Entertainment & Media Strategy, Regulation & Valuation

BBC Trust The economic impact of the BBC on the UK creative economy Appendices

July 2008

pwc Important Notice These Appendices have been prepared by PricewaterhouseCoopers LLP (“PwC”) for the BBC Trust in connection with the economic impact of the BBC on the creative economy under the terms of the PwC engagement letter with the BBC Trust dated 9 January 2008 (the “Engagement”). These Appendices contain information obtained or derived from a variety of sources as indicated within the Appendices. PwC has not sought to establish the reliability of those sources or verified the information so provided. Accordingly no representation or warranty of any kind (whether express or implied) is given by PwC to any person (except to the BBC Trust under the relevant terms of the Engagement) as to the accuracy or completeness of the report. Moreover these Appendices are not intended to form the basis of any investment decisions and does not absolve any third party from conducting its own due diligence in order to verify its contents. PwC accepts no duty of care to any person (except to the BBC Trust under the relevant terms of the Engagement) for the preparation of the Appendices. Accordingly, regardless of the form of action, whether in contract, tort or otherwise, and to the extent permitted by applicable law, PwC accepts no liability of any kind and disclaims all responsibility for the consequences of any person (other than the BBC Trust on the above basis) acting or refraining to act in reliance on the Appendices or for any decisions made or not made which are based upon such Appendices. UK Copyright Notice © 2008 PricewaterhouseCoopers LLP. All rights reserved. “PricewaterhouseCoopers” refers to PricewaterhouseCoopers LLP a limited liability partnership incorporated in England or, as the context requires, other member firms of PricewaterhouseCoopers International Limited, each of which is a separate legal entity. Contents

1. OUR TERMS OF REFERENCE 2

2. LITERATURE REVIEW 4 2.1 Introduction 4 2.2 The creative industries 4 2.3 Rationale for intervention 9 2.4 Externalities 17 2.5 Analogous impact studies 23 2.6 Reviews of BBC services and market impact assessments 27 2.7 Best practice impact assessment methods 32

3. KEY FINDINGS FROM SEMINAR 35 3.1 Introduction 35 3.2 The creative economy 35 3.3 Rationale for intervention 35 3.4 Specific impacts 36 3.5 Counterfactual 38 3.6 Scope and use of the study 38

4. LIST OF HYPOTHESISED IMPACTS 39 4.1 Introduction 39 4.2 Hypotheses to assess 39 4.3 Prioritisation of impacts 52

5. LIST OF STAKEHOLDER SUBMISSIONS 54

6. ESTIMATION OF REVENUES IN THE COUNTERFACTUAL 55 6.1 Counterfactual revenues from TV advertising 55 6.2 Counterfactual revenues from radio advertising 62 6.3 Counterfactual revenues from online 65 6.4 Total revenues 66

7. FURTHER GROSS VALUE ADDED AND NET VALUE ADDED RESULTS 67 7.1 Gross value added and gross employment impact of the BBC’s spending on creative activities 67 7.2 Net value added of the BBC’s spending on creative activities 69

1 1. Our terms of reference

Below, we present the terms of reference as presented on the BBC Trust website on 18 February 2008 (http://www.bbc.co.uk/bbctrust/research/economic_impact/index.html) Study into the economic impact of the BBC on the UK 18 February 2008 Sir Michael Lyons, Chairman of the BBC Trust, announced in his Fleming Memorial Lecture in November 2007 that the Trust was commissioning a wide­ranging study of the BBC’s economic value. The Trust has agreed the terms of reference for the study. Summary terms of reference The main goals of the study into the economic impact of the BBC on the UK, to be conducted by PricewaterhouseCoopers, are to: • Identify the most important types of benefits and costs • Provide evidence on the scale of these benefits and costs, either in monetary terms, where relevant, or using other indicators where this is more meaningful The study will provide evidence of the scale of these benefits and costs both at the level of the UK as a whole, and for each of the four nations and the English regions (where relevant). The Trust will use the results of this study to help inform its judgements on future priorities and investment decisions. The study will focus on the BBC’s operations alongside other broadcasters and creative businesses in the UK. The project will examine the economic impacts of the BBC’s activities across all media, and in particular will consider new distribution channels (such as the internet) as well as the more traditional media of television and radio. The study will examine the role the BBC can play in relation to: • The supply chain, including upstream (such as independent producers) downstream (for example, distribution via third parties) or horizontally related (for example, if investment by the BBC in a particular area creates a cluster of similar businesses) • Training and talent • Risk­taking and innovation • The use of the BBC brand • Investment in content • Positive or negative effects (externalities) from promotion (for example, giving a new writer airtime) • Joint ventures

2 How the study will be conducted The Trust would expect the study to comprise: • A review of the existing academic and policy literature on the economic impact of the BBC and public service broadcasters more generally • Consultation with industry stakeholders, in particular other broadcasters and major players in the creative industry, to obtain views and evidence as to what are regarded as the most important economic effects of the BBC’s activities • Compilation of relevant data • Analysis of information and evidence provided by the BBC and others It is the Trust’s intention that the study will be published in early summer 2008.

3 2 Literature review

2.1 Introduction In this section we provide a summary of the key findings of our review of the literature relevant to this study. We selected the literature for review with the following objectives in mind: • To obtain a workable definition of the creative economy; • To highlight hypotheses to test and counterfactuals from previous academic and policy literature based upon the rationale for intervention in public service broadcasting, and the role of the BBC in particular; • To consider the implications of the findings of a selection of analogous economic impact studies for the methods used in our study; • To set the context for this study with respect to existing impact assessments of the BBC’s activities, which also inform the selection of counterfactual scenarios; and • To summarise best practice impact assessment methods to inform methods used in this study. The structure of this section follows these objectives. Much of the academic literature on public service broadcasting and the creative industry has focused on the rationale for intervention in the market, .e. the economic (or political and social) justifications for public service broadcasting, rather than its economic impact. This literature review focuses on economic impacts to businesses in line with the terms of reference for this study. Therefore we have not included the wide ranging literature on social, political impacts or consumer impacts (including assessments of consumers’ willingness to pay for the BBC 1) of public service broadcasting. 2.2 The creative industries 2.2.1 Definition of the creative industries This study aims to identify and estimate economic impacts of the BBC on the creative industries or the creative economy. We understand from the Trust that the creative industries were selected as the basis for this study because the BBC’s economic impact is likely to be most important in these sectors. Whilst clearly the BBC has economic impacts across other sectors, focussing on the creative industries should capture the most important economic impacts of the BBC. To identify and estimate these impacts it is important to ascertain a workable definition of the creative industries. We describe some of the definitions used in the literature below. According to the Department of Culture, Media and Sport (DCMS), “The creative industries are those industries that are based on individual creativity, skill and talent. They are also those that have the potential to create wealth and jobs through developing intellectual property” 2.

1 For instance: Work Foundation (2006), “Willingness to Pay for the BBC during the next Charter period – A report prepared for the Department for Culture, Media and Sport”; and BBC/Human (2004), “Measuring the Value of the BBC”. 2 http://www.culture.gov.uk/what_we_do/Creative_industries/ 4 Specific sectors identified by DCMS (2001)3 as “creative industries” are: advertising, architecture, the art and antiques market, crafts, design, designer fashion, film and video, interactive leisure software, music, the performing arts, publishing, software and computer services, television and radio. However, the Centre for Urban and Regional Development at Newcastle University (CURDS) suggests that the creative industries may encompass a broader range of activities and industries than those defined by DCMS: “… It [the creative economy] has obvious overlaps with tourism and hospitality, and has specific overlaps in certain business activities in knowledge intensive business services...”4 Richard Florida (2002) describes the creative economy in terms of the creative individuals within it, under the title of “creative class”: “The distinguishing characteristic of the creative class is that its members engage in work whose function is to “create meaningful new forms.”5 Florida denotes three groups of workers who may perform some creative economic activity: • A “super­creative core” includes “scientists and engineers, university professors, poets and novelists, artists, entertainers, actors, designers, and architects, as well as the “thought leadership” of modern society: nonfiction writers, editors, cultural figures, think­tank researchers, analysts, and other opinion­makers. Members of this super­creative core produce new forms or designs that are readily transferable and broadly useful – such as designing a product that can be widely made, sold and used; coming up with a theorem or strategy that can be applied in many cases; or composing music that can be performed again and again.” • Beyond this super­creative core are “Creative professionals” who “work in a wide range of knowledge­intensive industries such as high­tech sectors, financial services, the legal and healthcare professions, and business management. These people engage in creative problem­solving, drawing on complex bodies of knowledge to solve specific problems.” • The third group is of “technicians” who apply “complex bodies of knowledge to working with physical materials. In fields such as medicine and scientific research, technicians are taking on increased responsibility to interpret their work and make decisions, blurring the old distinction between white­collar work (done by decision makers) and blue­collar work (done by those who follow orders).” Florida argues that all three groups are members of the “creative class” and it could be argued that, by extension, all three groups contribute to the creative economy.

Handke (2007)6 suggests that: “Creative industries supply informational media content that requires “artistic creativity” as a quintessential knowledge­based and labour­ intensive input. The cultural products they supply serve aesthetic, broadly educational or entertainment purposes rather than any immediate “technical” function.” Thus, Handke argues that the common theme linking creative industries is that they supply “artistic” informational media content. Handke also describes a “core” of non­ contentious creative industries, including suppliers of literary works, still and moving images (e.g. films and TV) and musical sound recordings in his list and reports that the “literature distinguishes between creative activities that directly contribute to the creation of an original cultural product on the one hand and administrative, organisational or manufacturing activities that take place in cultural industries on the other.” Handke continues, citing Caves (2000)7, who “distinguishes between “creative inputs”, i.e. “artists”/creators and their contributions, and “humdrum inputs” by lawyers, business managers, accountants, etc.

3 DCMS (2001), “Creative Industries Mapping Document”. 4 Cited in Scottish Cultural Enterprise/Tynedale Council (2007), “Creative Industries Study – Final Report: Part A”. 5 Florida, R (2002), “The Rise of the Creative Class”, article in Washington Monthly, May 2002. 6 Handke, C (2007), “Surveying innovation in the creative industries”, Humboldt University Berlin / Erasmus Universiteit Rotterdam. 7 Caves, R., (2000), “Creative Industries: Contracts Between Art and Commerce”, Cambridge: Harvard Univ. Press. 5 He suggests that the cultural industries are different from other parts of the economy for two reasons: first, because of the peculiar characteristics of creative inputs (as discussed in Throsby (2001)8); and second, because of the need to co­ordinate a number of creators and ordinary contributors to create and market cultural products.” 2.2.2 Creative industries in the economy The Work Foundation9 notes that “Two hundred years ago, received opinion was that art and culture, whatever their important intrinsic merits, were a diversion of otherwise productive capital and labour into essentially unproductive activity”. In the modern economy, however, the linkages between the creative industries and the wider economy have become more widely recognised. Andy Burnham, the Secretary of State for Culture, Media and Sport, stated that: “There are challenges, but however you look at it, the creative economy is the future for our economy.”10 Recognition of the importance of the creative industries to the future of the UK economy is demonstrated in the recent DCMS paper “Creative Britain – New Talents for the New Economy” (2008)11 which states that “The creative industries must move from the margins to the mainstream of economic and policy thinking, as we look to create the jobs of the future.” In our view, much of the literature does not distinguish clearly between the overlapping concepts of the “arts”, the “cultural industries” and the “creative industries”.

However, The Work Foundation report “Staying Ahead” (2007)12 goes some way to clarifying distinctions between these concepts, describing a “core” of creative fields, on which the cultural industries, creative industries and activities and the rest of the economy rely. This is described in Figure 1.

8 Throsby, D, (2001), “Economics and Culture”, Cambridge University Press. 9 Work Foundation, (2007) “Staying ahead: the economic performance of the UK’s creative industries”. 10 Burnham, A (2008),”Creative Britain: new talents for the new economy, Creative Economy Strategy”, Speech at Stakeholder launch at the Hospital Club, London WC2, Friday 22 February. 11 DCMS (2008), “Creative Britain – New Talents for the New Economy”. 12 Work Foundation (2007), “Staying ahead: the economic performance of the UK’s creative industries” report for DCMS Creative Economy Programme. 6 Figure 1: The creative “core”

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Source: Work Foundation (2007) The “creative core” refers to those activities where pure creative content is generated and consists of workers such as authors, painters, film­makers, dancers, composers, performers and software writers. The Work Foundation differentiates the cultural and creative industries, describing cultural industries as industries that focus “primarily or solely on the commercialisation of pure expressive value” and provides the examples of such as music, TV, radio, publishing, computer games and film. Creative industries however are described as delivering “both expressive and functional value. They tend to respond to the close demands of clients for creative offerings that work to their specifications; they constitute intermediate input in sectors in the wider economy.” Examples provided include architecture, design, fashion, computer software services and advertising. It is notable, however, that much of the literature implicitly refers to the “creative industries” as comprising all of the “inner three rings” of the Work Foundation’s “creative industry bulls­eye”. Hence applying a commonly­used definition would describe an author as being in a creative industry, as well as TV and fashion13. Richard Florida’s “Creative Capital Theory” posits that creative industries are now the key to growth and prosperity. He argues that “regional economic growth is driven by the location choices of creative people – the holders of creative capital – who prefer places that are diverse, tolerant and open to new ideas.”14 This is underlined by the rapid growth of the creative industries and the high economic value added by creative workers.

13 A useful overview is provided by Reeves, M. (2002), “Measuring the economic and social impact of the arts: a review”. 14 Florida, R (2002) “Rebuilding lower Manhattan for the Creative Age”. 7 Myerscough (1988)15 was at the forefront of understanding the role that creative industries could play in GDP, finding that the annual turnover of the “arts”16 was £10 billion a year and they employed 2.1% of the UK labour force. O’Brien and Feist (1995)17 found that the cultural sector18 employed 2.4% of the UK labour force in 1991, but found that much of the industry was centred in and around London.

DCMS (2001)19 documented that the creative industries had grown to produce £112.5 billion in revenues, around 5% of GDP, while they contributed £10.3 billion in exports. Although these industries were still centred around the South East, there had been some growth in the rest of the country. Of the £112.5 billion creative industry revenues in 2001, it is estimated that £12.1 billion and 102 thousand jobs (out of a creative industries total of 1.3 million) were generated by TV and radio (TV £6.7 billion and radio £522 million). Of the creative industries, those closest to the BBC’s activities are the TV, radio and online sectors – and these form the focus of this study. The size of these sectors and the scale of the intervention (i.e. public revenues) form useful context to this study.

Ofcom (2007)20 reports that 2006 TV revenue equalled nearly £10.8 billion in 2006, of which approximately £2.5 billion (23%) was generated by public funds (BBC); and radio revenue equalled £1.15 billion, of which estimates BBC expenditure to account for £637 million (55%).

The Internet Advertising Bureau21 reports that 2006 online advertising revenues were equal to £2.0 billion (higher than radio advertising revenues and around half of TV advertising revenues in 2006). The BBC has a significant presence in this sector also (although it does not contribute to advertising revenues in the UK) – .co.uk has a weekly reach of 14.8 million unique users22.

According to the Work Foundation report “Staying Ahead” (2007)23 the creative industries now contribute 7.3% of GDP, directly employ one million people and, in terms of contribution to GDP, the creative industries are now comparable in size to the financial services sector. The OECD has estimated that the UK’s cultural industries24 make up a greater share of GDP than in other nations at nearly 6%, relative to 3.5% or less in each of the USA, France, Australia and Canada. The UK is the second largest exporter of broadcasting and music in the world, and is Europe’s largest advertising market25.

15 Myerscough, J (1988), “The Economic Importance of the Arts in Britain”, Policy Studies Institute, London. 16 Defined as: ‘independent provision alongside grant­aided activities and it covers the museums and galleries, theatres and concerts, creative artists, community arts, the crafts, the screen industries, broadcasting, the art trade, publishing and the music industries”. 17 O’Brien, J. and A. Feist, (1995), “Employment in the arts and cultural industries: an analysis of the 1991 census”, Ace Research Report No. 2 Policy Research and Planning dept, Arts Council of England, London. 18 Defined as the “‘total number employed in cultural industries and total number of individuals with cultural occupations working outside the cultural industries”. 19 DCMS (2001), “Creative Industries Mapping Document”. 20 Ofcom (2007) “Communications Market Report”. 21 http://www.iabuk.net/en/1/iabadspend2006.mxs, accessed 4 March 2008. 22 BBC, “Annual Report and Accounts 2006/07”. 23 Work Foundation (2007), “Staying ahead: the economic performance of the UK’s creative industries” report for DCMS Creative Economy Programme. 24 Defined as including advertising, architecture, publishing, video, film and photography, music, visual and performing arts, publishing (including printing), radio and TV, art and antiques, design, designer fashion and crafts but excluding software, computer services and computer games. 25 “Convergence Think Tank – Submission” 2008. 8 One NorthEast, the regional development agency for the North East of England, is cited in a Scottish Cultural Enterprise project (2007)26 as saying that the creative industries are important because they make a significant contribution to the regional economy, add quality of life for all, attract non­creative wealth­generating activities and help to project a positive image of a region and its culture. Hence, these industries are seen as growth generators for the regional economies.

NESTA (2008)27 finds that incomes of creative workers28 were 37% higher than the average wage in the UK in 2006. However, incomes have grown at 2.5% since 2001, below the 3.5% average for the UK as a whole. Furthermore, NESTA (2005)29 found that there is under investment in the creative industries despite the growing importance of the sector. They use an ‘infant industry’ argument to suggest that public investment should be used to support creative companies until they become commercially attractive. In this role the State would be a “facilitator, broker and advocate for the creative industries”.

A study30 assessing the economic impact of the creative industries in San Antonio, USA found that the creative industries added over $1.2bn to the local economy, paying £319m in wages to 11,888 employees. During the study, stakeholders argued that the presence of a vibrant cultural economy helped local businesses attract and retain a skilled workforce.

Key points for this study • DCMS defines 14 sectors as “creative industries”; however there are also overlaps with various other sectors and creative workers exist both within creative industries and in other industries. • The creative industries are significant for the UK economy and employment and constitute a larger share of the economy than in other countries. • The creative industries have high economic value added, paying higher wages than the average for the UK (but at slower growth rates) and potentially making regions more attractive places in which to live. This has implications both for multipliers used when calculating overall impacts but also for the role of creative industries in regional development and regeneration. • The BBC accounts for a more than half of revenues in the radio broadcasting industry and nearly a quarter of revenues in the TV broadcasting industry. While similar figures have not been identified for online services, the BBC plays a significant role with a weekly reach of 14.8 million unique users.

2.3 Rationale for intervention In this section, we outline a number of the rationales for intervention in the broadcasting market which have been used to argue in favour of public service broadcasting and the BBC in particular. We have not attempted to identify evidence to support/refute each of these as an in­depth investigation of this evidence is outside the scope of this study.

26 Scottish Cultural Enterprise (2007) “Creative Industries Research Project: Literature Review”. 27 NESTA (2008), “Beyond the Creative Industries”. 28 NESTA use a definition of “creative workers” consisting of 26 creative occupation groups including town planners and graphic designers; advertising managers and furniture makers; actors and librarians; journalists and software professionals; architects and archivists. 29 NESTA (2005), “Creating Value: How The UK Can Invest In New Creative Businesses”. 30 “The Economic Impact of San Antonio’s Creative Industry: An Assessment of Economic Impact in 2003”. 9 2.3.1 The purposes and characteristics of public service broadcasting During the PSB Review 2004­2005, Ofcom set out what it expects from public service broadcasters based upon research, consultation with industry stakeholders and an assessment of what the market might deliver without intervention, as shown in the box below.

PSB purposes • Informing our understanding of the world ­ to inform ourselves and others and to increase our understanding of the world through news, information and analysis of current events and ideas • Stimulating knowledge and learning ­ to stimulate our interest in and knowledge of arts, science, history and other topics through content that is accessible and can encourage informal learning • Reflecting UK cultural identity ­ to reflect and strengthen our cultural identity through original programming at UK, national and regional level, on occasion bringing audiences together for shared experiences • Representing diversity and alternative viewpoints ­ to make us aware of different cultures and alternative viewpoints, through programmes that reflect the lives of other people and other communities, both within the UK and elsewhere PSB characteristics • High quality ­ well­funded and well­produced • Original – new UK content rather than repeats or acquisitions • Innovative – breaking new ideas or re­inventing exciting approaches, rather than copying old ones • Challenging – making viewers think • Engaging – remaining accessible and attractive to viewers

Source: Ofcom PSB Review Phase 3: Competition for Quality (2005)

Ofcom describes the BBC’s contribution to these public purposes as being “the cornerstone of PSB, with special responsibility for investing in distinctive content and always striving to meet PSB Purposes and Characteristics” which demonstrates “that publicly funded provision can ensure delivery of valued content, even in today’s rapidly changing media environment”31. However, we note that this is not a universally held view32.

31 Ofcom (2008), “Second Public Service Broadcast Review”. 32 Elstein, D. (2004), “Building Public Value: a new definition of public service broadcasting?”. 10 Ed Richards33 notes that subscription TV provides some programming that delivers some of these characteristics, for example through channels like . However, he argues that the market under­provides such content, and as such it is the role of the PSB to correct this under­provision. Ofcom summarises the purposes of PSB intervention as the “consumer” and “citizen” rationales for PSB intervention in TV34: • “Helping the broadcasting market work more effectively to deliver what consumers want to watch or want to have an option to watch. • Providing the programming that as citizens we want to be widely available for as many people as possible to watch. Such programming secures the wider social objectives of UK citizens by making available TV which has broad support across the UK, but which would be underprovided or not provided at all by an unregulated market.”35 “Citizenship” externalities exist if it is assumed that broadcasting has some influence on the behaviour of individuals: programme­makers would cater only to the tastes of viewers, with no concern for wider social impacts, it is likely that an unregulated market would under­provide broadcasting that exhibits positive externalities (such as promoting democratic values or educational programming) and over provide broadcasting that exhibits negative externalities (for instance screen violence). Ultimately, the consumer and citizen rationales and the purposes and characteristics of intervention in PSB, and the BBC in particular, attempt to counteract a number of market failures in broadcasting to which we now turn. 2.3.2 Arguments for intervention in PSB and the BBC We discuss below a number of more “traditional” arguments in favour of PSB intervention and then discuss how the debate has moved on in the context of digital switchover (DSO). Broadcasting is a public good The traditional ‘public good’ argument for intervention in public service broadcasting is as follows: broadcasting, unless encrypted, is a public good, in that it is non­ rivalrous (consumption by one person does not reduce consumption by another) and non­excludable (if it is supplied to one consumer, another cannot be prevented from also consuming it). This creates a free­rider problem – there is no incentive for a consumer to pay to receive these services, given that they can get them without paying for them (if somebody else pays for them to be provided). Therefore, if left to the market, a less than socially optimal amount of the public good (broadcasting) will be provided.

Annex 8 of the BBC funding review report36 argues that, because broadcasting can be provided at zero marginal cost to an extra consumer, it is socially optimal for all consumers who have a marginal utility of above zero to be able to access the services. Hence, even if encryption allows restriction of viewing, any such restriction leads to allocative inefficiency and welfare losses.

33 Richards, E. (2004), “Speech to the Westminster Media Forum – Ofcom Review of Public Service Broadcasting”. 34 We refer to the literature on TV extensively, although many of the arguments apply similarly to radio broadcasting. 35 “Ofcom Review of Public Service Broadcasting – Phase 1: Is television special?” (2004). 36 Davies, G. (chairman) (1999), “The future funding of the BBC. Report of the Independent Review Panel to Department of Culture, Media and Sport”. 11 However, Armstrong and Weeds37 argue that many products which are non­rival but excludable are supplied commercially (a large number of information goods fit into this category). This argument follows that broadcasting must exhibit other market failures in order to be treated differently to other products for which supply is left to the market. Quality broadcasting is a merit good A merit good is a good whose value exceeds the value placed upon it by individuals. Merit good arguments for intervention in broadcasting argue that it is a merit good because it has the capacity to “expand or restrict the knowledge, experience and imagination of individuals.”38 In a market system, without some form of intervention, individuals may under invest in the development of their own tastes and learning and not experience the full benefits that may later become apparent. This still remains relevant in the expansive choice of the digital world39, although its impact may be more fragmented40. Ofcom (2004)41 finds that without public subsidies the broadcasting market would not be able to sustain in a digital world the current quality and range of programming on offer. Public service broadcasters act as trusted providers of high quality programming given that consumers are not fully informed Consumers do not know the value of a programme until they have experienced it. In a market system, this information gap, along with under investment in development of tastes and learning, mean that consumers may not know which programmes are preferred. The argument follows that a trusted provider of high quality programming may be able to bridge this information gap: • Consumers may be more willing to try new genres if provided by a trusted source of high quality programming; and • The brand value of the BBC, for instance, means that consumers have a greater level of information on programme quality than may otherwise be the case. Economies of scale exist in broadcasting It is argued that the existence of economies of scale in broadcasting means that a market system would be characterised by concentration with few suppliers, possibly restricting competition and choice, while creating both productive (inefficient use of inputs) and allocative (price above marginal cost) inefficiencies42. One of the roles of the BBC is to provide competition to commercial broadcasters, and to provide a plurality of supply, as well as a range of choice. Spectrum scarcity In the analogue era, spectrum scarcity limited the number of analogue TV and radio (and other non­broadcasting) services that could be supplied, allowing a commercial broadcaster to earn ‘scarcity’ rents43. Armstrong and Weeds (2007) argue that this means that analogue broadcasting under a market system would consist of a small number of advertising­funded commercial broadcasters, which would exhibit the following market failures:

37 Armstrong M. and H. Weeds (2007), “Public Service broadcasting in the Digital World” in “The Economic Regulation of Broadcasting Markets”, edited by P. Seabright and J. von Hagen, Cambridge University Press, April 2007. 38 Davies, G. (chairman) (1999), “The future funding of the BBC. Report of the Independent Review Panel to Department of Culture, Media and Sport”. 39 Graham, A. (2007 ) “It’s the Ecology, Stupid” in “The Economic Regulation of Broadcasting Markets”, edited by P. Seabright and J. von Hagen, Cambridge University Press, April 2007. 40 Ofcom (2008), “Second Public Service Broadcasting Review”, Annex 11. 41 Ofcom (2004), “Review of public service television broadcasting”. 42 Mason, R. (2004) “A Year under Ofcom”, Paper for the Beesley Lecture on Regulation, 4 November 2004. 43 Armstrong M. and H. Weeds (2007), “Public Service broadcasting in the Digital World” in “The Economic Regulation of Broadcasting Markets”, edited by P. Seabright and J. von Hagen, Cambridge University Press, April 2007. 12 • “diversity of programming is insufficient, with broadcasters duplicating popular genres rather than serving niche tastes;

• quality of programming is too low (relative to the social optimum44; • innovation incentives are poor; and • airtime devoted to advertising tends to be excessive, especially if its nuisance cost to viewers is high”45. From these arguments, it may be deduced that the BBC addresses the spectrum scarcity market failure by increasing the diversity of programming, introducing new genres and maintaining a range of programme­types; raising the quality of programming – both directly by providing high­quality programming, but also by encouraging competition in quality between the BBC and commercial broadcasters (thus raising the quality of their output); and by providing leadership in innovation, in particular innovations that will benefit audiences but which commercial broadcasters may not invest in. Summary of “static” rationales for intervention Armstrong and Weeds (2007)46 summarise the rationale for intervention in TV broadcasting by stating that it is to promote the maximisation of public value by ensuring sufficient provision of programming with educational benefits, network externalities and social or “citizenship” benefits: • Educational benefits arise from direct educational programming and by raising interest in new topics; • Network externalities are created through conversation stimulated by watching programming; and • Social benefits arise through the creation of “social capital” or social cohesion by broadcasting programming that encourages better “citizenship” or may help understanding across different communities within society. Peacock47 (2004) describes the BBC’s role as providing the “social glue” that binds communities and the nation together. In addition to these commonly­cited rationales, increasingly “dynamic” impacts, in which the intervention impacts on the behaviour of other broadcasters, are being considered.

44 Commercial channels have an incentive to generate programming of sufficient quality to attract viewers, and hence advertising revenue. Armstrong and Weeds note that “It is possible that advertiser targeting of more affluent viewers, or of those with a greater propensity to spend on advertised goods, might result in some bias towards the viewing preferences of those groups. However, unless these viewers have a particularly strong desire for quality and, in addition, the elasticity of their expenditure with respect to advertising is sufficiently high, this effect is unlikely to guarantee the provision of high quality programmes”. 45 Armstrong M. and H. Weeds (2007), “Public Service broadcasting in the Digital World” in “The Economic Regulation of Broadcasting Markets”, edited by P. Seabright and J. von Hagen, Cambridge University Press, April 2007. 46 Armstrong M. and H. Weeds (2007), “Public Service broadcasting in the Digital World” in “The Economic Regulation of Broadcasting Markets”, edited by P. Seabright and J. von Hagen, Cambridge University Press, April 2007. 47 Peacock, A. (2004), “Public Service Broadcasting Without the BBC?” IEA. 13 Dynamic rationales for intervention The arguments set out above have featured throughout the substantial literature on the rationale for public service broadcasting. The “dynamic” rationale for PSB intervention focuses on the positive impact of PSBs on consumers and other organisations in the creative economy through stimulating demand, innovation and creativity (acting as a catalyst), and acting as a standard­setter. The BBC’s activities may raise “the competitive benchmark” and force competitors to raise standards and invest more in order to compete with the BBC. Indeed, the BBC sets as a core priority the universal provision of high quality content48. By way of example, the BBC Governance Unit’s report on the PSB proposition argued that “The introduction of PSB Freesat may encourage other suppliers to strengthen their competitive offerings. This would benefit consumers by encouraging the development of new product offerings such as greater interactivity and HD.”49 As discussed in Section 6 below, dynamic impacts are often difficult to determine, and it is not always possible to predict where an intervention may cease to act as an incentive to other broadcasters and starts to crowd out investment. 2.3.3 How the transition to digital Britain affects the validity and/or strength of the arguments In the digital era, spectrum scarcity is reduced. Armstrong and Weeds argue that a number of the market failures cited above are also reduced. The provision of large numbers of commercial channels may mean that fewer consumers choose to watch PSB programming (they consider TV only, but a similar argument could apply for radio), thus rendering such programming less useful.

The BBC Funding Review50 argues, however, that intervention remains important in the digital era because it considers the rationale for intervention (with the exception of spectrum scarcity) to hold in a digital environment with large numbers of TV channels and radio stations, and furthermore: • Over­concentration remains a risk, due to continuing economies of scale, increasing economies of scope and the ability for “gatekeepers” – those that control TV set top boxes for instance – to control delivery of programming and extract monopoly rents; • Increased audience fragmentation would tend to raise average costs and decrease efficiency. We note that there is an implicit assumption that PSB intervention will help slow or halt audience fragmentation; and • Negative externalities may increase as it becomes more difficult for regulators to monitor the output of large numbers of channels and stations. In a 2004 speech Gavyn Davies discussed the relevance of what he saw to be the four main market failure arguments in the digital broadcasting world 51. The relevance of each of these arguments is discussed below. “Broadcasting remains a public good, which implies that it should be provided without making a charge at the point of use.” Davies argues that, whether or not broadcasting qualifies as a “pure” public good in the economic sense (due to increasing excludability), it remains non­rivalrous and hence the optimum price charged is zero. Since “broadcasting will always remain

48 “Convergence Think Tank – BBC Submission to Seminar One” 2008. 49 BBC Governance Unit (2006), “PSB Freesat: BBC Governance Unit review of market implications”. 50 Davies, G (chairman) (1999), “The future funding of the BBC. Report of the Independent Review Panel to Department of Culture, Media and Sport”. 51 Davies, G (2004), “Economics and the BBC Charter”, Lecture at the Said Business School, Oxford. 14 non rivalrous, the optimal subscription charge at the point of use should be zero. Any attempt to exclude some users by levying a subscription may result in under­ consumption and could be sub­optimal. And the technology required to put such a charging mechanism in place would be a waste of resources.” Hence, Davies argues, some form of provision at zero price remains the efficient mechanism of supply (though note that this allows for advertising­based funding models).

Helm (2005)52 supports the Davies view and criticises what he perceives to be Ofcom’s view that “the coming of digital broadcasting largely “solves” the public good problem in respect of consumer choice for programmes and broadcasting that they are willing to pay for” as incorrect. Helm continues: “Nothing in the digital world changes the basic point that the marginal cost is effectively zero. Excluding people does not make a product rival. What digital programming may do is fragment the market, and therefore disaggregate the public goods. As a result, the number of people who enjoy the zero marginal cost output is reduced for each programme or channel, and therefore the number of people who might be persuaded – through charging – to contribute towards the fixed costs falls.” Hence, disagreement remains as to whether the relaxation of spectrum scarcity and the increasing range of channels available will “solve” the public good problem in the broadcasting market. “Broadcasting involves the creation of inter­personal relationships, called externalities, which are not fully reflected in market transactions.” Davies suggests that an important externality of public service broadcasting is to provide programmes that bring communities together, in the sense that it creates something in common across regions, social classes etc. This argument could be extended to say that in the digital world, with more fragmented viewing (and listening), the BBC’s ability to attract large numbers of viewers to programmes means that it is the only broadcaster able to provide this positive externality. “Broadcasting involves increasing returns to scale, which tends to lead to the existence of private monopolies in a free market.” Davies argues that increasing returns to scale (i.e. economies of scale) are equally important in the digital world as in the spectrum­scarce analogue world that preceded it. He cites the example of Sky, which has grown rapidly, far outstripping revenues of ITV (and now the BBC). He suggests that the BBC’s declining relative (to the market) size makes it harder for the BBC to provide effective competition to powerful commercial firms, however the emergence of commercial players of such a scale suggests that the need for intervention to address this market failure remains. “Broadcasting involves informational deficiencies which lead to sub­ optimal levels of demand for quality products from consumers in the free market.” The information failure associated with broadcasting, as an experience good, is argued to be fundamental to the product, and is not lessened (arguably it may be increased) by the switch to digital and the increasing range of channels available.

52 Helm, D. (2005) “Consumers, Citizens and Members: Public Service Broadcasting and the BBC”, chapter in Little, T. and Helm, D. “Can the Market Deliver?: Funding Public Service Television in the Digital Age”. 15 The BBC view In line with arguments presented by Davies, the BBC’s submission to the Convergence Think Tank53 in January 2008 argues that market failures persist in the digital world: • “Paradoxically, the huge increase in the choice and availability of content could make it harder for many audiences to find the content they are looking for and to know what content to trust… • ... It will become increasingly difficult for UK content providers to maintain reach and impact on a global scale, as imports and acquisitions could draw viewers and listeners away from UK­produced content. UK content production could therefore be under pressure in a globalised world. • Despite the proliferation of content, there will be some genres where there are very few producers and distributors. These could include genres which audiences have traditionally valued highly for society, for instance children’s programming or regional news.” The BBC argues that it continues to have relevance as an intervention in the digital age because it helps to resolve these persisting market failures: • It provides trusted content gathered together and easy to find (i.e. the BBC family of channels and stations); • It helps maintain UK content provision by focussing on UK production, giving UK content providers an opportunity to reach the market, and hence challenge in the global market; and • It continues to fill in by providing genres that otherwise may not be provided, or in which provision is limited and restricted to a small number of providers. Rationale for intervention in the future Robin Foster54 provides a summary of how the rationale for intervention persists and may evolve in the future, particularly given the switch to digital and convergence: • “…there remains a public interest rationale for intervention in the sector to achieve important social objectives, alongside a well­functioning competitive market, but the scale and nature of that intervention may well differ; • An end to spectrum scarcity and increased competition will undermine the old model of implicit subsidies for public objectives. New measures will almost certainly be needed if it is decided to continue to secure plurality in the provision of public interest content – involving support for Channel 4 and/or for other providers of such content; and • The provision of public interest content will need to be fit­for­purpose in the broadband world – this means increasing use of on­demand and interactive content, rather than conventional scheduled channels.”

53 “Convergence Think Tank – BBC Submission to Seminar One” 2008. 54 Foster, R. (2007), “Future Broadcasting Regulation – An independent report by Robin Foster commissioned by the Department for Culture, Media and Sport”. 16 Key points for this study • The BBC is a public policy intervention with the aim to address market failures (such as public good and merit good status of broadcasting) in the broadcasting industry and to provide citizenship benefits – benefits to society that would not necessarily be captured in a market environment. • Some of these market failures have reduced as the development of excludability via TV signal encryption means that TV broadcasting is no longer a pure public good, unlike radio. • Armstrong and Weeds (2007) state that PSB may have a smaller role to play in the future as increased choice means that fewer consumers choose to watch PSB programmes. • However, a number of commentators have argued that a large number of market failures would continue to hold in a digital environment and that continued PSB intervention is justified. • More recent discussions over the rationale for intervention in the future suggest that the nature of intervention in the future may need to change, which is the main focus of the 2008 Ofcom PSB Review. 2.4 Externalities A 2007 study for the DCMS55 develops a framework for evaluating cultural policy focussing on the market failures that arise in the creative industries. Seven areas of market failure are identified, of which four are relevant to the BBC’s role within the creative industries. They arise in education (training), regeneration, network building and clustering. Each of these externalities is a possible example of a positive effect of the BBC that counteracts an existing market failure. A large number of other possible impacts may exist, including talent, brand and promotion externalities, supply chain, risk­taking and innovation benefits. We focus on the four areas below as those that have received the greatest attention in the relevant literature we have identified. We set out the theories behind these externalities below, noting that our project will aim to uncover evidence of these impacts and their scale, as they relate to the UK. 2.4.1 Education (training) externality Brunello and De Paola56 (2004) suggest that the presence of a “poaching externality” reduces investment in training in a market without intervention. If firms can poach workers or workers can leave for other firms then a firm is unlikely to capture the full benefit of providing training (i.e. the raised productivity of a trained employee), while a competitor can free ride and benefit from this investment in training without making any investment itself. Hence under­provision occurs, reducing social welfare. This can lead to a suboptimal (from a social perspective) level of training under certain conditions57. For instance, Schlesinger (2004)58 states that “Presently, the BBC is the only broadcaster offering high quality training across the board” (i.e. in multiple disciplines and skills).

Brunello and Gambarotto59 (2004) and Brunello and De Paola60 (2004) find that in clusters of businesses within the same industry, training may generate positive pooling externalities from the flow of ideas and innovation, offsetting the poaching externality.

55 Frontier Economics (2007), “A Framework for Evaluating Cultural Policy Investment”. 56 Brunello, G. and M. De Paola (2004), “Market Failures and the Under­provision of Training”. 57 i.e. if labour turnover rates are positive and the labour market is not perfectly competitive (workers are paid less than their marginal product). 58 Schlesinger, P. (2004), “Do institutions matter for public service broadcasting?”. 59 Brunello, G. and F. Gambarotto (2004), “Agglomeration effects on employer­provided training: evidence from the UK”, IZA Discussion Paper 1055. 60 Brunello, G. and M. De Paola (2004), “Training and the density of economic activity: evidence from Italy”, IZA working papers n. 1173. 17 It is notable that economic theory suggests that individuals may not seek out sufficient training for themselves, either because they do not receive the full benefits (some benefits are received by employers), they do not possess sufficient information on appropriate training or they may demonstrate myopic thinking, which prevents the individual from understanding the long term benefits of acquiring skills if it comes at a cost in the short term. 2.4.2 Regeneration externality Frontier Economics (2007)61 identifies a potential regeneration externality to cultural policy investment. The redevelopment and regeneration of a run­down neighbourhood or poor local economy can be hampered by coordination failure and the public good nature of regeneration, which creates an incentive to free ride and not contribute to the costs of regeneration while still receiving the benefits. Intervention in regeneration can create and support new businesses, which has a knock on effect for employment. It can attract higher­skilled workers, increase graduate retention and lead to an increase in tourism. In the case of the BBC, intervention may take the form of regeneration leadership – locating activities in an area to encourage other businesses to follow. As discussed above, Richard Florida’s “Creative Capital Theory” is an example of the greater emphasis that modern regional planning literature places on creative industries as drivers of economic growth and economic and social regeneration. Examples of regeneration schemes that have included large projects as their cornerstones include the Baltic art gallery and Sage music centre in Gateshead, or the Tate Modern and Peckham Library in Southwark, London. Possible contenders for positive BBC impacts in this area include the BBC’s nations and regions presence, and specific location decisions such as the Pacific Quay and Salford Quays projects. 2.4.3 Network­building externality An additional externality cited in the literature is that of network­building. Network­ building within the creative industries can increase the flow of information between companies, which can improve productivity and boost growth as brainstorming and the sharing of ideas can both breed creativity and warn against what methods do not work. However, this construction of “social capital” can be hindered by transaction costs and a lack of information. NESTA (2003)62 notes that creative industries are dependent upon the flow of creative ideas which flow through informal networks. The BBC’s presence as part of a “creative cluster” can aid the formation of networks between companies. The development of infrastructure to support creative clusters is an important ingredient for the growth of creative industries. DCMS (2008) reports that the construction of Salford Quays will provide space for 1,000 creative firms and provide the infrastructure for these firms to form networks63.

NESTA (2006)64 cites BBC Innovation Labs as an example of a network­building externality. The initiative was started jointly by the BBC and a consortium of Regional Development Agencies to bring people from different areas of the creative industries together. The group brainstorms new programming ideas to be put forward to a panel of BBC New Media commissioners.

61 Frontier Economics (2007), “A Framework for Evaluating Cultural Policy Investment”. 62 NESTA (2003), “New Solutions to Old Problems: Investing In the Creative Industries”. 63 DCMS (2008), “Creative Britain, New Talents for a New Economy”. 64 NESTA (2006), “Creating Growth: How the UK Can Develop World­Class Creative Businesses”. 18 2.4.4 Clustering externality Also identified in the literature is a clustering externality65. In the absence of intervention, clusters may fail to form due to positive externalities generating free riding opportunities and coordination failures. The BBC has the ability to take the lead in location decisions due to the certainty of its income stream and is large enough to give other businesses confidence to follow a first mover BBC. An example of this could be the role of the BBC in creating the Pacific Quay creative industries cluster and the ongoing development of MediaCity:uk at Salford. New businesses and jobs may be created and training in relevant skills is more likely due to more concentrated demand (a “critical mass of potential trainees may be assembled from clustering, making training courses viable”66) increasing graduate trainee retention. This may improve the perception of an area, making it a more desirable area to move to or to set up business67. London’s cultural institutions are cited as a specific example, raising the profile of the capital and so attracting high value­added workers from around the world68.

Demos (2007)69 describes policies that encourage clustering as creating industry economies of scale rather than economies of scale at the firm level. Merely encouraging growth of individual firms within the industry may not be as productive as supporting clustering which lowers costs of all participants.

Ofcom’s 2006 review70 of the television production sector notes that some parts of the production sector based outside of London argue for further investment in the nations and regions to create a diverse nationwide production sector. Ofcom reports that the sector is unsustainable outside of London without intervention in order to allow the diversity benefits of producing in the nations and regions to be accrued. This is echoed in a speech given the Oxford Media Convention by Secretary of State for Culture James Purnell71, who said that ‘a thousand flowers never bloom until they are planted’ in reference to stimulating the independent production sector. It is worthwhile noting that there is substantial potential for overlap between the clustering and network­building externalities. 2.4.5 Negative externalities The correction of the market failures discussed above is often cited as a justification for intervention in the broadcasting sector together with the promotion of wider consumer and citizen benefits. The BBC funded by a licence fee and set up in its current form is one of the UK’s major policy interventions in broadcasting, together with the formation of Channel 4, the gifting of free analogue spectrum and the granting of Channel 3 and Channel 5 licences (notwithstanding similar interventions in radio). The BBC’s activities are, however, likely to have negative as well as positive impacts upon other organisations in the creative economy.

The BBC competitive impact framework72 The BBC Trust has published a ‘Statement of policy on competitive impact’ setting out how it will take account of its duty to take account of the BBC’s competitive impact on the wider impact in line with the BBC Charter and Agreement and UK and EU competition law and State aid law. The BBC recognises that the BBC’s activities

65 For example, Schlesinger, P. (2004) “Do Institutions Matter for Public Service Broadcasting?”. 66 Frontier Economics (2007), “A Framework for Evaluating Cultural Policy Investment”. 67 Kelly A., and M. Kelly (2000), “Impact and Values – Assessing the Arts and Creative Industries in the South West”. 68 Frontier Economics (2007), “Creative Industry Spillovers – Understanding Their Impact on the Wider Economy”. 69 Demos (2007), “So, What Do You Do? A new question for policy in the creative age”. 70 Ofcom (2006), “Review of the Television Production Sector”. 71 Speech by James Purnell to the Oxford Media Convention, 17th January, 2008. 72 See http://www.bbc.co.uk/bbctrust/framework/fair_trading.html 19 could affect competition to the detriment of licence­fee payers and consumers who benefit from a vibrant broadcasting sector. The BBC Trust has introduced the concept of the ‘Competitive Impact Principle’ which applies to all of its public service activities – while fulfilling its Public Purposes, and taking into account its other obligations in the Charter and the Agreement, it should endeavour to minimise its negative competitive impacts on the wider market. The Trust requires the BBC to consider impacts on consumer welfare consistent with competition law; impacts on other market participants are considered within this consumer welfare assessment. Such impacts are considered in Ofcom’s Market Impact Assessment of the introduction of a new BBC public service or a significant change to an existing service. The Trust also requires the BBC to minimise the market distortion of its Commercial Services. This policy is supported by a Competitive Impact framework, which outlines how the policy will be considered across the range of BBC activities. The framework includes a Fair Trading Policy and a specific code on cross and digital TV promotion. In line with Charter requirements, the BBC Executive has published its own Fair Trading Guidelines which were approved by the BBC Trust. Key impacts in current debates Robin Foster73 summarises the focus of broadcasting­related competition concerns as: • “Rights issues, including exclusive contracts for premium content and the terms on which such content is supplied to third parties; purchase of programmes by broadcasters from independent producers; and especially new media rights; • Control of gateways to the consumer, such as conditional access systems (and other bottlenecks in the broadcasting value chain); • Impact of public broadcasters on competition; and • Vertical integration – commonplace in the media sector ­ is an added complexity, leading to the possibility that an operator could lever any market power it has in one part of the value chain into adjacent downstream or upstream activities.” Impacts identified by DCMS The 2006 DCMS Regulatory Impact Assessment of the BBC74 outlines five possible negative impacts of the BBC: it refers to these as crowding out, predation, innovation, uncertainty and exclusivity, which we describe below. “Crowding out”: This argument suggests that the BBC may crowd out commercial competition both through supplying material at below cost and through bidding up prices paid for staff and materials75. The DCMS concludes that this effect could be reduced by increasing the required proportion of independent production to total productions. Crowding out of investment due to BBC activity is an often cited negative impact of the broadcaster. However, there also exist examples of potential crowding in from BBC activities. For instance, Radio 1 tripled the subscriptions to the online game Second Life by launching a concert through it76. Gardam77 (2004) cites the mutual gain that both the BBC and the commercial sector have received in the

73 Foster, R. (2007), “Future Broadcasting Regulation – An independent report by Robin Foster commissioned by the Department for Culture, Media and Sport”. 74 DCMS (2006), “Regulatory Impact Assessment: BBC Charter Review”. 75 Indepen (2006), “Appraising the proposed BBC licence fee increase”, a study for ITV. 76 Berry, C. (2007), “Public service broadcasting in the digital age”, think piece for Compass. 77 Gardam, T. (2004), “Independent Review of the BBC’s Digital Radio Services”. 20 digital radio market, as the push by the BBC for digital radio take up allowed the commercial sector to commit large investment into the sector (although the returns to this investment have not yet necessarily been realised).

Barwise (2003)78 also cites an example of crowding out by the BBC that was positive for UK production. The introduction of CBBC and CBeebies provided extra competition to a UK children’s TV market that was dominated by American channels. On first observation the BBC should not enter an already competitive market. However, it was adjudged that any scaling back by these channels was outweighed by the benefits that would accrue to the British public. “Predation”: This refers to potential activities that could undermine competitors, either by design or as an unintended consequence79. We note that there is potential overlap between this externality and the “crowding out” externality referred to above. Examples cited by DCMS include: • Cross subsidising services which compete with private sector companies; • Supplying material at zero price (below competitors’ costs); • Poaching staff; and • Giving commercial value to sponsors on publicly funded services. If the BBC were to undertake any of these activities and if actual or potential competitors were prevented from effectively competing in the market then in the long run, the market would be less competitive than would otherwise be the case. DCMS supplies the example of radio station One Word which claimed that it was forced to exit the radio industry due to the presence of free­to­air BBC7. It is clear that the BBC, as a major player in media markets, has the potential to impact negatively on actual or potential competitors in ways such as those described above. However any impact from new services should be controlled or mitigated by the Public Value Test framework for accepting new services. “Innovation”: The BBC may determine the pace and direction of innovation in markets, creating market distortions and preventing development and adoption of the least­cost technology. This could result in large amounts of R&D expenditure in an inefficient technology, undermining industry investment in the long run and raising costs for all participants. DCMS suggests that this is more likely to occur in newly created markets such as the online market where R&D and initial training costs may be higher. It is possible that, in these circumstances, the BBC may spend large sums “on R&D and in training and nurturing staff while at the same time unfavoured markets and technologies are neither explored nor exploited. This may place the BBC in danger of over­expansion or undermine investment in the industry in the long run and raise costs for all participants”80. “Exclusivity”: The BBC may be able to impose conditions on the contracts it enters into which can prevent other firms from obtaining the means to compete. Forms of exclusivity noted by DCMS include:

78 Barwise, P. (2003), “What are the real threats to public service broadcasting?” in Damian Tambini and Jamie Cowling, eds, “From Public Service Broadcasting to Public Service Communications”. London: ippr, 2004, 16­33. 79 The “predation” effect identified by DCMS differs from predation in competition policy, where price rises are imposed once competition has been weakened or eliminated. 80 DCMS (2006), “Regulatory Impact Assessment: BBC Charter Review”. 21 • Exclusive content rights; • Prevention of sale to other media companies; • Hoarding of spectrum for which it does not pay (although we recognise that Ofcom is in the process of auctioning spectrum across the UK); and • Not allowing access to BBC Intellectual Property Rights. “Collusion”: DCMS suggests that large organisations, such as the BBC, may be more able to join anti­competitive cartels. It reports that the BBC has been accused of such practices in the case of the agreement with the FA over the sale of rights to broadcast the FA Cup and over the Red Bee Media Ltd contract with Channel 4. However, were any such practices to be occurring DCMS suggests that the Trust framework should assist in prevention of such practices in future81. Other identified impacts In addition to these impacts identified by DCMS, it is possible that the BBC’s presence in a market could increase uncertainty for competitors, potentially reducing investment. This uncertainty could arise from the possibility of BBC entry into new markets or new innovations in markets in which it already has a presence. Potential competition from the BBC could deter entry or innovation by other, commercial, businesses. Graf (2004)82 found that BBC online had not reduced competition in its market although it concluded that it is possible that its presence deterred some investment from potential competitors.

Indepen (2006)83,84, in reports for commercial competitors to the BBC, cites possible negative impacts of the BBC on the broadcasting industry as including the reduction of audience share and hence advertising revenues of commercial broadcasters, the bidding up of costs85, the stifling of subscription markets through the provision of free content and a potential reduction in household income spent on broadcasting services due to the licence fee. Another example is the online advertising industry. Globally, this accounts for just 5% of all advertising. However, in the UK this proportion is 14%. Victor Keegan86 suggests that the relatively high proportion of advertising online in the UK may be because advertisers are forced online by the shortage of popular TV advertising slots due to the BBC’s advert­free status.

Frontier Economics (2008)87 investigates creative industry spillovers and provides a helpful classification of spillovers into three categories: “Knowledge spillovers: firms benefit from new ideas or processes developed by other firms without having to pay for that benefit (for example, the Toyota production process). Product spillovers: the demand for a firm’s product increases as a result of the development of a new product88 by another firm (for example, the iPod substantially increased demand for pre­recorded music).

81 We note that the BBC is also subject to general competition law and that there are severe penalties (including the possibility of criminal action) for participation in cartels. 82 Graf, P (2004), “Report of the Independent Review of BBC Online”, Report for DCMS. 83 Indepen (2006), “Appraising the proposed BBC licence fee increase”, a study for ITV”. 84 Indpen (2006), “A licence to kill? The impact of the BBC licence fee settlement on commercial radio”. 85 See Oliver & Ohlbaum (2008) “On Screen and On Air Talent – An Assessment of the BBC’s Approach and Impact”. This provides relevant up­to­date evidence of the BBC’s impact on talent costs. 86 Victor Keegan (2006), “Cherish the BBC, the best innovator of all”, Technology Guardian, 21st December 2006. 87 Frontier Economics (2008), “Creative Industry Spillovers – understanding their impact on the wider economy”. 88 i.e. a “complementary good”. 22 Alternatively, a firm is able to adapt or replicate a new product developed by another firm (for example, high street fashion retailers often base new lines or styles on the designs of high profile designers such as Stella McCartney). Network spillovers: a grouping together of firms from an industry or industries may make a location more attractive to other firms or individuals (for example, the success of high profile UK artists and the ‘cool Britannia’ phenomenon is widely regarded as having been associated with attracting foreign investment and making the UK an attractive location for highly skilled workers).” These classifications are intended to cover all relevant externalities and classification of identified externalities according under these headings may provide a useful guide to identifying and separating impacts in this study.

Key points for this study • There exists a number of reasons to justify intervention in the production and delivery of public service content. • The activities of the BBC can have both a positive and negative impact on the UK’s creative industry. • Any activity undertaken by the BBC which could be supported in a purely commercial market may also have negative impacts. • A range of positive and negative impacts have been identified in the literature. This study recognise both crowding in and crowding out effects, and should consult a wide range of stakeholders in order to identify those of greatest importance. • The literature suggests a large number of hypotheses that this study should aim to test, including: – Training/education externalities; – Regeneration externalities; – Network­building externalities; – Clustering externalities; – Other possible positive impacts, including talent, brand and promotion externalities, supply chain, risk­taking and innovation benefits have not been considered as extensively in relevant literature but should also be considered in this study; – Potential negative impacts identified by DCMS include the areas of “crowding out”, “predation”, “innovation”, “exclusivity” and “collusion”; and – Other possible negative impacts include uncertainty and the negative impact on competitors resulting from BBC provision of zero cost advertising­free content. • Creative industry spillovers can be classified as knowledge spillovers, product spillovers and network spillovers. This study should identify in which class to include identified impacts. 2.5 Analogous impact studies There have been many studies in the UK89 that have tried to measure the economic and other impacts of the activities of PSBs and other creative organisations. We describe the key features of what we consider to be the most relevant selection of these studies below.

89 We have also identified a number of studies from outside of the UK, See, for example, http://sanantoniooca.org.dnnmax.com/Portals/0/creativeindustrypdf.pdf for a study of the economic impact of the creative industries in San Antonio, USA and “The Economic Impact of the Motion Picture & Television Production Industry on the United States” at http://www.mpaa.org/press_releases/mpa%20us%20economic%20impact%20report_final.pdf 23 2.5.1 Economic impact of The Cardiff Business School carried out an economic impact study of S4C90, with the aim of measuring the impact of the broadcaster on the Welsh economy between 2002 and 2006. It was estimated that the direct impacts of S4C spending through creating jobs are small compared to its indirect effects. These indirect effects were split into two types: a supplier effect; and an income induced effect. The supplier effect refers to the multiplier effects left over after accounting for leakage from the Welsh economy whereas the income induced effect is that employees spend their wages and salaries in their locality on goods and services, which then generates demand. Hence the increased income induces demand, which induces further income. The sampled firms’ data was then scaled up to create an industry aggregate which was entered into the Welsh input­output tables developed by the Cardiff Business School, which calculated financial trading relationships between different sectors of the Welsh economy. This method allowed estimation of an “impact” without consideration of a specific counterfactual scenario. That is, the impact estimated is a “gross” estimate, in that it estimates all economic activity supported by S4C. In terms of direct effects, S4C was found to support between 177 and 206 full time equivalent (FTE) jobs in the years 2002­2006. The indirect effects consisted mainly of jobs in hotels and the catering and retail industries, and S4C activity was found to support indirectly 2,100 FTE jobs over the five years of the study91. Furthermore, the presence of S4C in the creative industries added stability and certainty and hence encouraged investment, skills development and creative excellence. In total, it was estimated that S4C generated around £87m of value added in 2006 for the Welsh economy. 2.5.2 Economic impact of the UK film industry Oxford Economic Forecasting (2005)92 estimates the economic impacts of the UK film industry. This study considers the economic spillover effects that occur as a result of activity in the film industry as well as the direct and indirect impacts discussed in the S4C study. Skills are increased in the economy as the film industry both reduces skills emigration and pulls skills to the UK; tourism is created as people travel to see the locations where films were shot; UK culture is furthered by the activities of the film industry; merchandise sales increase; and trade is increased through the promotion externalities of indirectly marketing the UK abroad. £832m was spent on location shoots in 2002, £510m of which was attributable to television and £260m was attributable to film93. Multiplier effects are estimated by a detailed survey of firms in the UK film industry by Optima/Cambridge Econometrics (see below), which asked companies about their turnover, employment, wage costs and profits, and also about how much they spend buying goods and services from their suppliers. The multiplier effect estimated is a ‘combined’ multiplier impact representing the sum of the so­called ‘indirect’ and ‘induced’ impacts of the core UK film industry on the UK economy. The study suggests that an alternative method to estimate multiplier effects is by using data from the Annual Business Inquiry (ABI) conducted by the ONS. Oxford Economic Forecasting finds that both methods yield a multiplier of around 2.0 for the core UK film industry and provides a range of estimated multipliers for other industries, ranging from 1.5 (computer services and legal activities) to 2.2 (electricity production and distribution).

90 DTZ/Welsh Economy Research Unit (2007), “The Economic Impact of S4C on the Welsh Economy 2002­2006”, report for S4C. 91 Supporting this, NESTA finds that 35% of the UK creative workforce is employed in non­creative sectors (NESTA (2008), “Beyond the Creative Industries”). 92 Oxford Economic Forecasting (2005). “The Economic Contribution of the UK Film Industry”. 93 Cambridge Econometrics and Optima (2005), “Economic Impact of the UK Screen Industries, A Report submitted to the UK Film Council and the National and Regional Screen and Development Agencies”. 24 The study finds that the UK film industry supported 95,000 jobs (35,000 of which were directly employed by the industry) in the UK, contributed over £4.3 billion to UK GDP and contributed over £1.1 billion to the Exchequer in 2006. These figures are estimated in absolute terms, i.e. against a counterfactual of no British film industry. The study also considers the estimated impact of removing Film Tax Relief and a resulting 75% decline in UK film production. It is estimated that UK GDP would be reduced by around £200 million per annum, after accounting for workers finding alternative jobs where possible. Oxford Economic Forecasting also estimates the cultural value of UK film based on the extra number of UK cinema attendances and DVD sales a film is likely to receive as a result of being a UK­produced film. 2.5.3 Economic impact of the UK screen industries Optima and Cambridge Econometrics (2005)94 estimates the multipliers of income spent in the UK’s screen industries (film, television, corporate video, commercials/advertising and interactive). They find that at £8.7bn, London attracts two­thirds of sales attributable to the screen industries, while Scotland attracts the second largest sum (£1.2bn). This is partly due to the expansion of BBC activity. Multipliers in the regions were the largest where there was a strong representation of ”humdrum” services to support the creativity of the screen industries and where the region is relatively large. The UK multipliers are much larger than their component regional multipliers because they include the nationwide impacts of activities in these industries. They find that a £1 increase in final demand in a specified industry in a specified region boosts value added for the whole UK economy by £1.40­£2.50. Multipliers outside of South East England tend to be below the average multiplier of other UK sectors. The policy implications of these findings however are not to reallocate resources to the regions with the largest multipliers, a policy which would have a large impact on the BBC’s nations and region’s policy. The lower multipliers for these regions instead suggest that there is potential to develop the capacity of the screen industries outside of the South East in order to better exploit the opportunities that reside elsewhere. 2.5.4 The impact of Channel 4 on the UK independent sector, creative industries and the economy PwC was commissioned to investigate the impact of Channel 4 on the UK independent sector, creative industries and the economy95. This study focused on positive impacts, in particular the development of the industry and the talent base that supports it by: • “Supporting a plurality of independent producers to ensure that a diversity of ideas reaches the screen. • Bolstering the funds available to the independent production sector through matched funding from regional agencies. • Contributing to the development of regional clusters in the UK creative economy.

94 Cambridge Econometrics and Optima (2005), “Economic Impact of the UK Screen Industries, A Report submitted to the UK Film Council and the National and Regional Screen and Development Agencies”. 95 PricewaterhouseCoopers (2007), “The impact of Channel 4 on the UK independent sector, creative industries and the economy”. 25 • Identifying and nurturing talent in a new and… …unique way.” As part of the study a forward­looking counterfactual considered what might happen were Channel 4 to lose its institutional model of a publicly owned, not­for­profit corporation funded entirely by commercial revenues but with a PSB remit – and instead start to operate on a truly commercial basis, for example as a result of privatisation. Suggested impacts of such a change include: • Increased consolidation and fewer independent producers; • A reduction in size and plurality of Channel 4 sources; • A renewed focus on London (reduction in activity in the nations and regions); • Increased barriers for talent; and • Reduced risk­taking and lower quality linked to reduced certainty of funding. 2.5.5 The economic impact of the motion picture & television production industry on the United States A report for the Motion Picture Association of America96 measured the impact that the film industry has on the US economy. The study found the film industry to have many positive impacts, including: • The generation of over 1.3 million jobs in the USA; • $30.23 billion in wages paid; • $30.23 billion paid to US vendors and suppliers; • $60.4 billion of output generated for the US economy; • $10 billion in income and sales taxes paid; and • $9.5 billion trade surplus generated.

96 Motion Picture Association of America (2006), “The Economic Impact of the Motion Picture & Television Production Industry on the United States”. 26 Key points for this study • The BBC may support many jobs indirectly as well as directly in the UK. • Forward linkages between the creative industries and other areas of the economy are important. • Our study must consider the direct and indirect impacts of activity in the creative industries and the implications of this for the wider economy. • It is important to consider leakage – where estimated multiplier effects may not apply due to leakage from the UK creative industries, or from the UK entirely. • The impact studies considered above have an implicit counterfactual of the subject organisation (S4C or the UK film industry) ceasing to exist. This is useful for understanding the size of the subject organisation but not as useful for considering whether the existing organisation is any better or worse than alternatives. • The Oxford Economic Forecasting method for estimating the cultural value of the UK film industry may provide some insights into how some broader impacts of the BBC could be measured. • It will be important to distinguish the impacts of the BBC from those of other PSBs; also to consider carefully the role of other PSBs in the counterfactual. • One potential counterfactual to consider is of a purely commercial organisation (as used in a Channel 4 economic impact study); however this may be an extreme counterfactual for the BBC which currently operates on a non­commercial basis.

2.6 Reviews of BBC services and market impact assessments There have been several assessments of the impacts of BBC services, including reviews for and by DCMS, Market Impact Assessments by Ofcom, independent reviews and submission papers written for the BBC or other stakeholders. 2.6.1 UK television content in the digital age (2003) Oliver & Ohlbaum Associates Limited (O&O) compiled a report97 for the BBC on “UK Television Content in the Digital Age” to explain the role and importance of the BBC in sustaining TV content in the UK. As part of this, O&O estimated “The likely impact of reducing the scale and scope of public funding”. It estimated the commercial revenue growth resulting from reduced public funding to the BBC would be relatively low, and that there would be a substantial loss of “recycling effects” – creative industry multipliers that operate via the BBC’s tendency to spend large proportions of its revenue within the UK creative economy. O&O estimated that “for every one pound of income taken off the BBC, UK programme spend is likely to fall by about 60 pence.” 2.6.2 Review of BBC Online (2004) Philip Graf carried out an independent review of BBC Online for DCMS in 200498. As part of this, a market impact assessment found that BBC Online might lessen competition by deterring investment by commercial operators that would have led to new forms of competition. At the same time, Graf’s study found it unlikely that BBC Online has eliminated effective competition across any large areas of online content and that evidence of a significant impact of the BBC on internet take up is weak.

97 Oliver & Ohlbaum Associates Limited (2003), “UK Television Content in the Digital Age”. 98 Graf, P (2004), “Report of the Independent Review of BBC Online”. 27 Overall, Graf found that that BBC Online could lessen or eliminate effective competition in content (and related) markets, but could close the digital divide and/or contribute to the growth of the internet industry in the UK. Furthermore, it could strengthen competition in content markets by acting as a benchmark, improving overall quality. The counterfactual used is a world in which BBC Online does not exist. This study also emphasises that: • “Given the definition of market impact assessment outlined above, no single number (such as the amount of commercial revenue that may have been displaced by BBC Online) can capture the extent of market impact. Indeed, the most relevant market impacts captured by this assessment are likely to be described in terms of their qualitative effects on the process of competition rather than in quantitative terms”; and • “The review’s approach has been to emphasise a qualitative analysis of what we term the “mechanisms of market impact”, by which we mean the chains of causation through which the existence of BBC Online leads to changes in markets that can have an effect on the process of competition or on the achievement of clear and specific Government policy objectives.” – i.e. it is important to ensure clear, logical chains of causality from BBC actions to ultimate market impacts. 2.6.3 Review of the BBC’s digital TV and radio services In 2004, DCMS carried out a review of the BBC’s digital TV and radio services. A number of reports and submissions were compiled to inform this review99. Ofcom undertook a market impact assessment for the digital TV and radio services to be incorporated into the independent reviews, led by Patrick Barwise and Tim Gardam. In digital TV, Ofcom found that “the BBC’s main overall impact has been via its involvement in Freeview. By backing and cross promoting digital terrestrial TV (‘DTT’) and enhancing its offering with attractive new services, the BBC has been central to DTT’s recent success. In turn, the success of Freeview: • is likely to increase inter­platform competition; • may increase commercial revenues (as commercial advertising revenues have risen for digital only channels and more households have been drawn into the pay TV market). Over time, increased competition is likely to bring dynamic benefits to consumers in the form of greater innovation and choice.” Regarding digital radio, Ofcom found that “the BBC’s engagement with digital radio has helped grow the market and enabled the emergence of greater competition and more opportunities for commercial operators.” However, Ofcom also found that a negative revenue impact of the BBC’s digital services on actual or potential commercial providers may exacerbate the risks associated with market entry or content innovation. It suggested that “Combined with the BBC’s large budgets and relatively loose remits this may, in time, diminish overall levels of competition, investment and innovation.”

99 Including Patrick Barwise (2004), “Independent Review of the BBC’s Digital Television Services”; Tim Gardam, (2004), “Independent Review of the BBC’s Digital Radio Services”; Oliver & Ohlbaum Associated Ltd (2004) “The Market Impact Of The BBC’s Digital Radio Services”, report for the BBC’s submission to DCMS; Oliver & Ohlbaum Associated Ltd (2004) “The Market Impact Of The BBC’s Digital Television Services”, report for the BBC’s submission to DCMS; and Ofcom (2004), “Assessment of the Market Impact of the BBC’s New Digital TV and Radio Services”. 28 Ofcom also criticised the O&O reports for conclusions that were “assumption driven” and “highly sensitive to assumption changes”, in addition to specific criticisms of the counterfactual used for the O&O digital TV study. The lesson for this study is to use sensitivities and scenario testing where appropriate, such that results are defensible and to present results as indicative ranges or qualitative assessments where quantitative point estimates are infeasible.

Tim Gardam’s independent review of the BBC’s digital radio services100 makes a further point regarding the relationship between an estimated “total net impact” of BBC services and the individual impact at an individual service level: “Assessments of the market impact of new and existing services have to be made in the context of the individual market segment within which the service is set to operate.” That is, it will be important to note that, whilst at the aggregate level positive and negative spillovers will “net” off against each other, individual competitors feel the entire impact (positive or negative) in the market segment that affects them.

Patrick Barwise’s independent review of the BBC’s digital television services101 discusses Ofcom’s criticism of the O&O counterfactual: “Since the starting­point for this review is to evaluate the new services against the approval conditions, the BBC asked O&O to analyse their incremental market impact, i.e. comparing the market with the new services against what would have been the case if BBC Choice and BBC Knowledge had continued. This is compatible with the earlier O&O and ITC102 analyses of the projected market impact of the BBC’s revised proposals for BBC3 in 2002. From a policy perspective, however, it is more helpful to think of BBC Choice and BBC Knowledge103 as historical steps in the evolution of the BBC’s digital TV offering and to consider each of the current services under review against a base case in which the service simply did not exist.” Barwise’s choice of counterfactual for evaluating the market impact of each service “is one in which the service does not exist (and the licence fee is correspondingly slightly reduced) but digital satellite, cable, and Freeview penetration are unchanged.” It is noted that this decision is driven, at least partly, by the requirement that the impact of individual channels is measured, rather than the service as a whole, and because no information was available on the relationships between BBC channels, take up of different digital platforms, and commercial revenues. 2.6.4 Indepen reports for submissions to the BBC Charter Review Indepen prepared two reports as submissions to the BBC Charter Review, one on behalf of the Commercial Radio Companies Association (CRCA)104 and one on behalf of ITV105. The report for ITV identifies four ways in which the BBC competes with the commercial sector: • “The BBC competes for audience share which in turn determines the potential to raise advertising revenue by commercial broadcasters. • The BBC competes for scarce inputs such as talent and may act as a price leader.

100 Tim Gardam, (2004), “Independent Review of the BBC’s Digital Radio Services”. 101 Patrick Barwise (2004), “Independent Review of the BBC’s Digital Television Services”. 102 Independent Television Commission. 103 BBC digital TV services that existed before the additional services and time­shared with CBBC and CBeebies. 104 Indepen (2006), “A licence to kill? The impact of the BBC licence fee settlement on commercial radio”, report for the Commercial Radio Companies Association. 105 Indepen (2006), “Appraising the proposed BBC licence fee increase”, report for ITV. 29 • The BBC introduces new services which are free to users and competes with private innovations supported by subscription or advertising models. • The television licence fee takes a slice of money out of households’ budgets that might otherwise be spent on other communications and broadcasting services.” Indepen argues that a substantial increase in BBC funding would crowd out innovation and investment in services by the commercial sector. Additionally, the report argues that a steady increase in staff costs at the BBC relative to the commercial sector has made it more difficult and costly for the commercial sector to attract and retain staff. Indepen’s report for the CRCA also argues that the BBC raises costs for the commercial sector, both in talent and content (the examples of Chris Moyles and Peter Allen are cited as examples for presenters and journalists respectively). Indepen also argues that the BBC’s presence in, or potential entry into, complementary markets reduce the incentive for the commercial sector to innovate and invest. This report also discusses briefly appropriate market definition – arguing that radio competes with other formats for audiences and advertising. 2.6.5 Review of the BBC’s investment in Freeview The National Audit Office undertook a review of the BBC’s investment in Freeview in 2004106. While this did not comprise an economic impact assessment, it suggested impacts from the BBC’s involvement in the venture including: • The BBC contributed significantly to the quick and successful launch, speeding digital switchover. We note that, if digital terrestrial TV provides a commercial opportunity for other businesses (particularly broadcasters and programme makers but also, for instance, set top box manufacturers) then a quick and successful launch may positively impact on commercial businesses earning revenue associated with Freeview; and • By choosing to bid jointly with other broadcasters, rather than in competition, the BBC did not remove the opportunity for commercial broadcasters to invest in the innovation. 2.6.6 Ofcom market impact assessments Ofcom has carried out a number of market impact assessments into proposed BBC services as part of the Public Value Test framework107. Key methodological findings for this study from these assessments are discussed in Section 2.7.1. 2.6.7 Freesat As part of the process for deciding BBC involvement in Freesat, two reports (one by Fathom Partners/Indepen108 and one by Frontier Economics109) were commissioned (by DCMS and BBC Trust respectively) to provide reports on the market impact of the proposed non­subscription satellite TV services. These reports were commissioned in response to a BBC Governance Unit market impact assessment of the proposed services110.

106 National Audit Office (2004), “The BBC’s investment in Freeview”. 107 Ofcom (2007), “BBC new on­demand proposals ­ Market Impact Assessment”; Ofcom (2007), “Market Impact Assessment of the BBC’s High Definition Television Proposals”; Ofcom (2007), “Market Impact Assessment of the BBC/Gaelic Media Service Gaelic Digital Service”. 108 Fathom Partners / Indepen (2006), “PSB Freesat: Independent Review of Market Implications”. 109 Frontier Economics (2007), “PSB Freesat: Independent Review of Market Implications” report for the BBC Trust.”. 110 BBC Governance Unit (2006), “PSB Freesat: BBC Governance Unit review of market implications”. 30 The BBC Governance Unit report considered the appropriate market definition in some depth, underlining its importance to estimating an impact, concluding that the appropriate market to consider is that of “the provision of digital TV retail offerings in the UK” (it is noted that wider economic markets include upstream suppliers and individual channels). The report also concluded that the appropriate counterfactual is a market in which “PSB Freesat” is not launched and assumes, based on barriers to entry and long­standing lack of competitive entry, that no alternative commercial non­ subscription satellite TV offering (in addition to the existing Sky offering) would occur. The BBC Governance Unit report concluded that PSB Freesat would strengthen competition, might impose a competitive constraint on Sky’s free satellite TV offering, could impact on Sky’s pricing for its subscription pay TV service and could benefit operators if they chose to add a pay TV service onto the Freesat service. The Fathom Partners/Indepen report agreed with much of the BBC Governance Unit report, but concluded that the BBC Governance Unit had underestimated the potential impact on Sky’s revenues, particularly if a strong HD channel line up were to be included in the Freesat proposition. Frontier Economics compared the two papers and concluded that although some dynamic efficiency arguments were theoretically dubious, the launch of PSB Freesat should be expected to generate static welfare improvements (i.e. in terms of allocative and productive efficiency) as a result of an increase in competition in digital TV retail. This study should consider carefully the theoretical linkages between competition and dynamic efficiency in considering dynamic impacts as well as assessing static impacts. Key points for this study • The BBC recycles a large proportion of its revenue directly into the creative industries through spending including indie commissioning. • Estimating a single “impact” figure in quantitative terms has practical difficulties and does not show a true respresentation of impacts on different sections of the industries – for a large benefit to one large commercial business may not “equal” a significant benefit to a number of much smaller businesses. • Any impacts estimated should be supported by clear logical chains of causality. • BBC has contributed substantially to the development of digital TV and radio. • Competitor broadcasters were opposed to increases in the licence fee. • The digital TV and radio reviews demonstrate that estimated impacts can vary substantially with assumptions regarding the counterfactual. • Ofcom criticised the Oliver & Ohlbaum estimates of the BBC’s digital radio services for being overly assumption­driven. This study should use sensitivity testing to avoid similar assumption­driven results. • Impacts of BBC intervention may substantially change behaviour and pricing strategies of commercial competitors, for instance it is expected that the launch of PSB Freesat (as a joint venture including the BBC) may cause Sky to change pricing for its Freesat services, and potentially for its subscription satellite services also. • BBC intervention can open up new opportunities for commercial competitors, for instance the launch of Freesat (as a joint venture including the BBC) creates a platform that commercial companies may be able to use to supply subscription TV services as well. • Both static and dynamic impacts should be considered, although careful attention should be paid to theoretical underpinnings of any dynamic efficiency arguments.

31 2.7 Best practice impact assessment methods 2.7.1 Ofcom market impact assessment framework Ofcom’s Market Impact Assessments (MIAs) into individual services provide guidance on best practice process for conducting impact assessments. Ofcom has also produced a report “Methodology for Market Impact Assessments of BBC services”111 that summarises some key aspects to the MIA methodology. Key findings from these reports include: • Impact analyses should fully consider both “negative” substitution effects and “positive” market creation effects of BBC services; • Both static effects (the impact for other products and services assuming no change in behaviour by other providers in response to the BBC’s activities) and dynamic effects (through changing market behaviour, and impacts on investment and innovation by other providers in response to the BBC’s activities) should be considered; • Impact analyses should use an appropriate time frame. For this study the timeframe is specified as the last five years in the terms of reference. However, developing a counterfactual may require understanding market dynamics over a longer time frame; • Where there is uncertainty, the Ofcom MIAs consider multiple counterfactuals where appropriate (e.g. the Market Impact Assessment of the BBC’s High Definition Television Proposals112) and sensitivity tests on any quantifications. Ofcom criticised an Oliver & Ohlbaum report estimating the net impact of the BBC’s digital TV services113, arguing that it only assessed the incremental impact of the new services over and above the impact of BBC Choice and Knowledge (2 digital TV channels that timeshared with two of the assessed digital services): “The combined share of the new services was 2.7 per cent at the end of 2003 but O&O (Oliver & Ohlbaum) were instructed by the BBC to only look at the extra share taken by the new services – i.e. 0.8 percentage points. Including BBC Choice and Knowledge in the counterfactual understates the market impact of the new services. The actual impact could be around twice the effect calculated using the O&O/BBC approach.”114; We note that, in considering whether to use multiple counterfactuals, the benefits must be weighed against potential costs of reduced clarity and over complication; and • The importance of taking account of other regulation, in particular the BBC Trust’s Fair Trading regime and the Competition Act 1998 and Enterprise Act 2002, when assessing likely actions, constraints and impacts. That is, PSBs and commercial broadcasters are subject to other regulation that have an impact on their activities, and would continue to do so in the counterfactual.

111 Ofcom (2007), “Methodology for Market Impact Assessments of BBC services”. 112 Ofcom (2007), “Market Impact Assessment of the BBC’s High Definition Television Proposals”. 113 Oliver & Ohlbaum Associated Ltd (2004) “The Market Impact Of The BBC’s Digital Television Services”, report for the BBC’s submission to DCMS. 114 Ofcom (2004), “Assessment of the Market Impact of the BBC’s New Digital TV and Radio Services”. 32 2.7.2 NAO regulatory impact assessment best practice review The National Audit Office conducted an assessment of the use of regulatory impact assessments (RIAs)115. We note that we are not conducting a regulatory impact assessment here, but the results of this study are useful nonetheless. The NAO finds that: • Impacts on different businesses and sectors should be analysed separately because a proposal that is proportionate overall may have a disproportionate impact on some sectors or businesses; • RIAs should seek out responses from small businesses and charities in order to obtain a representative view of a sector; and • A wide range of options should be identified, from strict regulation to self­regulation. 2.7.3 The Green Book “The Green Book”, published by HM Treasury, provides guidance on best practice impact analysis for central government. Chapter 7 (“Evaluation”) provides guidance on evaluating past policy interventions within a cost­benefit framework. The methodology outlined in the Green Book is implemented in Ofcom impact assessments. Below we summarise how we have responded to the Green Book’s guidance on the sequence of an evaluation process. Establish exactly what is to be evaluated and how past outturns can be measured. For this study, the following decisions (amongst others) are included in this stage of the evaluation process: • How are the creative industries to be defined? A broader definition of creative industries implies a broader scope for the study and a likely larger range of impacts identified. • Which BBC activities are to be evaluated? Key decisions include: Inclusion of BBC Worldwide and international impacts; impact of core TV, radio and internet services vs. all BBC activities. It is notable that Ofcom’s Market Impact Assessments treat BBC Worldwide in the same way as any other commercial business116. Choose alternative states of the world and/or alternative management decisions as counterfactuals. Identification of an appropriate counterfactual or counterfactuals is a crucial and challenging aspect of this study. Most impact assessments in the identified literature refer to services that are yet to be introduced or have recently been introduced, hence a counterfactual is more straightforward. Other impact studies of organisations, as opposed to specific services, (e.g. Impact of S4C on the Welsh economy) focus on absolute impacts, using input­output tables to generate an impact without explicitly considering a counterfactual state of the world. For this study, as the BBC (in a licence­fee funded PSB role) has been an integral part of the UK broadcasting environment, this study considers a plausible counterfactual scenario regarding the BBC and possible reactions by the wider broadcasting ecology.

115 NAO (2001), “Better Regulation: Making Good Use of Regulatory Impact Assessments”. 116 Ofcom (2007), “Methodology for Market Impact Assessments of BBC services”. 33 Compare the outturn with the target outturn, and with the effects of the chosen alternative states of the world and/or management decisions. This has less relevance for this study, since the “target outturn” of the BBC is its public policy objectives, which are not focussed on the impacts on businesses. This study compares the actual impacts of the BBC against the impacts that would occur in other states of the world under the counterfactual. Present the results and recommendations; and disseminate and use the results and recommendations. The results will be supplied to the BBC Trust as a report, incorporating their comments on an earlier draft. BBC Trust will control further dissemination of the results and use the results as they see fit.

Key points for this study • It is important to consider both substitution and market creation effects; and both static and dynamic effects. • The impact of altering one BBC service on use of another BBC service may have important knock­on effects for both markets. • The Treasury Green Book suggests that the study should be able to answer the following questions: – What exactly is to be evaluated and how can past outturns be measured? – What is the alternative state of the world against which the impact is to be assessed?

34 ��������� ������������ ���������������������������������� 3 Key findings from seminar

��� ������������������������� 3.1 Introduction ����������������� On 28 February 2008 the BBC Trust held a seminar at the London Business School to discuss��������������������������������������������������������������������������������������������� the economic impact of the BBC. A distinguished panel of speakers and attendees��������������������������������������������������������������������������������������������� contributed to a lively session that produced useful insights for the PwC ��������������������������������������������������������������� study. Table������������������������� 1: Seminar speakers

������� ������������ ����������������� ��������� ����������� ����������������� ������������� ����������������� ��������� ������������� ����������� ������������������� ����������� ��������� ������������� ���� ��������������� ���������������������� ����������� ��������� ����������������� Source: BBC Trust Below,����������������������������������������������������������������������������������� we summarise what we consider to be the key points arising from the seminar. ����� �������������������� 3.2 The creative economy ����������������������������������������������������������������������������������������������������� Seminar���������������������������������������������������������������������������������������������������� speakers identified that the creative economy/creative industries are not clearly�������������������������������������������������������������������������������������������� defined and that we will need to form a view of an appropriate definition of the creative������������������������������������������������������������������������������������������������ economy to use for the purposes of this study. Furthermore, the relationship between������������������������������������������������������������������������������������������� the creative economy (however defined) and the rest of the economy is an important context to the BBC’s impact on the creative economy; the BBC’s impact is ��������������������������������������������������������������������������������������������������� potentially��������������������������������������������������������������������������������������������������� over and above its impact on the creative economy. ��������������������������������������������������������������������������������������������������� By���������������������������������������������������������������������������������������������� way of example, it is well­documented that a large proportion of creative workers do����������� not work in the “creative industries”. Should this study explicitly consider creative workers working in “non­creative” industries, e.g. where there is a creative/innovative �����������������������������element�� in the supply chain? It is important to note however, that innovation and “creativity” occur in a huge number of jobs and industries. ������������������������������������������������������������������������������������������������� ��������������������������������������������������������������������������������������������� 3.3������������������������������������������������������������������������������������������������������ Rationale for intervention ����������������������������������������� Speakers at the seminar discussed the rationale for intervention in some depth, including���������������������������������������������������������������������������������������������������� whether broadcasting (focussing on TV) remains a pure public good. It was reiterated������������������������������������������������������������������������������������������������������ that successful intervention requires a market failure to respond to, but that it ��������������������������������������������������������������������������������������������is important to remember “government failure” – i.e. non­perfect intervention. ��������������������������������������������������������������������������������������������� The�������������������������������������������������������������� context of the BBC as an intervention concluded that public intervention in broadcast markets is actually relatively small, given that circa 75% of revenues are commercial�������������������������������������������������������������������������������������������������� and also that the sector is very competitive. Another issue raised was that ����������������������� the constraint in the media sector may have changed with the advent of digital TV and radio and the internet. It was suggested that “The constraint now in the media sector is attention not spectrum”. A discussion of the appropriate role of the BBC provided useful context to this study. Particular issues raised included:

35 • What should the role of the BBC be? One suggested alternative to the current role is that the BBC should provide a platform for other organisations (e.g. indies) to broadcast content that addresses the persisting market failures in broadcasting. The BBC could then act as a “filter” ensuring that only quality programming with consumer or citizen benefits is broadcast. Clearly, many alternatives exist. • How should the BBC interact with the creative economy? It was suggested that one role of the BBC should be to provide space for creativity (through some spare capacity) in and between genres and for under­represented voices. Overall it is important for this study that the rationale for intervention is well­ understood. However, as highlighted in Appendix 2, we do not discuss the rationale in exhaustive detail, since the issues are well­discussed in existing literature and previous work regarding the role and funding of the BBC. Moreover, the main rationale for intervention relates to consumer and citizen impacts, rather than impacts on businesses. This is not to deny that examining effects on businesses could help in building a rationale for intervention, but that the main rationale would typically focus on the benefits to audiences. 3.4 Specific impacts It was noted at the seminar that there are a wide range of impacts of the BBC, both within the scope of this study (impacting on businesses) and outside (in particular, impacting on audiences). The quantitative and qualitative BBC’s “net impact on businesses” could be considered alongside the BBC’s estimated “net impact on audiences”. This discussion linked to another regarding how the study should or should not capture wider political, cultural and social effects. These were considered to be the cornerstone of the rationale for the BBC, and possibly its largest impacts. It was however acknowledged that such impacts may be difficult to quantify and are not necessarily economic impacts (and hence beyond the scope of the study). Possible BBC economic impacts cited by speakers included: • BBC standard setting, especially in training and ethos, but also in content quality; • The importance of the BBC’s institutional set up and market structure based around the BBC for quality, and the existence of competition on a quality dimension; • A resulting strong UK performance in global cultural markets with a low level of public subsidy and critical mass is important in global markets; • The BBC’s role in convergence – an issue relevant to platforms and hence impacting on businesses; • The impact on the advertising market (should the BBC be permitted to broadcast advertisements), might be substantial; • The importance of capturing the possible varying economic impact across Nations and Regions – especially as the sector GDP growth and GVA tends to be greater than GDP growth/GVA across all sectors; and • Analysis of any impacts associated with increased innovation should not be confined to the development of a hi­tech sector but linked to broader definitions of innovation.

36 Non­economic impacts – the seminar included a helpful discussion on economic versus other impacts: • While this is a study of economic impacts, other impacts should be mentioned in the study, to contextualise the findings as a (potentially small) subset of the overall impacts (e.g. consumer and citizen/society); and • A clear example of other impacts that are closely linked to our study is the BBC’s impact on regional regeneration, in which there are both economic and social impacts. Overall, a number of useful specific impacts were suggested. An important and emphasised point was that market impacts can be complementary as well as competitive. 3.5 Counterfactual There was consensus at the seminar that defining the counterfactual is the key challenge in the study; the suggested counterfactual ranged from ‘no BBC’ to incremental changes to the BBC’s size and scope. There was challenge to the Ofcom counterfactual used in the 2004 PSB review, arguing instead that the counterfactual should be a market with oligopolistic rather than perfect competition characteristics. Discussion at the seminar also highlighted the importance of the market structure and competition. The study should consider the BBC’s impact on market dynamics and competition in the context of high fixed costs, close to zero marginal costs and network effects of new technologies. This suggests that a perfectly competitive market is not an appropriate counterfactual. In developing a counterfactual, it was noted that institutional design matters in relation to the quality and quantity of the outputs and that a range of alternative funding models for the BBC could exist, each with different implications for its size and scope. Within a chosen counterfactual, it is important to analyse funding, and in particular the knock­on effects of the BBC’s impact on advertising and/or subscription markets. There was a clear consensus at the seminar that an impact without a counterfactual would be meaningless – and that the desired use of the study should frame the appropriate counterfactual. There were also suggestions as to how the study could be used – should it incorporate an element of forward­looking in order to be useful for a future Ofcom PSB review, the next Charter Review process and in BBC decision­ making (particularly MIAs/PVTs for new services)?

37 3.6 Scope and use of the study Evidence about the economic impact of the BBC could be relevant for a number of exercises: • Whether the licence fee should continue at its current level or be smaller and/or partially replaced by advertising or subscription funding; • Whether a licence fee funded BBC should exist at all; or • Whether the licence fee should be spent in a different way (so that the BBC could have a different shape regionally or in terms of activities). Each of these would have its own counterfactual and would suggest a slightly different purpose for the study, for instance using (b) as the counterfactual would imply that the existence of the BBC were under investigation, whereas (c) would suggest only that the impact on businesses of licensee fee spending should be taken into account as well the impact on audiences, also that it is not just a question of fulfilling the purposes subject to avoiding any undue negative impacts, but actually considering positively how the economic benefits of the BBC’s spending could be maximised. Similarly, part of the counterfactual question is whether same positive externalities could be delivered in more efficient ways. The importance of considering both the UK’s role in the global economy (and the BBC’s role in sustaining this) and also in developing the Nations and Regions (and sustaining this development) was also raised. Seminar participants did not express a desire for a single quantification of the estimated impact, but instead highlighted specific impacts that could be investigated in greater depth than they have been to date.

38 4 List of hypothesised impacts

4.1 Introduction This appendix sets out the “long list” of hypotheses we identified to assess as part of this study, how we prioritised those “important” impacts which we investigated in detail and how we categorised these impacts for the purpose of analysis. Note that, in this section, we list potential impacts, without making judgements on the relative importance of each potential impact, or whether evidence or stakeholder opinion supports such an impact. Impacts that were not raised by stakeholders, the BBC, the seminar or in the literature, and did not appear to be of significant importance or value are not discussed in detail in the main report. 4.2 Hypotheses to assess 4.2.1 Identification of impacts We identified hypotheses from the following sources: • Consultation with stakeholders, BBC experts and representatives of the BBC Trust and BBC Trust Unit; • Hypotheses or issues raised at the seminar held to inform this project outlined in Section 3; • The review of the literature outlined in Section 2; • Desk research and our knowledge of the BBC’s activities; and • Publicly available sources such as press releases. 4.2.2 Economic multiplier impact The non­hypothesised impacts of the BBC include the direct, indirect and induced impacts on the UK economy. As we are interested in the BBC’s creative activities, rather than its overheads and infrastructure costs, we estimate the value­added from the BBC’s expenditure on content and distribution and exclude spend on infrastructure and overheads). Combining these figures together generates a Gross Value Added (“GVA”) which is the sum of all economic activity related to the BBC’s expenditure on creative activities. However, as discussed in Section 5, we are interested in the impact of the BBC relative to the counterfactual – in this case it is the difference in the spend of the actual BBC relative to that of the counterfactual broadcaster that determines a Net Value Added (“NVA”) – i.e. the direct, indirect and induced impacts of the BBC’s expenditure on creative activities, minus the estimated corresponding impacts of the counterfactual broadcaster. We describe the “direct”, “indirect” and “induced” impacts below, noting that each of these can, given sufficient data, be calculated for each of the nations, each of the English regions and/or at a UK level. Direct impacts from the BBC are those that emerge from the transactions carried out by the BBC itself, for example the value of employment of BBC personnel and the value of independent productions purchased by the BBC. Indirect and induced effects are those resulting from subsequent transactions, i.e. spending by those receiving income from the BBC. Indirect impacts include economic activity generated to meet the BBC’s demand for goods and services, e.g. employment of actors and cameramen by independent producers to produce a programme purchased by the BBC, or purchase of equipment by independent producers, again to produce a programme purchased by the BBC.

39 ��������� ������������ ����������������������������������

Induced impacts include employment and activity by those directly and indirectly employed in the industry spending their incomes on goods and services, e.g. spending���������������������������������������������������������������������������������������������� on goods and services by those employed either by the BBC directly, or employed���������������������� by an independent producer to produce a programme for the BBC.

We������������������������������������������������������������������������������������������������������ note that direct and indirect impacts add value mostly to the creative and broadcasting������������������������������������������������������������������������������������������ sectors, if the measure of expenditure we use excludes overheads and infrastructure.������������������������������������������������������������������������������������������������ However, induced impacts correspond to people’s spending on all ���������������������������������������������������������������������� types of goods and services, of which spending on broadcasting and creative sectors is likely to be a small sub­section. At each stage of the transmission of income, a proportion of the money is saved and ����������������������������������������������������������������������������������������������� not��������������������������������������������������������������������������������������������������������� used to generate further economic activity at that time. Therefore, a point will occur�������������������������������������������������������������������������������������������������� where all the indirect and induced effects are exhausted. The size of the induced����������������������������������������������������������������������������������������������������� effect diminishes as money passes down the chain of transaction meaning that������������������������������������������������������������� the cumulative impact levels off after a certain number of links in the chain of transactions. This is demonstrated in Figure 2. ���������������������������������������������������������������������� Figure 2: Value of direct, indirect and induced impacts (illustrative)

�������������������������������� ��������������������������

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���� ������ ���� ���� ������ ���� ������ ���� ������ ���� ������������� ��������

���� ������ �������������� ������� ���� ������ ���� ����������������������������������

���� �������������������������������� �� �� � � � � � � � � � �� �� �� �� �� �� �� �� �� �� �� ����������������������

Source: PwC analysis ��������������������

������������������������������������������������������������������������������������������������� Similarly,������������������������������������������������������������������������������������������������� the BBC might (because of both size and geographical spread of spending) spend������������������������������������������� more in the Nations and Regions than the counterfactual broadcaster would, hence the GVA would be larger.

This���������������������������������������������������������������������������������� impact is summarised in Hypothesis #1: �������������������������������������������������������������������������������������� Hypothesis��������������������������������������� #1: The BBC spends more than the counterfactual broadcaster would (both nationwide and in the Nations and Regions) hence has a larger GVA (i.e. a positive NVA versus the counterfactual broadcaster).

40 4.2.3 Industry and quality leadership

Quality leadership The BBC might produce higher quality output than the counterfactual broadcaster would (because of, for instance, higher ability to take risks, higher and more secure funding or its remit to produce quality programming). This might have a number of possible impacts as shown in the hypotheses below:

Hypothesis #2: Higher BBC quality, relative to the counterfactual broadcaster, might mean that competitors’ costs are higher and their profits lower.

Hypothesis #3: High BBC quality, relative to the counterfactual broadcaster, might mean that the price of content is higher, benefitting factors of production that can charge higher prices for premium output.

Hypothesis #4: High BBC quality, relative to the counterfactual broadcaster, might make competitors’ content look low quality in comparison, hence reducing competitors’ audiences and advertising revenues.

Hypothesis #5: High BBC quality, relative to the counterfactual broadcaster, might mean that competitors’ quality is higher and they are able to make more revenue in secondary markets (exports, DVDs etc.).

Industry leadership The BBC might also take on an “industry leadership” role, one example of which could be the formation of networks of broadcasters, producers, and other creative businesses around the BBC. These networks might allow businesses to work together more effectively and efficiently. This might occur less in the counterfactual because we expect the counterfactual broadcaster would invest less than the BBC in external content and would have less of a reputation as an “institution” of British broadcasting.

Hypothesis #6: The BBC might play an industry leadership role in technology, innovation, content and other areas that steers the industry in a direction that benefits other businesses.

Hypothesis #7: The BBC might lead the broadcasting and creative sectors in the creation of more or better networks, with positive implications for profits, than in the counterfactual.

Content innovation and imitation by competitors The BBC might innovate more than it would in the counterfactual, for instance by investing more in new programme concepts or new technologies given its funding base. Other firms may be able to take advantage of these innovations, if they are successful, for instance by copying.

41 Hypothesis #8: The BBC might innovate more and generate more knowledge spillovers than the counterfactual broadcaster would.

Alternatively, the BBC might invest more in riskier talent and content investments. Competitors may be able to benefit by copying successes (or hiring the talent or content producer in the future) and minimising failures.

Hypothesis #9: The BBC might invest more in riskier talent and content investments, from which competitors might be able to benefit by copying successes and minimising failures.

Promotion externalities If the BBC brand has a stronger association with quality than the counterfactual’s brand would have, then former employees and businesses that work with the BBC might benefit more from association with the BBC creating an association with quality. Alternatively the BBC might have a greater number of former employees or associated businesses that can benefit from the association with its strong brand.

Hypothesis #10: More former employees of the BBC might be associated with its stronger brand and hence might obtain better opportunities in the labour market or in entrepreneurship than in the counterfactual.

Hypothesis #11: More businesses that have worked with the BBC might be associated with its stronger brand and hence might obtain better opportunities to earn revenue after having worked with the BBC than in the counterfactual.

Alternatively, if the BBC’s brand was perceived to include other businesses, via brand externalities that cause decision­makers in other countries to associate the UK creative and broadcasting sectors with quality, then decision­makers abroad may purchase more goods and services from UK businesses in the creative sectors.

Hypothesis #12: The BBC’s brand might extend to other firms in the UK creative and broadcasting sectors, giving them assistance in exports that wouldn’t occur in the counterfactual.

The BBC’s partnerships, joint ventures and agreements with some other businesses might create an uneven playing field, providing a benefit to those businesses working with the BBC but disadvantaging others. A net impact relative to the counterfactual might result if the BBC’s participation in partnerships has a bigger impact on the competitive landscape than the participation of the counterfactual broadcaster might have.

Hypothesis #13 The BBC might benefit businesses with which it joins in partnerships, joint ventures and agreements more than would occur in the counterfactual.

Hypothesis #14: The BBC’s partnerships, joint ventures and agreements might competitively disadvantage other businesses not in these partnerships, joint ventures or agreements more than the counterfactual broadcaster’s partnerships, joint ventures and agreements.

42 Broadcasts can have an impact on the sales of complementary products and services, for example programmes based on a book may boost the sales of that book. The BBC might have a bigger impact on the sales of complementary products and services if either it broadcasts more programmes that have close complementary products and services than the counterfactual broadcaster (e.g. linked to books or that lend themselves easily to secondary sales of products and services, or if its broadcasts have a larger impact on the complementary products and services than the counterfactual broadcaster’s programmes would, for instance because of larger viewing or a better reputation) subject to the BBC’s compliance to Fair Trading Guidelines, specifically relating to the relationship between the BBC and BBC Worldwide.

Hypothesis #15: The BBC might have a larger impact on sales of complementary goods and services than the counterfactual broadcaster would.

4.2.4 Impact on competitor revenues and business models The BBC may, because of its unique funding structure, large size and unique regulations to which it is subject, act in a manner that impacts on competitors differently from the impact of a counterfactual broadcaster as outlined in Section 5. Restriction of competitors’ market share The BBC’s presence in markets might discourage or prevent entry by potential competitors, or restrict growth of competitors to a greater extent that would not occur in the counterfactual. This impact might be larger in reality than in the counterfactual if the BBC has a competitive advantage because it can capture talent or content or attract larger audiences by not airing advertisements, or simply because the BBC might spend more than the counterfactual broadcaster would in attracting audiences (note that the counterfactual broadcaster might actually spend more on audience­ attracting programmes, given that it would not be incentivised to spend on expensive PSB programming).

Hypothesis #16: The BBC might have competitive advantages that prevent or discourage entry or restrict competitors’ market share.

The BBC’s presence in markets might also prevent competitors or other media players from growing to a sufficient scale to enable them to compete on a global scale. This might make them vulnerable to takeover by foreign companies that have been able to establish greater scale, and prevent them from competing effectively in the international mergers and acquisitions market.

Hypothesis #17: The BBC’s presence in markets might prevent competitors from reaching sufficient scale to compete in the international mergers and acquisitions market and leave them vulnerable to international takeovers.

The BBC brand might be strong enough such that its presence in a market might deter competitors from entering the market if they do not believe that they can compete effectively against its strength of brand and market position.

43 Hypothesis #18: The BBC’s brand might create a barrier to entry to firms looking to enter markets in which the BBC has a presence. If the counterfactual had a weaker brand, or a smaller presence in fewer markets, then these barriers might be smaller in the counterfactual.

The BBC, provides all its services for free at the point of use. If competitors cannot afford to provide services for free then consumers may choose the BBC’s free services over competitors’ offering with positive price. This may mean that subscription­based revenues are smaller than they would be in the counterfactual.

Hypothesis #19: The BBC might discourage entry or restrict competitor revenues. prevent revenues.

If the licence fee did not exist, as in the counterfactual, consumers would have £139.50 (for a colour licence) extra per annum to purchase other goods and services or to save. Some of this spending might be spent on products and services provided by creative and broadcasting industries.

Hypothesis #20: Without the licence fee, consumers would have more money to spend, some of which might be spent on products and services provided by creative and broadcasting industries.

An alternative, but similar, hypothesis might be that the BBC might decrease willingness to pay for pay TV, since consumers have to pay £139.50 (for a colour licence) per annum so might not be willing to spend more. Alternatively, the BBC’s provision of high quality content at zero cost might reduce the incentive to pay for other content.

Hypothesis #21: In a counterfactual without the licence fee, consumers might spend more on pay TV.

Impacts on advertising revenues Competitors might benefit from the BBC not showing advertisements – in the counterfactual the supply of advertising opportunities is higher and hence the price received by broadcasters is lower. Since the counterfactual broadcaster would take a share of these impacts, it stands that, unless the elasticity of net advertising revenue with respect to advertising impacts is very high, commercial broadcasters are better off with the BBC as compared to a strong, advertising­funded counterfactual competitor.

Hypothesis #22: Competitors might receive a higher price per advertising impact than in the counterfactual because the supply of advertising impacts is restricted.

Alternatively, the shortage of advertising opportunities resulting from the BBC’s zero­ advertisement status might reduce income of advertising agencies and other companies involved in the production of advertisements. In the counterfactual there might be greater competition for their advertising­production services.

44 Hypothesis #23: Advertising companies might receive less business than they would in the counterfactual because there are less advertising slots than in the counterfactual.

Use of the licence fee The BBC might use its large secure funding to purchase a larger number of exclusive contract rights than the counterfactual broadcaster would be able to afford. Hence competitors might be prevented from owning these rights and benefitting from the rents that they entail.

Hypothesis #24: The BBC’s large revenues might mean that competitors are prevented from obtaining exclusive content rights.

Alternatively, the BBC might, because it is less focussed on attracting audiences than the counterfactual broadcaster might be, purchase less exclusive content rights than the counterfactual broadcaster would. Hence competitors are able to obtain more exclusive content rights than in the counterfactual and hence benefit from more rents (than they would in the counterfactual).

Hypothesis #25: The BBC’s reduced incentive to chase audiences (as compared to the counterfactual broadcaster) might mean that competitors obtain more exclusive content rights than they would in the counterfactual.

Cross­media competitive advantage The BBC’s ability to cross­promote its services and products might mean that BBC services have an advantage over competitors’ offerings in attracting audiences. This means that competitors’ audiences (and hence revenues) are lower than they would be if the BBC’s cross­media ownership and promotion was restricted.

Hypothesis #26: The BBC’s cross­media promotion might give it an advantage over competitors in attracting audiences.

Talent and content costs The BBC might, because of its large market presence and secure funding, bid up the price of content and talent. This might disadvantage competitors but benefit talent or content rights owners.

Hypothesis #27: The BBC might bid up the price of talent more than the counterfactual broadcaster would, which would be a benefit for talent but a cost for competitors.

Hypothesis #28: The BBC might bid up the price of content more than the counterfactual broadcaster would, which would be a benefit for content rights owners but a cost for competitors.

Alternatively, the BBC might be less focussed on audiences and advertising impacts than the counterfactual broadcaster, and hence talent and content costs might be lower with the BBC than they would be in the counterfactual.

45 Hypothesis #29: The BBC might pay less for talent than the counterfactual broadcaster would, which would be a cost for talent but a benefit for competitors.

Hypothesis #30: The BBC might pay less for content than the counterfactual broadcaster would, which would be a cost for content rights owners but a benefit for competitors.

The BBC Trust commissioned a recent report investigating the BBC’s impact on talent costs117. Hence we do not investigate these hypotheses in depth. Poaching staff The BBC might have inherent advantages (such as guaranteed funding, more artistic freedom, larger budgets or utility from “public service”) in attracting workers and might use these to poach staff from competitors more than the counterfactual broadcaster could, because it would not have these inherent advantages. Poaching of staff by the BBC would reduce competitors’ productivity, since they would lose productive workers, as well as meaning that they would not benefit from any training costs (we note that this would suggest a disincentive for other broadcasters to invest in training their staff).

Hypothesis #31: The BBC might use inherent advantages to poach more workers from competitors than the counterfactual broadcaster would.

Sponsorship If sponsors can gain commercial value on the BBC’s publicly funded services then they might reduce the amount they spend on advertising on competitors’ services. In the counterfactual, all services would carry advertising, hence the “premium” sponsorship opportunities on advertising­free services would not exist.

Hypothesis #32: Sponsors might be able to gain commercial value on publicly funded services leading to reduced advertising revenue for competitors.

4.2.5 Independent producers

Commission of independent productions The BBC might commission more independent productions, from more independent producers, across more genres, at a higher or lower price, than might the counterfactual broadcaster. This generates a number of potential hypotheses:

Hypothesis #33: The BBC might commission more independent productions than might the counterfactual broadcaster, which we assume minimises its outside production to its required outside production quota. This generates more income for independent producers.

117 See http://www.bbc.co.uk/bbctrust/research/value_for_money/talent_review.html 46 Hypothesis #34: The BBC might commission independent productions from more independent producers than the counterfactual broadcaster, if the BBC actively seeks to hire a range of independent producers. This might mean that more independent producers exist than in the counterfactual. Also, competitors might benefit from increased choice of independent producers.

Hypothesis #35: The BBC might commission independent productions in a wider range of genres than the counterfactual broadcaster. If so, this would benefit indies specialising in the genres that the BBC commissions but the counterfactual broadcaster would not. This could also mean that competitors also then have the choice of independent producers from more genres.

Hypothesis #36: The BBC might bid up the cost of independent production, meaning that production houses receive more revenue than they would in the counterfactual and competitor broadcasters may have to pay a higher price for independent productions.

Alternatively, the BBC might be able to exert buyer power and bid down the cost of independent production:

Hypothesis #37: The BBC might bid down the cost of independent production, meaning that production houses receive less revenue than they would in the counterfactual and competitor broadcasters may be able to pay less for independent productions.

Commissioning in the Nations and Regions The BBC might commission more independent productions from the Nations and Regions than might the counterfactual broadcaster as a result of its remit and statutory obligations.

Hypothesis #38: The BBC might spend more on independent productions from the nations and regions, sustaining independent production outside of London.

Increased certainty for independent producers The BBC might, as a result of its long­term funding and planning, provide independent producers with greater stability and increased certainty, either as a result of commissioning longer­run series, or simply by giving independent producers the information that the BBC will be commissioning independent productions for many years to come.

Hypothesis #39 The BBC might increase certainty for independent producers allowing them longer­term planning horizons and encouraging investment and expansion.

“Cream­skimming” of independent producers The BBC might work only with the best independent producers, leaving only lower quality indies for competitors to work with.

Hypothesis #40: The BBC might “cream­skim” indies, leaving only lower quality indies for competitors to contract with.

47 4.2.6 Training and talent

High provision of training The BBC might provide more training than would be available in the counterfactual.

Hypothesis #41: The BBC might undertake more training than would occur in the counterfactual. Other businesses might benefit from having a stock of trained workers to recruit from.

Hypothesis #42: The BBC might offer a broader range of training than would occur in the counterfactual, meaning that other businesses benefit from being able to recruit workers with a broad range of skills.

Hypothesis #43: The BBC might offer specific training types that would not be available in the counterfactual. Other businesses might benefit from being able to recruit workers with specific expert skills.

Hypothesis #44: The BBC might train more “freelancers” or other external workers (i.e. they are not employed by the BBC) than the counterfactual broadcaster would. These external workers (and those who employ them or purchase services from them) may benefit from this additional training.

Hypothesis #45: The BBC might provide more training than any organisation would undertake in the counterfactual, generating economies of scale which means that other businesses can purchase training from the BBC at a lower cost than they would be able to acquire it in the counterfactual.

Developing skills in the Nations and Regions The BBC might undertake more training in the Nations and Regions, making it more likely that skilled workers will remain in the Nations and Regions.

Hypothesis #46: The BBC might undertake more training in the Nations and Regions than the counterfactual broadcaster would, aiding the retention of skilled labour in the nations and regions from which other businesses in the nations and regions may benefit.

Hypothesis #47: The BBC might encourage the creation of talent pools by aiding the construction of clusters and training people in those clusters.

48 Developing skills through local activities The BBC might conduct a larger number of local activities, and local training, leading to skill development.

Hypothesis #48: The BBC might broadcast more local programmes than the counterfactual broadcaster. Because local programmes are simulcast in different local areas, this means that a larger number of people develop skills concurrently.

Hypothesis #49: The BBC might broadcast more local programmes than the counterfactual broadcaster. If local programmes are lower­profile then the BBC might be able to take more risks with new talent or on­the­job training for less experienced workers. Other businesses might benefit from access to workers with early local experience.

Wider educational benefit and awareness of creative and broadcasting sectors The BBC might provide specific services and programmes that raise the level of education of the population, thus benefitting all industries, of which the creative and broadcasting sectors are a subset. Alternatively the BBC’s activities might raise the profile of the creative and broadcasting sectors as sectors in which to start a career – and hence increase the number and quality of people choosing to enter a career in these sectors.

Hypothesis #50: The BBC might produce more educational programmes or carry out more educational activities that might raise the educational level of the UK population, benefitting all industries in the UK including the creative and broadcasting sectors.

Hypothesis #51: The BBC might raise profile of the creative and broadcasting sectors as industries in which to work more than in the counterfactual.

Talent The BBC might seek out more new talent than the counterfactual broadcaster would, because of the BBC’s remit and because its secure funding might allow it to take more risks and more expenditure in talent search.

Hypothesis #52: The BBC might seek out more new talent than the counterfactual broadcaster would. Other businesses may benefit from an increased stock of talent in the industry.

Alternatively, the BBC might be able to “cream­skim” talent, by competing­for and winning top talent, disadvantaging competitors if the BBC has inherent advantages in talent recruitment.

Hypothesis #53: The BBC might “cream skim” talent, rendering top talent unavailable for other businesses to use to attract audiences and revenue.

The BBC’s presence in a region may naturally attract talent to that region, encouraging other businesses to set up nearby to benefit from the talent, and providing a pool of talent to businesses already located in that area.

49 Hypothesis #54: The BBC’s presence in an area might attract talent to that area and benefit businesses located there.

4.2.7 Technological impacts

Development of and support for new technologies and platforms The BBC might, because of its remit, scale or secure funding, support new technologies or platforms more than the counterfactual broadcaster would. This might benefit other businesses if the BBC spends development costs that other businesses would otherwise have to spend, or if it speeds up the pace of technology or platform introductions that generate revenue­earning opportunities. Alternatively, other firms involved in developing technologies might benefit from a more certain income stream that the BBC, with its longer­term perspective, might be able to provide.

Hypothesis #55: The BBC might support the development of new technologies or platforms more than the counterfactual broadcaster would. Other businesses might benefit from reduced development costs or increased (or accelerated) revenue­ raising opportunities.

Hypothesis #56: The BBC might supply a more certain income stream than the counterfactual broadcaster would to new technologies or platforms, benefitting businesses involved in the development of the new technology or platform.

BBC brand support to new technologies The BBC might attach a stronger brand to new technologies than the counterfactual would either be able or choose to. If the BBC brand attracts consumers to a technology then it may speed the rate of take up of new technologies, benefitting providers of the new technology and providing other businesses with opportunities to earn revenue using the new technology.

Hypothesis #57: The BBC’s brand might extend to new technologies, giving them a “seal of approval” in consumers’ eyes and encouraging take­up more than would occur in the counterfactual.

Media literacy The BBC might make its content available via more new technologies than the counterfactual broadcaster, or consumers might be more attracted to new technologies by BBC content, as compared to the counterfactual broadcaster’s content. Once consumers have been introduced to new technologies they may be more willing to use competitors’ services from which competitors can generate revenue.

Hypothesis #58: The BBC might attract more consumers to new media and new technologies than the counterfactual broadcaster. Once consumers are used to new technologies and new media, competitors may be able to earn revenues by attracting audiences to their services.

50 Preventing the market from finding least cost technology As an intervention whose investments are determined by policy rather than commercial gain, the BBC’s investments might not select the most efficient technology whereas in the counterfactual market forces might lead to selection of the most efficient technology. If the least cost technology were not found then other firms using the technology may have higher costs than they might have in the counterfactual.

Hypothesis #59: The BBC investments, as they are associated with policy rather than commercial gain, might lead to the selection of inefficient technologies, which might result in higher costs to other businesses than in the counterfactual.

4.2.8 Investment in creative sector

Crowding out of investment BBC investment in the creative sector, whether in programming, technologies or other initiatives, might “crowd out” investment that other companies would undertake. If the BBC’s investment meant that other companies were disincentivised to invest then less investment overall could occur than might occur in the counterfactual, causing possible business opportunities to be missed.

Hypothesis #60: The BBC might crowd out investment by other businesses sufficiently that less investment occurs and less business opportunities are taken than in the counterfactual.

Sustaining specific creative activities The BBC might directly invest in, and sustain, specific creative activities and businesses that would not be commercially sustainable so would not be funded by the counterfactual broadcaster.

Hypothesis #61: The BBC might sustain more specific creative activities and businesses than the counterfactual broadcaster.

4.2.9 Other hypothesised impacts

Provision of content to third parties The BBC might create more quality content and make it available to third parties at lower prices than the counterfactual broadcaster might do. This might mean that third parties have more revenue­earning opportunities than they would have in the counterfactual.

Hypothesis #62: The BBC might provide more content, or provide it at lower prices, causing revenue­earning opportunities for third parties to be higher than in the counterfactual.

Generation of social capital The BBC, as a renowned “national institution” and public service broadcaster, might help generate more (relative to the counterfactual broadcaster) social capital that might help reduce crime, encourage education, help develop networks and hence contribute to the UK economy. 51 Hypothesis #63: The BBC might help generate more social capital than the counterfactual broadcaster would, hence assisting the UK economy, of which the creative and broadcasting sectors are a subset.

4.2.10 Nations and Regions­specific impacts Many of these hypothesised impacts might apply to both the UK as a whole and to specific nations and regions within the UK. In addition, the following hypothesised impacts might be specific to the Nations and Regions. Presence in regions The BBC might have a greater presence in regions than the counterfactual broadcaster would, particular with respect to share of spending, employment, and skills and graduate retention.

Hypothesis #64: The BBC might spend more on all forms of creative inputs in the Nations and Regions than the counterfactual broadcaster.

Hypothesis #65: The BBC might employ more people, generating income for local businesses in the Nations and Regions than the counterfactual broadcaster.

Hypothesis #66: The BBC might retain more graduates and skilled workers in the Nations and Regions than the counterfactual broadcaster.

Clustering The BBC might contribute more to the generation of creative clusters than the counterfactual broadcaster. These creative clusters might benefit local businesses by creating network efficiencies, talent pools and easy access to factors of production, among other benefits. The BBC might contribute more than the counterfactual broadcaster would either by generating more critical mass or by playing a more active role in initiating clusters.

Hypothesis #67: The BBC might provide more critical mass towards the generation and success of clusters than the counterfactual broadcaster.

Hypothesis #68: The BBC might provide more critical mass towards the generation and success of clusters than the counterfactual broadcaster.

Hypothesis #69: The BBC might play a more active role in initiating clusters, for instance by investing in infrastructure or leading cluster planning and negotiations than the counterfactual broadcaster.

52 4.3 Prioritisation of impacts In discussing these impacts, we focussed on the most important impacts. Our assessment of “importance” was driven by a number of factors. 4.3.1 Literature, seminar, stakeholder and BBC perceptions We collated stakeholder views to assess whether stakeholders consider the impact to be important. Those impacts that stakeholders were eager to discuss or confirmed as important for themselves or for other businesses were considered to be “potentially important”. Similarly, we used interviews with BBC personnel to establish what the BBC considered to be its major impacts. We combined these with our findings from the literature and the seminar. Impacts cited as potentially important either in the seminar, the literature, our stakeholder interviews or BBC interviews were incorporated into our next stage of analysis.

53 BBC Trust Economic impact of the BBC on the creative economy 5 List of stakeholder submissions

5 List of stakeholder submissions

Organisation Organisation Advantage West Midlands Ofcom Alternative View One NorthEast BPI PACT Quicksilver Channel 4 Scottish Enterprise CEP Scottish Screen East of England Development Agency Screen East Endemol Skillset Film Council Sky five Smooth Operations/Unique Gaelic Development Agency South West RDA Gaelic Media Service South West Screen Green Bay Media Talkback Thames Invest Northern Ireland Tern TV IPA The Radio Centre ISBA Tiger Aspect Productions ITV Touch Productions Kudos Film and Television Twofour London Development Agency Wall to Wall Monterosa Welsh Assembly Government National Council for Graduate Entrepreneurship Yorkshire Forward National Film and Television School David Elstein National Union of Journalists Anonymous independent producer Nesta/BBC Anonymous industry expert North West Development Agency Anonymous industry expert North West Vision and Media

17 July 2008 54

54 6 Estimation of revenues in the counterfactual

6.1 Counterfactual revenues from TV advertising In this section, we describe the method used to estimate TV revenues of the counterfactual broadcaster and the rest of the TV sector in the counterfactual. We describe 3 scenarios – a “Central Scenario”, a scenario in which the counterfactual broadcaster attracts fewer viewers than in the Central Scenario (Alternative Scenario A) and a scenario in which it attracts more viewers (Alternative Scenario B). Throughout this section we posit a number of simplifying assumptions, which are required to ensure that the counterfactual is tractable. 6.1.1 Step 1 – define total viewing in the counterfactual We assume that total viewing in the counterfactual is the same in the counterfactual as actual total viewing in 2007. For the purpose of calculations below, we use “V” to denote total viewing.

Assumption 1 – Total viewing in the counterfactual is equal to actual total viewing in 2007

6.1.2 Step 2 – assign total viewers across channels in the counterfactual

Central scenario Our method is to assign viewers to BBC channels, based on the number of viewers of existing commercial channels that are relatively similar in genre or content to existing BBC channels. Summing these viewers across all the counterfactual channels (i.e. commercial equivalents to actual BBC channels) and actual viewers to channels in 2007 yields a total viewers figure smaller than that of actual total viewers today. We call this difference “X”. We assign X across the counterfactual and the rest of the market according to the existing market share (i.e. it is assumed that broadcasters take the same share of X as they do of all other viewers). We have not applied an “uplift” that could be associated with a change in competition between broadcasters, although we acknowledge that such an effect is possible, and would tend to increase viewing (and possibly revenues) of all broadcasters in the counterfactual.

Assumption 2 – The counterfactual equivalent to BBC One is assumed to be ITV1 Assumption 3 – The counterfactual equivalent to BBC Two is assumed to be Channel 4 Assumption 4 – The counterfactual equivalent to BBC Three is assumed to be E4 Assumption 5 – The counterfactual equivalent to BBC Four is assumed to be ITV4 Assumption 6 – The counterfactual equivalent to CBBC is assumed to be CITV Assumption 7 – In the absence of a commercial equivalent to CBeebies, we assume that the counterfactual equivalent to CBeebies is a commercial CBeebies (i.e. with number of CBeebies viewers) Assumption 8 – The counterfactual equivalent to BBC News 24 is assumed to be Assumption 9 – In the absence of a commercial equivalent to BBC Parliament, we assume that no equivalent exists in the counterfactual

55 We denote the total number of viewers watching all the “equivalent” services as “Z”, calculated as follows: Z = (ITV1 viewing hours*) + (Channel 4 viewing hours*) + (E4 viewing hours*) + (ITV4 viewing hours*) + (CITV viewing hours*) + (CBeebies viewing hours*) + (Sky News viewing hours*) = 7 hours and 12 minutes per week *All viewer figures relate to average 2007 weekly viewing figures. Denoting the actual viewing share taken by all non­BBC services (17 hours and 8 minutes per week) as N and using the definitions above: X = V ­ Z – N = 56 minutes per week i.e. X is the difference between total viewing (V = 25 hours and 17 minutes per week) and viewing calculated by summing viewing of the assumed “equivalent” services. To equate counterfactual total viewing with actual total viewing we assign part of X to the counterfactual broadcaster of interest, and assign the remainder of X to other commercial services. We allocate this remaining viewing share according to the share of all viewers except X. Denoting the viewers to the counterfactual broadcaster as : Ž

Assumption 10 (Central Scenario) – = Z + (Z/(Z + N))*X Ž

For completeness, denoting the total viewers to other broadcasters’ services in the counterfactual world as : Ň = N + (N/(Z + N))*X Ň Note that (by assumption), + = V Ž Ň Applying the above to weekly viewing figures from BARB:

Central scenario % viewing share in counterfactual held by counterfactual broadcaster = 29.59% % viewing share in counterfactual held by other broadcasters = 70.41%

Alternative scenario A In Alternative Scenario A, we assume, similar to the central scenario, that the counterfactual broadcaster has viewers to its channels equivalent to the total viewers of ITV1, Channel 4 etc. However in contrast to the Central Scenario, in this scenario we assume that X is allocated entirely to broadcasters other than the counterfactual broadcaster. Denoting the viewers to the counterfactual broadcaster in the weak scenario as : Ź

Assumption 11 (Alternative Scenario A) – = Z Ź

56 For completeness, denoting the total viewers to other broadcasters’ services in the counterfactual world as : Ń = N + X Ń Note that (by assumption), + = V Ź Ń

Alternative scenario A % viewing share in counterfactual held by counterfactual broadcaster = 28.49% % viewing share in counterfactual held by other broadcasters = 71.51%

Alternative scenario B In Alternative Scenario B, we assume, similar to the Central Scenario and Alternative Scenario A, that the counterfactual broadcaster has viewers to its channels equivalent to the total viewers of ITV1, Channel 4 etc. However in contrast to the Central Scenario, in this scenario we assume that X is allocated entirely to the counterfactual broadcaster and not other broadcasters. This is equivalent to assuming that that the counterfactual broadcaster manages to attract the same number of viewers as the BBC did in 2007. Denoting the viewers to the counterfactual broadcaster in the strong scenario as Z:

Assumption 12 (Alternative Scenario B) – Z = Z + X

For completeness, denoting the total viewers to other broadcasters’ services in the counterfactual world as N: N = N Note that (by assumption), Z + N = V

Alternative scenario B % viewing share in counterfactual held by counterfactual broadcaster = 32.22% % viewing share in counterfactual held by other broadcasters = 67.78%

6.1.3 Step 3 – use “eyeball” elasticities to estimate “change” in TV NAR The difference between total TV advertising impacts in the real world and the counterfactual is (assuming constant advertising minutes across channels) proportional to the counterfactual broadcaster’s viewers, since the actual BBC does not show adverts. By multiplying the difference in impacts by an “eyeball elasticity” figure we can calculate an estimate of the difference in TV NAR between the real world and the counterfactual. An “eyeball elasticity” is an estimate of the change in TV NAR resulting from one additional advertising impact. It is calculated from the price elasticity of demand. Table 2 describes recent TV price elasticity estimates.

57 ��������� ������������ ����������������������������������

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���������������������� ������������������������ ������������������������������ ������������������������������������������� ����������������������������������������������������������������������������������������� ������������������������������������������������������������������������������������������������������������������������������������ ������������������������������������������������ Source: PricewaterhouseCoopers (2004), “Economic Analysis of the TV Advertising Market”, BARB, PwC analysis �������������������������������������������������� ������������������������������������������������������������������������������������������������������������������������������������ ������������������������������������������������

118 Price elasticity is assumed to be constant across levels of TV advert viewing here. The potential for variation in elasticities across amounts of TV adverts is discussed below. 58 ��������� ������������ ����������������������������������

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The���������������������������������������������������������������������������������������������������� change in total viewing of TV showing adverts (moving from the factual to the counterfactual)���������������������������������������������������������������������������������������������� is equal to an increase of 47.5%. Applying this change to the PricewaterhouseCoopers���������������������������������������������������������������������������������������������� (­1.44) and Hendry (­2.4) price elasticity estimates generates the���������������������������������������������������������������������������������������������������� results in Table 3. We note that these estimates become increasingly unreliable for ������������������������ larger changes in impacts. We present the results here for comparison purposes. Table������������������������������������������� 3: Total TV NAR in the counterfactual

���������������������� �������������������������� ������������������������ ��������������������� �������� ��������������������� ��������������� ���������������

����� ������������������������������ ������ ����� ������������� ������� ����������������������������������������������������������������������������������������������������� Source: PricewaterhouseCoopers (2004), “Economic Analysis of the TV Advertising Market”, PwC analysis ��������������������������������������������������������������������������������������������������� It�������������������������������������������������������������������������������������������������� seems counter­intuitive that with an elasticity of greater than one, large changes in TV���������������������������������������������������������������������������������������������������� impacts might lead to zero or even negative changes in NAR. However, essentially this�������������������������������������������������������������������������������������������������� is a function of to applying elasticities designed for marginal changes in impacts to��������������������������������������������������������������������������������������������������� large changes in impacts. Because the price effect is a function of both the initial quantity������������������������������������������������������������������������������������������������ of impacts and the higher, post­change quantity of impacts, it becomes ��������������������������������������������������������������������������������������������������� relatively��������������������������������������������������������������������������������������������������� larger as the change in impacts becomes larger. At some point for any elasticity�������������������������������������������������������������������������������������������� greater than 1, as the change in impacts becomes larger, eventually the change���������������������������������������������������������������������������������������������� in NAR will start to become smaller. This shows the inherent problems with ���� using������� ����������������������������������� elasticity estimates for large changes; also there may be “saturation effects” from more advertising which may depress viewing and effectiveness of adverts. The impact��������������������������������������������������������������������������������������������������� of adjusting permitted advertising minutage (and hence impacts) has been considered���������������������������������������������������������������������������������������������������� in more detail in a recent Ofcom consultation119. �������������������������������������������������������������������������������������������������� ��� 6.1.4������������������������������������������������������������������������������������������������� Step 4 – compare existing estimates ������������������������������������������ �������������������������������������������������������������� The����������������������������������������������������������������������������������������������������� method described above assumes that the elasticity would not change at very different������������������������������������������������������������������ levels of advertising impacts. This is possible, but it is more likely that higher levels of impacts would be associated with lower eyeball elasticities (i.e. as the amount���������������������������������������������������������������������������������������������� of advertising increases, the extra amount of advertising revenue that can be �����������������������������������������������������������������������������������������������������120 raised����������� from an additional impact falls). Hendry (1992) states that (his) elasticity estimates do “not apply to converting existing BBC channels to advertising, since that would���������������������������������������������������������������������������������������������������� greatly increase the total number of viewers. Conversely the attractiveness of TV������ is estimated to fall because of the disturbing intrusion of adverts.”

In���������������������������������������������������������������������������������� addition, PricewaterhouseCoopers (2004) notes that the elasticity for traditional TV (which constitutes the majority of advertising impacts in the counterfactual) is lower than������������������������������������������������������������������������������������������������� the multichannel elasticity. ������������������������������������������������������������������������������������������ We������������������������������������������� have identified literature estimating��������������������������� the impacts on NAR of the��������������������������� BBC taking advertising,������������ discussed below. ITV’s written evidence to the Select Committee of Culture, �������������������������������������������������� Media������������������������������������������������� and Sport in 2004 ITV’s������������������� Written Evidence����������������������������������������������������������������������������� to the Select Committee of Culture, Media and Sport in 2004 estimates that advertising on the BBC would increase TV impacts by 50% (compared to our estimate above of 47.5%) and that this would only generate a 5% increase in total TV NAR. ITV states the following as evidence:

119 http://www.ofcom.org.uk/consult/condocs/rada/ 120 Hendry (1992), “An Econometric Analysis of TV Advertising Expenditure in the United Kingdom”. 59 “History shows that incremental increases in impacts generated by new channels (e.g. C5, TV3 in Ireland) or extra minutage, do not engender a commensurate increase in NAR… …any increase in impacts from advertising on the BBC would be absorbed within 18 months.” Billets (1999), “The implications for commercial television from advertising funding of BBC television” Billets (1999) states: “In overall terms, as the supply of advertising (commercial) impacts increases, both TV and non­TV display advertising contract. A 10% increase in commercial impacts leads to a 5.4% decrease in aggregate TV advertising expenditure” Hence, this evidence would suggest that a 47.5% increase in commercial impacts would lead to a decrease in aggregate TV advertising expenditure121. Submissions to the Peacock Committee on financing the BBC (1986) A number of papers estimating TV advertising elasticities were compiled as submissions to the Peacock Committee on financing the BBC in 1986, including Budd (1985)122, Cave and Swann (1985)123 and NERA (1986)124. These studies all found that the price elasticity of demand for TV advertising time was negative but of smaller magnitude than ­1, suggesting that an increase in the supply of advertising impacts (for instance by introducing adverts to BBC TV) would decrease the total TV advertising revenue. In addition, Cave and Swann (1985) estimate that the impact of allowing one minute’s advertising per hour on BBC television (BBC1 and BBC2) in 1984 would be equivalent to a 13.5% increase in the supply of TV advertising leading to a 4% decline in total TV advertising revenue in the long run125 . Again, these findings would suggest, that a larger (47.5%) increase in the supply of TV advertising would, based on these estimates, lead to a decline in total TV advertising revenue in the long run. Hendry, D. (1992), “An Econometric Analysis of TV Advertising Expenditure in the United Kingdom” In contrast to the findings of the papers used as submissions to the Peacock Committee, David Hendry found that the price elasticity of demand for TV advertising time is negative and considerably in excess of unity in absolute value; and that, consequently, an extension of available advertising time should raise total revenue even though the average price will fall.

121 We note that the functional form of the relationship between commercial impacts and NAR, means that as impacts increase beyond the point where the marginal revenue of an additional impact is negative, the impact on total NAR becomes more and more negative. 122 Budd, A. (1985), “The impact on ITV Revenue of Extending Advertising to the BBC”, London Business School. 123 Cave, M. and Swann, P. (1986), “The Effects on Advertising Revenues of Allowing Advertising on BBC Television”. 124 Nera (1986), “The effects on ITV and Other Media of the Introduction of Advertising on the BBC in Various Amounts”. 125 Note: (1) These estimates apply to 1984 – before the advent of multichannel TV in the UK. (2) These estimates are factored into Billets (1999) estimates, so there is an element of “double­counting” in considering these two estimates completely independently. 60 Hendry suggested that the previous studies obtained a smaller elasticity because the data frequency (they all used annual data, in comparison to his quarterly data set) was too low to allow demand and supply effects to be disentangled from the available information, i.e. there is a high degree of interdependence between price and quantity on annual data. Barwise, P. (2008), “The BBC: Its Brand, Its Competitors, and the Public”, presentation at Seminar to inform this project Patrick Barwise depicted a suggested counterfactual world in which subscription revenues are 50% higher than in reality, NAR & Sponsorship is 8% higher than in reality and other commercial revenue is 8% higher than in reality. In his example, this averages out to a total increase of 29% in commercial revenues. Total TV NAR in the counterfactual Based on the above we note the following: • Using different price elasticity estimates for the UK, a 47.5% increase in TV impacts would imply either a 1% decline or an 18% increase in total TV NAR; • It may not be appropriate to use these elasticities for large changes in the supply of TV advertising, such as a hypothetical switch from reality to the counterfactual; • Literature in 1985 and 1999 on the long­run effect on NAR of increasing the supply of TV advertising by introducing adverts to the BBC suggests that total TV NAR might fall slightly, but more recent estimates by ITV suggest a 5% increase in total TV NAR. On the basis of the remarks above, in particular the more recent estimate by ITV that suggests a small increase in NAR in the counterfactual, we assume that total TV NAR is 10% higher in the counterfactual – that is, 10% more revenue would spent by advertisers on TV advertising, but the spending would be spread “more thinly” across a larger number of channels (i.e. including the counterfactual broadcaster’s channels).

Assumption 13 – Total TV NAR is 10% higher in the counterfactual than in the factual

6.1.5 Step 5 – calculate share of total sector NAR apportioned to the counterfactual broadcaster Using the shares of viewing in the counterfactual estimated in Section 6.1.2 and the assumption of 10% higher total TV NAR in the counterfactual (compared to the counterfactual) as described in Section 6.1.4, TV NAR to the counterfactual broadcaster and other broadcasters are estimated as in Table 4.

61 BBC Trust Economic impact of the BBC on the creative economy

TableTable 44:: Scenarios Scenarios for TV forNAR TV in the NAR counterfactual in the counterfactual Phil Burrows 18/7/08 19:50

Deleted: 4 Scenario Total TV Proportion of viewing TV NAR received by TV NAR received 126 NAR attributable to counterfactual by other (£bn) counterfactual broadcaster / BBC broadcasters broadcaster / BBC (£bn) (£bn) Factual £3.354bn 32.2% £0 £3.354bn Central £3.689bn 29.59% £1.092bn £2.598bn scenario Alternative £3.689bn 28.49% £1.051bn £2.638bn Scenario A Alternative £3.689bn 32.22% £1.189bn £2.501bn Scenario B Source:Source: Zenith Optimedi Optimedia, a, BARB, BARB, PwC an PwC alysi s analysis 6.26.2 Counterfactual Counterfactual revenues revenues from radio from advertising radio advertising For radio NAR, we follow the same approach as for TV, with differences as outlined below. For radio NAR, we follow the same approach as for TV, with differences as outlined below. 6.2.1 Total listening

6.2.1We assume Total that listening total listening to all radio in the counterfactual is equal to actual total listening to all Weradio. assume that total listening to all radio in the counterfactual is equal to actual total listening to all radio. 6.2.2 Assign listeners across counterfactual broadcaster and other broadcasters in the 6.2.2counterfactual Assign listeners across counterfactual broadcaster and other

broadcastersWe assume that listening in the in thecounterfactual counterfactual is split 33:67 between the counterfactual broadcaster Weand assume other broadcasters, that listening but that in the total counterfactual listening remains isunchanged. split 33:67 This between compares the to a 57:43 split counterfactualBBC:non-BBC in broadcaster the factual. This and assumption other broadcasters, is based on the but following that total factors: listening remains unchanged.� This compares to a 57:43 split BBC:non­BBC in the factual. This The counterfactual broadcaster might close some stations as currently some BBC stations are assumptionnot commercially is based feasible;on the followingand factors:

• �The counterfactual broadcaster might close some stations as currently some BBC The counterfactual broadcaster would not have the same advantage of carrying no adverts stationsthat arethe BBCnot has;commercially but feasible; and

• �The counterfactual broadcaster would not have the same advantage of carrying no The counterfactual broadcaster would compete more vigorously for listeners; and adverts that the BBC has; but � • The counterfactualThe impact of competition broadcaster by the would counterfactual compete broadcaster more vigorously might cause for some listeners; stations, and particularly local stations, owned by other broadcasters to close. • The impact of competition by the counterfactual broadcaster might cause some Westations, consider particularly that the “no adverts”local stations, change mightowned be theby largestother broadcastersof these factors, tohence close. assume that share of listening for the counterfactual broadcaster is substantially lower than is the case for the WeBBC. consider that the “no adverts” change might be the largest of these factors, hence assume that share of listening for the counterfactual broadcaster is substantially lower thanAssumption is the case 14 for (Central the BBC. Scenario) – Listening in the counterfactual is split 33:67 between the counterfactual broadcaster and other broadcasters

AssumptionAgain, we suggest 14 (Central alternative Scenario) scenarios: – Listening in the counterfactual is split 33:67 between the counterfactual broadcaster and other broadcasters

17 July 2008 62

126 Zenith Optimedia (December 2007), “Advertising Expenditure Forecasts”, uplifted 10% reflecting the assumed increase in NAR in the counterfactual. 62 Again, we suggest alternative scenarios: • In Alternative Scenario A we flex the Central Scenario downwards and assume that the counterfactual broadcaster has a 17% share of listening:

Assumption 15 (Alternative Scenario A) – Listening in the counterfactual is split 17:83 between the counterfactual broadcaster and other broadcasters

• In Alternative Scenario B we assume that the counterfactual broadcaster has a 50% share of listening, only slightly down from the 57% in reality:

Assumption 16 (Alternative Scenario B) – Listening in the counterfactual is split 50:50 between the counterfactual broadcaster and other broadcasters

6.2.3 Estimate total radio NAR • We provide 3 elasticity estimates:

– Oliver & Ohlbaum (2004)127 assumes that the price elasticity of radio advertising is ­3.5. Oliver & Ohlbaum base this assumption on the following two estimates: ­ Oliver & Ohlbaum’s own estimates, presented in the same paper, estimate the price elasticity at ­5, although it is acknowledged that this may be an over­estimate; and ­A survey for the CRCA (now the Radiocentre) estimated the price ��������� elasticity at ­2.5128. ������������ ���������������������������������� The relationship between price elasticity and changes in listening on radio NAR is demonstrated for the three elasticity estimates in Figure 4. ���������������������������������������������������������� Figure 4: Radio NAR and radio listening hours with adverts

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Source: Rajar, Oliver & Ohlbaum (2004), “The Market Impact of the BBC’s Digital Radio Services”, Indepen (2004), ����������������������������������������������������������������������������������������������������������������������� ������������������������������������������������������������������������������������������������������������������������“Radio Mergers are Not Substantial: The impact of the Communications Act and the Enterprise Act on Radio Mergers”, PwC analysis. ����������������������������������������������������������������������������������������������������� ��������������������������������� 127 Oliver & Ohlbaum (2004), “The Market Impact of the BBC’s Digital Radio Services”. 128 Indepen (2004), “Radio Mergers are Not Substantial: The impact of the Communications Act and the Enterprise Act on Radio ����������������������������������������������������������������������������������������������������Mergers”. ��������������������������������������������������������������������������������������������� 63 �������������������������������������������������

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The����������������������������������������������������������������������������������������������������� same counterintuitive results from using elasticities to estimate large changes arise��������������������������������� in radio as for TV. See Section 6.1.3 above.

The���������������������������������������������������������������������������������������������������� change in total viewing of radio with adverts (moving from the factual to the counterfactual)��������������������������������������������������������������������������������������������� is equal to an increase of 130.8%. Applying this change to the three price������������������������������������������������� elasticity estimates described above generates the results in Table 5. Table���������������������������������������������� 5: Total radio NAR in the counterfactual

������������������������� �������������������������� ��������������������������� ����������������������� �������� ��������������������� �������������������������� ��������������� ������ ���� ������ ������ ���� ������ ������ �� ������ �����������������������������������������������������������������������������������������������������

Source:������������������������������������������������������������������ PricewaterhouseCoopers (2004), “Economic Analysis of the TV Advertising Market”, PwC analysis

Comparing�� ���������������������������������������������������������������� radio to our assumptions made for TV note the following:

• �Radio� ������������������������������������������������������������������������������������������������� elasticities appear to be higher than TV elasticities; and ����������� • The percentage change in impacts (from factual to counterfactual) is likely to be ����������������������������������������������������������������������������������������������larger in radio than in TV. ������������������������������������������������������������������������������������������� Based����������������������������������������������������������������������������������������������� on the points above, we expect the “change” from factual NAR to counterfactual���������������������������������������������������������������������������������������������� NAR to be larger for radio than for TV. However, given the evidence of recent���������������������������������������������������������������������������������������������������� weakening in the radio advertising market it seems implausible to assume a very large increase in total radio NAR. We therefore make the assumption of a 20% increase in NAR in the counterfactual – higher than the estimate based on an elasticity of ­2.5 but lower than estimates based on elasticities of ­3.5 or 5, which we consider plausible based on the potential for elasticities to fall at higher levels of advertising impacts129.

129 By comparison, Enders (“Privatising Radios One and Two: how to kill commercial radio with kindness”, 2008) argues in relation to a hypothetical privatisation of Radio One and Radio Two: “Undeniably, the market power of Radios One and Two could attract new advertisers who might not have used the radio medium previously, but total advertising spend on radio is unlikely to increase by as much as 66%, even over several years, to accommodate the similar increase in airtime”. 64 BBC Trust Economic impact of the BBC on the creative economy

Assumption 17 – Total radio NAR is 20% higher in the counterfactual than in the factual which we consider plausible based on the potential for elasticities to fall at higher levels of 128 advertising impacts .

TheA ssumptiondifference 17between – Total the radio equivalent NAR is 20%assumptions higher in forthe radio counterfactual and TV can than be inexplained the by two main factors:

• TThehe difference difference between in the the total equivalent supply assumptions of advertising for radio in theand counterfactual, TV can be explained relative by two tomain the factors:actual supply, is substantially greater in radio than in TV; and � • Radio T headvertising difference in may the totalhave supply higher of advertising price elasticity in the counterfactual, than TV advertising. relative to Oliverthe actual & Ohlbaumsupply, (2004) is substantially state that greater “Radio in radio advertising than in TV; is and probably more “elastic” than TV 130 �advertising”. Radio advertising may have higher price elasticity than TV advertising. Oliver & Ohlbaum 129 Based (2004)on Assumption state that “Radio 17, totaladvertising radio is NAR probably in the more counterfactual “elastic” than TV in advertising”. 2007 is estimated 131 as £718m . 130 Based on Assumption 17, total radio NAR in the counterfactual in 2007 is estimated as £718m . Total sector NAR apportioned to counterfactual broadcaster Total sector NAR apportioned to counterfactual broadcaster Using the shares of listening in the counterfactual estimated in Section 6.2.2 and the assumptionUsing the shares of the of listening same total in the TV counterfactual NAR in the estimated factual inand Section counterfactual 6.2.2 and the asassumption described of inthe Section same total 6.2.3, TV NARradio in NARthe factual to the and counterfactual counterfactual as broadcaster described in Sectionand other 6.2.3, broadcasters radio NAR to arethe estimated counterfactual as broadcasterin Table 6. and other broadcasters are estimated as in Table 6. Phil Burrows 18/7/08 19:50 Deleted: Table 6 TableTable 66:: Scenarios Scenarios for radio for NAR radio in the NAR counterfactual in the counterfactual

Scenario Total Proportion of listening Radio NAR received Radio NAR radio attributable to by counterfactual received by other 132 NAR counterfactual broadcaster / BBC broadcasters (£m) (£m) broadcaster / BBC (£m) Factual £598m 56% £0 £598.0m Central £718m 33% £236.8m £480.8m scenario Alternative £718m 17% £122.0m £595.6m Scenario A Alternative £718m 50% £358.8m £358.8m Scenario B Source:Source: Radio Radio Advertising Bureau, Bureau, PwC PwC analysis analysis

6.3 Counterfactual revenues from online

6.3For online Counterfactual revenues, we make a simple revenues assumption –from that the counterfactual’sonline online revenues are Forthe onlinesum of ITV’srevenues, (excluding we Friendsmake a Reunited) simple assumptionand Channel 4’s – that online the revenues counterfactual’s for 2007. online revenues are the sum of ITV’s (excluding Friends Reunited) and Channel 4’s online revenuesAssumption for 2007. 18 – Online revenue in the counterfactual is equal to the sum of the actual online revenues of ITV excludin Friends Reunited and Channel 4 in 2007

128 Assumption By comparison, 18 Enders – Online (“Privatising revenue Radios One in andthe Two: counterfactual how to kill commercial is radio equal with kindness”to the ,sum 2008) arguesof the in relation to a hypothetical privatisation of Radio One and Radio Two: “Undeniably, the market power of Radios One and Two could attract new advertisersactual who might online not have revenues used the radio of mediumITV (excluding previously, but Friends total advertising Reunited) spend on radio and is unlikely to increase by asChannel much as 66%, 4 evenin 2007 over several years, to accommodate the similar increase in airtime”. 129 Oliver & Ohlbaum (2004), “The Market Impact of the BBC’s Digital Radio Services”. 130 2007 advertising revenue (including sponsorship and promotions) = £598m (Radio Advertising Bureau) * (1+10%) = Under£658m. this assumption, the online revenues of the counterfactual broadcaster are estimated as £62m.

17 July 2008 65

130 Oliver & Ohlbaum (2004), “The Market Impact of the BBC’s Digital Radio Services”. 131 2007 advertising revenue (including sponsorship and promotions) = £598m (Radio Advertising Bureau) * (1+10%) = £658m. 132 Radio Advertising Bureau (2008), “Radio Marketplace Charts”. 65 ��������� ������������ ����������������������������������

��������� ������������ ���������������������������������� ������������������������������������������������������������������������������������� ������ �������� �� ��� �������� ������� �������� ��� ������� � �� ����

������������������������������������������������������������������������������������� ��������������������������������������������������������������������������������������������������� �������� �� ��� �������� ������� �������� ��� ������� � �� ���� ����� 6.4 Total revenues ���������������������������������������������������������������������������������������������������������������� Using����� the assumptions and methodology above, the estimated revenues for the counterfactual������������������������������������������������������������������������������������������ broadcaster are described in Table 7. ������������������� ������������������������������������� Table 7: Total revenues and creative spend of ������������������������������������������������������������������������ counterfactual������������������������������������������������������������������������������������������ broadcaster ������������������������������������� ����������� ���������������� ������������ ������������� ������������������������������������������������������������������������������������������������ ������������������������ ���������� ����� ����� ����� ������������� ��� ��� ��� ����������� ���������������� ������������ ������������� �������������� �� �� �� ������������������������ ������������������������ ������������� ����� ����� ����� ���������� ����� ����� ����� ��������������������� �������� ������ �������� ����������������� �������������� �� �� �� �������� ������������� ����� ����� ����� �������������������� Source:������������������������������� PwC analysis ����� ��� ����� * �����������������Based on BBC accounts. ��������������������������������������������������������������������������������������������������������� The�������������������� expenditure (financed by advertising revenue) on creative activities of other ������������������������������������������������������������������������������������������������������������������ broadcasters��������������������������������������������������������������������������������������������� is calculated similarly in Table 8. Because the method for calculating ������������������������������������������������� online������������������������������������������������������������������������������������������������� revenues of the counterfactual broadcaster does not relate to market advertising������������������������������������������������������������������������������������������� revenues, we do not consider advertising revenue raised by other broadcasters.����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� ������������������������������������������������� Table���������� 8: Total revenues���������������� and creative ������������ spend of other������������� �������������������������������������������������������������������������������������������������������������� ������������������������ broadcasters���������� in the counterfactual����� ����� ����� ����������������������� ������������������� ��������������� ���������������� ������������������ ����� ����������������������������� ����������������������������� ��������������������� ����� ����� ����� ��������������������� �������� �������� �������� ����������������������������� ����� ����� ����� ����������� ������������������������� ����� ����� ����� ������������������� �������������������� ���������������������������������� ����������������� �������� �������������������� Source:����������������������� PwC analysis * Based on BBC accounts.

66 ��������� ������������ ���������������������������������� 7 Further gross value added and net value added��� results ��������������������������������������������� �������

�����������������������������������������������������������������������������������������������In this section we provide estimates of the GVA to the UK economy (and gross ��� ��������������������������������������������������������������������������������������������employment impact) and net value added (and net employment impact) of the BBC’s���� ����������������������������������������������������������������������������������������������spending on creative activities133, against the selected counterfactual, for the BBC’s individual services (TV, radio and online). �����������������������������������������������������������������������������������������������������Scenarios 1, 2 and 3 refer to scenarios for radio and online multipliers as described in ��������������������������������������������������������������������������������������������������Section 8 of our report. Hence, these scenarios have identical figures for the impacts ����������������������������� of spending on creative activities in relation to TV. ����� ���������������������������������������������������������� 7.1������������������������������� Gross value added and gross employment impact of the BBC’s spending on creative activities ��������� 7.1.1 TV �������������������������������������� Scenario 1, 2 and 3

�� ��������������������� ��������������������������� ����������������������� ����������������������������� �������� ��� �� ���������� ����� ����� ��� �� ����� ����� ���������������� ��� �� ����� ��� ���� �� � ��� ��� ������������� �� � ��� ��� ����������� � � ��� �� ����������� �� � ��� ��� ����������� �� �� ��� ��� ����������� �� �� ��� ��� �������������� �� � ��� ��� ���������������������� �� � ��� ��� ���������������������������������������������������� ��� ��� ������ ����� ������� ����� ����� ������ ������ ������� ����� ����� ������ ������ �� ����� ����� ������ ������

������������ 7.1.2 Radio ����������Scenario 1

�� ��������������������� ��������������������������� ����������������������� ����������������������������� �������� �� �� ���������� ��� ����� �� �� ��� ��� ���������������� �� �� ��� ��� ���� �� �� ��� ��� ������������� �� � ��� ��� ����������� � � ��� �� ����������� �� � ��� ��� ����������� �� � ��� ��� ����������� �� �� ��� ��� �������������� �� � ��� ��� ������������������������������� �� ������������ � ������������������������������������� ��� �������������������������� �� �� ����� ��� ������� ��� ��� ������ ����� ������� ��� ��� ������ ����� �� ��� ��� ������ �����

Scenario���������� 2

�� ��������������������� ��������������������������� ����������������������� ����������������������������� �������� �� �� ��� ��� ����� �� �� ��� ��� ���������������� �� � ��� ��� ���� �� � ��� ��� ������������� �� � ��� ��� ����������� � � ��� �� ������������������������������������������������������������� �� � ��� ��� ��� ��������������������������������������������������������������� � � ��� ��� ����������� �� � ��� ��� �������������� �� � ��� ��� ���������������������� �� � ��� �� �������������������������� �� �� ����� ��� ������� ��� ��� ����� ����� ������� ��� ��� ������ ����� �� ��� ��� ������ �����

����������

�� ��������������������� ��������������������������� ����������������������� ����������������������������� �������� �� �� ��� ��� ����� �� �� ��� ��� ���������������� �� � ��� ��� ���� �� � ��� ��� ������������� �� � ��� ��� ����������� � � ��� �� ����������� �� � ��� ��� ����������� � � ��� ��� ����������� �� � ��� ��� �������������� �� � ��� ��� ���������������������� �� � ��� �� �������������������������� �� �� ����� ��� ������� ��� ��� ����� ����� ������� ��� ��� ������ ����� �� ��� ��� ������ ����� 133 Defined as content and distribution expenditure. 67 ��������� ������������ ����������������������������������

����������

�� ��������������������� ��������������������������� ����������������������� ����������������������������� �������� �� �� ��� ��� ����� �� �� ��� ��� ���������������� �� � ��� ��� ���� �� � ��� ��� ������������� �� � ��� ��� ����������� � � ��� �� ����������� �� � ��� ��� ����������� � � ��� ��� ����������� �� � ��� ��� �������������� �� � ��� ��� ���������������������� �� � ��� �� �������������������������� �� �� ����� ��� ������� ��� ��� ����� ����� ������� ��� ��� ������ ����� �� ��� ��� ������ �����

Scenario���������� 3

�� ��������������������� ��������������������������� ����������������������� ����������������������������� �������� �� �� ��� ��� ����� �� �� ��� ��� ���������������� �� � ��� ��� ���� �� � ��� ��� ������������� �� � ��� ��� ����������� � � ��� �� ����������� �� � ��� ��� ����������� � � ��� ��� ����������� �� � ��� ��� �������������� �� � ��� ��� ��������� ������������ ���������������������������������� ������������������������������� �� ������������ � ������������������������������������� �� �������������������������� �� �� ����� ��� ������� ��� ��� ����� ����� ������� ��� ��� ������ ����� �� ��� ��� ������ �����

������������� �����������7.1.3�� Online ���������� Scenario���������� 1

�� ��������������������� ��������������������������� ����������������������� ����������������������������� �� ��������������������� ��������������������������� ����������������������� ����������������������������� ���������� ���������������������� ���������������������������� �������������������������� ����������������������������� �� �������� � � ��� �� ������������� � � ��� �� ����� � � ��� �� ��������������������� � � ����� �� ���������������� � � �� �� �������������������� � � �� �� ���� � � �� �� ����������������� �� ���� ���� ������������� � � �� �� ������������������������ �� ���� ��� ����������� � � �� � ����������� � � �� ��� ����������� � � �� �� ����������� � � �� �� ����������� � � �� �� ����������� � � �� �� ����������� � � �� �� ������������������������� � � �� �� �������������� � � �� �� ������������������������������������ � � �� �� ���������������������� � � �� �� ������������������������������������������������ � � ��� ��� �������������������������� � � � � ��������������������������������� ���� ���� ������ ������ ������� ��� ��� ����� ����� ������� ��� ��� ����� ����� ������� ��� ��� ����� ����� ������� ��� ��� ����� ����� �� ��� ��� ����� ����� �� ��� ��� ����� �����

���������� Scenario���������� 2

�� ��������������������� ��������������������������� ����������������������� ����������������������������� �� ��������������������� ��������������������������� ����������������������� ����������������������������� ���������� ���������������������� ���������������������������� ������������������������ ����������������������������� � �������� � � � � ������������� � � � � ����� � � � � ��������������������� � � � � ���������������� � � � � �������������������� � � � � ���� � � � � ����������������� � � � � ������������� � � � � ������������������������ � � � � ����������� � � � � ����������� � � � � ����������� � � � � ����������� � � � � ����������� � � � � ����������� � � � � ����������� � � � � ������������������������� � � � � �������������� � � � � ������������������������������������ � � � � ���������������������� � � � � ������������������������������������������������ � � � � �������������������������� � � � � ��������������������������������� � � ���� ���� ������� � � ��� ��� ������� � � ��� ��� ������� � � ��� ��� ������� � � ��� ��� �� � � ��� ��� �� � � ��� ���

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