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Market Impact Assessment of the BBC's Local Video Service

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Market Impact Assessment of the BBC's Local Video Service Market Impact Assessment of the BBC’s Local Video Service This is a non-confidential version of the statement. Redactions are indicated by “[ ]”. Statement Publication date: 21 November 2008 Market Impact Assessment of the BBC’s Local Video Service Contents Section Page 1 Executive Summary 1 2 Overview of analysis and conclusions 3 3 Introduction 34 4 Market research, modelling and take-up 39 5 Local and regional newspapers and associated web services 50 6 Local radio stations and associated web services 83 7 Regional TV and associated web services 106 8 Local TV and associated web services 120 9 Mobile TV services 126 10 Other relevant services 138 11 Possible modifications to the BBC proposed service 148 Annex Page 1 Joint BBC Trust / Ofcom description of service 159 2 Terms of Reference 175 3 Market research – regression analysis 178 4 Modelling approach and assumptions 184 5 Broader static impact on consumer and producer surplus 198 6 Framework for assessing dynamic impacts 208 7 Summary of stakeholder submissions 210 Market Impact Assessment of the BBC’s Local Video Service Section 1 1 Executive Summary 1.1 Ofcom (the Office of Communications) undertakes a market impact assessment (“MIA”) as part of the BBC Trust’s Public Value Test (“PVT”) regime to assess whether the BBC’s proposals to launch new services, or to amend existing services, would be in the wider public interest. The MIA, which is carried out independently by Ofcom, assesses the likely impact of proposed BBC services on commercial providers. The MIA does not consider whether the proposal meets the BBC’s public purposes in terms of likely value to licence fee payers. This is considered separately by the BBC Trust in its Public Value Assessment (“PVA”). 1.2 This MIA looks at the BBC Management’s proposal to launch a Local Video service. The proposed service would offer an enhanced version of the “BBC Local” websites (part of the bbc.co.uk website) and would be available on any internet enabled device. The service would provide local news, sports and weather in 60 geographic areas across the UK, with an additional five Welsh language news sites. 1.3 Our analysis has considered the potential impacts of the proposed BBC Local Video service on: local and regional newspapers and their associated web services; local radio stations and their associated web services; local and regional TV services and their associated web services; mobile TV services; and other relevant services (including third party content providers, journalistic services, and Welsh language services). 1.4 Overall, we conclude that the launch of the proposal would have a significant negative market impact on commercial providers. We expect the impacts on these services, as they are currently provided, to be no more than about 4% of annual revenues. However, our main concerns are about the effect of the BBC’s proposal on future commercial innovation in online local news, sports and weather services. 1.5 Even in the absence of the BBC proposal, commercial prospects in these sectors are highly uncertain; a central issue being whether local online news services will be able to generate sufficient advertising revenues. Despite this, there are strong ambitions on the part of commercial providers to develop these areas of their business. Indeed almost every local newspaper now has its own website, although these vary widely in terms of numbers of stories, presentation, and the use of video content. The BBC Local Video service would represent a major presence in this area, and is likely to be of significantly greater scale than commercial providers could offer. Moreover, the current cyclical downturn in the economy means that the damaging effects of this proposal on commercial providers would be particularly acute if launched at this point in time. 1.6 Given the potentially adverse effects identified, we have looked at ways in which the proposal could be modified to limit those impacts and increase the overall net benefits of the proposal i.e. reduce the market impact without having a correspondingly negative effect on public value. 1.7 We conclude that there are only a very limited number of potential modifications to the proposal which the Trust might want to consider in order to mitigate its market impact. These are to: 1 Market Impact Assessment of the BBC’s Local Video Service • Give consideration to timing. Firstly, to consider whether roll out should be deferred to a point in the economic cycle when advertising revenues, which will be critical to the viability of competing commercial propositions, have returned to more normal levels. Secondly, to consider whether there is value in the BBC Management resubmitting a proposal for a similar service sometime in the future, once the commercial sector has had the opportunity to invest and test the commercial sustainability of their online services; and • Encourage links to external websites to improve the degree to which the proposed services could be made more complementary to commercially-offered sites, by setting and monitoring a key performance target relating to the proportion of users of BBC Local sites that click-through to those of commercial operators. 1.8 We do not believe, however, that these modifications would be sufficient to offset the negative market impacts we have identified. Therefore, in our view, the PVT should turn on whether there is a strong public value finding in the BBC Trust’s PVA. 2 Market Impact Assessment of the BBC’s Local Video Service Section 2 2 Overview of analysis and conclusions Introduction 2.1 The current BBC Royal Charter and Agreement, which came into effect on 1 January 2007, established a Public Value Test (“PVT”) regime to assess whether the BBC’s proposals to launch new services in the future, or to amend existing services, would be in the wider public interest. 2.2 As part of the PVT, Ofcom carries out a Market Impact Assessment (“MIA”), the purpose of which is to assess the likely impact of the proposed services on products and services which are substitutes or complements for the proposed BBC Local Video service. 2.3 This section sets out an overview of the analysis and conclusions of Ofcom’s fourth MIA. It considers the market impact of the BBC’s proposed Local Video service. The MIA has been conducted in accordance with the Terms of Reference agreed by the Ofcom-BBC Trust Joint Steering Group, and with the MIA methodology agreed between Ofcom and the BBC Trust.1 Overview of approach 2.4 Predicting the future in any market is necessarily subject to a high degree of uncertainty. In undertaking an MIA, this uncertainty is compounded, as an assessment of the future take-up of the BBC Local Video service, and how take-up will impact on demand for other services, needs to be made against projections of the future development of affected services in the absence of the BBC proposal. 2.5 Our approach aims to capture this uncertainty by developing a range of plausible scenarios of the potential impact of the BBC proposal. The uncertainty is explicitly recognised in drawing out implications and conclusions. 2.6 Under Ofcom’s standard approach to MIAs the first stage of the analysis is to identify the products and services likely to be affected by the BBC proposal. This analysis, which was based on our understanding of the markets affected and on stakeholders’ views, led us to identify the following services: • local and regional newspapers and associated web services; • local radio stations and associated web services; • local & regional TV services and associated web services; • mobile TV services; and • other relevant services (under which we cover third party content providers, journalistic services, and Welsh language news services). 1 Methodology for Market Assessments of BBC Services, 22 May 2007, available at http://www.ofcom.org.uk/research/tv/bbcmias/statement/statement.pdf 3 Market Impact Assessment of the BBC’s Local Video Service 2.7 There are three main elements to the MIA: • an assessment of likely take-up of the BBC’s proposed service; • an assessment of the current and future prospects of the affected products and services in the absence of the BBC proposal (“the counterfactual”); and • an assessment of the impact of the proposed BBC Local Video service on demand for affected products and services. 2.8 Drawing these together allows us to reach overall conclusions of the market impact of the proposed service. Assessment of impact 2.9 In assessing the potential impacts of the proposed service we have considered the: • Static impacts – the effects of the BBC Local Video service on affected services, without taking account of how other service providers might respond over time. In simplified terms, these are the impacts on other parties resulting from the BBC Local Video service either taking existing consumers away from the affected services, or from becoming users of those services; and • Dynamic impacts – the effects of the BBC Local Video service on affected services, once they have adjusted their behaviour in response to the BBC Local Video service. In the current context, these may be in the form of increasing quality of service in response to entry from the BBC Local Video service or in terms of reduced investment, innovation or exit to the extent that the BBC Local Video service reduces potential revenues and profits. Take-up 2.10 It is inevitably difficult to predict take-up of a new service accurately. Ideally, we would rely on a pilot of the service to inform take-up and also impact on demand for affected products and services. The BBC Management conducted a trial in the West Midlands in 2005 for nine months but the service was primarily a satellite and cable based offering although some elements were also available on broadband.
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