ITC And Ofcom Joint Briefing – ITV Merger Announcement
The investigation into the proposed merger between Carlton and Granada was led by the competition authorities, who invited the ITC and Ofcom to contribute their views as part of that enquiry.
The competition authorities then considered the regulators’ views – as well as the views of other organisations – before making their recommendations to the Secretary of State.
The Secretary of State was then required to decide whether the merger should proceed; and if it should proceed, to decide which pre-conditions should apply.
Given the Secretary of State’s decision today, the ITC, Ofcom and the Office of Fair Trading will now be required to implement the terms of the pre-conditions proposed – subject to Carlton and Granada’s acceptance of them.
This joint ITC/Ofcom briefing is intended to explain how the proposed pre-conditions would work in practice.
What has the Secretary of State decided?
The merger of Carlton and Granada has been approved by the Secretary of State on condition that the companies abide by a set of rules to protect the advertising community from unfair or discriminatory practices in the selling of television airtime.
The two companies must also abide by a set of rules to protect the other ITV companies – Ulster TV, Scottish, Grampian and the Channel Islands broadcaster, Channel. These obligations are explained later in this briefing.
The ITC and Ofcom, working with the OFT, have been charged with putting these rules in place, in discussion with Carlton and Granada.
In the light of the Secretary of State’s decision, the ITC and Ofcom will today begin a review of the ITC’s Airtime Sales Rules, which apply to all UK commercial television broadcasters on terrestrial channels, satellite and cable. The joint ITC/Ofcom Consultation on Airtime Sales Rules begins now. There are more details later in this briefing.
Protection for the advertising community
When the merger of Carlton and Granada was first proposed, the advertising community – who spend a large proportion of their budgets with ITV – expressed disquiet about the extent of market power the merged company would enjoy.
The Competition Commission considered these views and concluded that there would be a detriment to the public interest in the advertising airtime market unless a suitable remedy were found. As a consequence, Carlton and Granada will only be allowed to merge on condition that they agree to the terms of a new regulatory mechanism called the Contracts Rights Renewal (CRR) remedy.
If Carlton and Granada agree to rules that are acceptable to the Secretary of State and the merger therefore proceeds, the newly-merged entity would enable ITV to combine its strengths. This has the potential to deliver important public benefits: a reinvigorated ITV will secure the future of the UK’s leading commercial broadcaster for the benefit of all viewers and allow it to sustain its public service broadcasting obligations for the long-term.
However, the imposition of the CRR remedy by the Competition Commission acknowledges the concerns of the advertising community by safeguarding companies purchasing airtime from the newly-merged Carlton-Granada.
This protection applies to both advertisers – companies who enter into advertising agreements with broadcasters directly – as well as media buyers – intermediaries who buy television airtime on advertisers’ behalf. The maintenance of fair and effective competition in the television advertising market is also an important policy objective for the ITC and Ofcom.
The ITC, Ofcom and the OFT will jointly develop the Contract Rights Renewal remedy between now and November. Ofcom will then administer the remedy once the new communications regulator is vested with its full powers on 29 December 2003 and the Communications Act 2003 comes into force.
Carlton and Granada may not begin to merge their operations or jointly sell airtime until the Contracts Rights Renewal remedy is in place, the Communications Act is in force and sufficient safeguards have been introduced to protect the other ITV companies. It is anticipated that these conditions will have been met by 29 December 2003.
The Competition Commission has also recommended that the ITC and Ofcom should consider a review of the overall UK television advertising market in due course.
What is the Contract Rights Renewal remedy and how does it work?
Carlton and Granada jointly attract more viewers than any other commercial channel in the television advertising market. With more than half of total television advertising revenues, the newly-merged ITV could have significant influence over the ability of advertisers and media buyers to negotiate contracts fairly and effectively.
The Contract Rights Renewal remedy addresses that risk by imposing three main conditions:
by guaranteeing that advertisers and media buyers will be no worse off following the merger than before
by putting in place an automatic “ratchet” – a linkage which will reduce the amount advertisers will have to commit if ITV’s audience shrinks
by establishing an Adjudicator to make sure that fair competition prevails.
Condition #1: the advertising community is no worse off
The remedy caps the maximum commitment from advertisers to ITV. It gives advertisers and media buyers the right to renew their current contracts with Carlton and Granada in future with no increase in the share of their spend that they commit to ITV and no reduction in the discounts they receive.
From now until the remedy is no longer necessary, the share of revenue committed by advertisers and media buyers on television advertising to Carlton-Granada need not increase above 2003 levels.
Condition #2: advertising terms are linked to audience share performance
If the merged Carlton-Granada’s audiences shrink, advertisers will automatically be able to reduce the proportion of their spend they give to ITV. This linkage is a simple, proportionate ratchet, defined within the remedy as a contractual commitment on Carlton and Granada and overseen by Ofcom throughout the remedy.
The ratchet offers both added protection to advertisers and media buyers as well as a powerful incentive to the merged Carlton-Granada to produce compelling programming of widespread appeal to UK viewers.
Condition #3: The Adjudicator
The role of the Adjudicator is to ensure that Carlton-Granada respond fairly when the demands of advertisers or buyers change from time to time. The Adjudicator will act as an expert to determine the outcome of disputes between Carlton-Granada and its advertising customers.
The ITC and Ofcom (with input from industry representatives) will appoint an Adjudicator, with a strong background in the television advertising market, to act as an expert should there be any disputes between an advertiser or media buyer and the merged Carlton-Granada.
The Adjudicator will be a single individual, employed on a part-time basis with budget for support staff and consultancy if required. He/she will be based at Ofcom’s Riverside House headquarters but will be independent of Ofcom. Ofcom will pay for the costs of the Adjudicator in the first instance and will be reimbursed by Carlton-Granada.
In examining a dispute the Adjudicator will have access to all of the merged Carlton-Granada’s contracts and trading information. His/her decisions will also be final and binding on Carlton-Granada. Advertisers and media buyers will have a right of appeal to Ofcom under defined circumstances and thereafter to the courts if required.
Next steps on the Contract Rights Renewal remedy
The ITC, Ofcom and the OFT will work with the broadcasters and the industry to ensure that the Contract Rights Renewal is a successful remedy, balancing the guarantee of protection for the advertising community, the protection of their ability to negotiate with Carlton and Granada and the ability of the newly-merged Carlton-Granada to deliver benefits to viewers.
Protection for other ITV companies
In addition to the protections for advertisers and media buyers, Carlton and Granada will be obliged to abide by rules to protect the other ITV companies – Ulster TV, Scottish, Grampian and the Channel Islands broadcaster, Channel.
These rules will enable the other ITV companies to continue meeting their public service broadcasting commitments. Acceptance of these rules by Carlton and Granada is a pre-condition of the merger going ahead.
Currently the regional ITV companies which make up the national ITV Network can vote to determine the strategy and budgets of the ITV Network as a whole.
The merged Carlton-Granada would have approximately 90% of the voting power within the ITV Network. As a result, the competition authorities and the Secretary of State have recognised that the other ITV companies must be protected through a number of merger pre-conditions. These include:
An adequate say in the overall strategy of the ITV Network
The other ITV companies’ views must be taken into account in setting strategy for the ITV Network. The Network Council must be convened at least twice a year to consult the other ITV companies and to inform them of the broadcasting and programme strategy for the Channel 3 network.
Contribution to ITV Network costs to be capped
The contributions of the other ITV companies to the ITV Network Programme Budget should not increase by more than the rate of inflation.
Protection for programme compliance services
Programme compliance services enable production companies to ensure that programmes destined for the ITV Network meet agreed quality control standards prior to transmission. A number of ITV companies offer these services to production companies. Carlton-Granada will be prevented from obliging programme-makers to use the merged company’s compliance services exclusively.
Protection for programme production
Several ITV companies have programme production units which produce material for broadcast on the ITV Network. The extent of original programming (measured in network hours) commissioned from the other ITV companies will be monitored and reported annually to Ofcom.
Additional Ulster TV provisions
If Ulster TV’s local programme obligations were to be changed as a result of devolution in Northern Ireland, it will be permitted to opt-out of the ITV Network schedule on the same terms as are available to Scottish and Grampian.
‘Clean feed’ provisions
The other ITV companies will receive a ‘clean’ broadcast feed that does not contain end credits and other promotions for Carlton-Granada.
Consultation on the ITC’s Airtime Sales Rules
At present, the ITC seeks to ensure fair and effective competition in the advertising sales market by means of the Airtime Sales Rules 2001, which all commercial TV broadcasters are obliged to comply with. Amongst other provisions these state that none of the major television broadcasters may combine their sales activities to sell airtime jointly.
If Carlton and Granada agree to rules that are acceptable to the Secretary of State and the merger therefore proceeds, as a natural consequence of the merger decision the Rules which prohibit such joint sales activity now need to be reviewed.
It may also follow that, in light of the merger, other broadcasters similarly could be allowed to combine their airtime sales activities.
The ITC and Ofcom now wish to consider whether to have any revised Airtime Sales Rules or whether to rely upon competition law alone. Under competition law, any practice which could prevent, restrict or distort competition would be carefully examined by the OFT and/or Ofcom.
The regulators will therefore today begin a joint review of the ITC’s existing Airtime Sales Rules. That joint review will cover the entire UK television advertising market, embracing airtime sales on all terrestrial, satellite and cable broadcasters.
The closing date for consultation will be 14 November 2003 and the ITC and Ofcom intend to publish their conclusions by 29 December 2003.