Television Advertising: Communications Committee Report

Lord Clement-Jones Excerpts

Thursday 3rd November 2011 Lords Chamber

Moved by

[Lord Clement-Jones]

That this House takes note of the report of the Communications Committee on Regulation of Television Advertising (First Report, HL Paper 99).

[Lord Clement-Jones]

My Lords, I declare an interest as a sometime employee of London Weekend Television in the 1980s. First, I thank my fellow members of the committee, those who gave evidence to us, Ralph Publicover and Audrey Nelson who were successively the clerks to the committee, and our expert advisers, Professor Patrick Barwise, emeritus professor of management and marketing at the London Business School, and Professor Steven Barnett, professor of communications at the University of Westminster.

I also want to pay tribute to Michael, the late Earl of Onslow, who, if his health had permitted, would have taken over the chairmanship of the Communications Committee for this its first inquiry after the general election. I took over the acting chairmanship as a result. Despite ill health, as the House may imagine, he contributed intermittently but vigorously—sometimes even on the telephone. He was a considerable individual and we all miss him greatly.

Let me set out the background to the inquiry. The UK television advertising industry has changed over recent years as a result of the growth in the number of commercial channels, competition for marketing budgets from internet advertising and the economic downturn. This has led to calls for changes in the regulation of television advertising.

Although there has been some deregulation within the industry, there remain constraints on the quantity, scheduling and content of television advertisements and additional constraints on the price of commercial airtime—on ITV1 specifically. During 2008-09 there was a sharp fall in the revenues earned by commercial television companies from the sale of advertising—some 16 per cent. This was, in part, a reflection of the general economic downturn but it was also due to other developments including the migration of advertising from television to the internet. When we started the inquiry there had been some recovery of ITV advertising revenues in 2010, which seems to have continued into 2011, but the movement of advertising towards the internet seemed—and still seems—likely to continue.

If the advertising-funded model is in irreversible decline this would have serious implications for the future of commercial public service broadcasting. The committee therefore decided to conduct an inquiry into the current regulation of the television advertising market and how changes might assist the commercial television companies to maintain revenues and output to the benefit of the viewer. At the time, the Secretary of State for Culture, Media and Sport was also reported to have asked his officials to examine the case for ending regulation of the rates ITV could charge for advertising. It therefore seemed a good time to look at the whole question of advertising regulation but focusing on the regulations that do not involve advertising content.

Television advertising in the United Kingdom is subject to regulation in its scheduling and its sales arrangements. There is in particular a set of rules—the contract rights renewal undertakings, or CRR—which regulate what ITV can charge for advertising. These undertakings were required by the Competition Commission in 2003 as part of the arrangements for the Carlton/Granada merger to proceed to protect advertisers and other broadcasters from what was then perceived as potential and unhealthy market dominance from a unified ITV. The other major form of regulation of advertising on ITV is COSTA—the code on scheduling of TV advertising—which specifies an average of nine minutes advertising an hour on satellite channels and seven minutes on commercial public service broadcast channels.

The committee inquiry considered a number of questions: whether the current level of regulation of television advertising is appropriate; what the financial impact might be on television companies if changes are made to the regulation of scheduling and sales of television advertising; and the extent to which current arrangements reflect the public interest. It was not always easy—as committee members will testify—to come up with a clear answer, and sometimes fine judgments had to be made but if in doubt, when looking at particular proposals, we tried to give priority to television viewers’ interests.

The committee came to the following conclusions. First, the COSTA regulations should be harmonised to level the playing field between public service and commercial broadcasters when digital switchover happens in 2012. Research suggests that viewers would not support an increase in the amount of advertising on television, especially on ITV1, Channel 4 and Channel 5. It was our view that a reduction in the quantity of advertising airtime that broadcasters are allowed to sell may well improve the viewer experience and would certainly be fairer to those channels, which are limited more than all other commercial channels at the moment. As I said, under the COSTA rules public service broadcasters such as ITV1, Channel 4 and Channel 5 are permitted an average of seven minutes of advertising an hour and a maximum of eight minutes at peak times. On balance, our recommendation was that all channels should be allowed an average of seven minutes an hour, with an appropriate peak-time maximum which would be determined after research from Ofcom.

We also concluded that the CRR undertakings are no longer the most appropriate mechanism for regulating how advertising airtime is sold on ITV1. Your Lordships may have caught the speech today of the noble Lord, Lord Grade, in which he was exceedingly vigorous in his condemnation of the CRR rules and the remit of the Competition Commission. We took the view that the context in which CRR had been imposed had changed sufficiently to justify this view and that the Competition Commission when recently examining CRR had not been able to take more than a narrow, competition-based view, which did not take account of the wider public interest and in particular the clearly understood preference of television viewers for UK-originated content, as well as the contribution that increased original production makes to the nation’s creative economy.

ITV still dominates the market for fast-build advertising in mass-market popular television shows, but even so the competition has changed considerably, with heavy consolidation of the main media buyers into four organisations. On CRR, the committee therefore recommended that these undertakings should be removed on the important condition that they are replaced with binding undertakings devised and given by ITV plc to invest an appropriate proportion of any additional revenues from advertising in increasing its investment in quality, wide-ranging original UK programming on ITV1, and in training. If the television advertising regime is to be changed, we were insistent, however, that the binding undertakings we recommended would be rigorously upheld. All in all, the committee felt strongly that changes are needed to the regulation of television advertising and that our recommendations would encourage our commercial public service broadcasters to provide their viewers with quality original UK television programmes. After all, even in multichannel homes, over half of all TV viewing still goes to the five core channels.

As we said, it is extremely difficult to predict how much ITV plc would stand to gain in additional advertising revenue from the removal of CRR. However, the available evidence suggested figures of around £30 million to £55 million per annum. This equates to roughly 5 per cent to 10 per cent of ITV1’s current investment in original UK content. The public service broadcasters, I must emphasise, are vitally important for original UK production. Despite the advance of multichannel television and commitments from other broadcasters such as BSkyB to spend more, the PSBs still account for over 90 per cent of first-run original UK production, excluding sports rights. On the basis that they can be held to their promises, this rebalancing of television’s advertising money would therefore be seen on our television screens, to the manifest benefit of viewers and the creative economy, and would partially compensate for the £500 million which has been lost from original UK production in the last six years.

We noted that the changes to CRR may require primary legislation, but that it would be preferable to deal with these as soon as possible under the aegis of the Secretary of State for Culture, Olympics, Media and Sport. We recommended that the proposed changes are implemented at the very latest as part of the next communications Act.

A third extremely important element of our recommendations arose out of our view, in common with the Competition Commission and Ofcom, that the trading system used for selling television advertising is complex and arcane. This traditionally is based on an annual “deal round”, often on a so-called umbrella basis between advertisers, media buyers and broadcast sales houses involving a negotiation over the price of “commercial impacts”, essentially the eyeballs of particular types of target audience and unrelated to buying advertising slots in particular identified programmes, based on the discounts off station average price available for particular share of advertisers’ budgets. We took the view that the lack of transparency within the trading system favoured neither fair competition nor the viewer. We noted that for certain programmes called “specials”, such as the “X Factor” final or a Champions League match, different arrangements were put in place which could relate to the ratings of the programme itself. We therefore recommended that there should be a short, focused review of the trading system for television advertising airtime in order to find a more transparent system which includes a robust appeals process to address any outstanding industry concerns.

How have our recommendations fared at the hands of the Government and the competition authorities? Well, needless to say, we have not seen an instant relaxation of the rules yet, but a victory took place almost before the ink was dry. In March, just weeks after the committee’s report was published, Ofcom announced a review of the advertising trading model, as we recommended. This will be a significant step in assessing whether the CRR rules should be changed. The consultation document was launched in June this year and covers many of the areas which the committee was concerned with: transparency of pricing, signals, bundling of airtime and lack of innovation in the system. Above all, it is looking not only at the impact on advertisers, but also on TV viewers—an aspect that the Competition Commission was unable to consider in relation to CRR in its review. I trust that the review will be short and sharp. Ofcom also believes that more work is needed before changes to advertising minutage are made—that is, under COSTA. It is examining the potential economic impact and public interest arguments of different options.

The Government believe, and gave evidence to the effect, that they currently lack the power to lift CRR without the competition authorities’ recommendation, unless changes are made in the forthcoming communications Bill. However, I shall be interested to hear what the Minister has to say because they seem to have accepted that the Competition Commission was only able to take a narrow view when reviewing CRR in 2009-10 and have welcomed Ofcom’s inquiry into the advertising trading system. They are somewhat doubtful about the desirability of how to formulate and enforce any undertakings of the kind suggested by the committee.

In summary, the Government seem to be attracted to a more deregulated environment but uncertain about how to achieve it. This is understandable given the very different views that we heard about the impact of CRR, but with Ofcom’s advice they should be able to come up with a practicable solution. There is clearly a great deal of water to flow under the bridge. We did not expect a quick response in terms of action. We are pleased that the committee’s report has had an important response from Ofcom and the Government. We look forward to further progress which will explicitly feed into the forthcoming communications Green Paper and the subsequent Bill. I beg to move.

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[Lord Clement-Jones]

My Lords, I thank all noble Lords who have taken part in the debate, including members of the committee and the two non-members, the noble Lords, Lord Lipsey and Lord Patten, who have plunged into the debate so effectively. As a result of his Front Bench duties, we miss the noble Lord, Lord Stevenson, just when he was making a major contribution to the debate.

The debate has not been at all Byzantine or incestuous. We appreciate the noble Lord, Lord Fellowes, keeping a watchful eye over the future finances of ITV. That has been very helpful. None of us expected a Damascene conversion from the Government in the light of their original response. I am sure that ITV’s share price will go down tomorrow morning as a result of today’s debate, even if it went up earlier.

We have heard significant differences about whether CRR is fit for purpose. We have a common interest in believing that it is the viewers’ desire to have original UK programming. That is paramount. How you judge that and what kind of regulation over ITV advertising is adopted is crucial. I hope that the debate will continue with the Green Paper, when that is produced, and that the Government are persuaded by the outcome of the Ofcom review that the trading system needs to change.

Motion agreed.