Motion to Take Note

Television Advertising: Communications Committee Report – in the House of Lords at 4:32 pm on 3rd November 2011.

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Moved by Lord Clement-Jones

That this House takes note of the report of the Communications Committee on Regulation of Television Advertising (First Report, HL Paper 99).

Photo of Lord Clement-Jones Lord Clement-Jones Liberal Democrat 4:33 pm, 3rd November 2011

My Lords, I declare an interest as a sometime employee of London Weekend Television in the 1980s. First, I thank my fellow members of the committee, those who gave evidence to us, Ralph Publicover and Audrey Nelson who were successively the clerks to the committee, and our expert advisers, Professor Patrick Barwise, emeritus professor of management and marketing at the London Business School, and Professor Steven Barnett, professor of communications at the University of Westminster.

I also want to pay tribute to Michael, the late Earl of Onslow, who, if his health had permitted, would have taken over the chairmanship of the Communications Committee for this its first inquiry after the general election. I took over the acting chairmanship as a result. Despite ill health, as the House may imagine, he contributed intermittently but vigorously-sometimes even on the telephone. He was a considerable individual and we all miss him greatly.

Let me set out the background to the inquiry. The UK television advertising industry has changed over recent years as a result of the growth in the number of commercial channels, competition for marketing budgets from internet advertising and the economic downturn. This has led to calls for changes in the regulation of television advertising.

Although there has been some deregulation within the industry, there remain constraints on the quantity, scheduling and content of television advertisements and additional constraints on the price of commercial airtime-on ITV1 specifically. During 2008-09 there was a sharp fall in the revenues earned by commercial television companies from the sale of advertising-some 16 per cent. This was, in part, a reflection of the general economic downturn but it was also due to other developments including the migration of advertising from television to the internet. When we started the inquiry there had been some recovery of ITV advertising revenues in 2010, which seems to have continued into 2011, but the movement of advertising towards the internet seemed-and still seems-likely to continue.

If the advertising-funded model is in irreversible decline this would have serious implications for the future of commercial public service broadcasting. The committee therefore decided to conduct an inquiry into the current regulation of the television advertising market and how changes might assist the commercial television companies to maintain revenues and output to the benefit of the viewer. At the time, the Secretary of State for Culture, Media and Sport was also reported to have asked his officials to examine the case for ending regulation of the rates ITV could charge for advertising. It therefore seemed a good time to look at the whole question of advertising regulation but focusing on the regulations that do not involve advertising content.

Television advertising in the United Kingdom is subject to regulation in its scheduling and its sales arrangements. There is in particular a set of rules-the contract rights renewal undertakings, or CRR-which regulate what ITV can charge for advertising. These undertakings were required by the Competition Commission in 2003 as part of the arrangements for the Carlton/Granada merger to proceed to protect advertisers and other broadcasters from what was then perceived as potential and unhealthy market dominance from a unified ITV. The other major form of regulation of advertising on ITV is COSTA-the code on scheduling of TV advertising-which specifies an average of nine minutes advertising an hour on satellite channels and seven minutes on commercial public service broadcast channels.

The committee inquiry considered a number of questions: whether the current level of regulation of television advertising is appropriate; what the financial impact might be on television companies if changes are made to the regulation of scheduling and sales of television advertising; and the extent to which current arrangements reflect the public interest. It was not always easy-as committee members will testify-to come up with a clear answer, and sometimes fine judgements had to be made but if in doubt, when looking at particular proposals, we tried to give priority to television viewers' interests.

The committee came to the following conclusions. First, the COSTA regulations should be harmonised to level the playing field between public service and commercial broadcasters when digital switchover happens in 2012. Research suggests that viewers would not support an increase in the amount of advertising on television, especially on ITV1, Channel 4 and channel Five. It was our view that a reduction in the quantity of advertising airtime that broadcasters are allowed to sell may well improve the viewer experience and would certainly be fairer to those channels, which are limited more than all other commercial channels at the moment. As I said, under the COSTA rules public service broadcasters such as ITV1, Channel 4 and channel Five are permitted an average of seven minutes of advertising an hour and a maximum of eight minutes at peak times. On balance, our recommendation was that all channels should be allowed an average of seven minutes an hour, with an appropriate peak-time maximum which would be determined after research from Ofcom.

We also concluded that the CRR undertakings are no longer the most appropriate mechanism for regulating how advertising airtime is sold on ITV1. Your Lordships may have caught the speech today of the noble Lord, Lord Grade, in which he was exceedingly vigorous in his condemnation of the CRR rules and the remit of the Competition Commission. We took the view that the context in which CRR had been imposed had changed sufficiently to justify this view and that the Competition Commission when recently examining CRR had not been able to take more than a narrow, competition-based view, which did not take account of the wider public interest and in particular the clearly understood preference of television viewers for UK-originated content, as well as the contribution that increased original production makes to the nation's creative economy.

ITV still dominates the market for fast-build advertising in mass-market popular television shows, but even so the competition has changed considerably, with heavy consolidation of the main media buyers into four organisations. On CRR, the committee therefore recommended that these undertakings should be removed on the important condition that they are replaced with binding undertakings devised and given by ITV plc to invest an appropriate proportion of any additional revenues from advertising in increasing its investment in quality, wide-ranging original UK programming on ITV1, and in training. If the television advertising regime is to be changed, we were insistent, however, that the binding undertakings we recommended would be rigorously upheld. All in all, the committee felt strongly that changes are needed to the regulation of television advertising and that our recommendations would encourage our commercial public service broadcasters to provide their viewers with quality original UK television programmes. After all, even in multichannel homes, over half of all TV viewing still goes to the five core channels.

As we said, it is extremely difficult to predict how much ITV plc would stand to gain in additional advertising revenue from the removal of CRR. However, the available evidence suggested figures of around £30 million to £55 million per annum. This equates to roughly 5 per cent to 10 per cent of ITV1's current investment in original UK content. The public service broadcasters, I must emphasise, are vitally important for original UK production. Despite the advance of multichannel television and commitments from other broadcasters such as BSkyB to spend more, the PSBs still account for over 90 per cent of first-run original UK production, excluding sports rights. On the basis that they can be held to their promises, this rebalancing of television's advertising money would therefore be seen on our television screens, to the manifest benefit of viewers and the creative economy, and would partially compensate for the £500 million which has been lost from original UK production in the last six years.

We noted that the changes to CRR may require primary legislation, but that it would be preferable to deal with these as soon as possible under the aegis of the Secretary of State for Culture, Olympics, Media and Sport. We recommended that the proposed changes are implemented at the very latest as part of the next communications Act.

A third extremely important element of our recommendations arose out of our view, in common with the Competition Commission and Ofcom, that the trading system used for selling television advertising is complex and arcane. This traditionally is based on an annual "deal round", often on a so-called umbrella basis between advertisers, media buyers and broadcast sales houses involving a negotiation over the price of "commercial impacts", essentially the eyeballs of particular types of target audience and unrelated to buying advertising slots in particular identified programmes, based on the discounts off station average price available for particular share of advertisers' budgets. We took the view that the lack of transparency within the trading system favoured neither fair competition nor the viewer. We noted that for certain programmes called "specials", such as the "X Factor" final or a Champions League match, different arrangements were put in place which could relate to the ratings of the programme itself. We therefore recommended that there should be a short, focused review of the trading system for television advertising airtime in order to find a more transparent system which includes a robust appeals process to address any outstanding industry concerns.

How have our recommendations fared at the hands of the Government and the competition authorities? Well, needless to say, we have not seen an instant relaxation of the rules yet, but a victory took place almost before the ink was dry. In March, just weeks after the committee's report was published, Ofcom announced a review of the advertising trading model, as we recommended. This will be a significant step in assessing whether the CRR rules should be changed. The consultation document was launched in June this year and covers many of the areas which the committee was concerned with: transparency of pricing, signals, bundling of airtime and lack of innovation in the system. Above all, it is looking not only at the impact on advertisers, but also on TV viewers-an aspect that the Competition Commission was unable to consider in relation to CRR in its review. I trust that the review will be short and sharp. Ofcom also believes that more work is needed before changes to advertising minutage are made-that is, under COSTA. It is examining the potential economic impact and public interest arguments of different options.

The Government believe, and gave evidence to the effect, that they currently lack the power to lift CRR without the competition authorities' recommendation, unless changes are made in the forthcoming Communications Bill. However, I shall be interested to hear what the Minister has to say because they seem to have accepted that the Competition Commission was only able to take a narrow view when reviewing CRR in 2009-10 and have welcomed Ofcom's enquiry into the advertising trading system. They are somewhat doubtful about the desirability of how to formulate and enforce any undertakings of the kind suggested by the committee.

In summary, the Government seem to be attracted to a more deregulated environment but uncertain about how to achieve it. This is understandable given the very different views that we heard about the impact of CRR, but with Ofcom's advice they should be able to come up with a practicable solution. There is clearly a great deal of water to flow under the bridge. We did not expect a quick response in terms of action. We are pleased that the committee's report has had an important response from Ofcom and the Government. We look forward to further progress which will explicitly feed into the forthcoming communications Green Paper and the subsequent Bill. I beg to move.

Photo of Lord Patten Lord Patten Conservative 4:46 pm, 3rd November 2011

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 Five 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.

Photo of Lord Lipsey Lord Lipsey Labour 4:53 pm, 3rd November 2011

My Lords, I too very much welcome the report, which, besides its recommendations, contains a wealth of information on the system. If I might, not having been a member of the committee, I join the noble Lord, Lord Clement-Jones, in saying that the special advisers to the committee, Professor Barwise and Professor Barnett, really deserve an accolade for the work they have done, whether or not one agrees with them.

This debate has been long delayed. The report came out in February and only now in November are we debating it. However, that is quite desirable in one way because Ofcom is now within a few weeks of making its decisions on these matters. Therefore, I hope that the words uttered in this Chamber may have more effect on it than they would if it had had longer to forget them.

I only want to make two points, in one of which I disagree with the report. Its authors will not worry too much about that, but I also disagree with practically everybody else in the world, a not-unfamiliar position in which to find myself. In the other point, I powerfully agree with the report, and hope that it will bear fruit.

The thing that I think that I disagree with the report about is minutage-COSTA. As an economist, I find the concept that we should limit the number of minutes of advertising extraordinarily curious and hard to justify. It is a strange regulation to have introduced. When it was introduced, there was a powerful case for it, because ITV then had a monopoly; it was, famously, a licence to print money, and you had to do something to restrict the amount of money it was allowed to print. Of course, the situation is completely different today. Barely a minute goes by without my television seizing up with me being asked whether I wish to add additional channels; we are up to something like 1,200 or 1,300. There are more porn channels today than there were channels in total 10 years ago. A monopoly has turned into a properly competitive industry. It is very curious that the Government should seek to limit the output of competitive industries, in this case one output being advertising.

Why do people cling to this? I think, in most people's heads, the reason is due to America. If you watch American television-like other noble Lords present I have recently spent some time in America-you will know that it really is completely ghastly. Actually, in some senses, the ads are a relief from the bloody programmes, but one ghastliness about it is the amount of advertising. Therefore, there is a respectable fear that our television would become like that. However, this fear is greatly overdone for two principal reasons. The first is the BBC. If we do not like the amount of advertising on the commercial channels, we can turn to the BBC; sometimes the BBC itself is an offender because it contains so many trails for upcoming programmes as to seem almost like a commercial channel itself, but that is beside the point. The BBC's market share is roughly a third of the market: 33.1 per cent, according to its latest annual report. Compare that with America. There are no exactly comparable figures because PBS-public broadcasting in America-does not publish figures for its share but, thanks to the wonderful work of the Library, I have established that it is roughly 1.3 per cent: a 30th of the BBC's share. The alternative of turning to public broadcasting if you do not like the amount of advertising is not there; you have to put up with what you get. It is a completely different situation.

The second reason is of course that we have quite a lot of good television. Most of us now have DVRs. On good days I can even work the DVR, thanks to Sky+, which has transformed so many lives. Thanks to a DVR you can, if you want, watch a programme later and accelerate through the adverts, so any channel that puts too many ads in is simply inviting people to postpone their viewing and rush through the ads. There is therefore a powerful competitive force which says, "Do not put too much advertising on, otherwise you will lose your viewers".

There is a complication, a European directive which limits advertising to 12 minutes per hour. Pro-Europeans will say, "Well, it's great that we've got a limitation", and anti-Europeans will be surprised that the limit is so much higher than those which we ourselves impose: nine minutes for all channels and seven minutes for the public service broadcasters. The European limitation is so far above our limitation that for practical purposes it does not preclude a sensible liberalisation of our rules.

Why should we keep COSTA? The noble Lord, Lord Clement-Jones, gave the only argument there is: viewers do not want more advertising. It is true that polling evidence contained in this report shows that viewers do not want more advertising. However, I do not think that is a very sensible question to ask in a poll because it does not give the trade-off. If you ask people, "Would you like more taxes?", they are inclined to say no. If you ask them, "Do you want more taxes to pay for better health services?", they might be inclined to say yes. Similarly, with television advertising, if you ask the viewers, "Would you be prepared to put up with more advertising if you got more 'Downton Abbey'?", they might well say yes. I do not know. Certainly they would if you said more "Strictly" or more of Simon Cowell or whatever they much like to see.

It really is not a valid argument to rely on what the opinion polls show. We have to make our own judgments. In my judgment this is an indefensible piece of overregulation, which leads to all the things that overregulation usually gets. Now we get competitive briefings from various organisations, all talking for their vested interests as to whether they want this to change or to be put down to the same level for every broadcaster. As usual, what should be decided by the market is being decided by competitive political lobbying. That does not seem to me, as an economist, to be very desirable.

That is where I disagree with the report. Where I agree with it very much is that there has to be a relaxation. I quite agree with it on CRR, but I believe that the benefit of the relaxation should go to viewers in the form of more spending on programmes and not to anyone else. To use a fashionable phrase, there is no case for giving the broadcasters "something for nothing". Having been a director of an ITV company, London Weekend Television, I know how attractive it is to say that you want certain relaxations in order to provide a better service to broadcasters and then hand the money to the shareholders. The shareholders invested in these companies knowing full well the limitations on them. Some of them were no doubt hoping that the authorities would hand them a bonanza by lifting the advertising restrictions, but we should not be falling over backwards to grant them a windfall gain from the removal of restrictions.

I wholly agree with paragraph 47 of the report that any relaxation should be matched for viewers by an enforceable commitment to spend more on programmes. Of course, the detail of that is complicated. It is not an easy thing to do. However, I can think of a symbolic way in which this could be done: ITV could agree to restore "The South Bank Show"-so wonderfully compèred by my noble friend Lord Bragg-which it cruelly and remorselessly butchered in December 2009 to the immense disbenefit of its more sophisticated viewers and indeed of its reputation with the public.

Photo of Lord Razzall Lord Razzall Liberal Democrat 5:03 pm, 3rd November 2011

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.

Photo of Lord Patten Lord Patten Conservative

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?

Photo of Lord Razzall Lord Razzall Liberal Democrat

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.

Photo of Baroness Fookes Baroness Fookes Deputy Chairman of Committees, Deputy Speaker (Lords) 5:11 pm, 3rd November 2011

My Lords, before turning to the substance of the debate I want to add my own tribute to that paid by my noble friend Lord Clement-Jones to our late chairman, the Earl of Onslow. He behaved most honourably in relinquishing the chairmanship when he did not feel he could give it his full attention but remained an assiduous member of the committee as far as he could and despite increasingly debilitating illness. I admired greatly his resilience and his honourable approach to the matter, and my respect for him increased by leaps and bounds.

This was the first inquiry that I had held as a new member of the Communications Committee. Unlike some of my colleagues I did not have that tremendous experience of running a TV company or being a long-standing broadcaster, so I came to it very fresh and new. I have to confess that for the first few weeks I was utterly confused. I felt like some explorer, stumbling upon some ancient civilisation remote from the modern world, where the language was strange and the customs even weirder. It took me some time before any sort of light dawned. Television in the history of the world is a very modern device and television advertising is even more modern. How could it be quite so obscure? I remind my noble friend Lord Patten that I was the first to murmur the word "Byzantine" in relation to this arrangement, which has been described by others. Whether your Lordships who are not members of the committee are much the wiser for the descriptions given, I am not sure, because they are pretty impenetrable. There is a case for making the system for purchasing television advertising utterly transparent and clear. Who knows what goes on with all these strange, convoluted arrangements that have been described this afternoon?

I certainly hope that Ofcom, which I believe is going to report soon, will come up with some really good recommendations to cut through this obscure arrangement. Even if it does, it may involve the Competition Commission and the relevant government department. I fear that between these three and possibly other bodies nothing at all will happen or what does happen will not be as clear and decisive as it should be. I hope that my noble friend, if he is unable this afternoon to give detailed responses to what we have recommended, will give an indication that firm and decisive action will be taken, particularly so that if it does require any form of legislation we can latch it on to the next communications Bill, which I believe will be brought forward within the next two years or maybe less.

Looking at one aspect raised by the noble Lord, Lord Lipsey, I have to confess that he is on his own as far as I am concerned. I look at it as an ordinary television viewer and for me there is too much advertising already. I certainly do not want any more. I dislike especially when advertising comes in the middle of a particularly poignant part of a TV programme-I will not mention the one by my noble friend Lord Fellowes, but I have it in mind. It is irritating and demoralising to have some adverts slotted in just when you are in a real state of emotion. For me, the amount of advertising on television that we have at the moment is quite enough and there is merit at least in making the arrangements the same, either seven or nine minutes-for me, definitely seven.

I cannot believe that restricting it will ensure that the whole arrangement for making TV programmes will go down the drain, as I think the noble Lord, Lord Lipsey, was implying. I understand that about £4 billion a year is spent on advertising. If I am incorrect on that I hope somebody will put me right. Anyway, it is a huge sum of money. I believe that for the final contribution of "The X Factor", £250,000 was being charged for a 30-second slot. I will not shed tears if there is some sort of reduction in the number of minutes that can be broadcast per hour.

Photo of Lord Fellowes of West Stafford Lord Fellowes of West Stafford Conservative

I shall interrupt to say one thing, if I may. ITV is a marvellous company to work for. A drama is paid for by advertising. Although I do not disagree with anything that people have said about making things more transparent and so on, I do not think that anyone should ever see advertising revenue as a completely negative factor. We would have been unable to make the show, which I cannot bring myself to name yet again, in that way at the BBC. We were left entirely free to make the show that we wanted to make because we had the funding of advertising to do it. It is wrong to present advertising as a sort of hideous evil that wrecks the programmes it appears in. It also enables and makes them.

Photo of Baroness Fookes Baroness Fookes Deputy Chairman of Committees, Deputy Speaker (Lords)

I take the point that my noble friend has made. I was against the apparent wishes of the noble Lord, Lord Lipsey-to increase the amount of advertising, to make it without limit and that there should be no rules. That was what I was concerned about. I entirely take the point of my noble friend Lord Fellowes that it is the advertising revenue that produces good-quality drama and other types of programme.

Photo of Lord Lipsey Lord Lipsey Labour

I should correct the misapprehension, which is no doubt my fault. I did not say that we should increase the amount but that we should get rid of the restrictions. It might go up; it might go down. Who can tell? I am not in favour of restrictions on competition in this field.

Photo of Baroness Fookes Baroness Fookes Deputy Chairman of Committees, Deputy Speaker (Lords)

That is exactly what I thought the noble Lord had said, and what worried me was the thought that there might then be an increase in advertising. However, that is an academic point at the moment. All in all, as I persisted in remaining on the committee despite my initial reservations, I thought that we came out with a good, robust report. It is one that I hope the Government will take on board very seriously.

Photo of Lord Macdonald of Tradeston Lord Macdonald of Tradeston Labour 5:19 pm, 3rd November 2011

My Lords, I speak as a member of your Lordships' Select Committee on Communications and as a veteran of 30 years in the advertising-funded side of public service broadcasting in ITV, Granada and Scottish Television, alongside six years moonlighting on-screen for Channel 4 in the 1980s. I, therefore, vigorously applaud the sentiments expressed by the noble Lord, Lord Fellowes.

I moved on from ITV in 1998, and since then the network has changed a lot. The old network structure of 15 independent regional companies has consolidated into ITV plc, based in London, and only Scottish and Ulster television are still independent.

The issue of contract rights renewal being debated today is a product of the most significant merger to create today's ITV plc-the merger of Granada and Carlton Television in 2003. The CRR regime in all its complexity was introduced to stop the merged ITV from abusing its powerful position in the advertising market. We did not find any evidence of attempts to abuse that position in the years since. Over the past eight years, many new channels have offered advertisers niche options if they have problems buying airtime on ITV. For advertisers, targeting specific groups of potential customers has become much more economical. Over the same period, a significant proportion of UK advertising has been switched on to the internet. The internet advertising market has just overtaken television advertising spend for the first time, as advertisers spent £2.3 billion on internet advertising in the first half of this year alone, up 14 per cent year on year. By contrast, the forecast for ITV earnings is not too encouraging, falling along with confidence in the economy.

The Select Committee examined the relationship between ITV, media buyers and advertisers, and airtime trading mechanisms are complex and opaque, as has been said. We recommended a short inquiry by an impartial group of industry experts into the system. Our concerns about this operation prompted Ofcom to launch its own review of the way television advertising is traded, as our chairman said. I would be grateful if the Minister could update us on Ofcom's progress, when it is expected to report, and whether it will report in time to influence trading before the next communications Bill comes to your Lordships' House; or will all the committee's concerns be rolled into that legislative process that presumably starts with a Green Paper next year?

Given all the debates and reviews about the contract rights renewal mechanism over the years, it is something of a surprise that the value put on CRR is only between £30 million and £55 million a year, which is a small percentage of a total UK advertising spend of between £8 billion and £9 billion-much less than 1 per cent by my count. If that was spread across corporate advertising budgets, the queues at supermarket checkouts would remain calm. When customers got home and turned into viewers, they might welcome seeing the improved ITV programme that CRR money might put on their screens. As the noble Lord, Lord Clement-Jones, said, it might be a 5 per cent boost to ITV's programme spend of around £1 billion. I say "might" because ITV could use the extra revenue to enhance dividends for shareholders but, to thwart that, our committee linked the removal of CRR to undertakings that would be required of ITV to put the money on the screen.

Given the nine months since we published our report, it now seems more likely that the spending of any post-CRR gains would be left to the discretion of the management. ITV's chairman, Archie Norman, complained that the CRR mechanism helped drive a "ratings rat-race". ITV does seem to be committed to improving its schedule with quality, popular programming. In the first half of this year, ITV launched eight of the 10 most popular new dramas on television, and the second series of "Downton Abbey" has held its huge audience-despite complaints of the advertising breaks being too long.

I support the removal of CRR primarily to encourage more investment in ITV programme production. If ITV gets CRR removed and any unprincipled diversion of that gain can be identified, the danger will be of reputational damage. That would be a real risk. It is probably the most feasible incentive that we will eventually come to rely on-but I hope that I am wrong.

I do not wish to seem pessimistic, but after reading the Government's response to our report, I think that the long grass beckons for our recommendation that the amount of advertising permitted per hour should be harmonised across all channels. I cannot conceal some sympathy for the arguments put forward by my noble friend Lord Lipsey. The government response batted the recommendations on to Ofcom-but we should not hold our breath for that report. My political judgment, for what it is worth, is that if the hundreds of satellite and cable channels lose revenue to a more competitive post-CRR ITV, I doubt that the Government would want to see the sector hit again by a reduction in its advertising minutage. As I said, I have sympathy for the arguments of my noble friend, but in the world to come it will be for viewers to zip through fast and for companies to decide their own minutage.

Another smaller but for me more important interest must be the independent licensees. Scottish Television and Ulster TV must still be protected. Both exist on channel 3 alongside ITV plc. Together, the two of them make up just a small percentage of ITV's advertising revenue. Their airtime is sold largely by ITV's sales house under another arrangement that was put in place in 2003. The undertakings inhibit ITV plc from flexing the rates on its digital channels-ITV2, ITV3 and ITV4-to the detriment of the sales income of channel 3 proper, better known as ITV1, on which Scottish and Ulster depend. These undertakings are covered by airtime sales rules. Removing CRR would give an incentive to ITV to bundle together channels and break those sales rules-an incentive that does not exist at present. It will be for Ofcom to ensure that the two unconsolidated companies are dealt with transparently and fairly if CRR is eventually removed. I am sure that the Minister, too, will want to protect the interests of Scotland and Ulster in this regard.

I greatly enjoyed the description by the noble Lord, Lord Patten, of ministerial mystification. Like him, I will make a confession. During my 30 years in ITV I never quite understood the dark art of airtime sales. For that reason, I look forward with great curiosity to Ofcom's review of the television advertising market. I hope that it will come sooner rather than later. I, too, conclude by paying tribute to our late chairman, the Earl of Onslow, and by thanking our chairman, the noble Lord, Lord Clement-Jones, for his comprehensive and clear introduction to the key concerns of our report.

Photo of Lord Stevenson of Balmacara Lord Stevenson of Balmacara Shadow Spokesperson (Business, Innovation and Skills), Opposition Whip (Lords), Shadow Spokesperson (Culture, Media and Sport) 5:28 pm, 3rd November 2011

My Lords, I was briefly a member of the Communications Committee. By a curious coincidence, my time encompassed almost all of this inquiry, although I was not a member when it started or when the final draft was approved.

The noble Lord, Lord Patten, in his entertaining speech, was right to focus on the CRR and the advertising selling system. Like the noble Baroness, Lady Fookes, I found some of the issues we were probing, in particular the trading system for selling TV advertising, to be extremely complex and arcane. The comparison to the Schleswig-Holstein question was not far-fetched. I also have fond memories of our session with the CRR adjudicator. Rereading the minutes brought back the committee's sense of incredulity at the burdens he said he was carrying, given the relative lack of activity on his patch. In the five years to 2008, he had only 15 disputes to deal with, and he had none between 2008 and 2010.

Your Lordships' House owes the noble Lord, Lord Clement-Jones, a considerable debt of gratitude for chairing the committee and delivering this report. In an earlier debate, the noble Lord, Lord Fowler, said that the committee went through a golden period while he was chairman and the noble Baroness, Lady Bonham-Carter, was a member. I felt that was slightly churlish, but they are his memories and he may wish to differ on that. It seemed to be a golden time when I was on the committee.

Although the late Lord Onslow was present only for a few meetings, he made a great impact and, like other noble Lords, I want to pay tribute to his contribution to the committee and to his memory. In his absence, and sometimes when he was present, the noble Lord, Lord Clement-Jones, was a tower of strength as our chair. Often he probed reluctant witnesses, including Ministers, with supplementary questions that we could never have imagined, let alone deliver, particularly with the Ministers, Messrs Davey and Vaizey. We were brilliantly served by our advisers, Professor Steven Barnett and emeritus Professor Patrick Barwise, and I record my thanks to the clerks for their help and support to a new member and during the inquiry.

Several of the committee's recommendations affect Ofcom and the Competition Committee as well as DCMS, and the situation is made more complicated by the fact that a lot of time has passed and action has been taken already in some areas and is continuing. As the Government's response to the committee made clear, this is a fast-moving policy area. On the other hand, as we have heard, we are promised a communications Green Paper and presumably legislation will follow, so in some senses this debate will feed in very well.

The key points are that by and large, British television benefits, as it always has done, from the main channel groups having separate funding streams. Satellite, licence fee and advertising supported channels are freed up to compete on quality. This has been for the public benefit ever since ITV was introduced to break the BBC monopoly. However, in today's broadcasting ecology, TV advertising supports hundreds of channels and underpins investment in high-quality, UK-originated content, in particular from the commercial PSBs, ITV, Channel 4 and channel Five. As a matter of public policy, we want this to continue, albeit technology may in the end subvert this desire.

As my noble friend Lord Macdonald says, the growth in internet advertising needs to be taken into account and may upset the entire way in which we approach this. Our report argues that the current advertising minutage rules create an uneven playing field between the commercial PSB channels and the satellite and cable channels. This may have been appropriate 20 or 25 years ago to help the satellite and cable channels when they were starting out, but the situation is very different today. My noble friend Lord Lipsey argues that we should not keep COSTA and he may be right, but Sky+ makes this sort of regulation otiose. I suggest that more work is required and Ofcom should carry out a review urgently.

The current TV advertising market delivers many benefits to advertisers and viewers. It is alleged that advertisers benefit from lower prices, and the price of TV advertising has certainly fallen steeply over the last 10 years. Apparently it has not been cheaper since 1993. Having said that, I feel, like other noble Lords, that the system is almost impossible to follow. It is counterintuitive and arcane. On the other hand, it seems to work. Again, I suggest that an urgent review is required.

The noble Lord, Lord Grade has fired off a broadside against the CRR regime. Again, the arguments seem to be finely balanced. ITV's continuing market power, with 40 per cent of TV advertising revenue in 2010, suggests that whatever it says-and it said a lot in evidence-a competition remedy ought to remain in place. However, if the CRR undertakings were removed and the strict conditions imposed by the committee actually took place, there would be a great deal of extra money to invest in UK content across the industry and in matters such as training. As that is definitely a public good, we have to consider it as important. I agree with noble Lords that ITV's commitments to quality, original UK TV production, training and other PSB obligations would need to be held closely in front of it and there might have to be additional regulation.

For me, this has been a trip down memory lane and I have enjoyed it. This has been a very good debate. The committee system in this House is impressive and it commands wide respect. This report does the committee and your Lordships' House great credit. I invite the Minister to respond.

Photo of Baroness Rawlings Baroness Rawlings Lords Spokesperson (Department for Culture, Media and Sport), Baroness in Waiting (HM Household) (Whip) 5:34 pm, 3rd November 2011

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".

Photo of Lord Patten Lord Patten Conservative

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.

Photo of Baroness Rawlings Baroness Rawlings Lords Spokesperson (Department for Culture, Media and Sport), Baroness in Waiting (HM Household) (Whip)

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 thank you 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 of 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.

Photo of Lord Clement-Jones Lord Clement-Jones Liberal Democrat 5:46 pm, 3rd November 2011

My Lords, I thank all noble Lords who have taken part in the debate, including members of the committee and the two non-members, the noble Lords, Lord Lipsey and Lord Patten, who have plunged into the debate so effectively. As a result of his Front Bench duties, we miss the noble Lord, Lord Stevenson, just when he was making a major contribution to the debate.

The debate has not been at all Byzantine or incestuous. We appreciate the noble Lord, Lord Fellowes, keeping a watchful eye over the future finances of ITV. That has been very helpful. None of us expected a Damascene conversion from the Government in the light of their original response. I am sure that ITV's share price will go down tomorrow morning as a result of today's debate, even if it went up earlier.

We have heard significant differences about whether CRR is fit for purpose. We have a common interest in believing that it is the viewers' desire to have original UK programming. That is paramount. How you judge that and what kind of regulation over ITV advertising is adopted is crucial. I hope that the debate will continue with the Green Paper, when that is produced, and that the Government are persuaded by the outcome of the Ofcom review that the trading system needs to change.

Motion agreed.

House adjourned at 5.49 pm.