Speeches
MICHAEL GRADE SPEECH TO RTS PATRONS BREAKFAST
23/05/2007 We have a long and proud history of universality in the core civic and cultural life of our country. Universality has been the key to public service broadcasting in the UK for decades. As a nation we have made the transition from radio, to television, from black and white to colour and we are now embracing digital television. The PSBs have led this progression and citizens across the UK, rich and poor, young and old have participated in return for nothing more than the price of the licence fee and the most basic terrestrial receiving equipment.
It is this tradition - this equality of participation in the life of our nation - which has given us a powerful fear of the divides created by unequal access to the benefits of new technology. Freeview has done more than anything else to bring equal access to the benefits of digital multichannel television in the UK. And of course, after switchover, free access will be almost universal. But just as one digital divide is closing another is potentially opening up as High Definition television begins to take hold worldwide.
Make no mistake, the world is moving to High Definition technology, not simply for television but for many devices which use TV screens.
It seems very clear to me that if we are to maintain our leading position in television worldwide our industry urgently needs a clear domestic imperative to justify a significant investment in HD production across most genres of programming. I don’t think I am overstating it to suggest that the alternative is sub-optimal investment in HD production and a significantly weakened place for the UK in the global market.
But let me tell you what frightens me most. Last year nearly 2.4m HDTVs were sold in the UK, five times as many as in 2005. The market research analysts GFK predict that by the end of 2010 80% of households will have an HDTV. In practice the whole market is at the point of tipping to HD. At the same time of course, consumers are continuing to buy into DTT in large numbers too and it is already the UK’s largest TV platform.
The warning lights for policy makers should be flashing red. For instance, recent independent market research for Freeview shows that most Freeview users buying HDTVs expect to get HD television services via, Freeview in the future and they expect Freeview to keep up with technological advances. And this expectation is not confined to digital households - 42% of people who had not even converted to digital television expected Freeview to keep up to date with technology. These expectations reflect both the profile and importance of DTT but above all the ingrained belief that PSB will continue to embrace mainstream developments in technology and be available to all via the cheapest possible terrestrial means.
The trouble is that in due course these people are likely to be bitterly disappointed.
Ofcom’s proposal that the released spectrum should be offered to all comers in an open auction doesn’t of course stop us from bidding for the capacity. But there is no obvious significant incremental revenue opportunity from simulcasting ITV1 in HD and no evidence from the US or Canada that advertisers are prepared to pay more for HD. Moreover, we would be competing in an auction with, amongst others, pay-TV and mobile providers who could pass any spectrum bid directly on to customers. And remember, the cost of spectrum is in addition to the costs of simply transmitting an HD channel which are likely to be in the tens of millions.
But worse than this, the 3G process demonstrated that in auctions of scarce resources such as spectrum, bidders may bid more than is rational - in the case of 3G up to four times what could have been justified rationally in the auction. It is risky enough to enter an open auction without an incremental business model by which we could judge the level of a rational bid but if we also sought to compete effectively against potentially irrational bidders, we believe we would have to commit a fair chunk of our programme budget to guarantee that we could provide an HD service with universal access on DTT.
I’ve operated in commercial markets for most of my career and I have learned a couple of things about them. First, that markets tend to work pretty well for people as consumers but often rather less well for people as citizens. The second is that markets fail because they take no account of externalities which cannot be factored into cash bids at auction.
Rather than leave the fate of HD on DTT to an auction what we suggest is that the UK builds on the approach to digital switchover both here and in the USA. Lend the PSBs a little over a multiplex of capacity and by broadcasting in HD we will help to drive the transition to a more efficient transmission standard on DTT, helping to increase the capacity of the platform and bringing original UK produced content in HD to everyone in the UK. In due course, once HD compatible boxes are sufficiently widespread, we will give the loaned spectrum back and it can be auctioned. Even if you did this Ofcom would still be able to auction nearly two thirds of the released spectrum now which would give plenty of space for successful bidders to develop mobile TV, Wifi and so on.
I don’t think if you took this approach and made less spectrum available to the market in the next couple of years, that the government would necessarily take a big financial hit in terms of auction proceeds. If there is little demand for the spectrum then little would be lost through reserving some of it for the PSBs. By contrast, although I admit it is difficult to model with any certainty, my rudimentary understanding of economics suggests that if there is significant demand for the spectrum and some supply is taken out the price of the spectrum which remains in the auction should rise, possibly substantially.
Ofcom have suggested that there will, in theory, be additional capacity on the DTT platform at DSO sufficient to provide a number of HD services. Frankly, we don’t disagree with them that there will be additional capacity and there isn’t that much between us about how much capacity might in theory be available. But here’s the difficulty, Ofcom have not given any real thought to how the PSBs might obtain this additional capacity to actually provide our HD services.
For the BBC there is an easy win - they may have enough additional capacity for one HD service on their existing multiplexes. But one PSB service is likely to fall far short of what the people who have gone out and invested money in HD equipment will expect.
The other new capacity on DTT will for the most part not actually belong to the commercial PSBs or the BBC and it is spread between different multiplexes. We cannot see how this spectrum could be lawfully mandated to the PSBs under existing legislation. In addition assembling the spectrum commercially and reshuffling channels between multiplexes in separate ownership to bring sufficient spectrum for an HD service onto a single multiplex appears to us to present insurmountable practical, legal and financial hurdles.
In short, we shouldn’t let the theoretical possibility of additional capacity on the DTT platform fool us into thinking that the PSB services in HD are likely to be provided in this capacity on the DTT platform. In practice, there is every chance that they won’t.
I know Secretary of State that you see the enormity of the decision we and particularly you face here and, I hope, the danger of the DTT platform becoming a sort of welfare TV platform, confined for ever to the technology of the 20th century. I would ask you all to imagine the consequences for our national life and our position as arguably the greatest creator of television in the world if we had never moved from black and white to colour -- itself by the way a technology which was referred to in the press in the early days as "little more than a rich man’s toy".
The difficulty we all face is that this is a slow burn issue. By the time that most people wake up and really realise the significance of HD and the fact that they won’t get the PSB channels in HD on DTT any time soon, it will be too late, the spectrum will be gone. The millions who, by switchover, have invested in DTT and in HD televisions will discover that they backed the wrong horse. And they won’t be happy. But we are in the position to head this off if we act now and some spectrum is made available for a period to allow the PSB channels to broadcast in HD.