In the final week of January two events shook British broadcasting. Michael Grade, one of our most successful television executives, quit as head of Channel 4. Four days later the four biggest media organisations in the country-and four fierce rivals-combined to bid for the bulk of the new terrestrial digital licences on offer from the Independent Television Commission (ITC).
The two events are not obviously related. Yet both are reactions to the deep changes that are sweeping through the industry, in Britain as elsewhere. Grade is leaving television to run an entertainment group-a step which until very recently would have seemed a bizarre retreat to the second division for someone of his talents. That few expressed such a thought indicates the extent to which traditional broadcasting has lost its place at the top of the media and entertainment sector. Likewise, the fact that Carlton, Granada, BSkyB and the BBC felt they had to swallow their differences and come together if they were to manage successfully the journey to the multi-channel digital future is evidence of how far power in broadcasting has shifted.
The emerging forces are the rights holders, in particular those who own the rights to big events (such as football matches) which, when broadcast live, can, thanks to the development of pay television technologies, generate revenues that would have been inconceivable five years ago. This shift of power is one of the two fundamental changes that the arrival of pay television is bringing about. The other is the beginning of the end of universal access and its replacement with a two-tier television culture, where those who pay to watch have either unique or primary access to the best programmes and those who do not, or cannot afford to, are left with second best material. In the late 1990s, rights is might. To a considerable extent the continuation of public service broadcasting, whether funded by the licence fee or the sale of advertising, will turn on the extent to which those who own the important rights want to see it continue, or are allowed by the politicians to determine its future.
it is now possible to appreciate just how stable the first 40 years of television were in Britain, and how unstable the past five have been. Until the early 1990s the two separately funded public service systems (BBC and ITV) coexisted in rough equilibrium, competing for audiences and prestige but never threatening to undermine the other's existence. The two systems adjusted easily to the addition of extra channels (BBC2 in 1962, Channel 4 20 years later) and technological changes such as colour and the video recorder. In the mid-1980s the stable environment did begin to crack, a process sharpened by a Thatcherite attack on traditional broadcasting structures and values, but the final outcome, the 1990 Broadcasting Act, failed to deliver the full radical agenda: the legislation had to be toned down as Thatcher no longer had the political strength to realise all her ambitions.
However technology and Rupert Murdoch carried on the work. The merger of Murdoch's Sky satellite network with the rival British Satellite Broadcasting at the end of 1990 to create BSkyB, and the new company's wresting of Premier league soccer from ITV two years later, enabled the take-off of pay television in Britain. In the past five years the consequences have been dramatic.
In 1992 total cable and satellite revenues were ?49m (from advertising and subscription). In 1996 they were ?1.5 billion. Already the new television channels earn more than the BBC; within a few years their income is forecast to overtake the collective income of the ITV companies. And this despite the fact that the number of cable and satellite homes in the UK-around 5m-is far fewer than the either the experts or BSkyB were predicting five years ago.
The paradox is that while the British as a whole have resisted cable and satellite, the minority that has taken to it has shown itself willing to spend much more than anyone forecast. Pay television has only a 10 per cent share of total viewing, but it generates 27 per cent of total television revenues. This trend is set to continue. BBC licence fee income is pegged to inflation; the advertising financed sector will see modest growth; but over the next five years pay television could achieve real annual growth of nearly 20 per cent. This avalanche of money poses problems for the traditional broadcasters, but it could also prove a problem for the new media-even BSkyB. As the pay television market opens up, as it will in the digital era, the broadcasters could lose their hitherto dominant position.
Actually the broadcasters have really only dominated the industry for the past ten years. Before that they shared power with the programme makers and production workers whom they employed. In the 24 years between the Pilkington report of 1962, which turned the ITV network into a public service broadcaster, and the Peacock report of 1986, which inaugurated the era of competition and market forces across all channels, British broadcasting was creatively run by producer elites, while the economic rewards went disproportionately to the workforce.
This unusual arrangement arose from the twin features of monopoly funding and a Reithian ethos-television should be good for you. The definition of what was good for you was left to the programme departments of the BBC and the ITV companies, self-perpetuating oligarchies which shared a common value system, supported by managements and regulators who had themselves started their careers in the broadcasting organisations.
Many producers tried to combine being high-minded with being popular, but it was a populism protected by lack of real competition; the venerable ITV current affairs series, World In Action, for example, founded in the spirit of campaigning Daily Mirror journalism, used to get a 50 per cent audience share 30 years ago when it was head to head with Panorama on BBC 1. This January against EastEnders (and football on Sky) it was down to 14 per cent.
The ITV unions exploited their monopoly power in two ways: to maintain manning levels and work practices that ought to have become obsolete as a result of technical change, and then to use these archaic arrangements ruthlessly to enhance their earnings. At London Weekend Television (LWT) the company joke ran: "What's the difference between an LWT engineer and an Arab oil sheikh? The oil sheikh doesn't get London weighting." At the BBC the problem was never so bad but it too suffered acute overmanning.
From the mid-1980s broadcast managements began to assert themselves, first in ITV and later in the BBC. The ITV companies came under increasing pressure from the City and from the Conservative government, which was threatening to change the way the franchises were allocated. At the same time changes in trade union legislation made it possible to keep a broadcast service going during a strike-as Bruce Gyngell demonstrated at TV-AM in 1987.
In the same period Channel 4 provided evidence that it was possible, even desirable, to separate the activities of broadcasting from those of programme making and production. Producers had to sell their ideas to the channel's commissioning editors not just creatively, but in terms of price and cost effective production. The independent producers and the Soho facility houses gloated over their ability to make programmes far more cheaply than the in-house operations at the BBC and ITV.
The traditional broadcasters bought the message. Ahead of the 1991 licencing round many ITV companies sacked up to half their workforces. They split their businesses into profit centres-broadcasting, programme making and production facilities. In theory, and to a limited extent in practice, each activity could do business where it liked, even with rival organisations. (Granada, for example, makes programmes like What The Papers Say for the BBC; Central sold past episodes of Inspector Morse to Channel 4.) Subsequently, under director general John Birt (an ex-ITV man) the BBC underwent a similar reorganisation, although it attracted much more public hostility than the ITV reforms.
These changes have had two consequences on the culture of broadcasting. First, the industry is now highly casualised. Where once people joined programme departments with the expectation of building a career there, most production companies, including the BBC, now rely in varying degrees on short term contracts. It is much easier to get into television. Technology is far simpler and you no longer need engineering qualifications to operate much of it. Recruitment itself is far less rigorous. One ITV head of department recently described how, when he joined it 15 years ago he went through a long series of one hour interviews; now he hires people on the basis of a ten minute conversation. The qualities he needs for the programmes he makes can be established quickly-energy and a quick-witted personality; if he makes a mistake he can get rid of the person at the end of the contract, often in a matter of weeks rather than months. Second, the broadcasters-those commissioning the programmes from the producers-make their programme choices based on a sense of what the audience wants to watch, not what is good for them or what seems like a good idea to the producers. And as a result the output across all four traditional broadcasters has become substantially more commercial, though the old ethos does survive to some extent in BBC2 and Channel 4.
However one consequence of the disaggregation of the various parts of the television business has proved short-lived. At the time of the ITV licence tenders in 1991, the concept of the "publisher-broadcaster," who employed no production staff at all but commissioned programmes from independent producers (as opposed to the old-fashioned "producer-broadcaster," who made programmes in-house) was very much in vogue. Many incumbent ITV companies feared they would lose out to these publisher rivals, whose costs would be much lower than theirs and who would therefore be able to make a higher bid for the licence. And indeed two big companies-Thames and TVS-did lose out in this way (although in the case of TVS it was as a result of making an absurdly high bid). However their successful rivals-Carlton and Meridian-soon realised that being only a publisher made no business sense. They needed the influence that programme making gave over the programme schedule, and the value that could be derived from possessing such assets. In short, they saw the increased importance of content, of being a rights holder.
There are various kinds of economic rights in a television programme. Performers have the right to further payment if a programme is repeated; producers have the right to sell a programme in markets other than the one for which it was first made; those who "own" events which television wishes to cover, such as the Olympic games, can sell the broadcast rights. Until about ten years ago in Britain none of these rights had great value; there were not many outlets for selling programmes after their original broadcast, and those who owned events often found they were dealing with broadcasters who cooperated informally to keep the price of purchasing the rights for such events as low as possible.
The development of pay television changed this. Cable and satellite systems, first developed for telecommunications purposes, were adapted to carry television channels-in the US in the 1970s, in Europe a decade later. These systems not only had the capacity to carry many more channels than traditional television, they enabled their owners to deliver services only to those who subscribed to them.
The early beneficiaries of this technical revolution were the Hollywood film and television studios. Films could be sold to pay television months or years before they were sold to "free" broadcasters. Old television shows could be taken off the archive shelf and sold many times over to new channels desperate for material. Experience in the US in the 1980s had shown the value of owning programme libraries. This realisation provoked a struggle between the independent producers and the BBC and the ITV companies for ownership of the secondary rights in programmes made by independents for the big broadcasters.
The sports rights owners joined the gravy train later-but sport rather than films has now become the "driver" of pay television, as Rupert Murdoch acknowledged when he described sport as the "battering ram" of his global strategy. Part of the explanation for this is obvious with hindsight. Your experience of a film is unlikely to be diminished whether you see it in the cinema, on video or on television for the first time. But a live sporting event is unique; watching it in recorded form is a very different experience; the premium value of live sport for pay television is therefore that much greater than the value of what is in any event the film distributor's third "window." What is more surprising has been the willingness of sports fans to pay ever larger sums to get access to their favourite pastime.
This is where Britain's big pay television broadcaster, BSkyB, is vulnerable. This may seem an odd thing to say about a company which in six years has grown from nothing to being the country's biggest media organisation, which has seen off both competitors and regulators, which has a highly effective management team, and whose biggest shareholder is Rupert Murdoch's News International. But BSkyB does not own rights; it leases them. It has no guarantee it will be able to renew its key contracts when their current term expires. Indeed it is highly likely to lose some of them and to find itself forced to take a lower share of the profits from those it does retain.
Hitherto neither sports organisations nor the Hollywood studios have had any choice; in Britain they had to deal with BSkyB to generate pay television revenues. This will not be true once digital television broadcasting is established. Contrary to the fears of many commentators, the regulations covering digital, particularly on competition issues, are much tougher than in the current analogue world; and the channel capacity of digital television is so great that it will be feasible for rights holders, the big football clubs and the Hollywood studios, either to eliminate the middleman and run their own operations or to force the broadcaster-BSkyB or whomever-to accept less favourable deals.
The tough new regulations, to be supervised by the Office of Telecommunications (Oftel), are crucial to this opening up of the pay television market. Although they have been drawn up by the department of trade and industry (DTI), the unsung heroes are the members of the European parliament and the British broadcaster lobbyists who in a two year campaign overcame the hostility of the British government and the European commission to create an effective regulatory framework.
Early in 1993 the German telecoms ministry, with the active support of our DTI, initiated a consultation to speed up the creation of digital broadcast standards. They feared that without a coordinated European effort the US would reap all the industrial advantages. Mindful how the most recent attempt to create a European broadcasting standard (the D2-MAC directive of 1992) had ended in fiasco when British, German and Italian broadcasters rejected it, the Germans sidelined the commission and focused on creating an industry consensus. It was, however, to be a consensus based on the interests of the main European pay television broadcasters, who owned their own analogue technologies and were deemed essential to lead the transition to digital.
At first only ITV opposed the proposal to allow existing pay broadcasters free scope in digital; but ITV's European lobbyist, Sue Eustace, slowly put together with the BBC and the European Broadcasting Union a coalition of broadcasters who argued for the "common interface" approach on the vital technology which allows broadcasters to switch viewers on and off pay television. The adoption of common interface technology in television receivers (in set top boxes) would have stopped broadcasters with proprietary systems acting as gatekeepers, as they do now, thus securing the best content for themselves.
BSkyB, Canal Plus and the other pay broadcasters argue that the common interface is both more expensive and more vulnerable to piracy. The first is true; the second disputed. None the less they persuaded the German and British telecoms ministers to reject the common interface. When the European commission produced a directive to implement digital broadcasting in 1994 it was based on the original proposals.
The European parliament had other ideas however. Many MEPs were alarmed at the growing power of the pay television broadcasters, and were receptive to the arguments of the common interface lobby. They amended the directive radically, calling for the common interface to be mandatory. The commission and council of ministers agreed to a compromise which stopped short of mandating the common interface but imposed a tougher framework on pay broadcasters such as BSkyB who had used their analogue satellite technology to create what were in effect monopolies. It was a significant achievement, demonstrating how effective the parliament can be.
Detailed regulation was left to individual governments. In Britain there had been a change of ministers and officials at the DTI; the newcomers were more sympathetic to competition policy issues than their predecessors, and with Oftel drew up a set of regulations which reached the statute book in February and which look as though they can provide the basis for a properly regulated pay television market.
While such a development is clearly an important public policy achievement it seems likely to boost the power of rights holders and diminish that of broadcasters, unless they themselves are creators and owners of important content. Here the broadcasters face an interesting dilemma.
Experience so far suggests that the value to be realised by broadcasting old programmes on "gold" channels will be far less in Britain than it has been in the US. These channels have insufficient appeal on their own to persuade people to buy the equipment needed for pay television. However with certain programmes producer-broadcasters could expect to generate more substantial revenues by showing them on pay television first. While there is no immediate prospect of the BBC or an ITV company putting dramas such as Pride and Prejudice or Rebecca on pay television before they are shown on the free channels the pressure to do so will grow. If you are a subscriber to Sky you will have seen The X Files and The Simpsons months or even years before the BBC audience did. It would be perverse to expect British producers to deny themselves revenue opportunities already available in this country to their US counterparts.
can we avoid creating an even sharper two class broadcast culture? At worst, free television could become the medium of second showings, soaps, gameshows and talk shows-material either without any of the inherent "premium" quality that could justify a place on a pay channel or, in the case of soaps, programmes that require a mass audience hooked on regular consumption and which would lose their potency if viewing were split between pay and free.
The example of what happened to radio could be instructive. Before the rise of television and multi-channel radio, radio broadcasting covered the full range of genres-drama, current affairs, comedy, documentary as well as news, talk and music. Now, with the exception of part of the BBC's national network, radio has largely shrunk to the last three categories, because only in these is it sufficiently effective to compete with more powerful media. If pay television does triumph as the experts forecast, will it similarly shrivel traditional free television?
The US experience is ambiguous; despite a recent dip the main networks still take more than half of all viewing time. Here, while the BBC is still financed by an indexed licence fee it should be able to sustain much of its current output. However the government's ambition to see all television become digital carries a threat to this form of funding. Once we all have digital sets it would be relatively easy to abolish the licence fee and turn the BBC into a mass subscription service, an idea already proposed by David Elstein, the chief executive of Channel 5.
ITV should remain the country's largest commercial channel, with the resources to sustain a diverse schedule, provided the ITC substantially reduces the money the companies pay to the government for their licences. That tax was legitimate when ITV had an advertising monopoly; it is not when the monopoly has disappeared. Securing the ability of the BBC and ITV to continue to make their current service available in a pay dominated world therefore requires the government to do two difficult things-maintain a poll tax (the licence fee) when it might be popular to abolish or reduce it; and to forego the special tax revenues it currently receives from ITV.
These two policies would increase the chances of traditional public service television surviving on a substantial scale in the next century, and thus mitigate the worst consequences of a two-tier system. However it may be necessary for government and regulators to intervene further to check other consequences of the rise of pay television, for those who own the rights to attractive events may feel no duty to sustain a diverse broadcasting culture.
Already we have seen both the British government and the European authorities start to take steps to limit the ability of those who own certain key rights to sell these to pay broadcasters. During the passage of the 1996 Broadcasting Act the government agreed to extend the list of sporting events (such as the FA Cup final) which cannot be exclusively shown on pay television.
At the same time the competition authorities are moving to break up the cartel-type power that football clubs have when they negotiate as a league rather than as individual clubs. And the regulators are beginning to challenge the concept of compulsory "bundling" of pay channels, which requires viewers to buy a load of channels they do not want in order to get the one they do want. Both developments could prevent pay television being organised around the interests of a few dominant players.
So, it is possible to envisage public policy measures which could prevent the irreversible decline in traditional public service broadcasting and the development of a divisive two-tier culture. We will know soon enough whether the next government wishes to implement such policies.
