Television Advertising: Communications Committee Report

Lord Patten Excerpts

Thursday 3rd November 2011 Lords Chamber

[Lord Patten]

My Lords, I hope that your Lordships take close note of this report—it is a good one—and in particular of the pressing need to clean up the system of contract rights renewal, or CRR, to which my noble friend Lord Clement-Jones has just referred. By their own words in this report, Ministers do not fully understand the CRR system. I hope that once they do, they will take speedy action in the public interest to change it. That need is urgent.

I have no interests of any sort to declare. I have no business or professional interests in TV or advertising. Rather insultingly, no person, company or body has lobbied me to make my voice heard in the debate. I try not to take that amiss. I decided to take part as a Back-Bench and serious non-expert. I read the report—sometimes a dangerous thing for anyone to do. Not only do I declare no interest of a professional or commercial sort, in the interests of transparency—to which I shall return in a moment—I also declare that at one stage in our lives down the road here in Westminster, we had a deliberate and considered total lack of interest: we brought up our daughter in a home without a television set. I hope that my coming out in this way does not overly shock those of your Lordships of a delicate nature. Indeed, the fact that we brought her up in this way led to one notable occasion when she was asked in her primary school class to name her favourite mid-week programme. She was forced to explain that she did not have one because she did not have a television set at home. I was told that that led to some debate later in the staff-room of the possible need for social services to check up on the manifestly cruel and unnatural lifestyle imposed on her. Having left one of England’s ancient universities, she has more than made up for lost viewing time subsequently.

If one refers to the excellent glossary at the end of this well produced report, one sees that contract rights renewal is defined simply as:

“A set of undertakings which determine the way in which ITV plc is able to sell advertising airtime on ITV1”.

That seems crystal clear and simple, but in practice it is not. CRR seems to lack much transparency of any sort and is exceptionally hard to understand, at least according to the Ministers who have the responsibility of understanding it. The Ministers giving evidence fell over themselves throughout to stress their own lack of understanding of the CRR system. As I ploughed through the report, I carefully noted their various descriptions of it. First, they described CRR as “arcane”; then, slightly revving up, it became “complex”. Getting a bit racier, it was termed reminiscent of the Schleswig-Holstein question. Warming to their theme, it was “Byzantine”, then “highly complicated and Byzantine”, before peaking with the truly wonderful “Byzantine and incestuous”, to be found on page 195 in all its glory. I look forward to being reassured that HMG are not in favour of incest whether in business or elsewhere. If your Lordships and Ministers apply that valuable old test, “If one cannot explain it, it should not exist”, the CRR system, which we have allowed to carry on, fails absolutely.

This is not some arcane administrative sideshow, for the public interest cannot be served nor the market be perfectly informed about a cloudy system that determines how the approximate 80 per cent of annual deals and the 20 per cent of short-term burst deals are agreed. It is right that the public—and best of all even junior Ministers—should be able to understand it. The CRR system should be reformed completely so I very much echo what my noble friend Lord Clement-Jones said earlier. Alas, I was not in the Chamber to hear my noble friend Lord Grade of Yarmouth in an earlier debate, but it sounds as though we agree pretty strongly. We have never discussed the issue; again, I say this in the spirit of transparency.

I think the CRR system should be reformed completely. It should be subject to enhanced public interest undertakings, and subject to an equally enhanced adjudication process to help complaints about the way advertising airtime is sold. This is because of my belief that—as ITV strongly and to a lesser extent Channel 5 have argued—if CRR was removed then advertising revenues would increase. If advertising revenues increase, this will enable broadcasters, by charging more for advertising, to invest more in programming and invest more in the training of broadcasters. Better programming? That is highly desirable. Better training? More training? Both are highly desirable. Both to be guaranteed by a new public service broadcasting undertakings arrangement of a binding sort is a proper trade-off for the transparency and deregulation that I really thought our coalition Government favoured.

This reform of the contract rights renewal system is urgently needed. It is in the public interest. In the light of the migration of advertising to the internet pointed out by my noble friend Lord Clement-Jones, it is much needed as well to sustain good programming and good training for good broadcasters. I congratulate him and his colleagues on this excellent report, and for pinpointing the pressing need for CRR to be reformed as quickly as possible, something that I hope that Ministers will listen to. I ask my noble friend on the Front Bench not to respond in any detailed way to what I have said, but to draw my views to the attention of the Ministers responsible.

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[Lord Razzall]

My Lords, following the remarks of the noble Lord, Lord Lipsey, I ought to report that, as a member of the committee, his noble friend Lord Bragg showed remarkable restraint in not making the point that the noble Lord, Lord Lipsey, has just made.

I think I speak for every member of the committee who had not previously been involved in the television industry when I say that when we started on this inquiry we were to some extent extremely surprised and in some cases shocked to discover the way in which TV advertising was sold. That very much coloured our deliberations. As a relatively sophisticated business person, I would have assumed, until I got to the first meeting of the committee, that advertisers were by and large able to choose which programmes they would like their products to be advertised around. I was somewhat surprised to discover that that applies only to about 20 per cent of advertising, during big events such as a cup final or “The X Factor”. I do not know whether that yet applies to the next episode of “Downton Abbey”, but no doubt the noble Lord, Lord Fellowes, who is not speaking in the debate, will tell us afterwards. That represents only 20 per cent of the way in which advertising is sold.

For the benefit of the people who read Hansard, it is worth expanding a little on my discovery of the way in which advertising is sold. People who do not appreciate the way in which it is sold might be interested to know about that. Each year there is an annual deal round, usually in the autumn, when media agencies negotiate an “umbrella deal” which will form the basis for booking specific advertising campaigns for the year ahead. That surprised me. It was even more of a surprise to learn that those negotiations do not start with a blank sheet of paper each year. The starting point each year is likely to be what was agreed in the previous year, which means that there is likely to be considerable consistency over time in the deals which are made.

In broad terms, media agencies agree to commit a proportion of their television advertising spend to a particular broadcaster. In return the broadcast sales house gives them a discount off the station average price. This is the price which the broadcaster charges for a particular target audience or demographic group; for example, men aged 16 to 34. During the course of the year, within the terms of the annual contracts which have been negotiated, advertisers then negotiate terms to reach certain target audiences for particular advertising campaigns. The standard station average price is calculated after the advertisements have been aired and varies month by month depending on the viewing ratings delivered by a broadcaster for a particular demographic group. The audience viewing figures for each advertisement are measured using an independent industry metric and the overall revenues which it has received.

What I have just said eminently proves what my noble friends Lord Clement-Jones and Lord Patten have indicated—that this is a completely non-transparent, peculiar system. The most fundamental element of our report was that it should be reviewed. All members of the committee were absolutely unanimous on that. We were also unanimous that the CRR undertakings should be removed. They were implemented in 2003 and the broadcasting world has fundamentally changed since then. I was not in my place when the noble Lord, Lord Grade of Yarmouth, spoke in the previous debate but I understand that he expressed the view that I have put rather more strongly than I have just done.

Picking up a point that has been made, if these concessions are going to be made to ITV, it is important that binding undertakings are obtained from it on its commitment to invest in further quality UK original content and training. Although ITV might not like to be quoted on the exact detail, the representations that the committee received from representatives of ITV showed that it was very open to do this. Obviously, there will be a question of definition and what is meant by improved programming; it cannot just be ITV making programmes that it would have made anyway. However, it is perfectly possible to measure that. Those undertakings are very important.

[Lord Patten]

Would my noble friend also add to his list of desiderata in the matter of undertakings which ITV says it is glad to give that a certain amount of resources should be devoted to more and better training for more up and coming young broadcasters and producers?

[Lord Razzall]

The committee made that point. I am not sure that in its representations to us ITV talked about training but it certainly indicated its receptiveness to giving undertakings on UK programming. I entirely agree that that is a very important point.

As regards the remarks made by the noble Lord, Lord Lipsey, I do not think that the committee ever contemplated removing all the restrictions on advertising minutage. The debate, which was lengthy—we had representations from a number of different channels on this—concerned whether we should bring in line the minutage that ITV, Channel 5 and Channel 4 were allowed to have with that which the other commercial channels were allowed to have. There was a long debate about whether everyone should go up to nine minutes or the nine-minute people should come down to seven, but we never discussed whether the COSTA rules should be abolished entirely. Even the noble Lord, Lord Lipsey, indicated that there was a general feeling that the public really would not want to have more advertisements. We had no detailed evidence to that effect; there was a general assumption that that was the public’s view. Therefore, we felt that everyone should be brought in line and come down to seven minutes. I will be interested in the response that the noble Baroness, Lady Rawlings, makes to this but no doubt there will be a recommendation by Ofcom in due course as to which of the two it should be. I will be very surprised if the noble Lord, Lord Lipsey, carries the day on a complete abolition of the COSTA rules. To go back to my first point, it is fundamental that we have a comprehensive review as to the way television advertising is sold.

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[Baroness Rawlings]

My Lords, I am most grateful to my noble friend Lord Clement-Jones for elevating the last part of this afternoon, which has given us the opportunity to discuss the importance of the regulation of television advertising through the report he chaired following the untimely death of my noble friend Lord Onslow. As my noble friend Lady Fookes, the noble Lord, Lord Stevenson, and my noble friend Lord Clement-Jones all said, we miss him and his contributions.

This debate has confirmed something that is obvious and known to us already, but I repeat it. There is a staggering accumulation and store of informed expertise and experience available in this House that can be marshalled and focused upon in this area. I am grateful to the chairman and members of the House of Lords Communications Select Committee—six noble Lords—for contributing today and for undertaking this inquiry into the regulation of television advertising. I thank all noble Lords who have contributed to a most interesting debate. I read the report with interest and rather wished I had been on the committee.

As the report points out, many of the recommendations are matters for the competition authorities, but there are also recommendations for ways that the competition regime could be changed, which would require legislation. It therefore falls to the Government to consider these points. As my noble friend Lord Patten expressed so clearly, despite not being involved in the television world, the operation of the television advertising market is highly complex. I agree that it is so complex a subject as to compete, as several people have said, with the complexity of the dreaded Schleswig-Holstein question. We have, of course, carefully considered the recommendations and, even where we do not always agree with the solutions, we strongly support the aim of trying to encourage investment in high-quality UK programming.

There is no doubt about the importance of television in most people’s lives. We must therefore make certain that the regulation is correct. That will allow for innovation and growth but will still provide a degree of protection where necessary. The continued success of television broadcasting in the United Kingdom and abroad suggests that the existing regulations are, broadly speaking, fit for purpose.

Let us briefly consider the state of the market, since it is against this backdrop that calls for change must be considered. Time prohibits me from reeling out a series of statistics, but 2010 was a good year for television. Viewing figures were up, revenue was up and investment in content and first-run originated programming for the five main PSB channels also increased. Despite the growth of multi-channel TV, the highest percentage of this viewing remains with the PSBs and their extra channels.

I commend the Communications Committee for its diligence in examining the complexities and regulation of this market with a view to simplifying and improving it. The committee quite rightly concentrated on identifying ways of maintaining the commercial PSBs’ revenue potential so as to encourage more investment in programmes which have high standards.

I now turn to the CRR. Many of the recommendations in the committee’s report concern the removal of contract rights renewal and replacing it with the imposition of undertakings to make certain that ITV invests an appropriate proportion of any additional advertising revenue in high-quality programming. While we would welcome any increase in ITV investment in more diverse and new high-quality programming, we are not persuaded that this is the right way of achieving that.

First, there are a number of potential practical problems with introducing such undertakings which need to be looked at. For example: how is high-quality programming defined and by whom? How can it be determined whether the programmes would have been made anyway? In other words, how do you avoid deadweight? Is a decision taken in advance of broadcasting, so programmes have to be vetted in advance to see that they fit the criteria, or is the decision taken retrospectively? Aside from the practical issues, some of which could possibly be resolved, there are bigger problems around the operation of the competition regime.

ITV remains by a long way the most popular commercial channel in terms of audience. As the committee’s report noted, it is the only commercial broadcaster able consistently to draw in large peak-time audiences with programmes such as “Coronation Street”, my noble friend Lord Fellowes’s Emmy award-winning “Downton Abbey”, and “The X Factor”.

[Lord Patten]

My noble friend and other noble Lords might wish to be aware that at the close of the London Stock Exchange at 4.30 pm, the biggest riser on the stock market was indeed ITV, up by 5.94 per cent. I am not a shareholder but it may well prove that the mentions of ITV in your Lordships’ debate this afternoon have indeed moved markets.

[Baroness Rawlings]

I thank my noble friend Lord Patten for keeping us up to date. Unfortunately I have been in the Chamber for most of the day and have not seen that, but I thank my noble Friend very much.

It is precisely these kinds of successes that were a key consideration in the Competition Commission’s review of the CRR, which led it to conclude that it should be retained, notwithstanding the changes in the market since the original review. It cannot be the right time to be making the TV advertising market less competitive, which would be the inevitable effect of removing the CRR undertakings. I am most grateful for the intervention of my noble friend Lord Fellowes, which came from his highly successful professional viewpoint.

I remind noble Lords that Ministers themselves have no power to lift the CRR, which is a competition remedy that only the Competition Commission has the power to lift. Although we have some sympathy with ITV’s position, we should not forget that the CRR undertakings were offered by ITV at the time of the merger of Carlton and Granada when the Competition Commission had concerns that the new company, ITV, would have a dominant market position. We are aware of the important contribution that ITV makes to public service broadcasting. It produces high-quality programmes which also act as a spur to the BBC to produce equally good television. This competition is good for all of us.

We do not believe that it is in anyone’s interests to allow ITV to abuse its dominant position in the television advertising market. This would be bad not just for consumers and advertisers but would also have a detrimental effect on other broadcasters’ ability to produce high-quality content. Even if we could construct a watertight system for making certain that the additional revenue that ITV could raise as a result of the removal of the CRR was spent on additional high-quality content, it surely cannot justify making the TV advertising market less, rather than more, competitive.

The Competition Commission believes that its review of the CRR was constrained by not being able to consider the wider advertising market. This was something it felt Ofcom could do. Many noble Lords, including my noble friends Lord Razzall and Lady Fookes, and the noble Lord, Lord Lipsey, have pressed for the removal of CRR. The Government hear their case, and we welcomed Ofcom’s announcement in March that it would review the way TV advertising is traded. This review is currently going on and we await its outcome with interest. I wish I could answer the question asked by the noble Lord, Lord Macdonald, about the timing of this review. Alas, we have no date as yet but we hope it will be soon. If Ofcom concludes that there are reasons for concern, it can refer the matter to the Competition Commission. The results of Ofcom’s review, or recommendations coming from any further review by the Competition Commission, will feed into our communications review and be carefully considered in that context.

Perhaps I could answer the question put by my noble friend Lord Clement-Jones on harmonising advertising minutage for commercial PSBs and non-PSB commercial channels. I recognise that there is a debate about commercial PSB channels having different rules to non-PSB channels. However, that is an issue for which the independent regulator, Ofcom, is responsible, taking into account representations and the requirements of the AVMS directive. Ofcom is currently reviewing this.

On the question from the noble Lord, Lord Macdonald, on revenue arising from internet advertising, Ofcom has concluded that that is a different market. Of course, I shall pass the clear views of my noble friend Lord Patten to the department.

I close by thanking all noble Lords who have contributed to the debate. If I have not answered all the questions, I shall of course write, placing a copy of my letter in the Library. I am grateful again to my noble friend Lord Clement-Jones for undertaking this inquiry, for his chairmanship of this difficult subject area and for bringing this debate to the House. It may be that as the market develops and circumstances change, the Competition Commission concludes that the CRR is no longer necessary, as felt by so many of your Lordships today. I shall take noble Lords’ views back to the department.

I should like to end on a more positive note. As I touched on earlier, with revenues, investments and viewing all up, television is one of the UK’s strengths and its quality remains the envy of the world.