Advertising regulation review: publication of econometric analysis, and next steps
1.1 Ofcom is today publishing an independent econometric study of the demand for TV advertising. It provides one of a range of inputs into a review Ofcom is conducting of current rules on the amount of advertising permitted on television. Amongst other issues, we shall also be looking at the impacts on the TV advertising market of possible changes to the Airtime Sales Rules, and the recent decision of the Competition Commission to retain a modified version of the Contract Renewal Rights arrangements.
1.2 Ofcom will be publishing a consultation on the review in due course, and will invite views on the options it will set out. To allow time for interested parties to consider the econometric analysis, we shall be deferring this consultation until later. As a result, any changes to rules that might have a significant effect on the market will not take effect until 2012. Any decisions that Ofcom takes as a result of the review will need to take account of the full range of our statutory duties, including those summarised in paragraph 1.14 and 1.15 below.
1.3 Following changes to the European framework for advertising regulation (-1-), Ofcom began a comprehensive review of television advertising regulation in 2007. Stemming from earlier stages of the review, Ofcom published a much simpler set of advertising rules in the Code on the Scheduling of Television Advertising in 2008 (-2-).
1.4 The next stage of the review will consider whether or not to apply common rules to all channels on the amount of television advertising, and if so, what those rules should be. In this connection, Ofcom has already published a consultation on whether the Airtime Sales Rules (including the requirement to sell all advertising airtime, which applies only to public service channels) should continue in force, or whether they should be modified or scrapped.
1.5 Ofcom expects to consult in due course on whether or not the stricter rules on advertising minutage that apply to public service channels should continue, or whether the same rules should apply to all broadcasters, and if so, what those should be.
Previous econometric analysis
1.6 In order to be able to model how changes in the rules on the amount of advertising impact on different stakeholders, we need analysis of the responsiveness of prices to changes in the volume of commercial impacts and also how viewers might respond to an increase in the amount of TV advertising.
1.7 Modelling work carried out by Ofcom at an earlier stage in the review process was based on an econometric study conducted by PwC (-3-) for Ofcom in 2004. However, in the course of the consultation process stakeholders raised a number of concerns about the use of the PwC study. In general terms, those concerns were that:
- the earlier econometric study on which Ofcom had based its modelling was developed for the purposes of forecasting growth in television advertising revenue. It was therefore not appropriate to use the estimates of the responsiveness of price derived from this econometric model to model the impact on revenue from changes in the amount of advertising minutage;
- as the dataset on which the study was based only went up to 2002, it could not take into account more recent changes in the operation of the market, including effects of the imposition of CRR (-4-) from 2004;
- the estimates of the responsiveness of price derived from that study were not sufficiently disaggregated to allow a proper assessment of the impact on different broadcasters. While the PwC study distinguished between public service channels and other channels, it did not provide estimates of the responsiveness of price at the level of individual broadcasters. Furthermore it did not generate specific estimates of cross-channel effects e.g. the impact on Five of changes in ITV1's minutage; and
- the study did not incorporate the viewer side of the market into its analysis.
Current econometric analysis
1.8 Responding to these concerns, Ofcom commissioned Analysys Mason and Brand Science in October 2009 to carry out a new independent econometric study. Analysys Mason/Brand Science was assisted by Professor Greg Crawford of the University of Warwick as their economic advisor. The study makes use of data for the period 2002-2009 on the prices actually paid by media buyer OMG to broadcasters.
1.9 The updated study is intended to derive estimates of both own and cross price elasticity effects of changes of advertising minutage on broadcasters. The econometric study also looks explicitly at the viewer side of the market i.e. the response of viewers to changes in the amount of television advertising.
1.10 The analysis enables us to derive estimates of:
- the responsiveness of prices (measured in costs per thousand (CPT)) to changes in the volume of commercial impacts delivered by different broadcasters as a result of changes in the volume of minutage; and
- the cross-effects (e.g. the impact on Five's prices of changes to the minutage on ITV1).
1.11 The results suggest that:
- if C4 or Five were unilaterally to increase their advertising impacts, then their CPT would fall, but by a less than proportionate amount. In other words, if they were to show more advertising, their revenue might be expected to increase;
- on the other hand, if ITV1 were unilaterally to increase its advertising impacts then its CPT would fall by a (slightly) more than proportionate amount. In other words, if ITV1 were to increase the volume of advertising, its revenue might be expected to fall;
- the CPT of non-PSB channels would fall if C4 were unilaterally to increase its advertising impacts, but a corresponding move by ITV1 might not affect the CPT of non-PSB channels; and
- viewers are not particularly responsive to changes in the amount of advertising minutage.
1.12 However, once the cross effects (e.g. the impact on Five's price for advertising if ITV1 were to change the volume of impacts it delivered) are taken into account the position becomes more complex. We shall be considering this in more detail in the modelling that Ofcom will undertake over the next few months, the results of which will be published in our consultation.
1.13 In developing our own modelling of potential options, Ofcom expects to apply the findings from the analysis about how prices might respond to changes in the amount of television advertising. We shall also be looking at other factors, such as possible changes to the Airtime Sales Rules, and the recent decision of the Competition Commission to retain a modified version of the Contract Renewal Rights arrangements, amongst other issues.
1.14 Ultimately, any decision we make will need to be taken in light of the full range of statutory duties under the Communications Act 2003. These include, in particular, furthering the interests of citizens and consumers by securing (amongst other things):
- the availability throughout the UK of a wide range of television and radio services which (taken as a whole) are both of high quality and calculated to appeal to a variety of tastes and interests; and
- the maintenance of a sufficient plurality of providers of different television and radio services.
1.15 In performing our duties, we must also have regard to a number of specific matters, to the extent they appear to us to be relevant, including:
- the desirability of promoting the fulfilment of the purposes of public service television broadcasting in the UK;
- the desirability of promoting competition in relevant markets; and
- the desirability of encouraging investment and innovation in relevant markets.
1.16 Ofcom's regulatory objectives on which we consulted at the start of the review process and which were repeated in the May 2009 statement, reflected these duties.
1.17 We anticipate that broadcasters and other interested parties may wish to review the findings of this study, as well as the underlying econometric analysis and may have comments and questions (-5-). With that in mind, we shall defer publication of the consultation document on the next stage of the advertising regulation review until later. This will mean that any changes that might have a significant effect upon the market will not take effect until the beginning of 2012.
1.18 It should be noted that Analysys Mason and Brand Science have also carried out some scenario analysis which is set out in an annex to the econometric report. The scenarios that the consultants chose to model are ones developed by the consultants and should not be regarded as prejudging the options on which Ofcom may consult.
1.19 While Ofcom will consider suggestions from interested parties, our starting point will be the options set out in the second stage of the review in October 2008, including extending the rules that apply to public service channels to other channels or vice versa (-6-). In the light of the econometric analysis, we may also include other options that would constrain the growth of advertising impacts, in order to limit adverse impacts on advertising revenue, including capping hourly advertising at 10 minutes, and limiting the hourly average to 8 or 9 minutes.
1.20 The econometric analysis is based on the television advertising market in the UK, and so does not shed any light on the impact of possible rule changes on Ofcom-licensed broadcasters operating in other markets. Ofcom is therefore inviting non-domestic broadcasters to provide evidence on the impact that changes in the regulation of television advertising minutage may have on them.
Ofcom, May 2010
1.- The Audiovisual Media Services Directive, an amended version of the Television without Frontiers Directive (http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2010:095:0001:0024:EN:PDF).
2.- Code on the Scheduling of Television Advertising Regulatory Statement, Ofcom, May 2009 (http://stakeholders.ofcom.org.uk/binaries/consultations/rada08/statement/costa.pdf). The current version of the code can be found at http://stakeholders.ofcom.org.uk/binaries/broadcast/other-codes/tacode.pdf.
3.- Economic Analysis of the TV Advertising Market, PwC, December 2004 (http://www.ofcom.org.uk/research/tv/reports/tvadvmarket.pdf).
5.- Interested parties with comments or questions relating to the econometrics analysis may contact firstname.lastname@example.org.
6.-Review of television advertising and teleshopping regulation Stage Two, Ofcom, October 2008 (http://stakeholders.ofcom.org.uk/binaries/consultations/rada08/rada08.pdf)