The Implications Of Scottish Independence on the UK TV Industry

By Nigel Walley. @nwalley

Sept 2011 - New NW BW Head & Shoulders (thumbnail)The TV industry is in a very strange position with the independence referendum in Scotland. Those broadcasters with a news function are rightly required by OFCOM not to take sides and report on the referendum in a totally unbiased way. However, when it comes to potential impact of an independent Scotland the TV industry is in the eye of the storm. In the case of a ‘Yes’ vote it would be faced with significant organisational and cultural challenges. Given the industry’s inability to discuss this in public, we felt that it is incumbent on neutral commentators to explore some of the issues for them.

Underlying the debate is a broader question of whether the UK is a single television market, or whether Scotland somehow exists as a separate cultural and media entity. We have split our analysis of this into two related, but ultimately separate questions.   The first looks at the issue from a technical, commercial and regulatory point of view. We ask whether it is actually possible to split the UK television industry on either side of a new English/Scottish border. The second discussion (published here) looks at the issue from the perspective of talent and content.

 

Essay 1 – Is It Actually Possible To Split The Two Markets?

So, from a technical or commercial perspective, could you create a new border and have any significant impact on TV distribution? The simplest answer is no, not really and less so with every new set top box sold.   To understand this, we have to look seperately at the constituent distribution technologies: satellite (Freesat and Sky) terrestrial (Freeview andYouView) and Virgin cable .

Firstly satellite, Scotland has lots of satellite customers due to its mountainous terrain which makes terrestrial distribution difficult. Scotland is slightly over represented in Freesat audience and has a pro-rata percentage of the Sky customer base – approximately 1 million homes. TV channels on these two platforms are currently broadcast using a unitary satellite signal serving the whole UK and Ireland. It is not possible to broadcast only into Scotland or England with the nature of the signal used. Satellite bandwidth is a free and open market and this means that the Scottish govt. couldn’t stop any company currently broadcasting into Scotland over satellite from continuing to do so. (We’ll deal with licences and spectrum a little later).

It is however, possible for Sky and Freesat to mitigate this by changing the channel listings their on-screen ‘electronic programme guides’ (EPGs) based on the postcode of the user.  They are able to configure them so that certain channels are not prominent or visible in a particular region. This is how STV is positioned in EPG slot 3 in Scotland on Freesat and Sky (even though the various other ITV regional channel feeds are all received in a Scottish box). But to ensure this happens would require the Scottish government to have regulatory or leverage over TV platforms based in London.

Most importantly, a channel can broadcast into Scotland over satellite without needing people, buildings or infrastructure on the ground there. This means that all UK channels would continue to be broadcast into Scotland over satellite, even if they didn’t have a licence to operate there. (We will return to why this is commercially troubling later in the piece).

With digital terrestrial (DTT) and cable the situation is a bit simpler. DTT channels are broadcast from a series of local masts around the country. Spectrum is limited, expensive and highly regulated. Currently OFCOM issues licences to operators for the use of DTT spectrum and the regional use of masts and we must assume that the Scottish Government will take control of this process – they have stated (without detail) that they will respect existing licences. However, the new ‘connected’ DTT landscape has confused things.   It is now possible to ‘broadcast’ linear channels into a new Freeview box via the internet (using various IP technologies).  Channels like BT Sport are already distributed into YouView using this system.  We are assuming that over the next few years, older ‘dumb’ Freeview boxes will gradually be swapped out for the current generation of connected ones (although any box sold since 2012 has connected capability).  So the ability to use spectrum to control access to the Freeview or Youview platforms has been removed.

Once again, using IP, a channel could ‘broadcast’ into Scotland without needing people, buildings or infrastructure on the ground there. As with satellite, control of access to a Scottish market for broadcast channels would reside solely at the EPG and the Scottish Government would have to impose their will on Freeview and YouView to manage it. (They could of course ban internet connected Freeview boxes from the market but this would merely kick off a cross-border smuggling trade).

This situation is made more complex by the fact that all TV platforms and the majority of broadcast channels serving Scotland are based south of the border. An independent Scotland would be unique in Europe in not having a domestically owned TV platform or major ISP. (There are Scottish owned commercial ISPs and some very small consumer ISPs). For consumers, this means that pay TV becomes an ‘imported’ service unless the providers set up new local market companies. Any Scottish channel will have to negotiate carriage with TV platforms based in a different country.  A new Scottish government regulator would spend a lot time trying to manage a group of London based broadcasters and technology platforms without any leverage to do so.

The Scottish Government could attempt to do this by securing a share of the ownership of Freeview, Freesat and YouView. It could only do this by demanding a representative portion of the BBC’s current shareholding of those companies, as part of a wider division of BBC assets. How this might work (and whether it is possible) is anyone’s guess?

There is added complexity in that part of the rapidly expanding IP elements of the TV industry are built on the BT wholesale network of telephone exchanges and the locally unbundled national ISPs (BT and TalkTalk in particular). Those companies do have kit on the ground and the Scottish White Paper makes no mention of its intentions around the curious piece of legislation by which this system operates.

Finally there is cable to resolve. Because of the physical nature of cable and the regionalised head-ends it requires to operate, cable is the most grounded of all the TV platforms. A Scottish government could find various ways to control the activities of the cable industry, and controlling who gets access, by regulating its physical activities on the ground. It could require Virgin to establish a local operator for the Scottish market and regulate it through a new media regulator. The problem with this is that the current network topology of the cable industry doesn’t make this easy. Virgin run a single VOD and web infrastructure across the whole of the UK, (ie Virgin can currently only stream the London ITV feed into its iPad app in STV homes). More importantly, cable is a small player in the Scottish market so the impact would be limited.

 

Regulatory complexity – Currently the majority of media regulation in the UK is controlled by OFCOM, an organisation that acts as our ‘competent authority’ for our participation in media regulation within the EU, EFTA and the EEA. Scotland is currently compliant only because there is a UK institution that covers Scotland. Were Scotland to leave the UK, such institutions would no longer act for Scotland (they would act only for the rest of the UK). If Scotland ultimately wishes to re-apply to join the EU it has, under EU law, to show that it has in place a competent regulatory environment and institutional / administrative structures normally expected of accession countries – including a regulatory framework for public broadcasting.

Therefore it couldn’t subcontract any regulation back to OFCOM and would have to go to the expense of building a replacement regulatory environment for one already in place (and viewed around the world as best in class). For existing platforms and broadcasters serving Scotland, it would mean having to operate under two separate, and potentially conflicting regulatory regimes just to continue serving existing subscribers and existing viewers.

However, a very good post by Telecoms researcher Ewan Sutherland (here) points out that the Scottish Government has made it clear it does not like the present structure of OFCOM and is not proposing to replicate it in its current form. We don’t know what form they currently favour, as this has not been spelt out. In the area of communications policy and media regulation, the Scottish government white paper raised many more questions than it answered. This would mean more cost and complexity to maintain current activity, and that is before we factor in the new currency uncertainty that would suddenly be an issues.

 

Competition among UK broadcasters – The Scottish Government’s white paper has made noises about taking a share of the BBC’s assets to create a new Scottish Broadcasting Corporation (SBC). Scottish viewers would still pay a licence fee but it would be directed to the SBC Instead of the BBC. Apart from the huge TUPE claim this will entail to move a potentially unwilling Scottish BBC workforce into a new employer, there are massive questions about the competitive environment this new SBC would face.

The Scottish Government White Paper assumes that the rump BBC won’t broadcast into Scotland and will hand over programmes like Strictly, MOTD and Eastenders for broadcast in Scotland by the SBC.  Some commentators have pointed out that the SBC would have to pay for these at a commercial rate. But we believe that it is much more likely that a situation like that in Ireland would prevail, where the BBC broadcasts its own channel in direct competition to RTE. The rBBC will be free to compete directly with the SBC in Scotland – unless the Scottish Govt. tries to ban it, which, of course, is contrary to broadcast regulation in those European bodies like the EU and EFTA that the Scottish Govt. is so keen to join. It is also, as described at the beginning of this piece, technically very hard.

The same situation could have faced STV, who currently hold the third PSB licence for Scotland (and receive the PSB benefits of EPG position etc).  They currently get Downton Abbey, Coronation St, Emmerdale Xfactor and other ITV programming for distribution in Scotland under a commercial agreement that keeps ITV out of the market. Under a new regulatory framework, all bets would theoretically be off and ITV would be free to compete against STV when the current commercial contract expires.  ITV and STV have sensibly put this off for a decade by signing a commercial deal that maintains the status quo until at least 2024.   At this point ITV may just opt to continue the deal but the distribution will be significantly different by then.  ITV don’t currently have any DTT broadcast in Scotland and nothing indicates an increase in capacity but by 2024 IP delivery of channels into Freeview and YouView will be commonplace.

So the immediate problem is with the intentions for the BBC / SBC.  If the BBC decides to compete the Scottish Government would need to emulate that of the Republic of Ireland and massively subsidise the new national broadcaster SBC if it to survive. This would be on top of taking responsibility for full funding of BBC Alba (whose cost is currently shared across 26M licence fee payers). Its role and funding would become similar to that of TG4 in Ireland – an unwanted cost for an unwatched channel that is too culturally significant to close down.

 

Content rights and territories – The final area left unexplored in the Scottish white paper is that of content rights and territorial split of IP. Currently content rights for sport, movies etc are negotiated on a UK basis. It is likely that this would change, particularly is Scotland was outside the EU and EFTA for a period of time. IP owners would see this as a great opportunity to add a rights window into the mix in search of extra revenue.  A broadcaster servicing both markets currently would have to pay two separate rights to continue to serve the existing customers. This cost would be borne by Scottish consumers. While the Scottish TV industry might appreciate the control this would supposedly give them, they should cast an eye over to Ireland once again. Ireland operates as a de jure separate media market for IP rights. But a conversation with any Irish TV exec will tell you that they are, in effect, a de facto adjunct to the UK. UK operators playing in both markets routinely ‘add-on’ the Irish market to sweeten any deal, making it almost impossible for Irish broadcasters to negotiate favourable rights for content to go on the Irish channels.

 

Summary

It feels like the Scottish Government is 20 years too late in any attempt to separate off a Scottish TV industry.  In a wholly DTT world, this might have been possible.  But in a world where satellite, and increasingly IP linear distribution, play a significant role it just isn’t.  Scotland is part of a British Isles wide TV distribution landscape, which itself is slowly merging into a pan-European one.

From a commercial point of view, all the TV platforms and most of the channels viewed in an independent Scotland would continue to be run from London.  More destructively for Scotland, the BBC would most likely be given free rein to compete in Scotland, freed of any obligations to make or distribute content there. Scottish broadcasters currently protected from the full force of competition, within a unitary regulatory environment, will no-longer enjoy that protection. Worse still they would be forced to negotiate carriage deals with platforms based in a foreign country just to serve heir existing viewers.

As has been the experience in Ireland, the Scottish Government will be required to subsidise local channels.  While a small number of Scottish TV companies may benefit from an initial influx of public money (paid for courtesy of the Scottish taxpayer), the long term impact will be to impose cost on Scottish viewers and put barriers between the Scottish TV production and the wider UK TV audience.

Television, while forced to stay mute on the subject, may be the one industry that properly gives lie to the idea that we are separate countries.  Alex Salmond’s problem is that you can change politics, but you can’t change geography or technology.


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