Written evidence submitted by Sky

The Future of Public Service Broadcasting – Sky response

June 2020

Executive summary

Despite the short-term effects of the COVID-19 pandemic, the fundamentals of the UK content sector are strong. Viewers have more choice and quality than ever before, and last year investment in UK original content reached an all-time high. These positive outcomes have been driven not only by the Public Service Broadcasters (‘PSBs’), but, increasingly, by the wider sector as well.

Sky’s own contribution to this is significant and growing. As a broadcaster we are producing an increasing amount of original British content, on a scale comparable to and in some cases greater than the PSBs. Much of our content clearly bears the key characteristics of public service content – be it Sky News’ high quality journalism, multi-award winning original dramas like Chernobyl, channels such as Sky Arts delivering hours of original content in underserved genres, or how we have used our TV platforms to highlight to audiences programming related to Black Lives Matter. Other broadcasters and content providers are also stepping up their investment in UK programming to the point where overall growth is being driven by the non-PSB sector.

The COVID-19 pandemic has resulted in some significant short-term challenges for all broadcasters, including the PSBs. It has also accelerated trends in the sector that were observable before the crisis. These include a continued shift in viewing as audience choice increases, a plurality of providers making content that is public service in nature available, and a short-term pressure on advertising revenues.

Given these prevailing trends the existing system needs to adapt. It would be a mistake to continue to focus interventions on only a handful of broadcasters. Such an approach will likely result in a diminished return on public value as audiences continue to fragment in favour of other content sources. Instead, there is a need to revise the regulatory framework in a way that seeks to support, incentivise and grow the contribution from across the entire sector.

Our vision of the future builds on the best of what we have today, with tough competition among a range of different players and business models delivering great outcomes for UK viewers. It includes a strong public sector offering combined with continued strength in private sector delivery, which includes firms like ITV, ViacomCBS/Channel 5, Sky, Discovery, and Netflix.

In some respects, policy is already moving in the direction of greater use of horizontal intervention available to all. For example, the government has recently established a contestable fund for the production of public service children’s programming, and the system of tax credits for ‘high end’ TV productions has been immensely successful in getting great television series made in the UK.

The Committee’s Inquiry followed by Ofcom’s forthcoming broad review of public service broadcasting present an important opportunity to drive the changes necessary for public service broadcasting to continue to serve British audiences in future.

Key facts  More than £4bn investment in UK content in 2019 – an all-time high.  Non-PSBs contributing £1.75bn of this and growing.  In 2019 Sky announced that we would double our investment in original content over the next five years.

Introduction

Sky welcomes the opportunity to respond to the DCMS Select Committee call for evidence on the future of public service broadcasting. As both a major broadcaster and platform operator, Sky has a substantial stake in policy discussions around the future of the UK content sector.

This Inquiry is timely as it enables a realistic assessment of the current market context, including the impact that COVID-19 has had, in order to build an approach to government intervention in the broadcasting sector that is fit for the 21st Century.

The pace, scale and scope of change in the TV sector, driven by the delivery of content over the internet, is plain to everyone; it will not let up. This inquiry and Ofcom’s own PSB review are real opportunities to ask the big questions on how best to reshape the PSB system for the future.

After setting the sector in a wider context, and outlining Sky’s contribution to public service broadcasting, we set out an alternative vision for the future of public service broadcasting in the UK, which reflects the new environment we are in and increases the level of PSB delivery from across the sector in order to better meet the needs of increasingly fragmenting audiences.

1. The UK Content Sector

Investment in UK content is at an all-time high

The UK has a dynamic and competitive content sector that provides viewers with access to a vast array of original British programming, as well as a large range of programmes produced in other countries. By almost any measure, UK content is more widely available than ever before. Thanks to the near ubiquity of digital television platforms, the high rate of broadband penetration in the UK, and an explosion in online services from PSBs and non-PSBs alike, audiences enjoy an unprecedented level of choice. In tandem with this, investment in UK television production is at an all-time high, driven by a wide range of different channels and services, the variety of sources for funding content creation, and a highly developed production sector with a track record of world-beating creativity.1

These positive outcomes of huge audience choice and significant investment opportunities are fundamentally driven by the strong ‘mixed ecology’ of the UK’s audiovisual sector, which sees significant contributions from a variety of sources:

a. The PSBs, who together spend £2.6bn on original British content per annum.2 Licence fee funding gives the BBC the ability to deliver public service content that may not otherwise be commercially viable to produce3, while commercial PSBs receive significant regulatory benefits that allows for an advertising-focused funding model aimed at maximising audiences.

b. Growth in spend on new British programming has predominantly been driven by the multi-channel sector, which now invests more than £1bn a year in UK production.4 Sky’s own investments account for a significant proportion of this spend, creating high-quality British content across a wide range of genres.

c. Beyond this, a variety of other non-PSB sources – including new on-demand only players and production companies themselves – have provided additional funding, either through direct co-production investment or deficit financing. We estimate these additional contributions to be in the region of £650m.5

It is critical, therefore, that future policy in this sector is developed with a clear appreciation of its impact on the strength of the UK’s mixed ecology, rather than being narrowly focused on the impacts on PSBs.

Choice continues to increase as audience viewing fragments

The television broadcasting sector around the world is subject to rapid change, and the UK sector is no exception. Indeed, in many ways the UK is a world leader in terms of change in this area. The key driver of this change has been the virtuous circle of the ability to deliver high quality video over the internet, a proliferation of

1 Circa £4.3bn in total, with £2.6bn from the PSBs, £1.1bn from multichannel broadcasters, and an estimated £650m from other sources. See p34, Small Screen: Big Debate – a five year review of public service broadcasting, Ofcom, available at: https://www.ofcom.org.uk/__data/assets/pdf_file/0022/117256/CMR- 2018-narrative-report.pdf; COBA 2019 Content Report, available at: https://www.coba.org.uk/wp- content/uploads/2019/01/COBA-Content-Report-2019-Summary.doc; PACT Census 2019, available at http://www.pact.co.uk/asset/EB1DF9E3-A894-4098-8EFDC86EE6CCFE81. 2 Ofcom Small Screen: Big Debate. 3 This is supplemented by the BBC’s commercial returns from wholly owned subsidiaries such as BBC Studios. 4 Coba 2019 Content Report. 5 See Ofcom estimates for third party investment for PSB commissions in Small Screen: Big Debate (£400m) and PACT Census 2019 for SVOD investment estimates (£280m). online video services and ways of accessing those services, and the rapid expansion in the number of people able to access video in this way.

Some of the most important results of these developments include:

a. growth in viewing of TV programmes and movies ‘on demand’, rather than via scheduled, broadcast services or via physical media such as DVDs and BluRay discs, with significant differences in this growth across different demographic groups;

b. growth in viewing of non-traditional video content, predominantly via YouTube - for example short-form video produced by vloggers or tutorials on particular subjects, often produced by amateurs or semi-professionally. Again, there are significant differences in this growth across different demographic groups, with younger people watching significant amounts of this type of content;

c. increasing globalisation of video services, with firms able to offer a broadly similar service in many countries across the world;

d. entry into the audiovisual sector of new players, such as Google (via YouTube), Apple, Amazon and Netflix; and

e. massive growth in investment in high quality original content across a broad range of genres by new players in the sector.

While the PSB channels continue to drive more than half of traditional viewing, households are consuming content differently with on demand viewing growing rapidly. The proliferation of online video services available to consumers includes an increasing number that provide original content, much of it high quality, at relatively low price points. Consumers typically have the ability to ‘dip in and out’ of these services, for example by subscribing for a short period of time.

Major SVOD services available in the UK

Est. UK subscribers6 Monthly price Netflix 13m £5.99 (basic) Prime Video 8m £7.99 (bundled with free delivery service) NOW TV 2m £8.99 Britbox - £5.99 Apple TV+ - £4.99 Disney+ _ £5.99

6 BARB SVOD households, available at: https://www.barb.co.uk/tv-landscape-reports/tracker-svod/. As recently launched services, BARB does not yet publish data on Britbox, Apple TV+ and Disney+ Public service content is no longer just produced by the PSBs

Content of a public service nature is no longer simply produced by the PSBs. The key characteristics of public service content – high quality, original, innovative and challenging – are fulfilled increasingly by offerings from multichannel broadcasters, SVOD players and online content creators. Sky’s own role in this area is substantial and growing, to the point where our public service contribution is on a scale that is comparable to or in some cases greater than the PSBs.

Sky’s drive to increase investment in original British commissions was a direct reaction to the preferences of our customers. It is clear that audiences value local, relevant and authentic stories, and that in an increasingly competitive marketplace Sky needs to continue to deliver this in order to maintain our position as Europe’s leading media and entertainment company. UK content is less readily available to acquire, which necessitates direct investment in original production.

The results of this investment have been significant, and clearly demonstrate Sky’s contribution to UK’s cultural economy.

 Investment: we announced in 2019 that we plan to double our investment in original content by 2024.

 Volume: this year we will bring viewers 80 new Sky Originals, a 25% increase from 2019.

 Awards: a growing number of Sky originals have received critical acclaim and award nominations, including Chernobyl (winner of 10 Emmy awards and nominated for a record 25 BAFTAs), Save Me (Best Drama, Best Writer, RTS), Patrick Melrose (two BAFTA wins), Sally4Ever (BAFTA for Best Comedy), coverage of the Open (Best Sports Programme BAFTA) and The Art of Drumming (Best Arts Programme, RTS).

 News and current affairs: Unlike the PSBs, who have a requirement to provide news programming and are subsidised either by the public purse or through regulatory benefits, Sky News operates on a wholly commercial basis, making a vital contribution to news provision in the UK. The channel’s quality of coverage and editorial integrity have been frequently recognised, most recently with Sky News being named the News Channel of the Year by the Royal Television Society for a record-setting thirteenth time.

 Culture: Sky Arts remains the UK’s only dedicated arts channel, broadcasting hundreds of hours of original content each year. Through this we partner with a variety of cultural institutions, giving access to and broadcasting a breadth of diverse cultural events.

 Sport: Sky’s coverage of sport is well recognised, but our contribution goes beyond coverage of elite events, through initiatives such as Sky Sports Scholarships (support some of Britain’s most exciting athletes) and our partnership with the ECB to drive participation in cricket.  Production: One year ago we launched Sky Studios, our Europe-wide development and production business, and work continues on the development of our new TV and movie studio, Sky Studios Elstree. Sky Studios Elstree is expected to create over 2,000 new jobs and generate an additional £3 billion of production investment in the UK creative sector in the first five years alone.

 Platform: we also use our role as a platform operator to highlight key issues of public interest to our customers by collating programming from a variety of providers on a particular topic in dedicated sub-menus (for example Sky’s ‘Ocean Rescue’ campaign, or more recently content related to the Black Lives Matter protests).

In summary, non-PSBs, and Sky in particular, continue to produce an increasing range, quality and diversity of public service content without public subsidy or other forms of intervention. This directly contributes to the good outcomes and level of choice that British audiences currently face. Moreover as audiences continue to fragment – away from a world where almost all viewing was directed towards a small number of services – maintaining this wider provision of public service content will become increasingly critical in order to ensure that as many people as possible in society benefit from content of a public service nature.

COVID-19 has accelerated trends in the sector

The COVID-19 pandemic has resulted in some significant short-term challenges for all broadcasters, including the PSBs. It has also accelerated trends in the sector that were observable before the crisis.

In the short term, advertising revenues have been materially reduced, with 2020 Q2 figures as much as 40% lower on a year-by-year basis for some broadcasters.7 While the early signs of recovery in Q3 are promising, it is still too early to predict how quickly the ad market will return to its previous level, or if this economic shock will precipitate a more long-term structural shift. A reduction in advertising revenues affects all commercial broadcasters, but is particularly acute for FTA providers (including the PSBs) who rely solely or predominantly on advertising for funding.

Viewing habits have continued to change through lockdown, with an unsurprising surge in content viewing; in late March Sky saw the highest ever TV viewing among its customers, an increase of almost a third.8 Initially this included a significant rise in linear TV consumption, as the nation turned to news channels in their millions in order to stay informed. However, since then, whether because of the easing of lockdown or news fatigue, linear audiences have declined back to levels broadly in line with where they were prior to the pandemic. In contrast, the increase in ‘unmatched’ viewing to the TV set – typically streaming services – has been partially retained, and at the end of May were still a third higher than at the same time in

7 See ITV figures reported here: https://www.theguardian.com/business/2020/may/06/itv-reveals-scale-of- covid-19-impact-due-to-advertising-losses. 8 Sky data, available at: https://www.skygroup.sky/en-gb/article/sky-identifies-top-trends-among-viewing- habits-in-lockdown. 2019.9 Lockdown appears to have catalysed a step change in online viewing which may end up being permanent.

COVID-19 has also underlined the importance of public service content delivery from a variety of sources. Sky News saw a more than 200% increase in its viewing at the end of March, reaching more people than ever before across its various platforms. A number of broadcasters have run public awareness campaigns during the crisis – including Sky’s comprehensive children’s home-learning package, UKTV’s Dave partnering with suicide prevention organization CALM, Discovery partnering with WHO on a public awareness campaign and Nat Geo making a range of educational resources available. Similarly, Netflix released a range of entertainment and documentaries for free on YouTube. Meanwhile the first day of YouTuber Joe Wicks’ virtual PE class during lockdown was viewed nearly 7m times. As audiences continue to fragment, it is apparent that a wide variety of providers far beyond the PSBs are delivering public service content during the pandemic.

2. Sky’s vision for the future

The UK’s public service broadcasting system emerged over fifty years ago in a time of relative stability in the television sector and has evolved gradually. But the scale, scope and pace of change in the sector today require a fundamental review of that system to ensure that it remains appropriate for the 21st Century.

Given the prevailing trends outlined in section 1 – an increase in investment in high quality UK content, driven primarily by non-PSBs; a continued shift in viewing as audience choice increases; and significant pressure on advertising revenues as the effects of COVID are felt – it is plain that the existing system needs to adapt. In particular, it would be a mistake to continue to focus interventions on only a handful of broadcasters. Such an approach will likely result in a diminished return on public value as audiences continue to fragment in favour of other content sources. Instead, there is a need to revise the regulatory framework in a way that seeks to support, incentivise and grow the contribution from across the entire sector.

Our vision of the future builds on the best of what we have today, with tough competition among a range of different players and business models delivering great outcomes for UK viewers. It includes a strong public sector offering combined with continued strength in private sector delivery, which includes firms like ITV, ViacomCBS/Channel 5, Sky, Discovery, and Netflix. This is supported by targeted Government intervention that is accessible to a whole range of providers, increasing the breadth of public service provision, driving innovation and investment, and reaching a greater proportion of UK audiences.

The existing system should evolve to increase the breadth of delivery of public service content

9 See Week 22 2020, BARB. Currently, there are a number of ways that public service objectives in the TV sector are delivered in the UK:

1. Provision of content and services by State owned (and in some case State funded), not-for-profit entities in the BBC, Channel 4 and S4C, with different objectives to purely commercial, profit-driven companies; 2. Provision of in-kind subsidies and other transfers of value to the holders of two broadcasting licences (the Channel 3 and Channel 5 licences), in return for the delivery of public service content that would not otherwise be provided; and 3. Horizontal’ cross-sector interventions such as tax credits, contestable funding etc that may have criteria attached but are open to all providers.

We consider that the BBC and Channel 4 with continue to drive an important level of public value as significant, direct interventions in the market. In contrast there is diminishing value in privately owned PSBs, over and above what these broadcasters produce on a commercial basis. Meanwhile horizontal interventions offer policymakers the greatest opportunity in the future, with a number of approaches that could bolster the delivery of public service content across the entire sector, driving innovative approaches to programming and, crucially, reaching a greater proportion of UK audiences.

The role of the BBC and Channel 4

The BBC and Channel 4 are designed to be the bedrock of the public service broadcasting sector, driving a substantial contribution in public value. With highly distinctive remits (such as the prohibition on programme making in the case of Channel 4) and the constraints of the resources available to them (the Licence Fee in the case of the BBC, and advertising and sponsorship revenues in the case of Channel 4), the primary focus of their operations should be to maximise the public value that they deliver.

Whilst we do not believe that there is a sound case for expanding either the remits or the scale of these public interventions, which are already broad and substantial, we consider that they serve a vital role in the UK broadcasting ecology.

Channel 3 and Channel 5 licences

The commercial, private sector PSB regime is established via the Channel 3 and Channel 5 broadcasting licences, which include rights and obligations over and above the standard TV channel licences held by all other broadcasters (except the BBC and Channel 4).

The Channel 3 and Channel 5 licences were developed in a very different TV landscape. Becoming only the second and fifth channel respectively available to much of the UK population, the model of designating privately owned, profit driven broadcasters as ‘public service broadcasters’, and providing them with in-kind subsidies and other transfers of value made sense at the time – particularly to create competition to the BBC in the case of the original Channel 3 licences. However, in the radically different world that now exists, this model provides limited additional value.

Firstly, as outlined above, there is significant and growing production of content that meets Ofcom’s definition of ‘public service content’ that is produced by companies other than the commercial PSBs, such as Sky, Discovery and Netflix.

Secondly, as Ofcom has previously concluded (and independent analysis has subsequently verified), it is likely that ITV and Channel 5 would continue to produce and broadcast almost all the content they broadcast today regardless of whether they were PSBs or not.10 Nearly all the ‘obligations’ included in the Channel 3 and 5 licences, which have been significantly pared back over time, are commercially profitable activities.

There is limited value, therefore, in seeking to drive significant public policy objectives through this model of privately owned PSBs. Indeed, it may be the case that even the programming these channels produce which would not be purely commercially viable – namely regional news and other content production outside the M25 – would be more effectively delivered by the types of intervention described in the following section.

Increasing cross-sector interventions

Given the continued growth in both investment and output by non-PSBs, it is likely that several of the outcomes that the commercial PSB regime seeks to deliver are now better suited to ‘horizontal’ policy initiatives which are open to all providers. We consider that there is a strong case for greater use of Government-led cross- sector policies in the audiovisual sector, particularly in view of its significant and growing economic importance in addition to its longstanding cultural and societal significance.

Cross-sector policies that apply to all firms in the sector have many advantages over narrower approaches including:

 they are often more flexible (for example, being able to be changed, wound up or initiated without primary legislation);

 there are many different policy instruments that can be used;

 they do not distort competition among firms in the sector, since the opportunities they present are available to all; and

 they are more transparent and therefore clear in what Government support is being provided, and what is being delivered in return.

In some respects, policy is already moving in the direction of greater use of horizontal intervention available to all. For example, the government has recently established a contestable fund for the production of public service children’s

10 Ofcom’s review of the Channel 3 and Channel 5 licences, 2013. programming, and the system of tax credits for ‘high end’ TV productions has been immensely successful in getting great television series made in the UK.

Selected horizontal policies in the UK audiovisual sector  Young Audience Content Fund  High End TV tax credit  Film and TV apprenticeships pilot scheme  The Creative Industries Council, a joint Government/ industry forum  Creative Industries sector deal (part of the Government’s broader industrial strategy)

Given the existing framework, coupled with an increase in British programming produced on a purely commercial basis from a number of sources, outcomes for UK audiences are likely to be positive even absent further intervention. But where policymakers identify a clear shortfall in the provision of certain types of desirable content, there are a variety of options that could be considered, including:

 contestable funding – funding pots that are open to all and allocated based on the strength of proposition. As with the Young Audiences Content Fund, policymakers could attach criteria to this funding in order to ensure a particular level of availability or certain programming characteristics;

 tax incentives – tax incentives have been used widely in the film industry across Europe and, more recently, for high-end TV content in the UK. Such schemes effectively reduce the cost of a programme to the commissioning broadcaster by offering tax credits to the producer, enabling them to claim back a portion of their qualifying production spend. Reducing the costs to commercial broadcasters can increase the gross margins such programmes achieve, helping to maintain their viability;

 franchise models – public funds could also be allocated via a franchise model – direct funding to provide a subsidy to a specific company to support a particular type of programming. For instance, a franchise model could be an appropriate approach for breathing new life into an important element of the UK broadcast ecology – providing competition to the BBC’s regional news service. Rather than continue to assign this responsibility to the holder of the Channel 3 licence – an approach provides little incentive to create a truly distinctive or innovative service – an award process could be held for the service, open to all, with clear specification of the core requirements, and with a defined duration for the franchise (for example, for five years). There would be clear benefits from such a process. Competition for franchises can be expected to deliver strong, innovative proposals for creating and delivering this content, from a variety of players (likely to include ITV). Proposals can be evaluated against criteria that take into account qualitative aspects as well as cost. It is likely to result in a better product being delivered to UK viewers, and drive broader exposure of UK citizens to regional news.

In summary, there is significant value to maintaining a thriving sector via well- targeted industry-wide approaches. Supportive Government policy in other areas

At the same time, it is critical that Government policy more generally is supportive of the UK audiovisual sector, particularly in relation to issues that have the potential to impose asymmetric burdens on the sector vis à vis online services. This includes addressing asymmetries in relation to advertising rules, and not imposing new asymmetric burdens, for example in relation to HFSS advertising.

There is no sound rationale for further privileges being granted to PSBs

Policy discussions around the future of the UK content sector invariably presents an opportunity for the incumbents to assert that the public value they provide is in peril unless they are given substantial additional new benefits. Given that the strength of the UK system is derived from the mixed ecology, policymakers should resist demands that would be directly harmful to the non-PSB sector – the biggest source of growth in investment.

The BBC and Channel 4 are already significant interventions in the market, and there is no good reason for expanding their scale or scope.11

In the case of ITV and Channel 5, as discussed above, the current balance between the value of the privileges they receive and what they deliver in public value may already be disproportionate. There can be no good reason for adding to the commercial benefits that they receive, particularly at the expense of other operators in the sector. Indeed, given the limited extent to which the current PSB obligations in these licences ‘bite’, policymakers should seek ways of extracting greater commitments from the licensees to the delivery of public service content.

Much of the rhetoric around the need for increased public support for these businesses is associated with claims that they are unable to compete effectively as competition in the sector intensifies, for example with the expansion of companies like Netflix. Sky considers that these assertions are exaggerated and, in any case, we agree with Ofcom that there is more that the PSBs can do to help themselves, particularly via partnerships both with each other and other important players, including Sky. Sky remains a vital partner for the PSBs and we value highly the positive commercial relationships that we have established with Channel 4, Five and the BBC, which bring significant value to Sky and those PSBs.

PSBs should look to make their content as widely available as possible

From an availability perspective, it appears that a key response for some PSBs to the arrival of new competitors such as Netflix has been to attempt to directly replicate an OTT, direct-to-consumer model for their content on an exclusive basis. The danger with this approach, as opposed to one where PSB commissioned content is

11 We recognise that these broadcasters, like all broadcasters, face challenges as a result of the increased competition posed by new online services, reducing levels of viewing of their services by young people, and the growth in on-demand viewing. We do not however believe that these challenges require greater levels of Government assistance to be provided to the PSBs. The PSBs have faced, and successfully addressed, significant challenges of this type in the past. There is much that they can do within their existing resources – both individually and in partnership with other operators – to overcome these challenges made available in the secondary rights window through a variety of outlets, is that it limits the potential audience of viewers who will access this content in future. This in turn reduces the public value that may be delivered.

Sky believes that viewers should be able to watch what they want, how they want, with platforms free to strike commercial deals with content producers and innovate wherever possible. We consider that PSBs should be working with platforms to make this possible, making popular content more accessible, rather than seeking to restrict it. We hope that upcoming Ofcom reviews – both of the PSB system in general and of the BBC’s commercial activities – consider and address this issue.

Sky June 2020