Licensing of Channel 3 and Channel 5: A report to the Secretary of State under section 229 of the Communications Act 2003
Ofcom's duty to advise the Secretary of State on renewal of Channel 3 and 5 licences
1.1 The Channel 3 and Channel 5 broadcast licences are due to expire on 31 December 2014. Ofcom has a duty under the Communications Act 2003 ('the Act') to report to the Secretary of State about matters which are relevant to the question of renewal.
1.2 In this report, we are required to give our opinion as to whether the existing licence holders will be able to contribute, at a commercially sustainable cost, to the fulfilment of the public service broadcasting purposes in the 10 years from 2015.
1.3 The Secretary of State's powers in relation to relicensing provide for three options:
- intervention to block licence renewal, requiring Ofcom to auction the vacant licences;
- no intervention, so that Ofcom proceeds with the renewal process; and
- extending the existing licences, potentially until after the Communications Bill is completed.
1.4 Under each of these options, the Secretary of State also has the choice of exercising his powers to remove (or in some cases amend) the statutory obligations that must be included in public service broadcasting licences.
1.5 This document is intended to meet the reporting duty placed on Ofcom. In carrying out our duty we have looked at two separate, but overlapping, issues that we consider are central to any decision by the Secretary of State to exercise his powers under the Act, namely:
- whether the licensees could continue to make a sufficient contribution to the fulfilment of public service purposes; and
- whether those contributions would be commercially sustainable in the next licence period.
Ofcom's view is the Channel 3 and 5 licensees could continue to make a sufficient contribution to the fulfilment of public service purposes
1.6 In preparation for this report, Ofcom published an open letter in September 2011 inviting views from licensees and other interested parties. We asked whether it would remain possible for the Channel 3 and Channel 5 licence holders to make a continuing commitment to public service broadcasting over the next licence period and, if so, what the appropriate level of obligation would be.
1.7 Licence commitments are currently focused on meeting public service purposes in a small number of core programming genres regarded by audiences as the most important (in particular news and current affairs). In return, the licensees receive specific benefits. These include the right to appropriate prominence on Electronic Programme Guides ('EPGs') as well as access to spectrum that enables them to make their services available to 98.5% of the UK population on the digital terrestrial platform.
1.8 Despite significant changes in technology and evolving consumer consumption patterns, the commercial public service broadcasters ('PSBs') have continued to play a key role in delivering public service programming and providing opportunities for the UK content production industry. Both Channel 3 and Channel 5 exceeded their respective production and programming obligations between 2007 and 2010, the last year for which full data is available.
1.9 For the Channel 3 licensees, this contribution is also reflected by:
- collective spending on original content second only to the BBC, of which around 40% has been sourced from independent producers in recent years;
- the provision of competition for the BBC in relation to universally accessible UK television news; and
- plurality in Nations and regions news coverage.
1.10 In comparison, delivery by Channel 5 is more modest, in part a reflection of the more limited range of PSB benefits it receives. Furthermore, between 2007 and 2010 spend by Channel 5 declined by 49% from £122m to £62m. Within this context, however, we note that Channel 5's own provisional figures indicate that its investment in new programming increased to £[x]m in 2011. We also note that its most popular news bulletin receives an audience broadly comparable in size with Channel 4 News.
Although the potential value of PSB licences have declined, we believe commercial PSB services could make a sustainable public service contribution over the next licensing period, creating a case for renewal
1.11 The background to our present assessment of licence renewal is very different from the analogue environment in which the Channel 3 licences were first awarded in 1991. At that time, new businesses were created effectively to serve licences which offered privileged access to mass audiences across the UK. Companies competed vigorously to secure this advantage.
1.12 Within the current digital framework, the licences represent a set of assets among others to companies that, in most cases, have media interests far beyond the public service broadcasting licences which they operate. The pressures that changes in digital technology have placed on this long-standing broadcasting model are likely to continue over the next licence period.
1.13 Set against this environment, the Channel 3 and Channel 5 licensees have argued to us that the benefits they receive in return for PSB status have declined significantly as digital switchover has progressed and choice for viewers has grown. Nevertheless, the licensees maintain that, in broad terms and with some amendments, their existing public service obligations could continue to be sustainable during the next licence period.
1.14 Given uncertainty around future changes in technology and viewer consumption patterns, some of the Channel 3 and Channel 5 licensees have made it clear to us that they cannot be sure that their commercial imperatives and obligations to fulfil public service remits will remain aligned throughout the next licence period. Channel 5, in particular, has argued that amendments to certain PSB obligations may be necessary. Equally, all licensees have stated that they consider a contribution beyond existing levels is not possible.
1.15 The lack of clarity faced by the licensees about market developments and their impact up to 2024 is a matter that we have noted within this report. We also note that the existing licensees do not acknowledge any value in intangible factors linked to PSB status. We consider that there are benefits to the licence holders arising from certain elements - including the additional media coverage PSB programme schedules receive and viewer awareness of channel brands. Although they are difficult to quantify, we consider the potential loss of these benefits could represent a risk to an incumbent broadcaster. Nevertheless, taken as a whole, it is our assessment that the licensees have sought to present proposals for public service delivery that are realistic, sustainable and commensurate with current levels of delivery.
However, the options open to the Secretary of State - to ask Ofcom to auction the licences or extend them pending new communications legislation - remain credible and could offer benefits to citizens and consumers
1.16 As we set out in our interim paper last summer, there are a number of reasons why the Secretary of State could decide that the public interest is best served by either re-auctioning or extending the existing licences.
1.17 Re-auctioning would open up the licensing process to competitive examination and could establish a more accurate value for the licences.
1.18 In the case of Channel 3, it offers the potential to reinvigorate the existing Channel 3 model. Re-auctioning could test whether potential bidders - including the current licensees - would be able to bring forward alternative models of PSB delivery. An auction would also offer an opportunity to restructure the licensing map to reflect more accurately national and regional identities within the UK.
1.19 In the case of Channel 5, it would clarify whether a new bidder could offer a more significant commitment to original content production or important areas of public service content than the current licence holder.
1.20 Alternatively, a decision to extend commercial PSB licences would allow, as a new Communications Bill is developed, a full consideration by Parliament of the institutional structures required for delivering public service content in a world changed by the growth of digital media.
1.21 In this event, the role played by Channel 3 and/or Channel 5 could also be assessed alongside the different remits of both the BBC (in the context of Charter renewal) and Channel 4. Such a review could also take account of the relative importance of existing public service obligations, acknowledging changes to supply and demand for public service content including the impact of local television services over the next few years. Equally, it would create an opportunity to increase PSB provision by bringing possible additional benefits, such as retransmission fees or advertising minutage rules, clearly within the PSB framework.
1.22 In choosing between the options open to him, we believe the Secretary of State should be mindful of certain specific concerns. We consider the most notable of these to be the potential impact his decision could have on the future of ITN and news plurality more generally, particularly if he were to require an auction for the licences. However, it is ultimately a matter of judgment for the Secretary of State whether the benefits that might be secured through the exercise of his powers to re-auction or to extend the existing licences are sufficient to outweigh either the risks of doing so, or the contributions the licensees are currently willing to offer towards public service purposes in the future.
Ofcom believes the Secretary of State should take into consideration a number of potential changes suggested by the licensees as well as a range of other issues
1.23 Some amendments to the existing licences may be required in preparation for renewal. In the event that the Secretary of State decides not to exercise his powers to intervene in the renewal process, we would propose to examine through a consultation the specific proposals made by ITV plc, STV and UTV in relation to content for the Nations and the English regions. At the same time we would also propose to consider whether it may now be appropriate to amend the definition of peak-time programming in order to bring it into line with the definition currently in use for advertising.
1.24 Further, we also set out a number of additional matters relating to PSB delivery that we believe the Secretary of State may wish to consider when weighing up the alternative options open to him. In particular, we note the possibilities which exist in certain circumstances to:
- establish a separate, stand-alone licence for Channel 3 in Wales;
- ensure provision of Scottish news in the south of Scotland; and/or
- require a continuing commitment from Channel 5 to make children's programming.
Depending on the Secretary of State's decision, Ofcom may need to undertake a formal licensing process that should serve to secure the delivery of public service broadcasting purposes
1.25 Finally, we note that for the last few years, Ofcom's relationships with the Channel 3 and Channel 5 licensees have been characterised by an ongoing dialogue about alignment in the costs and benefits of PSB status, with licensees seeking to establish equilibrium through reductions in the obligations imposed on them. An ongoing process like this is not in the public interest. In the event of renewal, the benefits of stability enjoyed by the existing licensees must also serve the interests of citizens and consumers across the UK.
1.26 Therefore, if the Secretary of State elects not to intervene to prevent renewal, we would seek both to establish that commitments proposed by the licensees represented minimum licence requirements during the next period and expect the future regulatory and legislative framework to discourage further reductions in PSB delivery.