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Speech at Media Festival

Lord Carter of Barnes,  Minister for Communications, Technology and Broadcasting (jointly with DCMS)
Media Festival, Manchester,  28 November 2008

The PM asked me in the autumn to take on this role as a converged minister for communications technology and broadcasting. It doesn’t really matter what your ministerial brief is - all public policy is framed in and around the realities of the economic climate you find yourself in.

And we find ourselves in a particularly striking economic reality where there is certainly a lack of fixed points and it is certainly a very challenging environment to make forward predictions. And for many commercial businesses they are facing unprecedented changes in their order books and in their ability to secure credit in order to continue to run their businesses.

I have run two businesses in different recessions and these are very different times. And we are also seeing some fundamental structural changes and it’s worth stopping to think what those structural changes might be.

We’ve had an extraordinary period of global growth and many people say to me that this has consequently created a surplus of assets in many classes and in many markets and in many categories. And that means the quantity of those players will have to change and the value and price of those players will probably have to be re-priced and rebased. It will probably mean we will see some businesses exiting markets and it will probably mean there will be considerable pressures for a greater degree of consolidation. And that’s going to ask some pretty serious questions both of public policy and competition policy, not to mention the way companies are organised.

Also the inter-relationship between western markets and eastern markets will change because one of the consequences of the times we live in is that the emerging markets’ dependency on western demand has left them in a place which I suspect many of those countries will find challenging. And I think we will see many of those markets shift from a manufacturing focus to an infrastructure focus, which will mop up capacity for them in a way that will allow them to position themselves for economic growth.

What does that all mean if you are in the communications sector? I genuinely think it is a good thing for the sector because all of those changing realities mean many countries around the world - including our own - are looking at where future growth is going to come from. The Chancellor laid out this point very clearly when he said in this week’s PBR “we will increasingly look to sectors to provide growth” - of which the communications sector is one. And this will be an important and timely opportunity for the sector and also an important opportunity for me because it means the work we are doing on the Digital Britain Report will come at a time when people are inclined to listen to our recommendations and act upon them.

The other big structural change you are seeing has been wrought by digital itself. Digital activity underpins a large and increasing range of innovation and competitive activity in lots of different sectors. And there is a growing body of evidence for its positive, if unevenly distributed, social and economic benefits - in terms of access to discounted prices, greater educational opportunity, social mobility and other things.

But the forces that have given us growth and huge expansion in consumer choice, greater mobility, control, and participation in and around our media – all good things - have also significantly disrupted traditional business models and funding streams.

Broadly, broadly, digital is good if you are an aggregator and not so good if you are an intermediary. Good news if you are Easy Jet - bad news if you are a local travel agent. Good news for Tesco.com - bad news for the high street retailer.

You can win as a supplier of upmarket personalised services but it’s a bit harder in today’s climate. But digital, as a rule, tends towards commoditisation.

It also greatly increases the availability of multiple copies, reduces their cost, but also the rewards for mass-produced copies of the same content for the same experience; 79p for an i-tune versus £9.99 for a CD. Good for consumer choice, challenging for intellectual property and rights models even before we get to aggressive peer-to-peer file sharing and piracy issues.

Most importantly - and I do think this is a critical point - is that the concomitant of the drive towards digital is the story of the disappearance of the traditional advertising pound.

Back in the late 1980s anything other than television advertising was described as “secondary media.” Today total national advertising revenue in real terms is 8 per cent less than it was at the start of digital in the late 1990’s. That’s a phenomenal change. The volume of impacts - as anyone in the market knows - has grown out of all proportion for most advertising, as audiences fragment.

There is still some content that is so compelling that it can buck the trend, although that is less true in the UK broadcasting market because of the station average-price share-deal mechanism. (A point that was captured at the time – broadcasters weren’t in the market for a change in the system and wanted to keep the deal they signed up to - a bit of history but very relevant for those now campaigning aggressively for change.)

Added to fragmentation there is migration, especially of classified advertising from traditional media to the internet with its very different costs and price structures. For classified advertisers the internet is a good thing. For advertiser-funded media businesses - even those who have successfully made the transition to the digital media world - it’s a real challenge. Now in my view, net-net, the real benefit for consumers of the drive to digital substantially outweighs the costs.

What I’m trying to do is to make sure those costs are clear, in order that we understand as we look forward to write policy about what that means. So we need a clear-sighted view of the challenges and what they might mean to regional and local production, particularly journalism, newsgathering and news production. And this is not just an ITV phenomenon. It’s seen in local radio, local press and in fledgling local internet sites too. So a question: Do we need changes to the UK framework to allow other providers who can spread their costs over a range of different media to enter the hitherto closed world of newsgathering? It also needs us to reconsider changes too - does an acceptable level of consolidation in businesses capable of sustaining local journalism and newsgathering require us to examine media ownership law and competition principles and to think further about market definitions.

Secondly, on the challenges to the creation of what you might call “big content” – UK originated content of medium to high production values. The total number of content producers and distributors that advertising funds may now be too high to provide a sustainable, market-led force of scale alongside the publicly funded BBC. In global markets achieving scale UK presence and leadership may well require partnerships or even closer co-operation between the rights-arms of the broadcasters and independents.

Thirdly there are challenges to the current model of rights and revenue flows. If advertiser-funded first-window revenues cease to be sufficient to fund content creation, either the current balance of risks and rewards will need to alter or we need to find additional sources of value to address that deficit.

Now let me talk briefly about universality. That is inherently harder to do whilst it’s assumed that most of our valuable content is made universally available on all platforms free at the point of delivery. Save for a very limited number of successful vertically-integrated players which align rights the rewards and the incentives, mostly they are not so aligned. And this is an illustration of a wider question - and one which we have mostly taken for granted in the broadcasting world and in an era of surplus. But one we have to ask in the truly digital broadband world where less and less of the traditional surplus in the system is available and where new sources of value have to be found.

So as modern communications have become so central to the delivery of consumer well being and increasingly public services, what should every citizens’ guarantee of access be in digital Britain? It’s a very interesting question. How do you achieve it and how do you pay for it? Now actually the answer, like most of these things, is found piecemeal in a number of places, answered in different ways, through a different series of historical interventions. In most we try to see if there is a common rationale and discover that there isn’t. So let look at a few examples.

We have the universal service obligation laid on British Telecom which supports landline access and now of course accommodates very basic internet and phone masts – an odd combination.

In fixed broadband we made a commercial decision and a regulatory decision, with enormous public and market approval, which extended availability of basic broadband to 99 per cent of telephone exchanges. But take-up in this country is still only 60 per cent and only 70 per cent of homes have PCs.

In mobile, interestingly, licence conditions for what is now known colloquially as 2G, and the surplus that came through the system through exponential growth at a time when consumers were willing to pay premium prices, rolled 2G voice out and text to 98 per cent of the population - so in effect another form of universality. But in 3G and broadband mobile coverage we are nowhere near that, and whilst there is some interest among the mobile operators in looking at a new approach to universality in mobile, it is nowhere near being a public service obligation.

The BBC licence fee funds both radio, television and increasingly broadband online content and distribution over a range of platforms. And the decision it took - or maybe it had to take - 12 years ago at the dawn of digital, that the licence fee-funded services would be available broadly on a platform and technology neutral basis has been interesting because it’s had very varied consequences. For many those consequences have been popular - look at the number of users of the iPlayer - but it’s also been challenging. Here’s a question – would the economics of the other advertiser-funded content companies look as they do today if they had not had to follow the BBC’s lead, whether commercially or because Parliament had prescribed the potential for ‘must-offer’ provisions?

And it’s challenging for the BBC as it, and others, begins to question the boundaries of the licence fee.

The BBC has recognised, at times willingly and at times grudgingly, that it has responsibilities to a wider community and to wider public policy objectives. The digital help scheme and marketing monies may not be part of the BBC’s baseline funding, but there is no doubt they are part of the licence fee. Nor is there doubt that the BBC has taken a leadership role in the march towards digital terrestrial switchover - a role recognised explicitly in the BBC’s 6th charter purpose, which could colloquially be described as ‘helping to build digital Britain’. One that potentially extends beyond narrow broadcasting to a much wider digital connectivity. And one that could find a longer-term purpose and legitimacy for the licence fee.

Now the BBC cannot do it alone and nor should it do it alone, and it’s begun to talk the language of partnerships. And hopefully partnerships which might extend beyond the very narrow club of traditional public service broadcasters, many of whom in truth are running relatively single form business models.

There are others, as indicated, who have some interest in and some responsibility for universal services, albeit it in other places within the communications world. Nor in the digital world need the thought be confined to those with traditional responsibilities. Several other countries already have universal service funds supported by many who benefit from all citizens and consumers having universal access.

Yesterday at the European Council of Ministers meeting in Brussels the broadband world was a subject of much debate. And France, the UK, Finland and Sweden put firmly on the European policy agenda the question of universality for a digital Europe: How it should be defined; how it should be funded and what the service offering should be. Now, when you have a situation where the importance of the digital economy is increasingly clear to all of these countries, then we’re asking some very fundamental questions about how you redefine the approach to public policy. What do we need to do? Well at a very simple level we need to de-couple broadband and the PC. Spectrum needs to become an issue that everyone understands and everyone has a view on how it can be used.

And finally we have the emergence of the convergence of interest - social interest, political interest, creative interest and economic interest - which has caught up with convergence of devices and distribution networks.

Interestingly I think there are only two other countries in Europe where there is a converged minister - a minister who is responsible for communications and broadcasting and also telecommunications and information technology. It’s still the case in most of Europe that we see these as un-mixable tribes. Mixing those tribes as you’ve done in this conference is a fantastically productive thing for all sorts of very simple reasons. Not least because when you mix a tribe you learn that you can’t talk in assumptions, you learn that you can’t talk in acronysms, you learn that you can’t talk through prejudices or received wisdoms. You have to find a way of explaining what you are trying to do in a way that a group of people who want to do business with you don’t understand because they do it in a different way and the value sits in a different place. And from that you can have very highly creative and commercially successful conversations.

That is in part what the digital Britain project is trying to do. It’s trying to put in one place all of these questions. It’s trying to paint a common picture of what our ambition in this sector could be. And when its published in June of next year as a final set of recommendations, we’ll try to lay out a road map which could give us competitive advantage in this increasingly important sector.