CHAPTER MEDIA POLICY: THE BSKYB BID

Introduction 1.1 On 15 June 2010 News Corporation (News Corp) announced its bid to acquire those shares in

British Sky Broadcasting plc (BSkyB) which it did not already own and thus triggered a need for the Secretary of State for Business, Innovation and Skills (BIS), the Rt Hon Vince Cable MP, to consider the media plurality test introduced by amendment into the Enterprise Act 2002 at s58(2C).1 As is well known, Dr Cable's consideration of the bid became the subject of public controversy on 21 December 2010 as a result of comments which he made to undercover reporters from the Daily Telegraph about Rupert Murdoch and News International (NI). Those comments, which gave at least the appearance of bias against News Corp, prompted the Prime Minister immediately to intervene and transfer responsibility for considering the bid to the then Secretary of State for Culture, Media and Sport, the Rt Hon Jeremy Hunt MP.

¶1.2 The choice of Mr Hunt itself prompted questions from some quarters because he had

previously commented in positive terms about the bid and was believed to be well disposed towards News Corp.2 The bid returned to the public spotlight in July 2011, after the phone hacking scandal had broken in earnest, when an Opposition Day Motion was tabled: "This House believes that it is in the public interest for Rupert Murdoch and News Corp to withdraw their bid for BSkyB".3 In these very adverse circumstances News Corp withdrew the bid shortly before the debate.4

¶1.3 Significant further evidence about the bid, and in particular the relationship between politicians

and the press in relation to it, came to light during the course of the Inquiry. Exhibit KRM18 to Mr Murdoch's witness statement contained 161 pages of email traffic evidencing News Corp's lobbying effort. On their face, these emails appeared to show direct private contact between Mr Hunt and News Corp's then Director of Public Affairs, Europe, Frédéric Michel. Mr Michel gave evidence to the effect that, in fact, the overwhelming majority of the contact was with others at the Department of Culture, Media and Sport (DCMS), predominantly Adam Smith, then a Special Adviser (SpAd) to Mr Hunt. These documents, together with text and telephone records which were subsequently sought by, and disclosed to, the Inquiry demonstrate a sustained behind the scenes lobbying campaign by News Corp, in support of its bid wholly to own BSkyB, which the Inquiry investigated by calling relevant witnesses.

¶1.4 The publication of KRM18 by the Inquiry aroused very considerable public interest and

immediately sparked a political debate. On 24 April 2012 Mr Hunt wrote to the Inquiry I requesting that his evidence be taken earlier than had been programmed, but the Inquiry explained that it needed to hear all relevant testimony bearing on the issues before Mr Hunt could fairly and properly provide his own account. The Speaker of the House of Commons permitted urgent questions to be put to the Prime Minister about Mr Hunt on 30 April

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In those circumstances it was necessary for the Inquiry, on more than one occasion, to make absolutely clear why it was taking evidence about the bid, its approach and, just as importantly, those questions which fell outside its remit. On 23 April 2012 I said:5

"I understand the very real public interest in the issues that will be ventilated by the evidence. I also recognise the freedom that permits what is said to be discussed and the subject of comment in whatever way is thought fit, and I shall approach the relationship between the press and politicians from an entirely non-partisan judicial perspective, which I have no doubt is the reason that I was given this remit. I would hope that this approach will be made clear".

¶1.5 On 10 May 2012 I explained what I would and would not be looking at and why:6

"I will look at the facts surrounding the News Corp bid for the remaining shares of BSkyB. I will do so in order to investigate the culture, practices and ethics of the relationship between the press and the politicians. It was because of the need to examine the facts fairly that on 25 April I spoke about the need to hear every side of the story, and although I had seen requests for other inquiries and other investigations, it seemed to me that the better course was to allow this Inquiry to proceed. That may cause me to look at the Ministerial Code and its adequacy for the purpose, but I will not be making a judgment on whether there has been a breach of it. That is simply not my job and I have no intention of going outside the terms of reference that have been set for me. For the avoidance of doubt, I see the significance of the way the bid was handled both by the Secretary of State for Business Innovation and Skills and the Secretary of State for Culture, Olympics, Media and Sport as evidencing manifestations, to return to the terms of reference, of the relationships between a media interest and politicians and the conduct of each".

¶1.6 The publication of KRM18 led to calls for other inquiries and other investigations. On 25 April

¶2012 I expressed the view that it would better to allow the Inquiry to proceed:7

"In due course, we will hear all the relevant evidence from all the relevant witnesses, and when I report, I will then make findings that are necessary for me to fulfil the terms of reference the Prime Minister has set for me. In the mean time, although I have seen requests for other inquiries and other investigations, it seems to me that the better course is to allow this Inquiry to proceed. When it is concluded, there will doubtless be opportunities for consideration to be given to any further investigation that is then considered necessary".

¶I

¶1.7 I returned to the subject of other inquiries and investigations on 15 May 2012 in the light of

significant activity in Parliament arising from the publication of KRM18 during the intervening period. I fully recognised on that occasion the sovereignty of Parliament to determine its own proceedings, but explained how a Parliamentary investigation of the same events as were being investigated by the Inquiry, conducted in advance of, or concurrently with, the Inquiry's

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work risked making it impossible for the Inquiry to investigate this part of the evidence in accordance with its duty of fairness pursuant to s17(3) Inquiries Act 2005.8 In the event, Members of Parliament decided not to proceed in parallel with the Inquiry, and the Inquiry has continued as intended.

¶1.8 This subsection of the Report does not seek to provide a comprehensive history or critique of

the bid. Rather, it considers the relationship between the national press and politicians during the course of the bid and the conduct of each, including the ways in which the relationship was conducted.9 It explores the relevant interactions, how the competing parts of the press sought to advance their interests, and how the politicians conducted the process of applying the cross media public interest plurality test. It seeks to identify the issues of concern which arose during the process of applying the statutory test with a view to identifying lessons to be learned. These lessons are directly relevant not only to the future conduct of the national press and politicians in relation to one another but also to the question as to how best to ensure the maintenance of sufficient plurality in the media.

¶1.9 Scrutiny of the bid in this way raises many questions. Perhaps the most important question is

what role, if any, should politicians play in cross media plurality decisions? Also for consideration are: how did the statutory test work? Was it necessary? Does it require alteration or change? How and why did the problems with process at both BIS and DCMS occur? What can be done to prevent a recurrence of such problems? Consideration is also given to whether or not there was an explicit arrangement between Mr Murdoch and any Conservative politician in relation to the handling or outcome of the bid. It is right though to state at the outset that in fact the evidence did not come close to proving any such arrangement.

¶Context 1.10 Total control of BSkyB "...had long been an aspiration, since the merger with BSB"10 for News

Corp. At the launch of the bid, News Corp's interests in the United Kingdom included a 39.1% stake in BSkyB and 100% ownership of NI. News Corp also wholly owned HarperCollins, one of the top four book publishers in the UK.11 These holdings were but a part of a global media business with interests in many parts of the world, including shares in a number of European satellite broadcasters. News Corp was already generally regarded, for plurality purposes, as having control of BSkyB.12

¶1.11 James Murdoch explained why News Corp nevertheless wished to acquire the remaining shares:13

"...News Corporation wanted to expand its holding in BSkyB in order to simplify the operating model of the business, to have fewer, bigger businesses, and to focus on I cash flow and invest in upstream content and creative industries. It was intended to

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consolidate BSkyB with our interests in the other Sky businesses around the world to create the first state of the art, global, 21st century, digital pay television business, which would have centred in the UK. The proposed deal with driven by considerations relating to the way television is made and consumed around the world and the benefits of consolidation. We see competition increasingly on an international scale and our aim was to combine our interests in a number of our Sky businesses in order to compete more effectively with multinational telecoms companies and large technology businesses that have begun to distribute audio-visual programming, and enjoy certain benefits of scale and scope that the individual Skys might not."

¶1.12 He expanded on the international dimension, demonstrating as he did so, the truly global perspective from which media companies of the size of News Corp view the market:14

"The proposed transaction would have brought enormous benefits to industry, to the Sky business and its consumers and to the wider economy. We had hoped to combine our interests in the Sky businesses in the UK, Italy, Germany, India and New Zealand to build a world class company, with its headquarters in the UK, I am aware that some people in the UK thought that Sky was too big, but we felt that it would be helpful to be bigger in order to compete with other international companies such as Google, Apple and large telecoms companies, all of whom are much larger than BSkyB and have been investing in the audio-visual business heavily on a global rather than national basis."

¶1.13 There can be little doubt that the acquisition, if it had gone ahead, would have afforded News

Corp with a significant commercial opportunity to develop a large integrated multi-platform media company. The prospect certainly alarmed competitors in both the newspaper and television industries who vigorously opposed the bid. They were joined in that endeavour by two very active campaigning groups, Avaaz and 38 Degrees.

¶1.14 Although BSkyB is a satellite television broadcaster, its proposed acquisition was of undoubted

relevance to the national newspaper industry. It offered the prospect of increased cooperation between NI's titles and BSkyB, both of which would have been wholly owned by News Corp had the deal gone ahead. Competitors feared that both subsidiary companies would benefit from economies of scale, might be able to gain commercial advantage by bundling their products, and (subject to the rule requiring impartial television news coverage) share each other's content.15

¶1.15 The commercial context in which the bid took place is important. Regulation of media ownership must strike the right balance between, on the one hand, avoiding the over I concentration of media power into too few hands and, on the other, attracting investment and promoting innovation in a technologically very dynamic industry.

¶1.16 The precise timing of the bid was related to some extent to the general election held in May

News Corp deliberately waited until after the election before launching the bid. James Murdoch told the Inquiry that this was to avoid the bid becoming a political football.16 He also explained that more broadly the timing of the bid had primarily been influenced by the global

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financial crisis and was determined by the need for News Corp to amass the very substantial funds necessary to make a cash offer. A third and final factor was the timing of the BSkyB board's summer meeting:17

"A. I think it was to wait until the election was completed, regardless of the outcome, such that a transaction of this size, some $12 million [sic], didn't become a political football, and that was the goal. But the primary driver for the timing was really (a) the affordability of it, being able to do it. We had taken some time to really husband our resources carefully. It was contemplated that it would be an all cash offer and that took a little while to save up, if you will, after – over a number of years. Also, there was a gap because in 2009 you'll recall, with the financial crisis, with the uncertainty around the environment, you know, large scale mergers and acquisitions activity was a hard thing to get your head around. Q. Yes. A. And furthermore, in 2009 – and forgive me, Mr Jay, but it's important because I think I know where you're going, but every summer the BSkyB board, the independent directors, meet together to talk through long-term strategy and the like, and we wanted to do it ahead of that, or around that time when the board was all scheduled to have a few days together, so it could be done completely and properly with the board."

The plurality test and quasi-judicial procedure

¶The statutory framework 2.1 The proposed merger met the threshold for consideration by the European Commission

under the EU Merger Regulation. Consequently, News Corp and BSkyB were required to notify the proposed transaction to the European Commission for clearance. Following negotiations between the parties, they notified the European Commission at the start of November 2010.18 Clearance was then forthcoming on 21 December 2010.19

¶2.2 Domestically, the first formal decision for the Secretary of State was to consider whether or

not to exercise his discretion to issue a European Intervention Notice (EIN) under s67(2) of the Enterprise Act 2002. The discretion afforded by that statutory provision is as follows:

"The Secretary of State may give a notice to the OFT (in this section "a European intervention notice") if he believes that it is or may be the case that one or more than one public interest consideration is relevant to a consideration of the relevant merger I situation concerned." (emphasis added)

¶2.3 The public interest considerations which fell to be considered in this case were those

commonly referred to as the "broadcasting and cross media public interest considerations" contained in s58(2C) of the 2002 Act. They are:20

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"(a) the need, in relation to every different audience in the United Kingdom or in a particular area or locality of the United Kingdom, for there to be a sufficient plurality of persons with control of the media enterprises serving that audience; (b) the need for the availability throughout the United Kingdom of a wide range of broadcasting which (taken as a whole) is both of high quality and calculated to appeal to a wide variety of tastes and interests; and (c) the need for persons carrying on media enterprises, and for those with control of such enterprises, to have a genuine commitment to the attainment in relation to broadcasting of the standards objectives set out in section 319 of the Communications Act 2003."

When Dr Cable in due course did decide to issue an EIN, the particular plurality concern which he identified in the notice was that set out at (a) above.21

¶2.4 The issue of an EIN triggers an obligation upon the OFT to report to the Secretary of State

and, as happened in due course in this case, media plurality is considered to be a public interest consideration, then Ofcom is also required to prepare a report. Once in receipt of the reports it then falls for the Secretary of State to decide whether or not to refer the case to the Competition Commission for detailed scrutiny. In the present case this was the decision which fell to Mr Hunt, after responsibility for the bid was transferred to him on 21 December 2010, and it is considered in more detail later in this section of the Report.22

¶2.5 The alternative to issuing an EIN was for the Secretary of State simply to permit the acquisition

to proceed, subject only to the European Commission's competition decision. In other words, simply to allow the acquisition without further specific scrutiny of the possible consequences of the transaction for media plurality.

¶The guidance

¶2.6 As promised by the Labour Government when the media plurality test was inserted by

amendment into the 2002 Act, and as is provided for by s106A of the 2002 Act, guidance was published by the then Department of Trade and Industry (DTI) in 2004 (the Guidance) with a view to explaining the considerations specified in section 58(2A) to (2C) to persons who are likely to be affected by them; and indicating how the Secretary of State expected the legislation to operate in relation to such considerations. The Guidance, whilst not binding, is intended to provide an indication of how the media public interest merger regime will operate in practice, and the approach which the Secretary of State is likely to adopt in considering cases. The Secretary of State should have regard to the Guidance and should only depart

¶I from it with good reason. Ultimately, as the Guidance makes clear, each transaction falls to be looked at on its merits on a case-by-case basis.23

¶2.7 In relation to a decision to intervene on a media public interest consideration, the Guidance provides in relation to procedure that:24

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"...If the Secretary of State is going to take a view on whether or not to intervene in the case on public interest grounds, the parties to the merger will be informed of this and invited to submit any views they have on this in writing. In taking a view on whether to intervene the Secretary of State will have regard to all available information which, depending on the case, may include: • submissions from the parties to the merger (as invited by the Secretary of State); • complaints made to the Press Complaints Commission and judgments made; • any previous regulatory decisions which include relevant information or judgments; • published articles raising matters of relevance; and • any third party representations received; but • she will not receive advice from OFCOM on whether to intervene (though she may receive and/or seek information from them in order to inform her decision)." and (insofar as is relevant):

"...The Secretary of State will not normally conduct a public consultation on whether she should intervene in a case, but will welcome and take account of any representations she receives. She may also seek the views of a few interested parties if time permits".

¶2.8 The exchange of submissions and the oral presentation of a party's case (in whatever form)

are not envisaged in this Guidance and, unless the Secretary of State chooses to go further than the Guidance indicates, those making submissions are not afforded, at this stage, the opportunity to reply to the arguments made against them.

¶2.9 Guidance about the substantive interpretation of the plurality of persons considered, specified

at s58(2C)(a), and the provision to which Dr Cable ultimately referred when he did issue an EIN, is to be found in chapter 7 of the 2004 Guidance. Amongst other things, it makes clear that the plurality of persons test "...is concerned primarily with ensuring that control of media enterprises is not overly concentrated in the hands of a limited number of persons..." and that "...the Secretary of State considers that sufficient plurality in this context refers to the number of persons controlling media enterprises, taking into account as appropriate relative audience shares" (emphasis added)25

¶2.10 Of particular relevance to the bid for BSkyB was the policy on intervention in broadcasting and

cross-media public interest cases set out in section 8 of the Guidance. This policy considerably narrows in practice the application of the otherwise widely worded public interest test applicable in broadcasting and cross-media public interest cases:26

"In principle, the Secretary of State may intervene in any relevant or special merger I situations involving media enterprises, including cross media mergers, where she believes that the broadcasting and cross-media public interest considerations are relevant. The Secretary of State's policy is that, save in exceptional circumstances, she will consider intervention only in cases where media ownership rules have been removed by the Communications Act 2003. These are: ... ...

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In addition, the Secretary of State's policy is that, save in exceptional circumstances, she will not intervene in respect of mergers in areas where there are no media ownership restrictions and none were removed by the Communications Act 2003 (e.g. mergers involving satellite and cable television and radio services). ... In exceptional circumstances, the Secretary of State may consider it necessary to intervene in mergers in areas where there continue to be media ownership rules or where there have never been such rules. The Secretary of State will only consider intervening in such a merger where she believes that it may give rise to serious public interest concerns in relation to any of the three considerations. During Parliamentary debate of these provisions, Ministers suggested that these might include circumstances where a large number of news or educational channels would be coming under single control, or if someone were to take over all the music channels. The Secretary of State may consider intervention if a prospective new entrant to local radio ownership has not shown a genuine commitment to broadcasting standards in other media or countries. The Secretary of State is not currently aware of any other types of cases in which exceptional circumstances might arise. She has also taken the view that an adverse public interest finding by a previous regulatory authority into a proposed merger is not necessarily in itself an exceptional circumstance meriting intervention; such cases should be considered in light of the reasons for the adverse finding and if the law has been changed to allow the sort of concentration resulting from the merger." (emphasis added)

¶2.11 The proposed acquisition by News Corp, a company connected with a newspaper proprietor,

NI, of a satellite television company, BSkyB, was not a case where media ownership restrictions either existed or had been removed by the 2003 Act. Under the policy, intervention was therefore only appropriate in exceptional circumstances and if the Secretary of State believed that the proposed transaction may give rise to serious public interest concerns in relation to any of the three public interest considerations. It was not one of the transactions expressly envisaged as exceptional at the time when the Guidance was drafted.

¶2.12 News Corp was not alone at the outset of the bid in thinking that there was a strong case

for not referring the bid when regard was had to this test. They did not see as exceptional a merger which involved the acquisition by it of the remaining shares in a company in which it already had a significant stake and exercised considerable control. Opponents of the bid differed and argued (insofar as is relevant) that there would in fact be a significant increase in control with real consequences for plurality.

¶I

¶Quasi-judicial procedure

¶2.13 Both Dr Cable and later Mr Hunt recognised that they were exercising a statutory power

in a quasi-judicial capacity. What then are the requirements of a quasi-judicial procedure? Counsel for News Corp rightly referred in their helpful closing submissions both to the seminal case of Council of Civil Service Unions v Minister for the Civil Service,27 which is authority for the proposition that the requirement is to act with "procedural propriety", the precise requirements of which may depend upon the specific legislative context in which the decision is taken; and then R v Home Secretary ex p Doody28 in which Lord Mustill (with whom the

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rest of their Lordships agreed) distilled six broad principles of fairness from the authorities at p560:

"What does fairness require in the present case? My Lords, I think it unnecessary to refer by name or to quote from, any of the often-cited authorities in which the courts have explained what is essentially an intuitive judgment. They are far too well known. From them, I derive that (1) Where an Act of Parliament confers an administrative power there is a presumption that it will be exercised in a manner which is fair in all the circumstances. (2) The standards of fairness are not immutable. They may change with the passage of time, both in the general and in their application to decisions of a particular type. (3) The principles of fairness are not to be applied by rote identically in every situation. What fairness demands is dependent on the context of the decision, and this is to be taken into account in all its aspects. (4) An essential feature of the context is the statute which creates the discretion, as regard both its language and the shape of the legal and administrative system within which the decision is taken. (5) Fairness will very often require that a person who may be adversely affected by the decision will have an opportunity to make representations on his own behalf either before the decision is taken with a view to producing a favourable result; or after it is taken, with a view to procuring its modification; or both. (6) Since the person affected usually cannot make worthwhile representations without knowing what factors may weigh against his interests fairness will very often require that he is informed of the gist of the case which he has to answer."

¶2.14 From these broad principles it follows that there is a degree of flexibility as to the precise

approach adopted by a quasi-judicial decision maker, so long as in the particular circumstances of the decision the procedure adopted conforms to the broad principles and the decision is free from either actual or apparent bias. Bias, whether actual or apparent, will taint and usually vitiate a decision. The test for apparent bias is whether a fair-minded and informed observer, having considered the facts, would conclude that there was a real possibility that the decision maker was biased: Porter v Magill.29 It is important to recognise the significance of the words "a real possibility of bias" because they set the threshold for a finding of apparent bias well below a finding that there is, or has been, actual bias.

¶2.15 The requirement for an independent and impartial tribunal does not mean that a person

cannot have a prior opinion on the matter in question, so long as that opinion can be and is put aside and is not such as to gives rise the appearance of bias. As Dr Cable put it:30 I "Yes. I think the key phrase is that an intervention decision must be taken with an independent mind, and I have given illustrations earlier in my political career of having encountered quasi-judicial decision-making before. I think with an independent mind doesn't mean with a blank mind. Most people in public life have views, opinions. Probably, if they're politicians, those opinions and views have been on the record, and the requirement on me and people in this position is to set those on one side for the

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sake of making this decision, to consider representations, the evidence, the facts, and decide on that and only on that."

¶2.16 An obvious but important feature of the quasi-judicial function which the Secretary of State

exercises in relation to the regulation of media mergers is that the decision is his alone and is not a matter for collective cabinet decision. It is not a political decision.

¶2.17 Crucially, the decision maker must address the appropriate test, taking into account all

relevant evidence and, equally as important, ignoring all irrelevant evidence. Thus, when applying the media plurality test, wider political and economic considerations are irrelevant and must be ignored.

¶2.18 It is against these requirements that the conduct and consideration of the bid first by Dr Cable and then by Mr Hunt, their advisers and officials, fall to be measured.

¶Precedent and experience

¶2.19 The media plurality test had been applied only once previously, in 2006, when BSkyB

had acquired shares in ITV plc.31 There was therefore limited practical experience of its application, no firmly established practice for conducting the test, and the guidance had barely been tested. There was, though, in the Department of Business, Innovation and Skills (BIS), significant experience in quasi-judicial decision making in other contexts and Dr Cable himself had had some experience of quasi-judicial decision making, albeit many years before when he was a Glasgow city councillor.32

¶2.20 Another case, the acquisition of Channel 5 by Northern & Shell, was being considered at

around the same time as the BSkyB bid. Dr Cable decided not to intervene in that case, distinguishing it from the bid for BSkyB:33

"In my view, a less robust case for intervention existed in relation to Channel 5 and Northern & Shell. Channel 5 is substantively different to BSkyB in that it is not a source of news – the news programmes that are broadcast on Channel 5 are provided by Sky News. Channel 5 is not central to news provision in the UK. In addition, Northern & Shell newspaper titles (the Daily Star, Daily Express and the Sunday Express) have a significantly lower market share – in the region of 10 to 14%, compared to 37% for News International titles. On an assumption that there was only a limited prospect that Channel 5 would develop the capability to provide news to other broadcasters in a similar way to ITN and Sky News, the prospect of a negative impact on plurality turned on the extent to which plurality might be damaged by a possible closer alignment

¶I between news broadcast by Channel 5 and news as covered by the Northern & Shell

titles. I considered advice in this matter and decided that, while it was open to me to intervene in this case, I should not do so. Bearing in mind the nature of the enterprises involved, and taking into account the Guidance, I did not consider this was an exceptional case in respect of which intervention on public interest grounds was appropriate. There

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were insufficiently strong grounds for believing the merger would actually reduce the number of sources of news available to people in a way that was detrimental to the public interest."

¶2.21 DCMS had no experience of applying the media plurality test but it did have some experience of conducting quasi-judicial decisions in relation to the National Lottery and gambling.34