The Future: A Regulator’s View by Ed Richards

SPEECH FOR ISBA ANNUAL CONFERENCE
THE FUTURE: A REGULATOR’S VIEW

Ed Richards, Chief Executive, Ofcom

Introduction

There’s a tried and tested routine these days whenever you’re asked to talk about “the future”.

It often involves the slow death of linear TV as a mass consumer proposition in the face of the inexorable advance of interactive technology, social networking and user-generated content.

It’s a forecast that dates back some years. It remains undiminished and undeterred by anything as inconvenient as hard facts.

In the dark days of post war communism, people in East Germany used to observe sarcastically that “only the future is certain. The past is always changing”.
I wonder if we are guilty of a mild form of the same ailment.

Somehow we seem sure that our future holds a particular outcome, and we are happy to adjust the past and even the present to fit that presumption.

Our own modest corrective to this tendency – of which we are sometimes also guilty – was some new research which we published a couple of months ago.

Our Digital Day study sought to identify, with more accuracy and more depth, what people were really doing in detail during a typical 24 hour period.

What we found was that, far from dying, television remains remarkably robust and strikingly central in people’s media consumption habits:

• 82% of all our video consumption is scheduled TV – a figure that is still as high as 70% among 16-24s.
• In prime time most people just watch TV – so-called “media stacking” is mainly the preserve of younger groups.

This adds to existing Ofcom research showing that overall television viewing over the past five years is up, not down.

And while that growth is mainly attributable to older age groups, even the decline in viewing hours among 16-24 year olds is not as dramatic as you might expect or as had been anticipated.

None of this is to deny or to seek to diminish the huge shifts in the broadcasting, media and advertising markets that you will be exploring in this conference today.

It is, however, to suggest that the new media landscape will be driven in no small part by a synthesis with television and television content, rather than separate to it.

As the television becomes the critical device in the home to be connected and to be interactive, we will see a shift in consumption patterns.

The dawning of fully-fledged on-demand platforms such as Virgin’s TiVo and YouView creates huge opportunities and challenges for our industry.

So my observation, from the point of view of a regulator which aims to be maintaining a strong grounding in consumer research, is that we should always keep in sight what consumers are actually doing and how they actually want to spend their time.

These are trends that you will all be aware of and understand how to take advantage of. But you will also know that there other things that affect the balance of the broadcast advertising ecosystem, and I’d like to turn to some of these themes now.

Recovery and change in the advertising sector

In 2009 I talked about the economic challenges and the need for a pragmatic approach to, what was then, very demanding conditions.

As ever in this fast paced sector, we find ourselves in a very different position.

The advertising market has significantly picked up since then; to a level few of us would have dared hope.

Growth was strong in 2010 and – at least in nominal terms – has made up for the losses suffered in 2008 and 2009. Companies such as ITV have indicated that the market grew at around 15% in 2010.

There is also an expectation that we will continue to see steady growth in 2011 and 2012.

Although this appears to be a good news story, speed of the turnaround in 2010 also demonstrates the volatility that can exist in this market.

We have also seen consolidation and change in ownership. We have effectively moved from seven to four sales houses with the disappearance of IDS, Viacom and GMTV.

We’ve seen wider changes, with the acquisition of Five by Richard Desmond and significant changes in senior management teams across the sector, notably ITV and Channel 4.

In the wider industry we have seen continuing technological change, if characterised by rapid evolution not revolution.

Against this backdrop now is a good time to consider three important sets of issues:

• Is the advertising market working effectively? Specifically, are there aspects of the way in which TV advertising is traded that could lead to consumer detriment?

• Secondly and more broadly, what do we want to achieve by regulating TV advertising. I ask that question not only from a competition perspective.

• Lastly, how might content regulation in general need to adapt for the future?

Is the TV advertising market working effectively?

First, the issue of the advertising market and the way advertising is traded.

This seems to have become a perennial anxiety, voiced by one or another party in one or another form and at various points in every one of the last five years, if not longer.

Most recently, last year, the Competition Commission requested that we examine this issue.

The Lords Communications Committee has echoed that concern.

A number of broadcasters, media buyers and advertisers, including ISBA, have also made their own positions clear – although it is noteworthy that some of these positions have changed through time.

In our advertising sales review last year we agreed with the CC and other stakeholders that the trading model is indeed complex and that the pricing is opaque.

We said that it is possible that some features of the market may interact with market power in such a way that restricts competition in the sector.

However, to date, we have not felt it was the right time to examine this issue fully.

This was partly because of the lack of a clear and consistent view or evidence about the harm which might arise from the trading model, and partly because of the severe economic downturn with which the sector was wrestling.

We are now in a different place.

In particular, the substantial recovery in the sector means that the industry is now in a much better position for a review of the trading model.

We are also aware that the way advertising is traded could be constraining or preventing the sector from evolving, as the media market around it is doing so rapidly and significantly.

So we have decided that the time is now right to consider whether there are reasonable grounds for suspecting that the trading mechanism prevents, restricts or distorts competition in the sale of TV advertising airtime.

We will make an assessment against this test, in which we will consider whether the trading mechanism may have a detrimental effect on consumers by virtue of its impact on competition.

This is a necessary step if we are to move beyond the somewhat general expressions of disquiet that have characterised this discussion so far.

Indeed, one further consideration in our judgement is the concern about the ability to secure clear and consistent views on this matter from interested parties.

By embarking upon a formal assessment we hope to be able to gather more reliable information and more consistent views.

It is therefore a real opportunity for the sector and others to come forward with views, on this very important question.

If we find there is a cause for concern about the trading mechanism (and we go in with no such presupposition), it will then be a matter for the Competition Commission to carry out a more formal review of competition in the TV advertising market as part of a market investigation.

There is therefore an onus on Ofcom to try and complete our assessment in good time and that is what we will endeavour to do.

What do we want to achieve by regulating TV advertising?

The second issue I want to touch upon is the role of regulation in advertising, specifically how much and how often advertising should appear.

Today’s broadcast ecology provides a huge and growing choice of programming for viewers.

Public service broadcasting remains crucial, but other advertising-funded channels are attracting a growing share of viewing and providing an increasing range and diversity of programming.

A great deal therefore rides on the outcome of any serious examination of the role of regulation in this area.

We’ve talked extensively to broadcasters, and to advertising interests- including ISBA – and we’ve listened carefully to what viewers have told us. We have heard a wide range of views with, it’s safe to say, very different opinions.

Everyone believes that change will create losers as well as winners.

Public service broadcasters argue that advertising regulation should be used to support them in delivering their public service objectives, both in peak and off-peak.

Other broadcasters argue that any new rules could shift revenue away from them and to the public service broadcasters.

Advertisers are torn between a concern that increased advertising will diminish the value of television as a platform for advertisers, and an equal and understandable concern that any reduction in minutage might lead to higher advertising costs.

And viewers are concerned about any move towards a US-style outcome that results in more advertising on screen, more often.

In that context, let’s all agree that it may be difficult to arrive at a result that makes everyone happy.

We’ve gone to considerable lengths to examine the potential economic impact of different options.

We’ve commissioned econometric analysis and we published that last May.

Following conversations with various interested parties, we commissioned further analysis, which we expect to publish shortly.

But, as we’ve worked through that process, it has become clear that economic analysis alone will not give us the answer.

The truth is that we face a real challenge in balancing our duties in this area.

The choices we make could have significant repercussions for the public interest objectives laid upon us, as well as for the fortunes of companies and organisations in this sector.

So any choices we do make must be rooted in a clear understanding of how the relevant public interest objectives, as reflected in our statutory remit, should be weighed against each other – alongside the narrower economic analysis of different options.

These include:

• The need to foster a wide range of high quality services appealing to a variety of tastes and interests,
• The desirability of a strong public service broadcasting system;
• And of course the promotion of competition as a means of furthering the interests of consumers.

To help us balance out these duties against one another, we’ve decided we need to conduct some further work on whether there is a case for a move away from the status quo in relation to the current minutage rules and to place this in the wider context.

However, given the significant consequences of any decision, it is important that we can base a decision in both economic analysis and a broader assessment of any relevant public interest rationale.

How might content regulation evolve?

Lastly, I want to touch briefly upon the evolution of content regulation more generally.

I started today by trying to dispel a tendency towards ungrounded futurology. Let me conclude, paradoxically, by taking a risk with a confident prediction about the next two or three years.

The government has fired the gun on a process that will lead to a new communications bill – it is a racing certainty in my view that this will necessitate a thorough review of content regulation more generally.

If legislation and regulation aims to keep up with consumers and keep up with technology, then it is certain that some very fundamental questions will be posed and in due course answered.

Forecasts tell us that soon most TV sets sold will be web-connected.

Content providers are already almost universally using non-broadcast distribution.

It looks like TV, feels like TV, competes for the same audience as TV – but it’s not TV as we know it.

At least not in the way the content is distributed and therefore regulated.

Some assume that the answer to this challenge will be a reflection of the zeitgeist of 2003, when it was assumed that nothing beyond broadcasting should be encumbered with regulation or rules of any kind.

There are two important points to make here.

First, we have already moved beyond this position through the AVMS directive in Europe and through the current debate around Net Neutrality.

And second, let’s beware of a form of techno-determinism which preaches that the powers of politicians and regulators are essentially rendered meaningless in the distributed, globally interconnected world.

Take one simple idea.

The watershed is a remarkable feature of broadcasting regulation. As far as I’m aware there’s never been a marketing campaign to promote it, but for some reason almost everyone seems to know about it and understand it.

More importantly, it is valued and trusted as a tool to protect audiences from content they may not want to have on their screens at all or at certain times of the day.

In the new world where we can choose whatever we want to watch whenever we want to watch it – do we simply throw the baby out with the bathwater? Or do we need to re-imagine what a watershed environment might look like and how it might work in this globally interconnected world in which we live?

This is but one example, and there are many others – and these kinds of questions will be at the heart of the debate around the framework for media in our country over the next few years.

And as the people who fund so much of the content which people enjoy and value so highly, your voice needs to be heard loud and clear in this crucial debate.

Thank you very much.

ENDS