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Methodology for Market Impact Assessments of BBC services

23 Gorffennaf 2010

Ofcom will employ the following methodology in carrying out all of its Market Impact Assessments. This methodology has been agreed by Ofcom and the Trust, in accordance with section 30 of the BBC Agreement. It is likely that the methodology document will be updated periodically, as Ofcom's experience in undertaking MIAs grows.

Introduction

Purpose of MIAs, how they fit into PVT

1.1 The new BBC Royal Charter and Agreement, which came into effect on 1 January 2007, provided for the establishment of a new Public Value Test (PVT) regime. The PVT must be applied before a decision can be taken to make any significant change to the BBC’s UK public services, which can include the introduction of a new service or the discontinuation of an existing one.

1.2 Under the new regime, the decision on whether to authorise such a change will be made by the BBC Trust (the Trust), following the application of a PVT. In reaching a decision on a PVT, the Trust must take into account the findings of two separate reviews:

  • Public Value Assessment ( PVA), carried out by the Trust Unit, which assesses the likely value of the service to licence fee payers, particularly in terms of its contribution to the BBC’s public purposes; and
  • Market Impact Assessment (MIA), carried out by Ofcom, which assesses the effect of the proposed service on other services in the market. It considers both the direct impact on consumers and producers of other services, for example in terms of price and choice, and the likely impact on competition and market development, which will affect consumer and citizen interests in the longer term.

1.3 This document sets out the approach which Ofcom intends to take in carrying out MIAs. It represents our current view of best practice, and is likely to be updated as our experience in conducting MIAs grows.

1.4 The guidelines set out below are intended to inform stakeholders about the approach Ofcom will take to MIAs. We may depart from this approach in particular cases but if we do so we will explain why.

Identification of impacts

1.5 The aim of Ofcom’s MIA is to be comprehensive in identifying all the significant market impacts arising from the BBC proposal. We seek to identify all of the ways in which other services are likely to be affected by the BBC proposal. We consider the effects on consumers and producers of other services, including those that compete with the proposed service as well as those in related upstream (e.g. suppliers), downstream (e.g. buyers) or two-sided (e.g. advertising) markets. We also ask what these impacts mean for consumers and citizens.

1.6 Account will be taken of both ‘negative’ substitution effects and ‘positive’ market creation effects.

  • The MIA considers the extent to which the BBC’s proposals are likely to induce substitution away from competing services and the ways in which that substitution may reduce investment in new services, and potentially reduce choice for consumers and citizens.
  • On the other hand, the BBC’s proposals are likely in some cases to generate substantial benefits to consumers and citizens. They may complement other services and thereby drive increased investment. They may also lead to an increase in consumer choice. These effects would have positive implications for consumers and citizens.

1.7 In general, the substitution effects are likely to be more significant and, as a result, MIAs may often propose modifications or conditions designed to limit the negative impacts which have been identified.

Impact on competition

1.8 It is important that identified impacts are traced through into implications for consumers and citizens. The fact that the proposed services are free at the point of delivery (although ultimately funded by the licence fee) potentially creates issues for competition and investment at various stages of the supply chain. To assess what the identified impacts mean for viewers and listeners, we need to ask how they affect competition and market outcomes i.e. price, service quality, innovation etc.

1.9 MIAs will consider both static and dynamic effects on services and markets and will adopt a total welfare approach, assessing changes in welfare for both consumers and producers:.

  • Static effects are concerned with the immediate, first-order impact of the BBC service on the demand for other services without taking account of how other service providers might respond, for example by altering their pricing policies or investment plans. This static assessment involves estimating the change in consumer surplus [ (-1-)] and producer surplus associated with shifts in demand for competing services.
  • Beyond the static effects of the BBC’s proposals, we are concerned with assessing dynamic effects on market behaviour, and the resulting impact on competition and market development. In particular, we are interested in the extent to which the BBC’s proposals might deter innovation and investment by the commercial sector, and potentially in the longer term by the BBC itself, if the market fails to grow as it otherwise might. Were commercial providers to be deterred from seeking to offer competing services this would ultimately have the effect of reducing choice for listeners and viewers, to the detriment of the public interest as a whole.

1.10 In some cases, the introduction of the proposed licence fee funded services would lead to a reduction in the usage of other BBC services.

  • Effects on other BBC public services (i.e. those funded through the licence fee) are excluded from Ofcom’s analysis, as they should be taken into account in the PVA. New licence-fee funded services may well impact other BBC licence-fee funded services, particularly if they involve the distribution of licence-fee funded content across new platforms.
  • Effects on the BBC’s commercial services (e.g. those offered through BBC Worldwide) are included in Ofcom’s analysis. For the purposes of the MIA, the BBC’s commercial subsidiaries (including BBC Worldwide) are treated in the same way as any other commercial provider. So it is important to note that where constraints are proposed on the scope of the licence-fee funded service under review, there are likely to be benefits which accrue to the BBC’s commercial subsidiaries and which are therefore available to licence fee payers through additional commercial revenue from the secondary and tertiary exploitation of licence fee funded content.

1.11 The assessment of effects is generally challenging because the proposed services are likely provided in newly emerging markets, the future size and characteristics of which are unknown, and difficult to predict. As a result, there will inevitably be a considerable degree of uncertainty around any estimates of likely impacts. As a general rule we will aim to quantify the quantifiable in a proportionate manner, taking account of uncertainty by expressing our findings as ranges where appropriate, through sensitivity analysis, and by attaching appropriate weight to qualitative, as well as quantitative, analysis.

Other regulation of the BBC

1.12 Apart from the PVT process, the BBC is subject to a number of other regulatory regimes which may address concerns raised by the MIA. It is important to take these alternative measures in to account when considering possible modifications to the service:

  • The Trust’s Fair Trading regime is designed to ensure that the BBC’s commercial activities are properly separated from its licence fee funded activities. The Trust is under a duty in the BBC Agreement to have regard to competition issues in ensuring the delivery of the BBC’s public purposes. The Trust has ex ante competition powers which can be used to prevent the BBC engaging in anti-competitive activities. The Trust will publish a new system of ex ante codes in areas where competition problems are likely to arise.
  • The Competition Act 1998 and Enterprise Act 2002 give Ofcom and the OFT ex post competition powers to deal with any anti-competitive behaviour by the BBC. If the BBC enters in to anti-competitive arrangements (Chapter I) or abuses a dominant position in a market (Chapter II), Ofcom can investigate the BBC’s activities and may penalise the BBC in accordance with the Competition Act. Similarly, Ofcom could include the BBC in a Market Investigation under the Enterprise Act.

1.13 In particular, although the MIA only applies to licence fee funded BBC services, concerns may arise in the MIA about the interaction between the BBC’s licence fee funded services and the BBC’s commercial subsidiaries, particularly BBC Worldwide. As pointed out above, the interaction between the BBC’s commercial subsidiaries and its licence fee funded services is regulated by the Trust’s Fair Trading regime and the competition implications of the BBC’s commercial activities are regulated by Ofcom as part of our concurrent jurisdiction over the broadcasting sector (Competition Act and Enterprise Act). However, to the extent that the relationship of a proposed public service to the BBC’s commercial arm is likely to alter the impact of the public service, Ofcom may consider this relationship and its implications for market impact as part of the MIA.

1.- This reduction in consumer surplus will need to be offset against the gross gain in consumer surplus from use of the BBC services – the latter will, by definition, exceed the former.

The full document is available below