Mind The Funding Gap: The Potential Of Industry Levies For Continued Funding Of Public Service Broadcasting

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Mindthefundinggap Thepotentialofindustryleviesfor continuedfundingofpublic servicebroadcasting AnipprreportforBECTUandtheNUJ March2009 ©ippr2009

InstituteforPublicPolicyResearch Challengingideas– Changingpolicy

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ippr|MindtheFundingGap:Thepotentialofindustryleviesforcontinuedfundingofpublicservicebroadcasting

Contents Aboutippr ............................................................................................................................. 3 Acknowledgements ............................................................................................................... 3 Executivesummary................................................................................................................ 4 Introduction........................................................................................................................... 6 1.PublicbroadcastservicesintheUK:anoverview............................................................. 7 2.Technologicalchallenges ................................................................................................. 12 3.Financialchallenges ........................................................................................................ 16 4.Thecurrentpolicycontext .............................................................................................. 22 5.Thepotentialofindustrylevies....................................................................................... 26 6.Thevalueofregulatoryassets......................................................................................... 35 7.Conclusion....................................................................................................................... 38 References ........................................................................................................................... 39 Appendix1:TheExpenditureandFoodSurvey(EFS)data................................................ 42

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Aboutippr TheInstituteforPublicPolicyResearch(ippr)istheUK’sleadingprogressivethinktank, producingcutting-edgeresearchandinnovativepolicyideasforajust,democraticand sustainableworld. Since1988,wehavebeenattheforefrontofprogressivedebateandpolicymakinginthe UK.Throughourindependentresearchandanalysiswedefinenewagendasforchangeand providepracticalsolutionstochallengesacrossthefullrangeofpublicpolicyissues. WithofficesinbothLondonandNewcastle,weensureouroutlookisasbroad-basedas possible,whileourinternationalandmigrationteamsandclimatechangeprogrammeextend ourpartnershipsandinfluencebeyondtheUK,givingusatrulyworld-classreputationfor highqualityresearch.

ippr,30-32SouthamptonStreet,LondonWC2E7RA.Tel:+44(0)2074706100 E:[email protected]www.ippr.org. RegisteredCharityNo.800065 ThispaperwasfirstpublishedinMarch2009.©ippr2009

Acknowledgements TheresearchforthisreportwasconductedbyKayWithersandHowardReed.Thereportwas writtenbyKayWithers. Thereportrepresentstheviewsoftheauthorandnotnecessarilythoseofippr’sdirectorsor trustees,orofBECTU(theBroadcastingEntertainmentCinematographandTheatreUnion) ortheNUJ(NationalUnionofJournalists).

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Executivesummary Publicservicebroadcasting(PSB)–televisioncontentfundedeitherdirectlyorindirectlyby thestateanddesignedtomeetspecificsocietalandculturalobjectives–isaculturallyand economicallyvaluablepartoftheUK’smedialandscape.Itispopularandvaluedbycitizens, andpublicservicebrands–suchastheBBCandChannel4–areinternationallyrespected. Therecontinuestobedemandforpublicservicebroadcastingtobeproducedbymorethan onesourceintheUK,andforUK-basedproductionsthatrepresentthemanydiverse culturesandwaysoflifeintheUKtoday. However,theUK’smedialandscapehasseenrapidchangeoverthepastdecadeandthe digitalrevolutionhaspresentedpublicservicebroadcasterswithhugechallenges.Theswitch todigitalduetotakeplaceby2012meansthattheimplicitsubsidiesderivedfromspectrum allocationinthebroadcastingsystemwillfalldramaticallyinvalue.Thiswillpresentahuge challengetotheeconomicbasisonwhichtheUK’sPSBsystemrelies. ButPSBprovidershavealsorespondedtotechnologicalchange.Whilethegrowthofthe internetsawearlypredictionsthattelevision–andbroadcastersinparticular–would becomeredundantinanewdigitalworld,PSBprovidershavediversifiedintheirofferings, enablingsomecontenttobeconsumedonlineviatheinternetandevenaccessedviathe newgenerationofsmartmobilephones.TheBBC’siPlayer,forexample,whichgivesaccess toitsprogrammesfromtheprevioussevendaysonline,isoneofthemajorcontentsuccess storiesofthepastfewyears.

Thefundinggap Followingdigitalswitchover,thedeclineinvalueofspectrumgiftedtoPSBproviderswill causeafundinggapofbetween£145and£235milliontoemerge. ButPSBprovidersarealreadyfeelingthepressuresofthecurrenteconomicclimateand greatercompetitionfromdigitalproviders.ThecontinuedpopularityanddesireforPSB amongBritishcitizensmeansthataddressingthefundinggapandongoingfinancial pressuresisamatterofgreaturgencyandimportance.

Bridgingthegap:industrylevies Variousdifferentmethodsandmodelshavebeensuggestedtobridgethefundinggap.One solution,showntobepopularwithmembersofthepublic,istheintroductionofindustry levies:putsimply,asurchargeortaxleviedoncertainsectionsofthemediaindustry,based onannualrevenueorprofit.IndustryleviesexistinmanyEuropeannationsandarenota newconcept. Examplesoflevysystemsinclude:

• Directmedialevies –levieschargedonrevenuefromorganisationssuchas broadcasters,cinemasorvideolabels

• Newmedialevies –levieschargedonorganisationssuchasInternetServiceProviders andmobilephoneoperators. A1percentlevyon‘paytelevision’(subscription-basedTVservices)intheUK,wouldyield anestimated£70millionperannum,basedonassessmentsfromtheUK’stwomajorpayTV broadcasters,VirginandSky. A1percentlevyonthefivemajormobilephoneoperatorsintheUK(O2,Orange,T-Mobile, 3andVodafone)wouldyieldanestimated£208millionperannum.

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Althoughthesefiguresremainestimatesasafinalmodelwouldlikelybedifferent,clearly thesemethodscouldgosomewaytowardsmeetingthefundinggapidentifiedbythe industryregulatorOfcom,andensuringthefutureofPSBintheUK.

Thevalueofregulatoryassets Digitalswitchoveralsopresentsanopportunityforrealisingvaluefromreleasedspectrum previouslyusedforbroadcastinganaloguetelevisionsignals. Althoughestimatingtherevenuelikelytobegeneratedfromanyspectrumauctionis problematic,theTreasurydoesnonethelesshavetheoptionofhypothecatinganyproceeds towardsfuturefundingofPSB.Thiswouldrepresentaone-off‘windfall’paymentthatcould providesomemuchneededassistanceintheshortterm.

Summingup Bothindustryleviesandregulatoryassetsprovidepossiblesourcesofrevenuethatcouldbe divertedintothePSBsysteminordertomaintainandstrengthenit.Introducingsucha systemwouldbeaboldmove.However,thescaleofthechallengefacingtheUK’sPSB systemwouldseemtodemandradicalsolutions.Atfirstglance,leviesmaynotappear politicallypopularbutthereisastrongrationaleforconsideringthemasaseriousoption.

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1.Introduction Thefutureofpublicservicebroadcasting(PSB)–televisioncontentfundedeitherdirectlyor indirectlybythestateanddesignedtomeetspecificsocietalandculturalobjectives–is uncertain.Thecompoundingfactorsofanuncertaineconomicclimateandadownturnin advertisingrevenue,alongsiderapidtechnologicalchangeandtheloomingprospectof digitalswitchover,havecreatedhugechallengesforpolicymakersandPSBproviders.One thingisclear:thepublicstillvaluespublicservicesbroadcasting,andwantstoseeitontheir screens.ButdespitereviewsbytheGovernmentandtheindependentregulatorand competitionauthorityfortheUK’scommunicationindustries,Ofcom,itisstillunclearhowto providethelevelandqualityofprovisiontowhichwehavebecomeaccustomed. ThisreportwascommissionedbytheBroadcastingEntertainmentCinematographand TheatreUnion(BECTU)andtheNationalUnionofJournalists(NUJ)in2008,toexploreone optionforpayingforpublicservicecontentinthefuture:industrylevies.Thisoption(which involvesapplyingsmallleviesortaxestodifferentelementsofthewidermediaindustry)has beenindicatedtobepopularwiththepublicaccordingtoOfcomresearch.However,the proposalhasbeengrantedlittleattentioninrecentpolicydebates.Thisreportaimsto increaseawarenessandgeneratedebateaboutthisoptionbyillustratingwhatalevysystem mightlooklike,andhowmuchfundingitcouldraise. Section1providesabriefoverviewofpublicserviceprovisionintheUK,andexaminesits value,includingcultural,societalandeconomiccontributions.Insections2and3we considersomeofthetechnologicalandfinancialchallengesthathavethreatenedthecurrent systemandthemedialandscapemoregenerally.Thefollowingsectionprovidesabrief overviewofrecentpolicydebatesanddevelopmentsbeforeinSection5wesetoutanindepthconsiderationofwhatamedialevysystemmightlooklike.Wethenconsiderthe continuingroleofregulatoryassetsforfundingmediacontent,inSection6,beforeproviding afinalsummaryofthefindingsinsection7.

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1.PublicbroadcastservicesintheUK:anoverview ThehistoryoftelevisionintheUKisinexorablylinkedwiththeconceptofpublicservice broadcasting(PSB).Atitsinception,LordReith,theBBC’sfirstchairman,established television’searliestpurpose–‘toinform,educateandentertain’1.Publicservicebroadcasting –forinstance,contentbroadcastbyBBC,Channel4andsomecontentfromITVandFive– todayhasawidersetofobjectivesbuttheReithianprinciplesremainacornerstoneofthe PSBethos. Fornearlythreedecades,parliamentariansbackedthenotionofapubliclyfundedmonopoly inbroadcastprovision.Untilthe1950s,theBBCremainedtheonlynationaltelevision broadcasterintheUK,defendedbyaninfluentialparliamentarycommitteethatargued‘the rightofaccesstothedomesticsoundandtelevisionreceiversofmillionsofpeoplecarries withitsuchgreatpropagandapowerthatitcannotbetrustedtoanypersonorbodiesother thanapubliccorporation’(Beveridge1951). Discussionsaroundtheintroductionofcommercialtelevisionreflectanunderstandingofthe politicaleconomyoftelevision:therelationshipbetweenpolicy,industryandoutput.Ithas longbeenrecognisedthatwhatappearsontelevisiontosomeextentdependsonthe institutionalcircumstanceswithinwhichtherelevantbroadcasteroperates–particularlyin relationtocommercialfundingmodels(Elliott1972,Gitlin1985,Hart1988).Whenfinally introduced,commercialtelevisionwasbeholdentostrongPSBobligations,andwas effectivelyseenasanextensionofPSBprovisionratherthanprovidingpurelycommercial competition. Withtheintroductionin1982ofChannel4–apubliclyownedbroadcastingcompanyaimed atchallengingthepublicserviceduopolyofBBC1and2–publicservicetelevisionwas chargedwithtakingmorerisks,behavingmoreinnovatively,andprovidingcontentforniche audiencesotherwiseunderservedbytheBBC.Theadditionin1997ofFive,withlimited publicserviceobligations,hasmadeuptheterrestrialpublicservicebroadcastingofferingfor thepast12years. Today,publicservicetelevisioncontinuestobedeliveredbytheBBCandChannel4.Both organisationshavespecificpublicservicemissions:theBBCseeksto‘enrichpeople’slives withprogrammesandservicesthatinform,educateandentertain’(BBC2009),while Channel4aimstoprovide‘abroadrangeofhighqualityanddiverseprogrammingwhich… demonstratesinnovation…appealstothetastesandinterestsofaculturallydiverse society…andexhibitsadistinctivecharacter’(CommunicationsAct2003). Meanwhile,ITVandFivecontributesomelevelofpublicserviceprovision,deliveringcontent –particularlynationalandregionalnewsandprogramming(ITV)andchildren’sprogramming (Five)–accordingtoquotassetbytheCommunicationsActandperiodicallyreviewedand modifiedbyOfcom. Theprinciplesofpublicservicebroadcasting,definedbyOfcom(Ofcom2004)areasfollows:

•Informingourunderstandingoftheworld –Toinformourselvesandothersandto increaseourunderstandingoftheworldthroughnews,informationandanalysisof currenteventsandideas

•Stimulatingknowledgeandlearning –Tostimulateourinterestinandknowledgeof arts,science,historyandothertopicsthroughcontentthatisaccessibleandcan encourageinformallearning

1.TakenfromBBC’smissionstatementatwww.bbc.co.uk/info/purpose/accessed22March2009

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•ReflectingUKculturalidentity –Toreflectandstrengthenourculturalidentity throughoriginalprogrammingatUK,nationalandregionallevel,onoccasionbringing audiencestogetherforsharedexperiences

•Representingdiversityandalternativeviewpoints –Tomakeusawareofdifferent culturesandalternativeviewpoints,throughprogrammesthatreflectthelivesof otherpeopleandothercommunities,bothwithintheUKandelsewhere. Therearesomeinherentcontradictionsintheseprinciples,withPSBatoncetaskedwith bringingaudiencestogetherforsharedexperienceswhilealsoensuringdiversityand representingarangeofcommunitiesacrosstheUK.Thepublicsphere,asrepresentedby publicservicebroadcasting,mustatoncebebothrepresentativeanduniting. InorderforPSBtomaintainabalancebetweenthesesometimes-competingclaims,itmust ‘negotiatethepoliticsofdifferenceonadailybasis’(Murdock1999).So,howcan broadcastersmanagethis?IntheUK,thepluralityofpublicserviceprovisionmeansthat bothaimscanbeaccommodated.Forexample,whiletheBBCworkstodeliverashared culturalexperience,Channel4canproduceprogrammingthat‘appealstothetastesand interestsofaculturallydiversesociety’(Channel4,2008)andexposesmainstreamaudiences towhatwouldotherwisebeminorityviews.

Theimportanceofplurality Therehasbeenahugeincreaseinthenumberoftelevisionandradiochannelsandother formsofentertainmentcontentsuchasDVDs,computergamesand,ofcourse,theinternet. Nevertheless,UKcitizenscontinuetovalueplurality–thenotionthatcertaintypesof programmesshouldbeshownonmorethanonechannel–inpublicserviceprovision(Ipsos MORI2008). ResearchundertakenbyIpsosMORIhighlightedthestrengthofUKopinioninthisarea. Morethanfourinfiverespondents(86percent)statedthatitwasimportantthatnews shouldbeshownonmorethanoneofthemaintelevisionchannels.Respondentsfeltthat newswasthegenreinwhichmaintainingpluralitywasmostimportant. Ahighproportion(76percent)alsobelieveditwasimportanttomaintainpluralityinthe provisionofregionalandnationalnews.WhenaskediftheBBCandITVshouldcontinueto eachprovideregionalandnationalnews,83percentrepliedthattheyshould.Inthe devolvednations,thisviewwasevenstronger,beingheldbynineoutoftenrespondents. Thosesurveyedalsobelieveditwasimportanttomaintainpluralityinsomeothergenres, includingfactualandcurrentaffairsprogramming.Almostfourinfive(77percent)thought itimportantthatsuchprogrammingshouldbeshownonmorethanonechannel.Thiswas largelybecausetheybelievedthatfactualandcurrentaffairsprogrammescontainedopinions aswellasfacts,andthatitwasthereforecrucialthattheyconveyedavarietyofoutlooks. Acrossseveralgenres,thekeyjustificationsforpluralitywerethatitwasnecessarytoensure accountability,impartialityandquality.Respondentsfeltthatalackofpluralitywouldresult notonlyinthepublicbeinglessinformedbut,becauseofalackofcompetition,adropin standards. Previousresearchhasshownthatdifferentproviderscaterfordifferentaudiences.For example,newsbulletinsfromITVattractaudiencesfromdifferentsocio-economic backgroundstosimilarprogrammesonChannel4andBBC1(Ofcom2004b).Similarly, Channel4tendstoserveayoungeraudience,andinitsfuturevisionhasarguedforan expansiontoitsremittofurtherenhanceprovisionforolderchildrenandyoungadults (Channel42008).Thisindicatesafurtherpurposeforplurality:thatofprovidingimproved access,offeringthepublicanopportunitytofindinterestingandcomplementarycontentat differenttimesofdayondifferentnetworks(Foster2008).

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Toprovideplurality,thereisaneedforcontinuedproductionofcontentoriginatedinthe UK,whetherinternational,nationalorregionalnews,currentaffairsandfactual programming,drama,children’stelevisionorcomedy.Themixed‘ecology’ofPSBintheUK (whichismadeupofabalanceofdifferentfunding,organisationalandoperationalmodels) hassupportedhigh-qualityprogramming,andcontinuestounderpinthestrengthofthe UK’sbroadcastingsector(Foster2008).InresearchbyOfcom,83percentofrespondents believeditisimportantthat‘programmesmadeintheUKareshownonthemaintelevision channels’(Ofcom2008).

TheeconomicvalueofpublicservicebroadcastingintheUK CalculatingthevalueofPSBintheUKisextremelydifficult.Itcanberepresentedasa measureofthelevelofsubsidyitreceives,intermsoflicencefeeandregulatoryassets,asan estimateoftheopportunitycosts.However,thekeystrengthsandmeritsofPSBareoften non-commercialinnature,andcapturingthevalueoftheseaspectscanbeacomplex exercise. Variousstudieshaveinvestigatedtheextenttowhichcitizensarewillingtopayforpublic serviceprogrammingoncommercialchannels,inordertoputahypotheticalpriceon somethingthatiscurrentlyreceivedforfree.ArecentstudyconductedaspartofOfcom’s reviewofPSBfoundsignificantreadinessamongthosesurveyedtopayforPSBbeyondthe BBC.Approximatelythree-quartersofrespondentswerepreparedtopayforpublicservice programmingonITV1,Channel4andFive,uptoanaveragevalueof£3.50amonth,in additiontothecurrentlicencefee.Thiswouldequateto£42perhouseholdperannum– over£800millionperannumnationally.Clearly,thevaluethattheserespondentsputonPSB issignificantlyhigherthanthecostofactuallydeliveringsuchservices(Ofcom2008e). IthasbeenclaimedthatPSBcancontributetothewidersocial,democraticandcultural healthoftheUKthroughtherangeandqualityofitsbroadcasting(Banerjeeetal 2006).In thepast,theBBChasundertakensignificantworkinordertotranslateitsvaluebyutilising theconceptofpublicvalue.OneofitsaimshasbeentounderstandhowPSBcontributes valuetopeopleasindividualsandcitizens,andtosocietyasawhole–forexampleby contributingtothewell-beingofsociety. PSBalsohasanimpactontheperformanceofthewidereconomicmarket.Recentanalysis oftheeconomicimpactoftheBBConthecreativeeconomy(PwC2008)estimatesthatBBC spendingoncreativeactivities–definedascontentanddistributionandexcluding overheadsandinfrastructure–providesa‘grossvalueadded’totheUKeconomyof approximately£5billion.IncludingtheBBC’sexpenditureonoverheadsandinfrastructure, thetotalgrossvalueaddedoftheBBCincreasestoaround£6.5billion.Thisvalueisaccrued inanumberofways–forexample,throughthevalueofexternalitiessuchaseducationand trainingactivitiesthattheBBCundertakes,aswellasitsimpactonregeneration,networking buildingandclustering. OtherstudiesassessingthevalueofPSBhaveincludedtheCardiffBusinessSchoolstudyon theeconomicimpactofS4C(DTZetal 2007),whichfoundthattheWelshPSBproviderhad considerableindirectimpactonsuppliereffectsandincome-inducedeffects.Forexample, whenemployeesspendtheirwagesandtheirsalariesintheirlocalityongoodsandservices, thisinturngeneratesfurtherdemand.ThestudyfoundthatS4Cactivitywasfoundto supportindirectly2,100full-timeequivalentjobsoverafive-yearperiod.Itconcludedthat thepresenceofS4Cwithinthecreativeindustriesaddedstabilityandcertainty,generatedan estimated£87millionofvalueaddedfortheWelsheconomyin2006,andhenceencouraged investment,skillsdevelopmentandcreativeexcellence. Inanotherstudy,theprofessionalservicesfirmPricewaterhouseCoopers(PwC)analysedthe impactofChannel4ontheUKindependentsector,onthecreativeindustriesmore

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generally,andontheeconomyasawhole(PwC2007).ThestudyfoundthatChannel4 supportsapluralityofindependentproducersandultimatelyensuresthatawiderangeof ideasandvoicesreachthetelevisionscreen.Itarguedthatbycontributingtothe developmentofregionalclustersintheUKeconomy,thechannelbuckstheotherwise London-centrictrendofthemediaandcreativeindustries,identifyingandnurturingtalent ‘inanewanduniqueway’. TounderstandtheimpactofChannel4asapublicservicebroadcaster,PwCanalysedthe impactsofchangingtheinstitutionalmodelofthechannelfromapubliclyowned,not-forprofitcorporationtoonethatoperatedinsteadonapurelycommercialbasis.Theypredicted thattheeffectwouldbe:

•Increasedconsolidationandfewindependentproducers •AreductioninsizeandpluralityofChannel4sources •ArenewedfocusonLondon(reductionofactivityinthenationsandregions) •Increasedbarriersfortalent •Reducedrisk-takingandlowerqualitylinkedtoreducedcertaintyoffunding. Otherresearchhasestimatedthepossibleimpactofreducingthescaleandscopeofpublic funding.In2006,mediaadvisersOliverandOhlbaumAssociatesarguedthatthecommercial revenuegrowthresultingfromreducedpublicfundingtotheBBCwouldberelativelylow, andthattherewouldbeasubstantiallossofrecyclingeffects–thatis,theimpactofthe BBC’stendencytospendlargeproportionsofitsrevenuewithintheUKcreativeeconomy. TheyestimatedthatforeveryonepoundofincometakenawayfromtheBBC,UK programmespendislikelytofallbyabout60pence(OliverandOhlbaumAssociates2006). Meanwhile,OfcomhasstatedthatBBC’sinvestmentinFreeviewhasbeencentraltothe successofDigitalTerrestrialTelevision(DTT),whichinturnislikelytoincreaseinter-platform competition.Thismayincreasecommercialrevenues,ascommercialadvertisingrevenues haverisenfordigital-onlychannelsandmorehouseholdshavebeendrawnintothepayTV market. Wecansee,therefore,thatinadditiontobeingvaluedbyUKcitizens,evidenceshowsthat PSBprovidersaddconsiderablevaluetothewidermediamarket–throughnetworkeffects, bytakingrisksthatarenotopentocommercialplayersandalsobypromotingandsustaining newtechnicalstandardsandplatforms.

TheinternationalvalueofUKpublicservicebroadcasting TheUKsystematicallyperformsbetterthanothercomparativenationswherebroadcastingis concerned.TheBBCisaninternationallyrespectedmediabrand,withitsWorldService reachingmillionsofpeopleworldwide.Similarly,manyprogrammesdevelopedbyChannel4, BBCandITVhavepopularityworldwide,andUKPSBcontentisfrequentlyhonouredonthe internationalawardscircuit. InthecontextoftheUK’screativeindustries,broadcastingisapowerfulplayerin internationalmarkets.EstimatedtotalrevenuefromthesaleofUKTVprogrammes internationallyin2005was£632million–anincreaseof21percenton2004.In2007this figureroseto£663million,accordingtotheUKTelevisionExportsSurvey(PACT2008)This survey,carriedoutindependentlyonbehalfofUKTradeandInvestment(UKTI)and ProducersAllianceforCinemaandTelevision(PACT,thetradebodyfortheindependent television,film,animationandinteractiveindustries),concludedthatUKtelevision programmescontinuetogrowinpopularityoverseas,withsalesofformatideasup53per cent,to£82million(PACT2008).

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PSBplaysanimmenselyimportantroleinasuccessfultelevisionindustrythatgenerated revenueof£10.4billionin2007,morethanFrance(£7billion),Germany(£9.3billion),Italy (£6.3billion)andCanada(£4.4billion)(Ofcom2008b). Meanwhile,comparedtoothercreativeindustrysectors,radioandtelevisionshowedaboveaveragegrowthof8percentperannum,comparedto4percentforthecreativeindustries generallyand3percentfortheeconomyasawhole(DCMS2009). Inotherrespects,too,theUK’sPSBsectorperformswellincomparisontoitsinternational counterparts.In2007,first-runoriginatedoutputaccountedfor49percentofallhours broadcastbytheEuropeanPSBproviders,comparedto53percentintheUK.UKPSB providersalsobroadcastthelowestpercentageofacquiredcontent(5percent,comparedto theEUaverageof15percent)(Ofcom2008b).

Conclusion Publicservicebroadcastingcontinuestoberelevantandvaluedbycitizens,asillustratedby viewinghabits,opinionpolls,andresearchinto‘willingnesstopay’.Italsoformsan importantpartofasuccessfulUKbroadcastingindustry,andcontributestothegrowthand expansionoftheUKcreativeindustriesmorewidely.Thisisanimportantfactorthatwe shouldbecarefulnottooverlook–particularlygiventheGovernment’scommitmentto transformtheUKintoaleadingknowledgeeconomyandthecontinuedemphasisonthe futureofourcreativeindustries. ThevaluethatPSBdelivers–bothintermsofeconomicbenefitsandimprovedwell-being– indicatethatPSBisnotjustaboutmarketfailure:italsoplaysacrucialroleinUKpubliclife. Overthecomingsectionsweconsiderthestructuralchangesthreateningthecurrentbalance oftheUK’sbroadcastindustry–changesthatareimmediateandarelikelytobesevere.

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2.Technologicalchallenges TheUK’smedialandscapehasseenrapidchangeoverthepastdecade.Innovationsin technologyhaverevolutionisedthewaysinwhichpeopleaccess,consumeandindeedcreate media.Themovefromanaloguetodigitalhasmeantthatcontentcanbedistributedmore quickly,easilyandcheaplythananaloguematerial,andcanbestoredforafractionofthe costwhiletakingupafractionofthespace. ForPSBproviders,thedigitalplatformoffersbothanopportunityandathreat.Thebiggest challengeistheendoftheanaloguecompact,inwhichbroadcastershavebeenoffered discountedorfreeairwavespectruminexchangeforbroadcastingpublicservicecontent.The switchtodigital,duetotakeplaceby2012,meansthatimplicitsubsidiesderivedfrom spectrumallocationwillfalldramaticallyinvalue,andwillultimatelychallengetheeconomic basisonwhichtheUK’sPSBecosystemrelies. Thissectionprovidesabriefoverviewofhowdevelopmentsintechnologyhaveimpactedon themediasystem,fromtheperspectiveofthemediaconsumer,anddescribesthe environmentinwhichPSBprovidersmustnowoperateandsurvive. WelookattheeconomicconsequencesofthesechangesinmoredetailinSection3,but briefly,themainchangesrelatetonewopportunitiesforaudiencestochangebehaviourin consumption,contentcreationandcommunication.ForthetraditionalPSBmodel,themost importantoftheseisconsumptiontrends.

Changesinconsumptiontrends Today’smedialandscapeisoneofvastchoice.Justover25yearsago,wesawthearrivalof theUK’sfourthterrestrialtelevisionchannel,Channel4.Today,theadventofdigitalhasseen thenumberofTVchannelsrockettomorethan400(Ofcom2008c).Take-upofmultichanneltelevisionhasincreasedrapidly:fiveyearsago,justoverhalf(54percent)ofUK householdshadaccesstomulti-channeltelevision,butby2008thisproportionhadgrownto nearlynineoutoftenhouseholds(88percent)(ibid).Radiostationshavealsoproliferated hugely,withdigitalradioprovidingaccesstoagreaternumberofnichestations,while internetradiooffersinstantaccesstostationsanywhereintheworld. Meanwhile,internettake-uphasincreasedrapidlyoverthepastdecade.Nearlytwothirdsof UKhouseholdshaveaccesstobroadbandinternet,andthisnumberissteadilygrowing.The internetitselfprovidesavastrangeofcontent–fromthatprovidedbyexisting,traditional mediaoutletstoblogsandotherformsofcontentgeneratedbyusersthemselves.Thescale ofcontentandinformationishuge.TheblogsearchengineTechnoratiestimatesthatthere arenowwellinexcessof100millionblogs,whilethevideo-sharingwebsiteYouTubereceives around65,000videouploadsonadailybasis. Whatimpacthasthislevelofchoicehadonpeople’sconsumptionhabits?Thegrowing rangeofcompetingmediadoesnotseemtohaveimpactedontheamountoftimethat peoplespendwatchingtelevision.DespitetherangeofDVDs,videogamesandinternet optionsonoffer,televisionviewingperdayhasincreased.In2008,theaverageBritishviewer watched26hours,18minutesoftelevisionperweek–anincreaseof48minutesfrom2007 (Thinkbox2009). However,theproliferationofchannelshasmeantthatviewingpatternsarenowmorewidely dispersed,andwhilethemainfiveterrestrialchannelscontinuetomakeupthebulkof televisionviewing,theirshareofaudiencesisindecline(Ofcom2008c).In2002,these channelsaccountedfor77.7percentofviewing,comparedto61percentin2007(Ofcom 2008c).

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Theincreasedlevelofchoicehashadasignificantimpactonconsumptionofnewsand currentaffairsprogramming.Whereasviewersinanaloguehomeswatchedatotalof135 hoursofnationalnewsonthefiveterrestrialchannelsin2006,multi-channelviewers watchedonly77hours(Ofcom2007).Thelowestlevelsofconsumptionwereamongthe 16–24agegroup,membersofwhomwatchedonly33hoursin2006.

Theinternetandonlinepublicservicecontent Theinternetasasourceofnewsandinformationisgrowinginsignificance.However, terrestrialtelevisionremainsthemainsourceofnewsformostofthepopulation(65per cent)(Ofcom2007).AnalysisbyOfcomsuggeststhattheinternetisseenasasourceof supplementaryinformationratherthanaprimarysourceinitself(ibid). Perhapsthebiggestindicatorofchangetocomeisthebehaviourofyoungeragegroups. Utilisingincreasesinbandwidthandthepotentialofsuperfastbroadband,16–24yearolds arebeginningtospendmoretimeonlinethanwatchingtelevision(EuropeanInteractive AdvertisingAssociation[EIAA]2007).Asubstantialamountoftheiruseisdedicatedtotime onsocialnetworkingsites.However,theinternetisincreasinglyseennotonlyasa communicationtoolorarichsourceofinformation,butasapointofaccessforaudio-visual content,includingtelevisionprogrammes.Reactingtothistrend,PSBprovidershavemade considerableinvestmentinordertoprovidepublicservicecontent(PSC)online. Publicservicecontentonline–currentprovision Wenowcometoconsiderpublicservicecontentanditsimportanceintheonlineworld, lookingatthescaleavailableasameasureoffinancialinvestment,andtheextenttowhich BritishaudiencesaccessandconsumePSC. AspartofitssecondreviewofPSB,Ofcomcommissionedtworeportsassessingfirst,the availabilityofPSConline(MTM2008a)andsecond,thelevelofeconomicinvestmentinPSC online(MTM2008b).ThesetworeportscoveredalltypesofPSC,includingcontentthatmet publicservice-typeprinciplesbutmayhavebeenprovidedbycommercialoperators, individualcitizensornon-governmentalorganisations,artorganisationsandcharities,and governmentorotherproviders–inadditiontothatprovidedbythepublicservice broadcastersthemselves. Theonlineavailabilityreport(MTM2008a)foundthatthereweresignificantlevelsof informationandcontentaccessibleunderthebroadPSBcategories,including:

•information,search,andreference •newsandcomment •businessandcommerce •entertainmentandlifestyle •health •scienceandtechnology •politicsandgovernment. However,farlesscontentandinformationwasavailableinotherareas,suchas:

•arts,cultureandheritage •children •teens •communityandsocialaction •learningandeducation.

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Ultimately,becausetherearenodirectoriesofonlinecontent,andbecausethescaleof contentissovastandchangingsorapidly,itisverydifficulttodetermineonceandforall howmuchpublicservicecontentisoutthere.Itiseasiertodeterminethescaleofcontent providedbytraditionalpublicserviceprovidersandtheextenttowhichthisremainsacentral componentofBritishinternetusers’consumption. Meanwhile,Ofcom’sfinancialanalysisreport(MTM2008b)showedthatanumberof differentbodiesweremakingsignificantinvestmentinPSConline.Itidentifiedthefollowing levelsofinvestmentduringthe2006/7period:

•CentralgovernmentspendingonPSCintheregionof£70–£90million

Thelargest proportionofthiswasonthegovernmentonlineinformationserviceDirectGov,but thisfigurealsoincludesinvestmentbygovernmentdepartmentssuchastheformer DepartmentforEducationandSkillsontheteacher.netwebsite.

•OnlinenewssectorannualspendingonPSCintheregionof£200million This includednewspapersandothermajoronlinenewsproviders,suchasSky.

•PublicservicebroadcasterannualspendingonPSCestimatedat£170million

This

wasthesecond-largestsegment.In2006/07theBBCspent£116millionon bbc.co.ukandafurther£37.7milliononBBCJam.

•Thirdsectorinvestmentof£60–80milliononPSConlineThisincorporated registeredandunregisteredcharities,andvoluntaryandcommunityorganisations.

•Localanddevolvedgovernmentinvestedintheregionof£45–55million

This estimatewasbasedonananalysisofICTandeGovernmentspendingonPSConline.

•Theeducationcategoryspentonly£6–7million

Thisincorporatedexpenditureon learningresourcesnotcapturedinothercategoriessuchasgovernmentandPSB providers.

Fromscheduledtoon-demandviewing Oneofthemostsignificantimpactsoftheinternetonconsumptionofaudio-visualmedia hasbeentheshiftfromlinear,scheduledviewingtoon-demandaccess.Theinternetisa ‘pull’technology,wheremediaconsumersrequestcontentbyaccessingcertainwebsitesor downloadingcertaincontent.Thisisinstarkcontrasttobroadcast,whichisa‘push’ technology:itdeliverscontenttotheviewerwithouttheviewerhavingtospecifically requestit. Thestorageanddistributionpotentialofdigitalcontenthasledtoinnovationsthatallow viewerstomoreeasily‘time-shift’content–thatis,towatchitwhentheywant,ratherthan whenthescheduledictates.NewservicessuchasBT’sInternetProtocolTelevision(IPTV) serviceBTVisionandVirginMedia’son-demandserviceenabletelevisionviewerstorequest contentanddownloadittotheirtelevision,inordertoviewitatatimeoftheirchoosing. Personalvideorecorders(PVRs)haveenabledviewerstocreatetheirowntelevision schedules,time-shiftingprogrammestostartanythingfromafewminutestoseveraldays aftertheoriginalbroadcasttime.ViewerscanalsoautomaticallystoreentireseriesonPVR harddisks,inordertoviewthewholeseriesfromstarttofinishinonesitting,overa weekendorwhenevertheychoose,ratherthanwaitingforthetypicalweeklyinstalment. Theycanalsoskiporfast-forwardadvertisementsoncommercialchannels–somethingthat hasbeenofsignificantconcernintermsoftheeconomicsofcommercialtelevision. Withinthewiderculturalcontext,themainchallengeofon-demandhasbeencouchedin termsofadecliningpowerofthetraditionalbroadcasterandthetraditionalbroadcastbrand. Previously,PSBprovidersinparticularbroughtpeopletogether,toviewthesameprogramme atthesametime.Thissolidifiedtheirpositionbothintermsofindividualhouseholdsand

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families,andintermsofnationalimportance.Thelatterhasbeenparticularlytruewhere channelssuchastheBBChavebroughtpeopletogetherovereventsofnationalimportance, suchastheQueen’sCoronation,majorsportingevents,thefirstlandingonthemoon,and Christmastelevision. Inrecognitionofitscentralimportanceindomesticlife,televisionhastypicallybeen scheduledaroundthefamily.Forexample,thewatershed,setat9pm,servestodrawan explicitdistinctionbetweenthe‘familyviewing’content(whichusuallytakesplacebetween 5.30pmand9pm)andtheadulttelevisionworldthatfollows.Inthisway,ithasbeenargued, televisionschedulingunderpinnedsociety’sexpectationsofbehaviour(forexample, expectingchildrentobeinbedby9pm),andhelpedtoprovideasenseoforderand continuityinindividuals’lives(Silverstone1994). Today’stechnologicaladvancesarethreateningtheimportanceofschedule,andalongside this,itisoftenspeculated,thepoweroftelevision‘brands’.However,inreality,theimpact maynotbeassevereassomehavepredicted.Forexample,researchintouseofPVRs (Barwise2005)hasshownthatconsumerstendtousethemtoshiftprogrammesbyaslittle astenminutes,andprimarilyinordertofast-forwardadvertisementsratherthantodiscard thescheduleentirely.(Ofcourse,thisstillcreatessignificantproblemswheretheeconomics oftelevisionbroadcastingisconcerned–anissuethatweaddressinSection3.) Moreover,PSBprovidershavebeguntoadapttothisculturalshift.Themostsuccessful examplesofPSConlineprovidedbyPSBprovidershavebeenthosethatenableviewersto accesscontenton-demand,suchastheBBC’siPlayerand4oDfromChannel4.Useofthese servicesisgrowingrapidly:inDecember2008,viewersaccessedBBCprogrammesviaiPlayer arecord41milliontimes.Meanwhile,Channel4’son-demandserviceisparticularlypopular amongyoungeragegroups.Oneinsixviewersofthetelevisionshow‘Skins’watchedthe programmeonline.

Conclusion Thespeedandscaleofthetechnologicalchangesinthemediaoverthepastfewdecades hasbeendramatic.Thesechangeshavecausedrapidchangewithinthewidertechnological andculturalcontexts,suchasallowingviewerstodefinetheirowntelevisionscheduleand accesscontentonthemoveonmobiledevices,resultinginimmensechallengesforPSB providers. Nevertheless,inthemain,PSBprovidershavereactedproactivelytothesechanges,and havesoughttoremainrelevantinanincreasinglyonline,on-demandworld.TraditionalPSB providershavemadesignificantinvestmentinPSConlineand,despitethehugescaleof competition,televisioncontentproducedbyPSBproviderscontinuestobeaccessedand consumedinonlineenvironmentsthroughinnovationssuchasiPlayerand4oD. Continuedinvestment,innovationandavailabilityislikelytoremainimportant.PSConline originatingfromawidevarietyofinternationalsourceshasbeenshowntomeetOfcom’s principles1and2ofpublicservicedescribedinSection1(inotherwords,informingand stimulatinginterest).However,significantlylesscontentappearstomeetprinciples3and4 (strengtheningculturalidentityandraisingawarenessofdifferentculturesandviewpoints). Thisisimportant,andechoesalong-heldconcernthatthehighlevelsofpersonalisationand choiceaffordedbytheInternetwillleadusinto‘discursiveghettos’. Aswesawintheprevioussection,UKviewersplaceconsiderableimportanceoncontinued sharedexperiences,andonreversingtrendsoffragmentationwithinsociety.Eveninournew technologicalenvironment,traditionalPSB-typecontenthasavalueandrationale,andis essentialtoUKcitizens. Inthenextsection,welookatthefinancialchallengesthatarecurrentlymountingandcould actasabarriertomaintaininglevelsofpublicservice–inbothonandofflineenvironments.

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3.Financialchallenges Intheprevioussection,wediscussedtheimpactoftechnologicalchangesonculturalfactors, suchasthewayweaccess,consumeandsharemediaandthewaysinwhichwecommunicate witheachother.Weconcludedthat,despitethesechanges,PSBcontinuestoberelevantand importanttoUKcitizens.Butshiftingconsumerbehaviourisnottheonlychallengefacedby PSBproviders.Technologicaladvanceshaveresultedinmassivechangestotheeconomicbasis andbusinessmodelsoftelevision,presentingnewdifficultiesinfindingfunding. ThissectionbrieflyoutlinesthefundingchallengescurrentlyfacedbyPSBprovidersinthe UK.Itsetstheseoutwithinthewidereconomiccontext,consideringtheimpactandfurther pressurescreatedbythecurrentrecession.Itthengoesontoconsiderwhichelementsofthe mediaindustryareseeinggrowth(orthepotentialforgrowth),lookingatinfrastructureand subscriptionservices,andcontentservices.Finally,itconsiderswhattheshiftsinrevenue meanforpublicservicecontent–particularlycontentoriginatedintheUK.

Fundingsources PSB,andthemassivefinancialinterventioninthemarketthatthisrepresents,haslongbeen justifiedonthegroundsofmarketfailure.Inotherwords,withoutspecialdirectionand fundingtodoso,itisnotthoughtthatcommercialcompanieswouldinvestinPSBcontent. Thisisparticularlythecasesincethistypeofcontent(forexample,home-produceddrama, children’stelevision,in-depthbroadcastnationalandregionalnewsandcurrentaffairs programming)isoftenexpensivetoproduce. Table3.1showsthelevelofpublicinterventionstosubsidisePSBcontentstartingin 2003/04andlookingforwardto2012/13.Providingaccuratefiguresforthelevelsof interventionisnotoriouslydifficult.Thisisbecauseoftheimplicitnatureofsomeofthe funding,thelackofclearalternativescenariosagainstwhichtotestitsvalue,andlimitsto theavailabledata. Themainsourcesoffundingarethelicencefeeandgiftedspectrum,thatisairwave spectrumprovidedfreetobroadcastersinexchangeforthemmeetingcertainpublicservice objectives(thelatterbeingmeasuredintermsofopportunitycosts).Opportunitycostsare particularlydifficulttoestimate.Theyarebasedonlostadvertisingrevenuethatcouldhave beengainedhadthebroadcastershownaprogrammethatwasmorecommerciallyattractive (intermsofaudienceandadvertising)instead.Forsomegenres,theopportunitycostis particularlyacute,andgrowing.Forexample,asaudiencelevelsfornewsandcurrentaffairs programmesdecline,theopportunitycostsoftheseprogrammesshownduringprimetime growconsiderably. Table3.1:Levelsofpublicinterventionstosubsidisepublicservicebroadcasting Institution 2003/04 2007/08 2012/13 BBC(televisionandonline) 2,700 2,865 3,010 S4C/GMS 105 110 110 ITVplc 280 140 45 Channel4 175 175 80 Five 40 50 50 Otherlicensees 25 25 10 Total 3,325 3,365 3,305 CommercialPSBproviders 520 390 185 Source:Ofcomestimates,BBCannualreports,financialdatafrombroadcasters Note:Allfiguresinreal2007£million.BBCdataforfinancialyears2003/4,2007/8,2012/13; othersfor2003,2008and2013respectively

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ThemostimportantstatisticshowninTable3.1isthedeclineinvalueofimplicitsubsidies forthecommercialPSBproviders–from520in2003/4to185in2012/13.Thisrepresentsa declineinthevalueofpublicsubsidiesof£335millionsincetheintroductionofthe CommunicationsActin2003.Ifnothingchangesinthisscenario,theBBCwillreceive90per centofallpublicsubsidies,upfrom80percentin2003(Ofcom2008).Thissituationwilldo littletopreservethepluralitythattheUKpublicsohighlyvalues. Ofcomestimatesthatinorderforthesamelevelofpublicservicecontentavailabletodayto beprovidedby2012,publicfundingofbetween£330and£420millionwillbenecessary. Existingregulatoryassetsarepredictedtocontribute£185million,asoutlinedabove.This leavesafundinggapofbetween£145millionand£235million(Ofcom2008). Thisestimateisbasedonanassessmentofthreefactors(Ofcom2008):

•ThelevelofinvestmentcommercialPSBproviderswouldbelikelytomakeinarange ofdifferenttypesofprogramminginthefuture,basedontheirrelativeprofitability

•Theamountofcontentthataudiencesarelikelytowantinthefuture,assumingthat currentdemanddoesnotchange

•Whetherthewidermarketislikelytomakeagreaterorlessercontributiontoeach typeofcontentinthefuture. Ascompetitionforadvertisingrevenueincrease,dramaticdeclinesinprofitabilityare expectedformanygenres.Inthefirstquarterof2009,advertisingrevenuesoncommercial televisionarepredictedtoexperiencea17percentfall(Sweney2009).Forexample,in 2007,GooglesurpassedITV1’sadvertisingrevenueforthefirsttime,andwiththegrowing recession,theoutlookforITVisnotgood.Theadvertisingslowdownhasalreadyhada significantimpactonjobsandprogrammingatthebroadcaster,withseveralbroadcasts delayedandfurtherjobcutspredictedoverthenextfewmonths.Themanagingdirectorof ITVbrandandcommercialhasannouncedthatthebroadcasteris‘scrappingforitslife’(cited inHolmwood2009).

Thewidereconomiccontext TheUK’smediaindustrycouldnotbeexpectedtobeimmunetothewidereconomicclimate inwhichitexists.TheUKeconomyispredictedtoshrinkbyupto4percentoverthe comingyear.Advertisingrevenueshavealreadyfallenintodecline,andarepredictedto shrinkfurtherovertheperiodoftheeconomicdownturn.Advertisingrevenueisstrongly correlatedtoGDPgrowth,andastheUKmovesintoarecession,thisisbadnewsnotjust forPSBproviders,butalsoformanycommercialmediaproviders(Deloitte2009). Forexample,newspapershavealreadybeguntomakesignificantcutbacks,including sheddingstaffasthecombinationofdecliningadvertisingrevenueandtechnologicalchange (withmanynowaccessingnewsonline)hithome.Atarecenteventtodiscussthefutureof newspapers,EmilyBell,contentdirectorofGuardianDigital,stated: ‘WecouldbeonthebrinkoftwoyearsofcarnageforWesternmedia.Inthe UK,fivenationalscouldgooutofbusiness,andwecouldbeleftwithnoUKownedbroadcasteroutsideoftheBBC.Wearefacingcompletemarketfailure inlocalpapersandregionalradio.Thisisasystematiccollapse–notjusta cyclicaldownturn.Eventhesurvivingbrandswillgothroughaperiodof unprofitability.’(citedinBeckett2008)

EvenmediamogulRupertMurdochhasinstructedNewsCorporationandthenewspapersin theNewsInternationalstabletopreparefora‘leanyear’in2009(citedinSweney2008b). ThisisnotasituationpeculiartotheUK.TheUShasexperiencedsimilarcasualties,with newspapergiantTribune(owneroftheLosAngelesTimes,ChicagoTribune andBaltimore

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Sun,amongothers)filingforbankruptcyinDecember2008,theMinneapolisStarTribune followingsuitinJanuary2009,andsignificantjoblossesformediafirmBloombergin February2009.Meanwhile,inFrance,PresidentSarkozyhasannouncedfinancialstateaid forthenewspaperindustry,includingtaxbreaksfordeliveryanddoublingthevalueof governmentadvertisinginordertohelptheindustrythroughtherecession. Whilethedifficultiesfacedbyotherpartsofthemediaindustrydonothaveadirectimpact onPSB,theynonethelessmassivelychangethecontextinwhichthediscussionregarding futurefundingtakesplace.Theformerassumptionthatmarketfailureislikelytoreducewith theadvanceofdigitaltechnologiesisincreasinglydiscounted.Inanycase,therehavelong beenconcernsaboutinvestmentinareassuchasnews.Whilemanyhavepreviouslyheralded thepotentialoftheinternettoprovidenewscontent,researchhasshownthatprimary sourcesofnewsandnewsgatheringremainlimitedtoafewlargeplayers:itisopinion,rather thanfacts,thathavemultipliedinthedigitalage(Davies2008). Asothersourcesofpublicservicecontentcomeunderincreasingpressure,andcertain genresbecomemorecostlyandcommerciallyattractive,PSB–andinparticular,pluralityin PSBprovision–islikelytobecomemoreimportanttocitizens,notlessso.

Mediarevenues Alongsidetheeconomicdifficultiescurrentlybeingexperiencedacrossthemedia,there continuestobemoneyinthemediasystem.However,withchangingconsumerhabitsand businessmodels,incomeisshiftingfromtraditionalmediacompaniestonewentrants,due toanumberoftrends:

•Advertisingincomeisshiftingfromtraditionalterrestrialbroadcasttelevisiontodigital andonlineservices.

•Theeconomicsofonlineadvertisingarevastlydifferenttotelevisionadvertising– particularlyinthatonlineadvertisingissubstantiallycheaper.

•Emergingbusinessmodelshaveresultedinpeopleincreasinglypayingforsubscription services,suchaspayTV,voiceanddataservicesonmobilephones,andinternet services–especiallybroadband. Wenowlookatthesetrendsinmoredetail. Shiftsfromterrestrialtodigitalandonlineservices Ofcom’sanalysissuggeststhatstructuralchangesaredrivingadvertisingtowardsdigital media.Itestimatesthatoverall,thecompoundannualgrowthrateforalladvertising between2008and2020willbe0.6percent,withtelevisionadvertisingdecliningby0.8per centandresponseadvertising(advertisingtargetedaccordingtousers’selections)growing by1.2percent(Ofcom2009). Theriseininternetadvertisingspendisawell-documentedphenomenon,withmost attentionfocusedonthecompetingincomesofsearchgiantGoogleandITVasaindication oftherapidlychangingtimes.In2002,Googleearned£77millioninUKadvertising,while GranadaandCarltonearnedacombined£1.5billion.In2007,Google’sUKadvertising revenues(of£1.3billion)outstrippedITVplc’snetadvertisingrevenuefromitsITV1licences (£1.2billion)(Ofcom2008).Inthecontextofthecurrentrecession,Google’sprofitsare slowingbutnonethelesssignificant,withprofitsof£275millionrecordedforthefinalquarter of2008. Asaresultoftheanticipatedpotentialofonlineadvertising,someexistingcompanies,eager tomaintainastakeasrevenuesshifted,purchasedsomeemergingpopularinternetservices forveryhighfigures.NewsInternationalspentUS$580milliononMySpacein2005,while

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GooglepurchasedYouTubeforUS$1.65billionin2006.Microsoftpaidout£117millionfora 1.6percentstakeinFacebookjustoverayearlater. Sincepeopledonotpaytousetheseservices,theirvalueislargelydeterminedbytheir popularityandthewiderpotentialtoconvertinvestmentintoadvertisingrevenue.However, speculationbyplayerssuchasNewsInternationalonthepopularityofthesesiteshasnot beenprovedwrong.MySpacehasinexcessof150millionusers,andisparticularlypopular amongyoungeragegroupsandformusicservices.In2007,YouTubewasthethirdmost popularsitegloballyintermsofminutesspentonthesite.IntheUS,12.6billionvideos werewatchedduringSeptember2008,whileintheUK55percentofinternetuserswatched avideocliponline.Facebookisthefifthmostpopularsiteintermsofglobalminutes,and hasover120millionactiveusers(Meeker2008).Thereismuchspeculationastothelongtermpotentialforadvertisingrevenueofsomeinternetservices–inparticularsocial networkingsites. Cheaperonlineadvertising Onlineadvertisingiscomparativelycheaperthanotherformsofadvertising,suchasprintor broadcast.Becauseoftheexpansivenatureoftheinternet,thesupplyofadvertisingspace caneasilyexceedthedemandforadvertising.Thecostbothofbanneradsandrich-media advertshavefallenasthenumberofimpressionsincreases(Meeker2008). Thedifferenteconomicsatplayhaveprovedproblematicbothforbroadcastersseekingto makecontentavailableandcommerciallyviableonline,andfornewspapers,whichareseeing significantgrowthinonlineusageatthesametimethatprintsalesfallintosharpdecline. Fornewspapers,printcirculationhasanestimated10percentofthepotentialreachof online,whileonlineadvertisingrevenuecontributesabout10percentoftotaladvertising revenue(Karp2007). Meanwhile,thesuccessofsomeon-demandserviceshasbeenmutedforcommercialPSB providersbecausetheamountofadvertisingrevenuethatcanbegainedissignificantlyless. Channel4,forexample,showedjustthreeminutesofadvertisingduringanonlineversionof theprogramme‘Skins’;ondigitaltelevision,thechannelshowsnineminutesofadvertising inthesameperiod(onehour)(Sabbagh2009).Itisgenerallyconsideredthatonlineviewers arelesstolerantofadvertisingthantelevisionviewers. Thisaside,thereisspeculationthatultimately,advertisingwillfolloweyeballs,andgradually onlineadvertisingrevenuewillincreaserapidly,attheexpenseofprintandtelevision.This may,however,dependoncompaniesdevelopingmoretargetedadvertisingtechniques, collectinggreaterdataabouttheirusers,andpushingmessagestothemonthisbasis.Social networkingsitesandservicessuchasGoogle’sGmailemailservicewillhaveadefinite advantageinthisregard. Infrastructureandsubscriptions Anothertrendinmediarevenueisthatincomeisincreasinglygeneratedthroughsubscription services.IntheUK,thetwomajorpayTVoperatorsareBSkyBandVirginMedia.Despitethe economicdownturn,BSkyBcontinuestoseecustomergrowth.Theseresultsarepartially attributedtothesuccessandpopularityoftheSky+digitalrecorder.Atthetimeofwriting, thecostofabasicSkypackage(includingbroadbandandvoicetelephonyservices)is £16.50permonth.Themostexpensivepackageis£55.75permonth.Addedtothis,Sky earnsfurtherrevenuethroughtheSkyBoxOfficeservice,whichenablesviewerstopayto watchpremiummoviesondemand. Meanwhile,VirginMediaoffersarangeofpackagesincludingtelephony,broadband (includingfibreopticbroadband)andtelevision,rangingfrom£5to£38permonthfora bundlethatincludesfreeUKcalls,fibre-opticbroadbandupto20Mbandaccessto165 digitalchannels.

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Thepopularityofmobilebroadbandisalsogrowingrapidly.In2006,5millionmobile internetmodemsweresold.Thevalueofmobilebroadbandisexpectedtorisetoinexcessof £68millionby2012.WiththeintroductionoftheAppleiPhone,Google’sG1phone,the BlackberryStormandNokiaN97overthepastyear,mobilebroadbandtake-uphas escalatedrapidlyintheUK.Thisispredictedtobeanareaofsignificantgrowthintheyears tocome.InJapan,mobilebroadbandusenearlymatchesthatofPCinternetuse. Itistheseservicesthatarepredictedtobebestplacedtoseeouttherecession,sincetheir revenuecomesfromsubscriptionsratherthanadvertising(ErnstandYoung2009). Notwithstandingthecurrenteconomicclimate,analystshaveidentifiedmobilebroadband andsuperfastbroadbandasareaslikelytoexperiencesignificantgrowthinusersandincome overthenextfewyears(Meeker2008). So,amidsuchrapidtechnologicalchangeandevolution,somecommercialentitiesare continuingtogainprofitfromthemediasector.Thesecompaniesare,ofcourse,providing servicesthatcustomersvalueanddesire–theywouldnotbesuccessfuliftheydidnot.But theirsuccessalsodependsonfactorsotherthansimplycommercialinvestmentand exploitationofthemarket.Inordertosurvive,contentservices–whichiswhat,atavery basiclevel,thesecompaniesareselling–needcontent.Thereisacomplexinterplaybetween investmentinpublicservicecontentandthoseservicesoperatingoutsidethepublicservice system.Itistothisinterplaythatwenowturn.

InvestmentinUK-originatedproductions IntheUK,publicservicechannelsaccountformorethan90percentofallspendingon originalUKtelevisionprogramming.AsidefromSky(throughSkyNewsandtheArts Channel),theDiscoveryNetworkandthesocialnetworkingsiteBebo(whichhasmadea smallinvestmentinoriginalcontent),themajorityofcommercialmediaplayersintheUK investlittleifanythinginoriginalUKcontent. However,overfourfifthsofrespondentstotheOfcomsurveyagreedthat‘itisimportantfor themaintelevisionchannelstoprovideprogrammesthataremadeintheUKandreflectlife intheUK’(Ofcom2009).Inaddition,thesuccessstoriesofthedigitalmediaworld undoubtedlygainvaluefrompublicservicecontent. Forinstance,bothYouTubeandGoogleVideoprovideaccesstopublicservicecontent, createdandinvestedinbypublicserviceproviders.AquicksearchofYouTubeUKreveals thatoriginalprogrammessuchas‘MidsomerMurders’(ITV),‘TrialandRetribution’(ITV), ‘LarkRisetoCandleford’(BBC1),‘Wallander’(BBC1),‘Skins’(Channel4)andthe‘ITCrowd’ (Channel4)canbeseeninfullonYouTubeortheGooglevideoservice. Equally,ahugesellingpointofsuperfastormobilebroadbandisthe‘anytime,anywhere’ accesstoone’sfavouritemusic,filmsandtelevisionprogrammes.Inthiscontext,theriseof copyrightinfringementhasbeenthesubjectofhugedebateoverthepastfewyears,andis likelytocontinueintothefuture.Leavingthisthornyissuetooneside,itremainsafactthat contentproducedasaresultofinvestmentbyPSBproviders(alongsideotheraudio-visual content,ofcourse)isastrongandattractivereasonforpeopletopayforbroadband subscriptionservices,whethermobileorfixed. Forexample,whileVirginTV’scablecustomerswatchedmorethan500millionitemsof broadbandcontentlastyear,theBBC’siPlayeraccountedforalmost20percentof programmeswatched(Sweney2009c). Elsewhere,theBBCiPlayer,availableonseveralsmartphonesincludingtheiPhoneandthe NokiaN97,hasbeenattributedwithboostingthesuccessofmobiletelevisionanddriving uptake.BBCwebsitesarethemostvisitedafterGooglebyBritain’s5.7millionsmartphone users(Khan2009).

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Despitethepromiseofuser-generatedcontent,mostmediaconsumerscontinuetovalue ‘quality’,andthereforeexpensive,productions(Deloitte2009).User-generatedcontent clearlyhasaroletoplayinadigitalmediaage–itcanempowerpeople,givecitizensspace tohavetheirsay,andencourageandstimulatecreativity–butitisneverlikelytoreplacea demandforqualitydrama,comedy,newsandcurrentaffairs.

Conclusion TheeconomicchallengesfacingtheUKmediaindustryshouldnotunderplayed.Theyresult inpartfromthecurrenteconomicclimate,butarealsoduetoanumberofsector-specific factors,includingtechnologicalandbehaviouralchange.The‘multiplier’effectofallthese factorscombinedmeansthatmanyplayerswithinthemediaindustryfaceextremely challengingtimesintheyearstocome. Certainelementsofthemediaindustrycontinuetogainrevenue,buttheincreasein spendingonsubscriptionservicesisunlikelytohelpfree-to-airpublicservicecontent. ThechallengesfacingPSBareacute,andshouldnotbeconsideredinisolationfromthe trendsaffectingtherestoftheindustry.Adeclineincontentinvestmentacrosstheboardis likelytomeanthatPSB–inparticular,apluralityofPSBprovision–willbecomemore,not less,important. Clearly,difficultdecisionsneedtobemadetoensurethatlevelsofpublicserviceare maintainedandtheUK’smediacontinuestomeettheneedsanddesiresofUKcitizens.In thefollowingsection,weoutlinethepolicycontextwithinwhichoptionsarebeingproposed, andwithinwhichdecisionswillultimatelybetaken.Wethengoontohighlightthepotential ofoneparticularsolution–industrylevies–asamechanismfortransferringincomefrom somericherpartsofthemediaintofundingpublicservicecontentthatbenefitseveryone– commercialplayers,PSBproviders,citizensandsocietyasawhole.

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4.Thecurrentpolicycontext PSBhasbeenthefocusofsignificantattentionoverthepastyearwithpolicyreviewstaking placeinGovernment(BERR2009)andOfcom(2009).Thissectionbrieflysummarisesthese andprovidesarecenthistoricalcontexttosetoutthepolicycontextwithinwhichdecisions aboutthefutureofPSBarebeingmootedandwillbetaken. Itfocusesonfourkeydocuments:

•TheCommunicationsAct2003 •Ofcom’sfirstreviewofpublicservicebroadcasting(Ofcom2004) •Ofcom’ssecondreviewofpublicservicebroadcasting(Ofcom2009) •TheDigitalBritainreview(BERR2009) Eachoftheseisdescribedbelow.

TheCommunicationsAct2003 In2003,theCommunicationsActestablishedaconvergedregulatorforaconvergingmedia market,intheformoftheOfficeofCommunications(Ofcom).Thisbodybroughttogether thefivepre-existingregulators–Oftel,theRadiocommunicationsAgency,theRadio Authority,theIndependentTelevisionCommission(ITC),andtheBroadcastingStandards Commission(BSC). TheCommunicationsActsetoutaframeworkforcontinuedpublicinterventioninorderto preservePSBinachangingtechnologicalenvironment,anddefinedwhattypesof programmesshouldcontinuetobeproduced.Itmadesomemovestostrengthencommercial broadcasters,byderegulatingownershiprestrictionsandreducingcontentregulation. However,itstatedthatallterrestrialbroadcasterscontinuedtobetiedtostructuralsupport fortheUKproductionsectorintermsofquotasforUKoriginalproduction,regional productionandindependentproduction. TheActalsosetoutOfcom’sdutiesinrelationtoPSB,providingtheregulatorwithtwo statutoryobjectives:

•Toreviewhowwelltheexistingpublicservicebroadcastersaremeetingthepurposes ofPSB

•Tomakerecommendationstomaintainandstrengthenthequalityofpublicservice broadcastingintheUK.

Ofcom’sreviewsofpublicservicebroadcasting Inordertomeetthestatutoryobjectivessetoutabove,Ofcomhasundertakentworeviews ofPSBsincetheCommunicationsActcameintoforce,asdescribedbelow. Thefirstreview Thefirstreviewtookplacein2004,andlaunchedaseriesofconsultationsseekingtodefine theprinciplesofPSB,fromwhichthefourprinciplesmentionedinSection1emerged.This firstreviewmademanyargumentsthatarestillconsideredpertinenttoday:

•ThatterrestrialPSBwasunlikelytosurvivedigitalswitchover,asthevalueoflicences forITVandFivedeclineandthefundingmodelforChannel4becameincreasingly threatened

•Thatwithoutaction,theBBCwaslikelytobecomethesoleproviderofPSB •ThatinnovationinthePSBsectorwaslacking–particularlywhenlookingathow terrestrialchannelshadrespondedtotechnologicalchanges.

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Oneofitskeyproposalswastheideaofa‘publicservicepublisher’:afundthatcouldbe distributedtocreatorsofpublicservicecontentonlinetoprovidecompetitiontotheBBC andspurinnovationinonlineenvironments(Ofcom2007b). Thesecondreview Ofcomisobligedtoundertakearevieweveryfiveyears,butitbroughtforwardthetimingof itssecondreviewbyayear,inresponsetotherapidnatureofchangewithinthemedia landscape.Assuch,thissecondreviewtookplaceagainstabackdropofgrowingurgency. Duringthereviewprocess,ITVthreatenedtosurrenderitsterrestriallicenceearly,ina campaigntohaveitspublicserviceobligationsreduced,whileChannel4madeincreasingly alarmingpredictionsregardingitsfuture. Inphase1ofthesecondreview,Ofcomoutlinedfourdifferentmodelsofapublicservice landscape,asfollows:

•Model1 –Maintainingthestatusquo(withdecliningpublicserviceresponsibilities forcommercialPSBprovidersoradditionalfundingtosupportthosewhichremain highpublicpriorities)

•Model2 –RelyingsolelyontheBBC •Model3 –TheBBCandChannel4actingasthemainprovidersofPSB,withlimited fundingavailableforotherservicesdeliveredbyalternativeproviders

•Model4 –AreducedBBC,withcontestablefundingforallotherpublicservice provision. Thefirstofthesefourmodels,elsewherelabelled‘evolution’,gainedmostsupportfrom responsestotheconsultation.However,thisoptionwouldrequirebridgingasignificant fundinggaptomaintaincurrentlevelsofPSBprovision.Ofcom’sreviewoutlinedthe followingfouroptionsforfunding:

•Directpublicfunding,includingdirecttaxation •Openinguplicence-feefundingorBBCassetstootherproviders(oftenreferredtoas ‘top-slicing’)

•Regulatoryassets,includingprivilegedaccesstospectrumandincreasedadvertising minutage

•Industrylevies. Duringthereviewprocess,theBBCputforwarditsownproposals,whichincludedsharing technologysuchasiPlayerandpremisesfortheproductionofregionalnews,andwaiving thefeesitcurrentlychargesforpublishingtelevisionlistings–proposalsthatitestimated couldbeworthupto£120million(BBC2008).TheseproposalswerebackedbyITV,which was,atthetimeofwriting,intheprocessofdrawingupaprovisionalagreementwiththe BBCdesignedtomakeregionalnews‘muchmorecost-efficient’(McNally2009).The proposalswerealsocautiouslywelcomebyChannel4.However,itisunlikelythattheyalone wouldbesufficienttobridgethefundinggapandprovidethefundsrequiredforcontinued provisionofPSBatcurrentlevels. OfcomconcludeditssecondreviewwiththepublicationofPhase3:Puttingtheviewerfirst (Ofcom2009).Themainrecommendationsandfindingstoemergefromthiscanbe summarisedasfollows:

•TheBBCshouldremainthecornerstoneofpublicservicebroadcastingintheUK,and shouldtakeonaroleofpioneeringthedevelopmentandtake-upofcontentacross newplatforms.

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•Theideaof‘top-slicing’theBBC’sfundingforprogrammesandservicesshouldnot bepursued.However,thelicencefeeswitchoversurplus,allocatedtotheBBCtodrive forwardtheprocessofdigitaltake-upandswitchover,continuestobeacredible optionforbridgingthefundinggap.

•Toensureplurality,asecondorganisationshouldbeestablishedalongsidetheBBC. Thisorganisationshouldhaveasustainableeconomicmodelandwithastrongpublic serviceroleembeddedatitscore,andshouldbebasedonpartnerships,jointventures orevenmergersbetweenChannel4andotherorganisationssuchasBBCWorldwide orFive.

•ThereshouldbeanimmediatereductioninpublicserviceobligationsforITVbut, goingforward,commerciallyownednetworksshouldretainamodestbutimportant publicservicecommitment. Thereviewprocessisnowcomplete,butOfcomstillhassubstantialfurtherworktotake forward,including:

•FurtheranalysisoftheproposalsputforwardbytheBBCtoshareinfrastructureand expertiseinordertobridgethefundinggap(so-called‘partnershipproposals’)

•ImmediateconsiderationsregardingexactlywhereandbywhatextentITV’slicence obligationswillbereduced

•FurtherexplorationofthesuggestedpartnershipmodelsinvolvingChannel4. Ofcom’sreviewprocesswascomplicatedbythefactthatagovernmentreview,Digital Britain,ransimultaneouslytoitsfinalstages,anditsinterimreportalsomade recommendationsforthefutureofPSB,describedbelow.

TheDigitalBritainreview TheDigitalBritainreviewwassetupbytheUKGovernmentinlate2008andsponsoredby theDepartmentforCulture,MediaandSport(DCMS)andtheDepartmentforBusiness, EnterpriseandRegulatoryReform(BERR).ItisheadedbyformerchairofOfcom,Lord Carter. Itsoriginalremitincludedevaluatingtheimpactofdigitalisationandthenewtechnologies onpublicservicebroadcastingassetsandpublicservicelicences,bothintheUKasawhole, andinthenationsandregions.Thiswouldbecarriedoutalongsideavastrangeofother activities,includingexaminingoptionsformaximisingparticipationandlevelsofbroadband serviceacrosstheUK,internetsafetyandmedialiteracy,andintellectualpropertyandthe problemofpiracyonline. AninterimreportwaspublishedinlateJanuary2009,shortlyafterthepublicationof Ofcom’sstatementonthefutureofPSB(BERR2009).Thekeyinterimrecommendationsare asfollows:

•Beforethepublicationofthefinalreport,thecaseshouldbeconsideredforpublic incentivestoenablefurthernext-generationbroadbanddeployment.Onesuggestion involvesusingthelicencefeeswitchoversurplusforthispurpose.

•Beforethepublicationofthefinalreport,toestablishwhetheralong-term sustainablesecondpublicserviceorganisationcanbedefinedanddesigned.Suchan organisationwoulddrawinpartonChannel4’sassetsbuthaveare-castremit.The reviewshouldbeginbylookingatpossiblepartnershipswithpublicsectorbodies– forexample,betweenChannel4andBBCWorldwide–butshouldnotruleoutother optionsorsolutions,includingpartnershipswithprivateorganisationssuchasFive. Thefinalreportisdueinspring2009.

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Conclusion Whilediscussionsanddebatehavetakensignificantstepsforwardinsofarasdefiniteoptions forthefuturearenowproposedandbeingdebated,therestillremainsmuchtodecidewhen itcomestothefutureofPSB.WiththepublicationofOfcom’ssecondreviewandthe interimreportfromtheDigitalBritainreview,governmentandParliamenthaveanumberof recommendationsonwhichtobuild.Butultimatelyitislikelythatnewlegislationwillbe required,andtheprospectofanewCommunicationsActremains. TheneedforadditionalfundstosupportthePSBsystemisclear,andtheoptionoftopslicingtheBBClicencefeeislargelydiscounted:Ofcom,theGovernmentandthe ConservativePartyhavealldeclaredthattheyareagainstthisoption.Alternativesolutions havebeenproposed(mostnotably,partnershipsbetweenChannel4andFiveandChannel4 andBBCWorldwiderespectively),buttheexactmannerinwhichthesewouldbridgethe fundinggapremainsunresolved.Boththesepartnershipproposalsinvolveinherentrisks,and itisnotyetclearhowfareithercouldgotoprovidealong-termsolutiontothestructural changesthatpresentthegreatestchallengestoPSBintheUK. However,thereisonesolutionthattosomeseemsobviousbutthathasattractedlittle attentionwithinthedebatesofar:industrylevies.Inthenextsectionwesetoutsomebrief modelstoillustratehowsuchasolutioncouldwork.

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5.Thepotentialofindustrylevies ThesizeofthefundinggapestimatedbyOfcomthatwillbepresentifwearetomaintain currentlevelsofPSBissignificant.WehaveseenthatthefinancialchallengesforPSBare largeandlikelytoremainsoastechnologicalchangecontinuestooccurandcompetition continuestogrow.Ifwearetomaintaincurrentlevelsofpublicservicebroadcasting,new fundsneedtobereleasedtobridgethisfundinggapfrom2012,butdebatecontinuesabout wheretosourcethesefunds.Onepossiblesolutioncouldbetosetindustrylevies. PublicopinionresearchconductedforthePSBreview(Ofcom2008)foundthatregulatory assetsandleviesweregenerallyconsideredplausiblesolutions,withtheotheroption–direct taxation–theleastpopularoption.Leviesarenotnew:levyschemesexisteffectivelyin someformorotheracrossEuropeandinothercountriessuchasCanada. Inthissectionweconsiderarangeoftypesoflevy,someofwhichareinuseinother countries,alongsideothersthatwouldrepresentanewstyleofpublicservicefunding.The sectionincorporatescasestudiesofothercountriesthatuselevysystemstofundpublic servicemediatoillustratehowsuchschemesworkinpractice.Italsopresentsaseriesof figures,whichareintendedtodemonstratehowlevysystemscould,anddo,work.Thereare severaldifferentpermutationsthatcouldbeputintopracticetoclosepartorallofthe fundinggapidentifiedbyOfcom. Theleviesconsideredherearethoseseton:

•Recordingequipmentorblankmedia •Retransmission •Directmedia •Newmedia. Eachoftheseisdescribedbelow.

Recordingequipmentorblankmedialevies Inordertocompensatecopyrightholdersforcopiesmadewithinfair-useorfair-dealing guidelines(inotherwords,nottocompensateforillegalfile-sharingorcopying),many countriesinEuropehaveintroducedsmallsalestaxesorleviesplacedonrecording equipmentorblankmedia. Thenewestpieceofequipmenttowhichsuchalevycouldbeaddedisapersonalvideo recorder(PVR),whichallowsconsumerstorecordprogrammesfromtelevisiontoadigital harddrivetowatchatalaterdate(commonlycalledtime-shifting). TheUKisoneofthefewcountriesinEuropenottohavesuchatax. Estimatedyieldfromrecordingequipmentorblankmedialevies WeuseddatafromtheUKExpenditureandFoodSurvey(EFS–seeAppendix1fora detaileddescriptionoftheEFSdata)toestimatetotalannualexpenditureonthefollowing categoriesofgoodsthatwouldbesuitablecandidatesfortheimpositionofalevy:recording equipment,blankmediaandcomputerequipment.Thesearedetailedbelow. Recordingequipment ThecategoriesofrecordingequipmentonwhichinformationisavailableintheEFScomprise:

•Videocassetterecorders(VCRs) •DVDplayers/recorders

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•DigitalTVdecoders •Audioequipment(forexample,CDplayersandrecordersandhard-diskaudio recorders). WiththeexceptionofVCRs,noneofthesecategoriesofgoodsis100percentmadeupof ‘recordingequipment’,assomeDVDplayers,digitalTVdecodersandaudioequipmentitems havenorecordingfunction.HowevertheEFSdoesnotcollectseparatedatafor(for example)DVDplayersasopposedtoDVDrecorders,sothesearethemostdisaggregated categoriesthatwecanusewiththedataavailable. Figure5.1,below,showsaggregatetotalexpenditurefortheyears2002–06inclusivefor eachoftheseitems,asestimatedusingtheEFSdata.(TheresultsfromtheEFSare reweightedand‘grossedup’tonationalaggregatelevelstomakethemcompatiblewiththe otherstatisticspresentedinthisreport.) audio equipment

VCR

digital TV decoders

DVD player/recorder

total recording equipment 2000 Estimated total expenditure, £ m (April 2008 prices)

Figure5.1: Estimated aggregate expenditureon recording(and playback) equipment,UK, 2002–06 Source: Expenditureand FoodSurvey

1800 1600 1400 1200 1000 800 600 400 200 0 2002

2003

2004

2005

2006

Year

ExpenditureonVCRshasbeenonadownwardtrendsincethefirstdatapointusedhere,in 2002/03.By2005theobsolescenceoftheVCRmeantthatexpenditureonnewVCRswas negligible.ExpenditureondigitalTVdecodersisrelativelystable,atalowlevelofaround £100millionperyear.ExpenditureonDVDplayersandrecordersroserapidlybetween2003 (thefirstyeartheywererecordedasaseparateitemofexpenditureintheEFS)and2005, butthendroppedtoaround£200millionin2006.Expenditureonaudioequipmenthas beenontheincrease,particularlybetween2005and2006. Theestimatedyieldfromalevyonrecordingequipmentdependsverymuchonwhatitems areincludedinthelevy.Totalexpenditureonaudioandvideorecordingandplayback hardwarehasbeenroughlystable,atbetween£1.5billionand£1.6billionperyear(inreal terms)since2004.Ifalevywereintroducedonthiswiderangeofhardware,a1percent levyontheretailpricewouldraiseamaximumofaround£16million.However,itwould probablybedifficulttosecurepoliticalacceptabilityforalevythiswidelydefined,because muchaudiohardware(andsomevideohardware,albeitadecreasingproportion)isplaybackonly–inotherwords,ithasnorecordingfunctionality. Ifahardwarelevywereconfinedtovideoproducts(ratherthanaudioproducts)only,the potentialyieldwouldbemuchlower.In2006,totalexpenditureonDVDrecordersand

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players,digitalTVdecodersandVCRswasonlyaround£285million.Hencea1percentlevy onvideohardwarealonewouldraiselessthan£3millionifexpenditurecontinuedatthis level.However,spendingonvideohardwarein2006wasaround40percentlowerthanin 2004.Thiswasprobablyduetoseveralfactors,includingdecreasinghardwarecosts, increaseduseofPCstorecordvideo(apointwereturntobelow),andincreaseduseof digitalvideodownloads.Ifthesetrendscontinue,thefuturerevenuestreamfromalevyon videorecordinghardwarelooksverylimited. Blankmedia InformationisavailableintheEFSonthefollowingtypesofblankmedia:

•Audiomedia(forexample,CDs,minidisks,cassettesandvinyl) •DVDs(blankandpre-recorded) •Videocassettes(blankandpre-recorded). Figure5.2,below,showscalculationsofaggregatespendingoneachtypeofblankmedia, derivedinthesamewayasforFigure5.1. audio media

video cassettes

DVDs

total media

3500 Estimated total expenditure, £m (April 2008 prices)

Figure5.2: Estimated aggregate expenditureon recording(and playback) equipment,UK, 2002–06 Source: Expenditureand FoodSurvey

3000

2500

2000

1500

1000

500

0 2002

2003

2004

2005

2006

Year

Figure5.2showsthatexpenditureonvideocassettesfellfrom2003,andby2005had reachednegligiblelevels.ExpenditureonaudiomediaandonDVDmediahasfallenmore slowly(dataforDVDmediaareavailablefromtheEFSonlyafter2004).Totallingexpenditure acrossallthreemediatypesfor2005and2006suggeststhatoverallexpenditurereduced fromaround£3.2billionin2005to£2.6billionin2006.Becauseoftheexpansioninthe marketforaudioandvideostorage,andrecordingdevicesthatusesolid-statemedia(such asiPodsandsimilarMP3devices,hard-diskvideorecorders,andsystemsbasedaround computers),itislikelythatthemarketforblankmediaofthetypesshowninFigure5.2will shrinkfurtherinfutureyears. A1percentlevyonsalesofallmediacoveredintheEFS(bothblankandpre-recorded) wouldhaveraisedaround£26millionin2006(inApril2008prices).However,thisisan overestimateofthepotentialrevenuefromalevyonblankmedia,astheEFSfiguresinclude bothblankandpre-recordedmedia.Moreover,itislikelythatsalesofblankmediawillfallin futureyears,reducingtheyieldfromalevystillfurther.

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Computerequipment Giventhatpersonalcomputers(whetherlaptopordesktop)arebeingusedmoreandmore fordownloadingandviewingbroadcastmediacontentnowadays,wenowlookatfigures fromtheEFSforexpenditureoncomputersandcomputercomponentsoverthelastfew years.ThisdataisshowninFigure5.3,below. 5000 Estimated total expenditure, £m (April 2008 prices)

Figure5.3: Estimated aggregate expenditureon computer equipment,UK, 2002–06 Source: Expenditureand FoodSurvey

4500 4000 3500 3000 2500 2000 1500 1000 500 0 2002

2003

2004

2005

2006

Year

Figure5.3showsthatin2005and2006,expenditureoncomputersandcomputer componentsandperipheralsintheUKwasaround£2.3billionincurrentprices.A1percent levyoncomputerproductswouldraisearound£23million.Oneadvantageofalevyon computersisthat,withtheincreasingimportanceofdigitaldownloadsasavehicleforthe deliveryofbroadcastmediacontent,spendingonPCsandothercomputersislikelytostay highinrealtermsintheyearsforwardto2013,comparedwithsomeothercategoriesof expenditureexaminedhere,whicharemorelikelytofall.However,noteverybodywhoowns acomputerwilluseitforviewingbroadcastvideoorlisteningtobroadcastaudio,sointhis senseitcouldbearguedthatacomputerlevywouldtargetthewrongconsumerstoalarge extent. Whileblankmediataxeshaveprovedsuccessful,revenuesareindeclinealongwithsalesof relevantequipment.Also,suchlevieshavetypicallybeenreservedforcompensatingrights holders,anditisunlikelythatasystemwouldbeintroducedwithoutservingthissame particularpurpose.Thisisespeciallythecasegiventhelevelofconcernregardingtheimpact ofpiracyontheUK’swidercreativeindustries(particularlythemusicindustry). Nonetheless,consideringthecaseofthecopyrightindustries,therearesignsthatthe Governmentissomewhatsympathetictotheideaofcontributionstothecostofdealing withpiracyfromthoseindustriesthat–manyhaveargued–indirectlyenableorbenefit fromit(namely,internetserviceproviderssellingbroadbandsubscriptionsthatenable downloadsofillegalcontent).TheinterimreportoftheDigitalBritainreviewhascommitted toexploringthepossibilityfordistributorsandrightsholderstofundanewapproachtocivil enforcementofcopyright‘tofacilitateandco-ordinateanindustryresponsetothis challenge’(BERR2009).Thustheideaofindustry-wide(andindustry-funded)solutionsto problemsthatthreatenthecontinuedwell-beingoftheUK’screativeindustries,whether music,filmorPSB,shouldnotbeoutofthequestion. Whileablankmedialevyisunlikelytodelivercontinuedfundingintothefuture,andif introducedwouldmostlikelytobehypothecatedforcompensatingrightsholders,itprovides

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anillustrationofaschemethathasexistedforsometimeinmanyothercountries.Italso introducestheprincipleofindustrycontributingcollectivelytoaddressamarketfailure.

Retransmissionlevies TheretransmissionofaudiovisualworksisgovernedbytheBernConvention,theEuropean Directive93/83/EECandnationalcopyrightlaw.Anyentitythatretransmitsaprotected workinthecontextofitseconomicactivitymustobtaintherightsholder’sauthorisationto doso.TheEUDirectiveandnationallawsaddthatarightsholdermustcalluponacollecting society’sservicesinsteadofexercisinghisorherrightsindividuallythroughretransmission operators(althoughintheUK,suchlawsdonotapply).AcrossEurope,thesystemis organisedbyAGICOA,whichcollected99.3millioninretransmissionleviesin2007. Retransmissionleviesareusedin30Europeancountries,andapplytocableandsatellite platformsthatbroadcastcopyrightmaterialforwhichnodirectfeeispaidtotheoriginal contentprovider.AUKequivalentwouldbeSkyorVirginMedia,whichbroadcastmaterial createdbytheBBC,Channel4orITVbutdonotpayforthecontent.Accordingtothelatest availabledata,Skyhas9.07millionsubscribers(Sky2008)andVirgin3.57million(Virgin Media2008).Basedonthesefigures,anannual£5flat-ratelevypersubscriberwouldraise around£45millionfromSkyandaround£18millionfromVirgin–atotalof£63million. Table5.1:Incomesecuredfromretransmissionleviesworldwide,inEuros TheNetherlands 25,480,546 Slovenia Germany 15,887,794 Slovakia Belgium 14,122,751 Iceland Ireland 6,191,116 Serbia Poland 5,361,796 Bulgaria Denmark 3,756,875 Lithuania Spain 3,000,000 Estonia Switzerland 2,690,460 Latvia Sweden 1,927,641 Bosnia Romania 1,618,287 Macedonia Portugal 1,138,012 Albania Special‘authors’share’ 961,091 SouthAfrica Austria 716,370 Canada Hungary 682,662 Ukraine Luxembourg 533,079

437,005 217,933 102,211 99,062 95,687 94,946 83,369 60,104 50,894 35,916 15,750 15,000 11,500 7,981

Itisworthnotinginthiscontextthatsubscriptionincomehasexceededtelevisionadvertising incomeforthepastfiveyears,andthatthegapbetweenthetworevenuescontinuesto grow.In2007,subscriptionrevenuegrewby6.4percent,to£4.3billion.Meanwhile,TV advertiserrevenuerose2.2percentto£3.5billionover2007followinganequivalentdecline in2006(Ofcom2008b).WhilesubscriptionservicesandpayTVmayseemtobenefitfrom thedigitalswitchover,commercialfree-to-airPSBprovidersaresuffering.

Directmedialevies Directmedialeviesarechargedonrevenuefromorganisationssuchasbroadcasters,cinemas orvideolabels.ThismodelisinplaceinFrance,whereCNC(CentreNationaldela Cinématographie,broadlyequivalenttoourUKFilmCouncil)isfinancedthroughleviesof thiskind.ThesystemprovidesCNCwitharound500millionayeartofundtheproduction ofFrench-languagefilm.

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AlevysystemsuchasthisintheUKwouldworkonthesamejustificationofthe retransmissionlevysystem,butwouldbeataxonrevenueratherthansubscribers.Thetax couldapplytopay-TVrevenues,forexample. Table5.2demonstratesthebroadcasterrevenuefroma1percentlevyonpayTVintheUK, basedonassessmentsfromtheUK’stwomajorpayTVbroadcasters.

Table5.2:Estimatedyieldfromleviesonbroadcasterrevenue Broadcaster 2007revenue(£m) Estimatedyieldfrom1%levy(£m) Satellite/cable: BSkyB 4,551 45 VirginMedia 2,486 25 (consumercabledivision) Total 7,037 70

Countrycasestudy1:PublicservicebroadcastinginCanada Canadaprovidesoneexampleofacountrythatusesindustryleviestofundpublicservicebroadcasting. TheCanadianBroadcastingCorporation(CBC)/RadioCanadaisCanada’snationalpublicservicebroadcaster.It offers29servicesonradio,televisionandtheinternet.CBChasaspecificremitsetoutunderthe1991 BroadcastingAct,andaparticularemphasisonbroadcastingservicescontainingcontentthatisdistinctively Canadian.CBCisfundedthroughacombinationofdirectgovernmentfunding,licencefeeandadvertising. PublicservicebroadcastingisalsoprovidedbytheAboriginalPeople’sTelevisionNetwork(APTN)andtheCable PublicAffairsChannel(CPAC),alongsideeducationalcontentbroadcastbyCanadianprovincialbroadcasterssuch asTVOntario.Fundingfortheseadditionalbroadcasterscomesfromavarietyofmechanisms,includingindustry levies.CPACisfundedbywhatisineffectavoluntaryindustrylevy:coverageoftheCanadianparliamentis carriedbycableoperatorsinCanada,butreceivesnogovernmentfunding. In1996,CanadaestablishedtheCanadianTelevisionFund(CTF).Thisisapublic–privatepartnershipbetween satelliteservices,cablecompaniesandtheGovernmentofCanadafocusedtowardscreating‘highquality, distinctiveprogrammingfortelevision.’Inessence,theCTFservestoensurethateachelementoftheCanadian broadcastingsystem‘contribute[s]inanappropriatemannertothecreationandpresentationofCanadian programming’(CanadianBroadcastingAct1991). TheCTFreceivesitsfundingfromtwoprimarysources:theDepartmentofCanadianHeritage,andbroadcasting distributionundertakings.Inaddition,theCTFreceivesrevenuefromrecoupmentonproductioninvestments madethroughitsEquityInvestmentProgram.UnderlicenceagreementswiththeCanadianRadio-televisionand TelecommunicationsCommission,broadcastingdistributionundertakingsarerequiredtocontributeupto5per centoftheirgrossbroadcastingrevenuetoCanadianprogramming,with1.5–5percenttobecontributedto productionfunds,ofwhichatleast80percentmustbedirectedtotheCTF. In2007/08,CTFproductionfundingcontributionstotalledCA$242million.Contributionsweremadeto466 televisionproductionsamountingtomorethan2,200hoursoforiginalcontent(CTF2008).Overits12-year history,theCTFhascontributed$2.7billiontosupportover5,400productions.Thishasresultedinthecreation ofmorethan27,000hoursofhigh-qualitytelevisionforCanadians,andhastriggeredmorethan$9billionin productionvolumeacrossthecountry.

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Newmedialevies AsimilarsystemtodirectmedialeviescouldbeappliedtoUKnewmedia–forexample,by applyingataxtointernetserviceprovidersandmobilephoneoperators,sothatanadditional levyispaidalongsidemonthlysubscriptionorasapercentageofrevenue.Suchleviesare notinwideoperationacrosstheworld,largelyduetotherelativelynewnatureofsuch technologiesandthepolicyacrossnationsofencouragingtake-up,particularlyof broadband. However,asdigitalmediamovesintomaturity,thisoptionmaybereviewedmoreclosely.For example,inFrance,PresidentSarkozyhasannouncedtheremovalofadvertisingfrompublic televisionchannels.Therevenuepreviouslyraisedthroughadvertisingrevenueistobe replacedbytaxescollectedfrominternet,mobilephoneandcommercialbroadcasting companies.Sarkozy’sproposalsarethatthelevyontherevenuesoftelephoneandInternet operatorswouldbe‘0.9percent,and3percentforprivatechannels’.Thelevyisexpected tomakeuptheshortfallof800milliononceadvertisingisphasedout. Newmedialeviescouldeithertaketheformofper-subscriberlevies,thatis,asurchargepaid perpayinguseroftheservice,orofapercentagetaxonannualrevenue.Wesetoutincome generatedbasedonthreedifferentexamples:per-subscriberleviesonbroadbandinternet provision,per-subscriberleviesonsubscriptionstomobilephoneswithinternetcapabilities, andleviesonannualrevenueofmobilephoneproviders. Per-subscriberleviesonbroadbandinternetprovision FiguresfromtheOfficeforNationalStatistics(ONS)forAugust2008suggestthataround 14.2millionhouseholdsnowhavebroadbandaccessintheirhomes(ONS2008a).Basedon thesefigures,anannualflat-ratelevyof£5persubscriberwouldraise£71million.

Countrycasestudy2:PublicservicebroadcastinginFinland Finland’sstate-ownedbroadcasterYleisradioOy(YLE)hasabroadpublicserviceremit,withastrongemphasis onnews,educationalandculturaloutput.Inform,YLElooselyresemblestheBBC,operatingfivemainnational televisionchannels.Twoarebothanalogueanddigitalfree-to-air,whiletheotherthreearedigital-onlyfree-toair.Italsooperatessevenmainanaloguestationsthatbroadcastawiderangeofpublicservicecontent. Additionalpublicservicecontentisbroadcastbynineothercommercialradiobroadcasters.Thesehavespecific remitstocaterforclassicalmusic,jazzmusic,youthmusic,Finnishpopularmusic,religiousprogramming, Russianlanguageprogramming,andLaplandtourism. Fundingforpublicservicebroadcastingisdrawnfromtwomainsources:adirectlicencefeepaidforbycitizens, whichcontributesthelargestshare,andanindustrylevypaidbycommercialbroadcastersinFinland.Underthe latter,broadcastersareobligedtopayaprogressiveproportionoftheirrevenuefrombroadcastingoperations (advertisingandsponsorship). Followinglegislationin2002,theindustrylevyisduetobephasedoutby2010,withanexpectationthat commercialoperatorspayfortheintroductionofdigitalinfrastructure.However,itprovidesaninteresting exampleofaprogressiveindustrylevy,withthescaleoffeesasfollows: Broadcasterturnover(in1,000) 3,400–5,000 5,000–6,700 6,700–10,100 10,100+

Licencefeeatlowerlimit(in1,000) 0 84 210 547

Licencefeeoverlimit%levy 5 7.5 10 12.25

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Per-subscriberleviesonmobilephoneinternetusage The2008reportMobileLife,producedbyCarphoneWarehouseandresearchedbythe LondonSchoolofEconomics,suggestedthataround15percentofmobilephoneusershad usedtheirphonetowatchTVordownloadmusicorvideoclipsfromtheinternet.Giventhat around95percentofpeopleintheUK(includingchildren)ownamobilephone,andthat thecurrentpopulationoftheUKisaround61million(ONS2008b),anannuallevyof£5on mobilephonesthatareusedtoaccessmusic,videoortelevisionwouldraisearound£43 millionperyear.However,asuseofmobilephonestoaccesstheinternetisincreasing rapidly,thepotentialyieldfromameasurelikethisislikelytorisesharplyoverthenextfew years. Leviesonrevenueofmobilephoneproviders IntheUK,a1percentlevyonUKmobileoperatorswouldyieldtheamountsshowninTable 5.3. Clearly,levieshavethepotentialtointroducefairlyextrafundsintoasystemthatis strugglingbutvaluedbyUKcitizens,andthatitselfcontributestotheeconomicsuccessof thewidermediaecosystem.Whileatfirstglancethisoptionmaynotappearpolitically attractive,theUKwouldnotbebreakingnewground:leviesexistinothercountriesacross theworld,andareanestablishedmechanismforfundingcontentandmediaservices. Table5.3:Estimatedyieldonlevyfrommobilephoneoperatorrevenues Mobilephoneoperator 2007revenue(£m) Estimatedyieldfrom1%levy(£m) 02 £5,500 £55 Orange £4,919 £49 T-Mobile £3,575 £36 3 £1,591 £16 Vodafone £5,124 £51 Total £208 Note:thecolumn‘2007revenue’showsannualrevenueconvertedfromEurotosterlingusingtheexchangerate inJanuary2008of0.743to£1 Datasources:02– www.o2.com/investor/press_release_14157.asp Orange – www.orange.com/en_EN/group/global_footprint/countries/uk/uk-fi.html T-mobile – www.annualreport2007.telekom.de/gb07/backstage_04/documentpool/en/en.pdf 3 – www.irasia.com/listco/hk/hutchison/announcement/a25330-e_2007hwlresultsann.pdf Vodafone – www.vodafone.com/etc/medialib/attachments/agm_2008.Par.77336.File.dat/2008_Annual _Report_FINAL.pdf

Analysis:pluggingthePSBfundinggapusinglevies Table5.4,below,bringstogetherthedifferentfundingmechanismsdiscussedhere.Thishas beendonebytakingthe£235millionPSBfundinggappredictedbyOfcomasemerging betweentheintroductionoftheCommunicationsActin2003anddigitalswitchoverin2012, andthenworkingoutwhatratewouldbeneededtoplugthefundinggapcompletelyusing eachkindoflevy.IftheGovernmentchosetofollowthiscourseofaction,acombinationof leviescouldbeused. Somecautionshouldbeexercisedininterpretingtheseresults,aswehaveuseddatafrom themostrecentavailableestimatesofexpenditure,revenue,numberofsubscribersandso on,andhavenotattemptedforwardextrapolation.Thisisparticularlyimportantinthecase oftheprojectedyieldfromalevyonaudioorvideomedia(whichislikelytofallsignificantly by2013,necessitatingahigherpercentagelevyrate)andtheyieldfromanannuallevyon

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internet-enabledmobilephones(likelytoincreasesharplyby2013,whichwouldmeanthe samerevenuecouldberaisedwithalowerlevypersubscriber). Additionally,wehavenotallowedforanybehaviouraleffectsfromtheintroductionofthese levies.Forexample,iftheincreaseinthepriceofaudioorvideorecordingequipment(asthe resultofintroducingalevy)ledtoameasurabledeclineinthequantityofequipmentsold, thiswouldreducetheyieldfromthelevy.However,wehavefewreliableestimatesofthe responseofquantitytoprice–the‘elasticity’,tousetheeconomists’technicalterm–for thesegoods,sohavechosentoassumenobehaviouraleffectsasafirstapproximation. Table5.4:Estimatedlevelofleviestobridgefundinggap Typeoflevy %orlevypersubscriberrequiredto raise£235million Levyonaudio/videorecordingequipment 14.7% (underwidestdefinition) Levyonaudio/videomedia(alltypes) 9% AnnualretransmissionlevyonSky/Virginsubscribers £19persubscriber Directmedialevyonsatelliteandcablebroadcasters 3.4% Directmedialevyonmobilephonenetworks 1.1% AnnuallevyonbroadbandISPsubscriptions £16.50persubscriber Annuallevyonmobilephonecontractswith £27persubscriber internetusage

Conclusion Leviescontinuetopresentapossiblesolutiontobridgingthefundinggapinorderto maintaincurrentlevelsofPSB.Thereareinherentpoliticaldifficulties:anadditionaltaxis unlikelytobereceivedenthusiasticallybythoseindustriestowhichitapplies.However,in exploringthisoptiontheUKwouldhardlybebreakingnewground:leviesexistinother countriesacrosstheworld,andareanestablishedmechanismforfundingcontentandmedia services. Asnotedabove,thefigurespresentedinthissectionareintendedtobeillustrative.Different ratescouldbeapplied,andleviescouldexistalongsideothermechanismsforsecuringextra fundingforPSBtosecureitsfutureoverthelongterm.Asinternetadvertisingrevenues increase,taxesappliedtothismayprovideasourceofextrarevenue.However,inthe mediumterm,thetrendappearstobetowardsincomegenerationbysubscriptionservices. Inthenextsectionwelookatthevaluethatregulatoryassetswillcontinuetoprovide,and howthesecouldbeexploitedtomaximisetheirvaluetoPSBproviders.

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6.Thevalueofregulatoryassets Asmentionedpreviously,PSBprovidershavehistoricallybeenpartfundedby‘regulatory assets’,thatis,giftedanaloguespectrum.Whilethiswilldeclineinvaluewithdigital switchover,somevaluewillremaininthesystem.Maximisingthisvalueisanobviousand non-controversialsolution(orpartsolution)tothefundingcrisisfacingcommercialPSB providers. Regulatoryassetsarecommonlydividedintotwocategories:

•PrivilegedaccesstoDigitalTerrestrialTelevision(DTV)spectrum •Otherassets,suchasprominenceonelectronicprogrammeguides(EPGs)(for instanceSky’son-screentelevisionguidewhichliststerrestrialPSBproviders–BBC1 and2,ITV,Channel4andFiveasnumbers1,2,3,4and5respectively),relaxed advertisingminutagerulesallowingforlongerormorefrequentadvertisingbreaks duringtelevisionprogrammesandmust-carrystatusoncable,meaningthatcable providersmustcontinuetodeliverPSBchannelstosubscribers. Ofcomhasestimatedthatregulatoryassetswillhaveavalueofaround£185millionin 2012/13.Beyondthistimeframe,itishesitanttomakefurtherestimatesbecauseof uncertaintyaroundthewidermediaenvironment. UnderModel3describedonp23above(inwhichtheBBCandChannel4actasthemain providersofPSB,withfundingavailableforotherproviders),thespectrumrightsandother regulatoryassetscurrentlysharedacrossBBC,Channel4,ITVandFivewouldbetransferred toBBCandChannel4toenhancetheirpublicservicepropositions.However,giventhatITV andFivearelikelytoretainsomepublicserviceobligations,astraighttransferralofassetsis unlikely.Instead,weconsiderwhereregulatoryassetshavepotentialtoenhancepublic servicemodelsinotherways. Inadditiontoretainedregulatoryassets,thereisalsothepotentialoftransferringsupport fromreleasedregulatoryassets–particularlythosecurrentlyatthecentreofthedigital dividendreview.

DigitalTerrestrialTelevision(DTT)spectrum Whilethedigitalswitchovermeansthatthevalueofaccesstobroadcastspectrumisin decline,itisanticipatedthatprivilegedaccesstoDTTwillretainsomevalueforPSBproviders. OfcomestimatesthatthevalueofgiftedspectrumallocatedtothecommercialPSBproviders (primarilyITVplc,stv,UTV,Channel4andFive)willbearound£120millionin2012/13 (Ofcom2008).ThisvalueisretainedinpartbythefactthattheDTTmultiplexcapacity allocatedtocommercialPSBproviderswillreach98.5percentoftheUKpopulationatthe timeofthedigitalswitchover,comparedto90percentforcommercialDTTmultiplexes. Itisdifficulttoconfidentlyandabsolutelyassessthevalueofspectrumpost-switchover. However,thereareanumberofpolicyinitiativesthatcouldhavesomeimpactonthevalue forPSBproviders,andforcitizensintheUK. AlongsideitsPSBreview,OfcomhasbeenconductingtheDigitalDividendReviewinorder todecidehowreleasedspectrumshouldbeallocatedoncedigitalswitchoverhasoccurred (Ofcom2006).IndicationsarethatOfcomintendstofollowaprocessofmarketauctionsas themostefficientwaytodeterminespectrumuse. However,theBBCandothershavecalledforatleastonethirdofthereleasedspectrumto bereserved,sothatPSBproviderscandevelopfree-to-airHigherDefinition(HD)services. Theyhavearguedthattherewillnotbeenoughcapacityonthesixexistingmultiplexes, evenafterswitchover,tocarrythecriticalmassofHDserviceswithoutremovingexisting services–andthereisnobusinessmodelforfree-to-airHDontheDTTplatform.

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Withoutthis,thevalueoftheFreeviewdigitalplatformislikelytodecrease.BBCresearch estimatesthatthesocialvaluelostthroughtheunavailabilityofHDservicesonDTTcould rangefrom£5.4billionto£15.6billion(BBC2007). Therehasalsobeendiscussionaboutthepossibilityoftransferringaproportionofincome receivedifthespectrumreleasedupondigitalswitchoverwereauctioned.Thisoptionhasa certainneatnesstoit,asitultimatelyinvolvessupportingPSBbytransferringincomegained fromreleasingassetspreviouslyusedtoupholdPSBprovision.Certainly,thereleased spectrumislikelytobeimmenselyvaluabletoanumberofindustriesandservices–not least,mobilebroadband.Incomefromspectrumauctions(forinstance,the3Gauction)has typicallybeenreceivedbytheTreasury.Nonetheless,itistechnicallyandpoliticallypossible tohypothecatesomeportiontowardfuturefundingofPSB.Thiswouldalsorepresentaoneoff‘windfall’payment,which–whilewelcome–maynotdomuchforsecuringthelongtermfutureofPSB. Alongsidethis,therehasbeenongoingdebateabouttheproposedadministeredincentive pricing(AIP)scheme.AIPiscurrentlyappliedtospectrumusedbybusinessradio,public wirelessnetworks,scanningtelemetry,point-to-pointfixedlinks,satelliteservices,the MinistryofDefenceandemergencyservices–butnottobroadcasting.Therearesignificant concernsabouttheproposaloftheintroductionofAIPtobroadcasting,andaboutthe associateddemiseofgiftedspectrum,offeredasanincentiveforcontinuedPSBoutput. ResponsestoPhase1ofOfcom’sPSBReview2 (Ofcom2008a)showedsupportforwaiving costsofaccessingspectrumunderAIP.Withoutsuchawaiver,thisoptionislikelytoput furtherfinancialpressureonPSBprovidersatatimewhentheyarealreadyfacingsignificant challenges. Thejuryisstilloutonthevalueofregulatoryassets–particularlybecauseitisdifficultto judgethemarketvalueofspectrumpost-switchover.Ultimately,regulatoryassetsare unlikelytobeconsideredasolutionbythemselves:theyaremorelikelytobeofferedin additiontootheroptions. Whilethetruevalueofregulatoryassetsremainsuncertain,itisimperativethatconsultations thathaveanimpactonthefuturefinancialstabilityofUKPSBprovidersdonotoperate independentlyoftheongoingreviews,andthattheimpactonPSBprovidersofany regulatorydecisionsisfullyconsidered,andsetoutasaPSBimpactassessment.

Otherassets OfcomhasestimatedthevalueofEPGprominencetobesomewhereintheregionof£30 million.However,aswithotherregulatoryassets,thisfigureisdifficulttocalculate.What preciselyconstitutes‘dueprominence’isdefinedbytheprovideroftheEPG,andmany audiencesseekoutcontentregardlessofitsplaceintheEPG.Itisinproviders’intereststo maketheEPGasnavigableaspossible–Sky’sEPGsystemisseenasavaluableassetforthe providerinhelpingSkycustomerseasilynegotiatethewealthofcontentavailableviatheir systems. Incontrast,must-carryobligationsarethoughttohavenegligiblevalue,giventhatmost cableandsatelliteproviderswillcarrythecommercialPSBprovidersinanycase,duetotheir audiencepopularity.Itisunlikelythatcustomerswouldwishtosignuptoaservicethatdid notofferITV,Channel4andFive,forexample. Finally,weturntothequestionofwhethertoenablecommercialPSBproviderstoincrease theiradvertisingscreentime.Thisoption,raisedinaconsultationdocumentfromOfcom publishedinMarch2008,isseenasneitherpopularnorasasustainablelong-termsolution (Ofcom2008f).Theproblemsofadvertising-fundedmediaarealreadybeingstarklyfeltin themidstofthecreditcrisis,evenamongplatformsthatdonothaverulestomeet(for instance,newspaperspublishingandonlineadvertising)intermsofquotasofadverts

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strugglingtoraisesignificantrevenue.Addingextracapacitymayservesimplytoreducethe overallcostofadvertisinginbroadcastenvironments,justasinternetadvertisingis comparativelysignificantlycheaper. Theabilitytooffermoreadvertisingslotswilldolittletocounterthecompetitionemerging fromtheonlinesector–particularlygivenitspotentialtooffermoretargetedadvertisingto usersandtobeinstantlyscaledupinseveralareas(although,aspreviouslyacknowledged, introducingfurtheradvertisingminutageforonlinetelevisionviewingisproblematic). Currentanalysisindicatesthatadvertisingspaceisincreasingatsucharatethatthecostof advertising,particularlyonline,iscomingdown.Thereforeitisunlikelythatincreasedlevels ofadvertisingwillbeabletoholdoffthiscompetition–northattherevenueexpected wouldnecessarilybegained.

Conclusion AsOfcomacknowledges,regulatoryassetswillcontinuetohavevaluepost-switchover, althoughprovidingestimatesbeyondthispointisextremelyproblematic. Thereisstrongsupportforcontinueduseofregulatoryassetstoprovidefinancialassistance forPSB.TheintroductionofadministeredincentivepricingatatimewhenPSBprovidersare facingsignificantfinancialstruggleswouldseemcounter-intuitive,onlyprovidingextra pressurewhereitiscurrentlyleastneeded. Thepossibilityofenablingincreasedrevenuetobegeneratedthroughadvertisingshouldbe treatedcautiously.Theshiftsinadvertisingincomearestructural,significantandlikelytobe longterm.Putsimply,theinternetoffersopportunities–intermsofsophisticationandscale –thatbroadcastcontentsimplycannotmatch.Evenwhenprovidingcontentonline,PSB providersareunlikelytobeabletoreapanadvantagefromonlineadvertising,giventhelack ofenthusiasmforadvertisementsduringonlinetelevisionviewing. Ultimately,itislikelythatregulatoryassetswillcontinuetoplayacrucialroleinsupporting PSBfortheforeseeablefuture.Itisimperativethatassociatedwork,particularlyaroundthe digitaldividendreview,doesnotthreatenthispotential.However,furthersubsidieswillbe required–so,again,governmentandParliamentmustturntoconsiderwhereadditional fundingmaybefoundtosupportthelevelofPSBthatUKcitizenswant.

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7.Conclusion DespitethemanychangestotheUKmedialandscape,publicservicebroadcastingcontinues toplayavaluablepartinUKlife–bothforourcitizens’well-beingandtothenational economy. Digitalswitchoverandtheongoingprocessoftechnologicalchangehaveputsignificant financialpressureontheUK’sPSBbroadcastersandthesepressuresarelikelytogrowover thenextfewyears. AsthetraditionalmodeloffundingPSBisunderthreat,thekeychallengefacing policymakersandthoseconcernedwithensuringthefuturehealthofPSBisfindingnew waystofundpublicserviceactivities. WehaveillustratedtwopossiblesolutionsaimedatincreasingincometoPSBactivities: industryleviesandcontinuingtoexploitthemaximumvaluefromregulatoryassets.There maybeothers.However,itisclearthattheimmediatethreatstoPSB,andtothewiderUK medialandscape,aresevereandlikelytobelongterm.Asaresult,solutionswillthemselves needtobelongterminnature,andmaylookvastlydifferentfromthefundingmechanisms wehaveutilisedpreviously.Atfirstglance,leviesmaynotappearpoliticallypopular,but thereisastrongrationaleforconsideringthemasaseriousoption. Ifwevalueourpublicservicehistoryandfuture,itisimperativethatwetakestepstoprotect andpromoteit.Thesemaynotalwaysbeuniversallysupported,particularlybysomeindustry sectors.However,attheheartofthisdebateisthedesiretoensureafuturemediaoffering thatistothebenefitofallcitizensandsociety.Withsuchhighstakes,itisperhaps unsurprisingthatsolutionsanddecisionswillneedtobecorrespondinglybold.

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SweneyM(2009b)‘BBCiPlayerboostVirginMediavideodownloads’,TheGuardian,12February 2009,availableat:www.guardian.co.uk/media/2009/feb/12/bbc-iplayer-virgin-media Thinkbox(2009)‘TVviewingupnearly1houraweektomatchrecordhigh’,pressrelease,3February 2009,availableat:www.thinkbox.tv/server/show/ConWebDoc.1677 VirginMedia(2008),‘VirginMediareportsthirdquarter2008results’,pressrelease,London:Virgin Media,availableat:http://media.corporateir.net/media_files/irol/13/135485/quarterly/FINAL_VM_Q308_Press_Release.pdf

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Appendix1:theExpenditureandFoodSurvey(EFS)data TheEFSisanannualcross-sectionalsurveyofaround7,000UKhouseholdswhichcollects dataoneachhousehold’sexpenditureusingdiariesfilledinoveratwo-weekperiod.We usedthisinformationtoestimatetotalannualexpenditurebyUKhouseholdsoneach categoryofaudioorvideoequipmentandmediausedinthisreport. Fortheyears2002to2005inclusive,theEFSwascollectedona‘financialyear’basis.This meansthat,forexample,theyearreferredtoas‘2004’inthisreportactuallyrunsfromApril 2004toMarch2005.In2006theEFSchangedtoacalendaryearreportingbasis.Hence, the‘2005’and‘2006’yearsinthisreportactuallyoverlapbythreemonths.However,when calculatingtheyieldfromtheleviesmodelledinthisreportweuseonlythe2006calendar yeardata.