1. Paying for Public Service: Advertising revenue in a competitive market Jamie Cowling June 2003

2. Historical Bargain: Rights and Responsibilities 1955-1956 – ITV1955-1956 – ITV For-profit network granted an advertising monopoly in return for public service obligations. 1982 – Channel 41982 – Channel 4 not-for-profit public service broadcaster. 1990 – Commercial competition begins1990 – Commercial competition begins 1996 – Channel 51996 – Channel 5 Second for-profit commercial public service broadcaster, some positive content obligations.

3. A plurality of public service? Assumption has been that public service content is a cost on for-profit broadcastersAssumption has been that public service content is a cost on for-profit broadcasters Has increased competition meant that the historical bargain is breaking down?Has increased competition meant that the historical bargain is breaking down? Assuming Government want a plurality of public service content providers how best should this be achieved in the future?Assuming Government want a plurality of public service content providers how best should this be achieved in the future?

4. ITV Share of Total Audience All Homes against Share of Net. TV Advertising Revenue Source: BARB; OMD UK

5. Channel 4 Share of Total Audience All Homes against Share of Net. TV Advertising Revenue Source: BARB; OMD UK

6. Five Share of Total Audience All Homes against Share of Net. TV Advertising Revenue Source: BARB; OMD UK

7. All Multi-Channel Share of Total Audience All Homes against Share of Net. TV Advertising Revenue Source: BARB; OMD UK Note: Includes BBC; ITV2; E4 etc.

8. Does declining share mean declining revenues? It is possible that increased supply of advertising space may stimulate demand for space by lowering barriers to entry and encouraging new market entrants.It is possible that increased supply of advertising space may stimulate demand for space by lowering barriers to entry and encouraging new market entrants. The ability of a commercial broadcaster to deliver on PSB obligations is not immediately linked to share of revenue but to costs of production and total net. revenue.The ability of a commercial broadcaster to deliver on PSB obligations is not immediately linked to share of revenue but to costs of production and total net. revenue.

9. Total Real Terms NAR UK 1996 – 2002 (£ millions – 2001/2002 Market Prices)

10. ITV (+ GMTV) – Share of Total Audience all homes against Real Terms NAR Source: BARB; OMD UK

11. Channel 4 – Share of Total Audience all homes against Real Terms NAR Source: BARB; OMD UK

12. Five – Share of Total Audience all homes against Real Terms NAR Source: BARB; OMD UK

13. Total Multi-Channel – Share of Total Audience all homes against Real Terms NAR Source: BARB; OMD UK

14. Summary 1 Demand for advertising space on mass broadcasters is closely linked to the state of the wider economy.Demand for advertising space on mass broadcasters is closely linked to the state of the wider economy. Declining share is important but it is important to remember for advertisers this is relative.Declining share is important but it is important to remember for advertisers this is relative. The expansion in supply of advertising space has increased number of advertisers by lowering barriers to entry thereby enlarging the advertising cake.The expansion in supply of advertising space has increased number of advertisers by lowering barriers to entry thereby enlarging the advertising cake. Niche services compete with each other for advertising as much as, if not more than, they compete with mass broadcasters.Niche services compete with each other for advertising as much as, if not more than, they compete with mass broadcasters.

15. Summary 2 If demand will meet supply, where is the problem?If demand will meet supply, where is the problem? It is possible that a glut may form in a period of general economic downturn. This should lead to a reduction in supply of advertising space.It is possible that a glut may form in a period of general economic downturn. This should lead to a reduction in supply of advertising space. However, it is possible that the expansion of supply may lead to a lower advertising price equilibrium, particularly among channels exhibiting similar characteristics.However, it is possible that the expansion of supply may lead to a lower advertising price equilibrium, particularly among channels exhibiting similar characteristics.

16. Summary 3 There may well exist a tipping point beyond which there is no longer a mass audience premium.There may well exist a tipping point beyond which there is no longer a mass audience premium. This, alongside profitability, should be used to determine how onerous psb obligations should be.This, alongside profitability, should be used to determine how onerous psb obligations should be. It is possible that in the future with universal digital availability another broadcaster may consider making the investment necessary to develop a mass channel. This would seriously affect the commercial psbs ability to deliver psb content.It is possible that in the future with universal digital availability another broadcaster may consider making the investment necessary to develop a mass channel. This would seriously affect the commercial psbs ability to deliver psb content.

17. Potential Policy Solutions Raise and lower psb obligations according to share of audience and net revenue. (proportionality)Raise and lower psb obligations according to share of audience and net revenue. (proportionality) Extend psb obligations to any channel reaching the psb threshold. (fair competition)Extend psb obligations to any channel reaching the psb threshold. (fair competition) Fund broadcasters so they dont reach the tipping point from taxation.Fund broadcasters so they dont reach the tipping point from taxation. Establish a psb pot available to all channels above the psb threshold and remove psb obligations from commercial public service broadcasters. (fair competition)Establish a psb pot available to all channels above the psb threshold and remove psb obligations from commercial public service broadcasters. (fair competition)

18. Selected Bibliography Cottrell A. (1997) Keynes, Ricardo, Malthus & Says Law Discussion Paper History of Economics Society Meeting June 1997 CharlestonCottrell A. (1997) Keynes, Ricardo, Malthus & Says Law Discussion Paper History of Economics Society Meeting June 1997 Charleston Erickson G.M. (2003) Dynamic Models of Advertising Competition (2 nd ed.) Dordrecht: Klumer Academic PublishersErickson G.M. (2003) Dynamic Models of Advertising Competition (2 nd ed.) Dordrecht: Klumer Academic Publishers Hendry DF (1992) An Econometric Analysis of TV Advertising in the UK Journal of Policy Modeling 14(3): 281-311Hendry DF (1992) An Econometric Analysis of TV Advertising in the UK Journal of Policy Modeling 14(3): 281-311 HM Treasury (2003) GDP Deflators at Market Prices 2001-2002 Available: http://www.hm- treasury.gov.uk/economic_data_and_tools/gdp_deflators/data_gdp_fig. cfmHM Treasury (2003) GDP Deflators at Market Prices 2001-2002 Available: http://www.hm- treasury.gov.uk/economic_data_and_tools/gdp_deflators/data_gdp_fig. cfm Masih R. (1999) An Empirical Analysis of the Demand for Commercial Television Advertising Applied Economics 31(2): 149- 163Masih R. (1999) An Empirical Analysis of the Demand for Commercial Television Advertising Applied Economics 31(2): 149- 163 Nilssen T. & Sorgard L (2000) TV Advertising, Programming Investments and Product Market Oligopoly Discussion Paper 06/00 Norwegian School of EconomicsNilssen T. & Sorgard L (2000) TV Advertising, Programming Investments and Product Market Oligopoly Discussion Paper 06/00 Norwegian School of Economics Richards B., I.MacRury & J. Botterill (2000) The Dynamics of Advertising Amsterdam: HarwoodRichards B., I.MacRury & J. Botterill (2000) The Dynamics of Advertising Amsterdam: Harwood

19. FTSE 100 against Total UK NAR

20. ITV (+GMTV) Real Terms NAR against FTSE 100 Source: OMD UK; Financial Times

21. Channel 4 Real Terms NAR against FTSE 100 Source: OMD UK; Financial Times

22. Five Real Terms NAR against FTSE 100 Source: OMD UK; Financial Times

23. Total Multi-Channel Real Terms NAR against FTSE 100 Source: OMD UK; Financial Times

24. Forecast Digital Television take-up Source: ITC