?

Let me finish with a picture of the London commercial radio market at the beginning of the 21^st Century.

I do sometimes wonder if those whose listening may be limited to one or two stations (and that means an awful lot of people) fully comprehend the vast range of services which commercial radio now provides in the larger towns and cities. Here in London, for instance, you can listen to Greek or Turkish-language radio, to services primarily directed towards the Afro-Caribbean community and towards Asian communities, services for sports enthusiasts, for those whose music tastes run to jazz or to classical music as well as to different genres of pop. There is a Christian station, Premier, and another, Liberty, which is aimed primarily at a female audience; a rolling news service and a news-talk station. There are stations whose remit is to serve communities within the metropolis – Lewisham, Thamesmead, Kingston, Havering, for instance. And these are just some of the analogue radio stations, not to mention the 27 new digital radio stations now broadcasting across London.

This diversity of choice produced by a regulated system, combined with sensible levels of pluralism of ownership, is I hope a more tangible answer to the theoretical question: Why regulate?