It is a truism to say that the world of communications is changing rapidly. There are 48m mobile telephones in use in Britain, compared with 7m in 1997. Nearly half of British households now have access to the internet, which they use for e-mails, for shopping, for reading the papers-or sometimes even to watch webcasts of football or pornography.
At the same time, millions have access to many more television channels than they used to, some through subscriptions, some through pay-per-view, others via a set-top box that gives access to digital channels like BBC4 and Sky News with no further payment.
All of this has big consequences for businesses as well as consumers and citizens. Commercial television bosses warn about reduced income from advertising or the over-mightiness of the BBC. Telephone companies offer new tariffs and services, but need to put up telephone masts which create local opposition. Computer experts predict that the web will make censorship impossible, that Microsoft's domination will end and that the smart computer is around the corner.
It is easy to get caught up in the atmosphere of breathless change swirling around the media and telecommunications industries. In the four years I spent working at the department of trade and industry (DTI), there was a feeling that if we did not respond quickly to this or that change the very competitiveness of the nation would be at risk. So we tied ourselves to ambitious targets: to be ahead of international competition on the use of broadband by 2005; for digital switchover to begin as early as 2006; to more BBC channels.
But the government has taken its time before proposing new legislation. The communications bill now on its final lap in parliament follows prolonged consultation over a draft bill that itself followed a white paper in late 2000. The key to good policy here is not lots of new initiatives, but designing a regulatory system that can deliver a healthy industry that serves consumers and citizens.
THE BIG TRENDS: CONVERGENCE AND DIGITAL
There are a number of trends and events that dominate the sector. First, the different media are "converging." That is, they are all starting to use digital technology. We can now (in theory) watch television on our computers, listen to radio on our mobiles or read newspapers on either. This has two consequences: first, treating each medium completely differently, in terms of the economic rules applied to them and the sort of content they are allowed to show, starts to look silly. In one incident a few years ago, Channel 4, when asked to cut a film for screening on television, showed the uncut version on its website. Second, companies that used to be associated with just one medium, start to get connected with other media via takeovers or joint ventures. We are used to newspaper owners also having television interests, but now there is the possibility of an internet company that has already bought US television interests and worldwide book interests-AOL Time Warner-buying into British television. We have BT and the BBC talking about doing deals. We have ntl, a cable company, owning parts of football clubs. Our old rules that treated each medium separately now allow some things that should be stopped and stop other things that should go ahead.
The second important change on the way is the switch from analogue to digital television. Digital is a better technology with many more possibilities, including interactivity. A switch to digital undermines the case for quasi- monopolies in television (as the spectrum is no longer rationed), potentially democratising the airwaves and opening up the possibility of community television, educational channels and other cultural blessings of which most Prospect readers would approve.
The government wants everyone to move over to digital so that the analogue signal can be switched off and used for something else. Otherwise there is a big opportunity cost in keeping the analogue signal going for a diminishing audience. But digital switchover is not simple. You cannot turn the analogue signal off if that leaves millions of people unable to watch "Coronation Street". The reality is that many people do not have digital televisions nor the set-top boxes required for digital, and show few signs of wanting them. So government has to find ways of encouraging us to switch over or, in the end, subsidising the refuseniks by handing out free set-top boxes.
Moreover, a world of digital television is one with many hundreds of channels. For a country like Britain which never fully embraced cable television, this is a big change. Does this mean that the case for funding a public service broadcaster is weaker-as there is no longer spectrum scarcity and broadcasting becomes more like the market for newspapers and magazines? Or does the case get stronger as quality is squeezed out? What about the commercial companies-ITV, Channel 5, and Channel 4-that have public service obligations that go beyond the general requirements on taste, decency and impartial news? Can they survive and be kept to their public service obligations in a world where many others are peeling off their advertising revenue?
The third big trend is moving away from a cluster of equally sized players towards a small number of big organisations-BBC, Sky, BT-and a whole host of niche companies and new entrants. Our commercial television companies are squeezed between the two; they are small by international standards and prey for the larger European companies waiting in the wings. In fact, the government proposes to extend the cast of vultures by allowing US companies into the market as well. Is that acceptable? We do not seem to care who owns our telecoms companies (Orange is now French-owned). So should we care who owns our broadcasters? And if we do worry about the power and motivations of foreigners, can't we have clear, intelligent and effective enough regulation to be confident that our objectives could be met, whoever the owner?
Finally, there is a school of thought which believes that the internet makes much of this debate of transitory interest. With the ability to run a service from any country, national regulation of television or anything else carried by the internet becomes close to impossible-despite attempts to take legal action against service providers. This may be true, but such a future is probably some way off.
COMPETITION AND CLOUT
What do we want regulation to achieve? In many regulated sectors, like energy or water, the emphasis has been on economic efficiency, usually delivered through promoting competition. Can that approach work for this sector?
The first question is: what do consumers want? A choice of different television channels or mobile telephone operators; diversity of content so that television programmes are not too similar; some protection, particularly for children, from content that is offensive or dangerous; and probably a system which encourages new investment and new technologies. And perhaps a desire for our communications sector to reflect and develop our national culture-something which, it is claimed, may not be possible if it is owned by foreigners.
In general, we would like lots of competition in an area where monopoly is intolerable culturally as well as economically. Yet this sector has long been characterised by monopoly: BT in telecoms; BBC and ITV in television and Sky (essentially) in most aspects of satellite broadcasting. Moreover, some network industries may be natural monopolies. Paul Starr, the American economic commentator, has argued that the history of telecoms and the telegraph in the US shows that while competition in communications drives innovation and efficiency, there is a tendency to collapse back to, more or less, monopoly: systems and networks will always be provided by only a few players, due to the enormous costs involved. This is where regulation is needed: to prevent any one player becoming a monopolist. Also important is that smaller players who want to provide services over the "network" can get access through the set-top box or the telephone's local loop. If access is fair to all comers then you can at least have competition between channels and services.
In the field of telecoms, the big step would have been to break up BT so that it remained in charge of the network but did not run services over it. It would have been like having the gas pipelines separately owned, with other companies supplying the gas that goes through them. Why did this not happen? For two reasons-apart from political lobbying. First, given that there was already a strong player with a complete network, it was tempting to see whether pressure applied to it could help get competition going without a break-up that might weaken the company. Second, there was an awareness that to take on BT would be a lengthy and disruptive job and such dislocation might put at risk the hope of rolling out broadband quickly. So BT, despite some change, remains a quasi-monopolist.
Perhaps this illustrates the fallacy, in this sector, of having a goal and pursuing it, rather than trying to create a competitive environment and letting the market decide the goals. The government became fixated on prime ministerially-announced targets for broadband rollout-which then conditioned its responses to BT. Better perhaps to have let the market rip and then, if the public wanted broadband, it would have developed.
On the other hand, competition might not have delivered. The high hopes for competition in infrastructure-BT versus cable and satellite-have proved over-optimistic. To encourage cable, restrictions were put on BT; but this did not kick-start the cable industry and compared to many countries we are well behind. Our remaining weak players, ntl and Telewest (who are both in terrible financial trouble), may merge and then play a role as a counterbalance in both telecoms and broadcasting. But this is not imminent.
A related story is the strength of BSkyB. Here is a company that owns a very important part of the infrastructure-the satellite distribution system-that others need access to. It also has very powerful content that it puts over it. This will need to be watched carefully, especially after the collapse of ITV Digital led to a BSkyB/BBC partnership in charge of digital terrestrial television. Conceivably at some point, there may be a case for ending vertical integration here as well, so Sky's business as a platform operator is split off from its business as a channel provider.
Competition was also memorably used to allocate the spectrum needed for the next generation of mobile telephones. The decision we took to auction the new type of spectrum (known as 3G) was a move away from the previous approach where officials decided among the applicants and prices were then paid by the winners based on some administrative process. Instead, we decided to go for a proper auction and for five licences rather than four-the argument being that if there were only four, the four incumbents with heavy investment in early mobile technology would be guaranteed one. That would not only mean that the bidding would have been (implicitly) rigged, but that there would have been little incentive to roll out 3G fast once the spectrum had been won. This latter hypothesis seems to have been validated by the fact that it is the new entrant (Hutchison) that is leading the charge to introduce 3G to Britain.
Of course, and much to our surprise, the auction raised an extraordinary amount of money-?22 billion. In some ways it worked too well. The enormous sums paid by the companies have been blamed for bringing the sector to its knees, even if the reality is that most of the damage has been caused by the bursting of the worldwide telecoms bubble.
So competition is not straightforward. And there is the further anxiety about whether competition alone can deliver the media content and diversity that we want. This view was summed up recently by Independent Television Commission director Patricia Hodgson, who said: "There's a genuine danger of a market delivering sport, films, and commodity television with little to challenge and engage." Some of those who take this position are avowedly elitist. For them, even if the market worked perfectly but did not produce, say, sufficient demand for opera on television, then competition could not be allowed to reign. Others more subtly argue that the economics of broadcasting pushes everyone to produce for the middle of the taste spectrum-or the lowest common denominator-although the public themselves would want more diversity. So there is a market failure which means we must be wary of too much competition.
Another argument, familiar to me from my DTI days, is that research-intensive companies must have protection from competition to allow them the space to invest. That is related to the fear that competition may mean we end up with no strong national networks, supposedly the only ones able to make substantial, high-risk investments and therefore original and creative programmes. In other words, ITV and BBC will not make "quality" programmes unless they are big and protected.
A further argument against overdependence on competition is that without regulation it will not deliver the universal service obligation-the guarantee that basic services, including the internet, will be provided at roughly the same price for everyone regardless of the vast differences in cost (between, say, central London and a Scottish island).
OFCOM AND THE LIMITS OF COMPETITION
Competition can only take us so far without regulation. And the complex interplay between cultural decisions and economic decisions has prompted the creation of a new kind of regulator, Ofcom, that covers both content issues and market issues-issues which in the past have been handled separately. What happens when the two interests point in different directions? Ofcom will have to choose and both sides fear the worst. The content side (usually public broadcasters) argue that the economic side will dominate because it can point to hard numbers. The economic side (often foreign companies) fear arbitrary interventions on ill-defined cultural grounds and a body that is soft on public service broadcasters.
There is no real answer to this conflict, but the white paper proposed setting up within Ofcom a separate content board to advise on content issues. But in the end, the full board of Ofcom will have to make the final decision on balancing economic and content matters. This in turn makes another feature of Ofcom important: the fact that the regulator will be several people rather than one individual. This reflects the lessons of the problems that personalisation of regulation has caused in a number of utilities, and which were tackled in the Utilities Act 2000 in the case of energy, but not in water, rail or telecoms.
In truth, the decision-making parts of regulatory organisations have a habit of ending up as a home for experts, often the kind who would be the last to learn how to text or to watch reality television. Making sure the ordinary consumer and citizen is properly represented is problematic. For reasons that were never entirely convincing, the model from energy-where a separate and powerful consumer body was created-has not been followed. Instead, there is a rather weak consumer panel allowed to deal only with issues affecting things like prices and quality of signal. This may become a source of complaint over time.
Once Ofcom is set up, the key thing is to define the objectives it is supposed to pursue. As noted earlier, some want to promote competition and make everything else subject to this. Rightly, the government has resisted this call and believes that there are several objectives that must have equal priority. This gives a degree of discretion to the regulator.
One generic conflict area will be between the need for some sort of predictability in regulation, to help serve economic efficiency, and the fact that citizens and consumers sometimes have fast-changing demands and desires to which regulation needs to respond.
A more specific problem that has not been sorted out is how to regulate the BBC. In the white paper, we tried to create a system that treated all broadcasters in broadly the same way. We also went for a lighter touch in controlling content on public service broadcasters, with Ofcom looking more generally at the output and replacing the rigid minute-counting rules of the past (so many hours religion, so many hours serious politics, and so on). Nevertheless, if a channel stepped out of line, Ofcom was to be given tough last resort powers. This system seemed to fit the BBC very well and there seems no reason why the BBC should be regulated any differently from others with a public service remit.
Sadly, this logic was not followed through in the white paper. Maybe the fact of the licence fee made people feel that the BBC was inherently different. More acutely, the belief -encouraged by ferocious lobbying-became established that Ofcom regulating the BBC content in any meaningful way (rather than carrying on as now with the governors) was a form of state control of the BBC. But in its absence, commercial organisations complain that they are faced with a network that is regulated, at least in content, only by itself. The ultimate sanction is the threat that if the BBC misbehaves then the charter review (next up for 2006) will yield a cut in the licence fee. However, it is hard to see that affecting most day-to-day decisions BBC managers make.
WHAT TO WORRY ABOUT
A combination then of technology, market forces and the regulation that is soon to come into effect will help frame the programmes we watch, the things we can buy on our PC and digital television sets, and the content we can get on our 3G mobile telephones.
But what are the problems going to be? In the first place, there is a real worry that the BBC is becoming too powerful. It raises some ?2.5 billion of public money and is a massive intervention in the market. This matters to the economists, but it also matters to those-see David Lipsey's article (Prospect, December 2002)-who think the BBC has become more interested in ratings than in public service broadcasting. Of course, there has always been a tension between the public service role and the need for many people to watch the programmes the BBC puts out. Different BBC director-generals have struggled with this trade-off, with the bias in recent years being towards keeping the watching figures up.
But there is a real issue about unfairness. The BBC has been awarded several new digital channels recently-at least one of them, BBC3 aimed at the youth market, hardly seems to fill a gap that is not being covered commercially. The faith placed in a set of tough rules that must be obeyed by the BBC (on local content, use of new artists and so on) seems unrealistic.
Why has this been allowed? Partly because of the government's desire for everyone to switch to digital television. The only way they believe that will happen is to put attractive new BBC services only on digital. There may be something in this, but it is distorting the broadcasting market and is allowing the subsidised BBC to close down many commercial experiments aiming at niche markets.
In addition, we have seen efforts by the BBC to create joint ventures with everyone from BT (where its old boss Christopher Bland is now in command) to Sky-a worrying duopoly in the making-as well as recently getting government permission to put the national curriculum on their website, provoking the fury of commercial educational publishers. And, of course, the BBC and Sky have capitalised on the collapse of ITV Digital by becoming a force in digital terrestrial television. Add weak regulation to this, and the situation seems serious. Ofcom will have to be strong to resist this tide. And there are signs that the BBC's charter renewal negotiations will be tougher for the corporation than had been expected until recently.
There will still be a strong case for the BBC even in a post digital-switchover world. There are things we want as a society that the market alone will not deliver. A world where all output has to be purchased individually by subscription or pay-per-view-as Barry Cox, deputy chairman of Channel 4, recently suggested in his Oxford University lectures-leaves out the BBC's role as part of the nation's "social glue"-no doubt a concept eagerly brandished by the BBC hierarchy, but not a complete irrelevance. Of course, the BBC (or public service broadcasting more generally) does not have to be funded by licence fee. But the current system works well, is fairly transparent and creates an institution that is reasonably creative and effective. The idea of replacing it with a public service "pot" of money, creating an "arts council of the air"-as Cox and the free-market thinkers of the 1986 Peacock report suggested-may eventually be appropriate but surely not until well after digital switchover. In the meantime, the BBC will have to remain popular even in multi-channel households, or its public service role will become hard to defend.
To help deliver public service television we need ways of making sure commercial organisations have incentives to continue to offer public service provision; probably, as proposed in the draft bill, through giving them their spectrum for free plus guarantees of being available on all platforms-even if the price for this "must carry" obligation on platform owner Sky, is hotly disputed-and advertised in a prominent way on the electronic programme guides owned by rivals.
The over-mightiness of the BBC is not only the result of its own actions. ITV, its main terrestrial competitor, has been self-destructing. To help it, the government is proposing to allow the last two ITV companies, Granada and Carlton, to merge-if they can satisfy the competition authorities that this would not give them too much power over advertisers. But even that might not work. An ITV in trouble, a Channel 4 struggling and a Channel 5 which seems to be thriving, has given policy-makers pause for thought.
The great unmentioned (by the government at least) is Rupert Murdoch. He is already bound by cross media ownership rules that stop him owning too many newspapers if he wants to own ITV. There is no proposal to end that and the white paper did not say much more about media ownership rules. But the draft bill gives him the opportunity to buy into Channel 5, which could be a back door to him becoming (should he wish) the main terrestrial commercial operator. At the same time, the government has proposed lifting restrictions that stopped non-Europeans (ie Americans) buying into Channel 5 and ITV. This has caused the most fury amongst commentators, with David Puttnam, the chair of the joint committee of parliament that looked at the bill, being particularly incensed. But an American buyer of Channel 5 does provide an alternative to Murdoch.
A related area that policy-makers worry about is the control of news on television. In recent times the government has had to accept the idea that Sky might win the contract to deliver news for ITV, thereby replacing ITN and making Sky-produced news as the only real alternative to the BBC. This is something that many people are not happy about, despite Sky still being bound by rules on impartiality and so on. This possibility will not be eliminated by anything in the bill, but it was decided to keep special rules for ITV: it has to use a nominated news provider, which must be owned by several companies (though shareholding limits are being increased a little).
Finally, where are we with the prospect of getting everyone onto broadband and digital television? Probably quite a long way off. BT is now pushing broadband harder. But despite recent signs of an increase in uptake, which is now over 1m and rising (at almost 30,000 a week), the cost remains too high and the benefits over "normal" internet access too unclear for most people. In contrast, the move towards digital television remains as much a decision for policy as a market-driven process. Although we are now at about 10m households (roughly 40 per cent of the total), in the end the government will have to give out free set-top box converters to those who have not got the technology before they can switch the analogue signal off. Meanwhile, getting above, say, 80 per cent may require allowing the BBC to put popular things like "EastEnders" on its digital channels only-which risks a political storm. At some point the government is going to have to decide just how important switchover is and what price it is prepared to pay to get it faster than the market is doing at present.
DID WE GET IT RIGHT?
Our objective in drawing up the white paper, "Converging Communications," was to try to square as many of these circles as we could and to ensure the regulatory system was responsive to changes in tastes, technology and industry structure. But can you design a system that works as well before digital switchover and after it? Is it robust to whatever the internet may turn out to do? Does it give enough certainty to companies to invest without just giving them easy rules to find a way round? Can it preserve the key qualities of public service broadcasting without stifling emerging media markets? Can the regulation of content be more consistent across media and yet sensitive to their differences when the public's attitudes are constantly changing?
It is a balancing act. And so the government gets criticised. It is too pro (or anti) BBC; it is messy on the consumer side or ignores it; it does not give a clear priority on objectives; economic regulation will dominate; or competition is not dominant enough. But overall it is right that the draft bill is largely carrying the white paper through into legislation. Undoubtedly there will be a great fuss as it goes through parliament-over the BBC and Ofcom but, above all, over Murdoch and Channel 5. The Lords should fight hard to bring the BBC within Ofcom. Although they will not see it this way, it would be better for the corporation than leaving this as a sore for the anti-BBC lobby to pick away at. On the Channel 5 issue, changes to the bill recently put forward by the government give Ofcom the opportunity to tighten the content control over the channel-including on news-if it is taken over or expands its market share. To go further and apply the same restriction to ownership of Channel 5 as exists for ITV (that Murdoch cannot buy it while he has such extensive newspaper interests) looks to be over-panicky at this stage, although the debate in the Lords will be ferocious. While it is right to be very careful on media ownership, it cannot be left in aspic. Above all, parliament must leave some flexibility in the regulatory system to let it function. In David Currie, Ofcom has got itself an excellent first boss, aware of the pitfalls as well as the opportunities, and tough enough (in conjunction with fellow economist John Vickers, boss of the Office of Fair Trading), to take on the power of the BBC-BT-Sky trio as and when needed.
In the end, consumers (including advertisers) will drive the system. Maybe that will not produce as much diversity as some of us would like: although if we all watch Big Brother, we can't complain when that is what is put on television. But my guess is that the "race to the middle" is not as strong as some fear. With the right regulatory system in place, we should be able to look forward to the future with some optimism.
