SUMMARY OF CHANNEL 3 NETWORKING ARRANGEMENTS: A REPORT ON WHETHER THE ARRANGEMENTS SATISFY THE COMPETITION TEST CONTAINED IN THE BROADCASTING ACT 1990

This report is the first made by the MMC on references under the Broadcasting Act 1990. The references were made by the 15 regional television licensees for Channel 3, on 22 December 1992, and by the Independent Television Commission (ITC), the regulator of commercial television, on 30 December 1992. They concern the networking arrangements under which the licensees make some programmes available for simultaneous broadcasting in all regions so as to provide a nationwide service which can compete with those of other television broadcasters.

These arrangements provide for the establishment of a Network Centre, which is a division of the Independent Television Association (ITVA), the licensees' trade association, and whose function it is to draw up the network schedule and to acquire and commission programmes for it from licensees and independent producers.

The networking arrangements preclude an independent producer from whom a programme is being commissioned from contracting directly with the Network Centre. He is obliged to enter into a production contract with one of the licensees, a potential competitor, who acquires the UK broadcasting rights to the programme from him and contracts with the Centre for its networking. On the other hand, a licensee from whom a programme is commissioned by the Centre could contract directly with it. The reason for making the independent producer contract with the licensee was to ensure that the licensee, as a broadcaster, would assume responsibility for the programme to the ITC.

Under the arrangements the Centre would normally acquire UK broadcasting rights from licensees for a period of ten years with an option to extend this for a further five years. An independent producer, however, from whom the Centre commissioned a programme for the network would generally have to assign in perpetuity the copyright of the programme to the licensee with whom he had a production contract.

The arrangements were examined by the Director General of Fair Trading (DGFT) to determine whether they satisfied a competition test under the Act concerning their effect on competition in any business activity. He concluded that they failed the test in that the requirement for independent producers to contract with a licensee and not directly with the Centre and the restricted rights that were available to the independents compared with those obtainable by licensees were likely to restrict and distort competition in programme making, and in the case of restricted rights also between broadcasters.

The DGFT specified two main modifications to the arrangements. The first allowed an independent producer to contract directly with the Centre for the production of a programme, with the Centre concluding a separate contract with a licensee to ensure that the programme complied with the ITC's regulatory requirements. The second required UK broadcasting rights to be limited to a maximum of five years, with an option to the broadcaster to extend this for a further two years, and prohibited the acquisition of all other rights.

Under the terms of reference we were required to consider whether those provisions of the arrangements to which the DGFT specified modifications did in fact satisfy the competition test. We concluded, for broadly the same reasons as the DGFT, that they did not. We were then required to specify modifications to the arrangements which would result in their satisfying the test.

During the course of the reference the licensees put forward revised arrangements, withdrawing one of the original documents and adding a network centre code of practice. The code included provision for the Centre to issue a letter of intent to the independent producer setting out the key features of a proposed commission, to be followed by a deal letter to a licensee who would contract with the producer on the basis of the deal letter and be responsible for compliance.

On direct contracting we were concerned to ensure equitable treatment as between independent and licensee producers for the network. We accepted the arguments of the ITC and the licensees that it was difficult to separate responsibility for regulatory compliance and associated production monitoring from the production contract, but we considered that both objectives—direct contracts with the centre and licensees' responsibility for compliance—would be achieved if a letter of intent and a deal letter from the Centre were followed by a tripartite agreement between all three parties, with the licensee's role being strictly limited. As further safeguards for the independent there would be provisions protecting confidentiality and restricting the licensee's role to its broadcasting (and not its production) division. We have specified all these requirements as modifications to the arrangements.

Concerning the appropriate period for broadcasting rights, we considered that as the new networking arrangements have only come into effect since the beginning of 1993 and the Centre had only recently been properly established it would be inadvisable to be too prescriptive at a time when circumstances were changing and future developments could not be predicted with confidence. We therefore sought reasonable flexibility with safeguards.

On UK broadcasting rights while we believe that the DGFT's period of five years, plus an option for a further two years, would be reasonable in most cases, we consider it should not be mandatory at this early stage of the networking arrangements but be regarded as a guide from which departures should be permitted in view of the wide range of circumstances that arise. Similarly, exclusive options to acquire further programmes based on the same format should not be excluded. We accordingly specified as modifications the deletion of prescribed periods in the arrangements but the insertion in the code of practice of guidelines indicating that UK broadcasting rights should normally not exceed five years with the option of a further two. If longer rights were required they would normally be purchased through additional options to extend the period. A producer should have the ability to reacquire the rights if they were not used by the Centre. The code would also provide for evenhanded treatment of independents and licensees.

We consider that with these modifications the arrangements will satisfy the test. We recommend that the working of the arrangements should be monitored by the ITC.

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Last Revised: June 1999