Communications Act

¶Introduction

¶5.1 The Communications Act 2003 (the 2003 Act) represented a major and controversial landmark

in New Labour's media policy. Its main features in relation to plurality and media ownership have already been outlined earlier in this Report.165 The Act had a protracted legislative history covering a wide array of media issues. This sub-section of the Report focuses on the genesis of those parts of the Act which relate to newspaper ownership, particularly foreign ownership, and cross media ownership involving national newspapers and terrestrial television. So far as terrestrial television is concerned, for reasons which will become clear, the focus is on Channel 5. In particular, this sub-section seeks to examine the relationship between politicians and the national press as it relates to the legislative process.

¶5.2 Legislation was considered and in due course enacted in the context of a rapidly changing

media landscape. Digital media and satellite television, in particular, were both growing prodigiously. At the start of the story, the position was that (save for EU and EEA countries) foreign ownership of, inter alia, analogue terrestrial television was prohibited.166 Moreover, cross media ownership was the subject of quantitative limits including a rule which stipulated that no proprietor of a national newspaper could be a participant with more than a 20% interest in a body corporate which was the holder of a licence to provide a Channel 3 service, or Channel 5, or a national radio service.167 Consequently, Rupert Murdoch, could not have acquired Channel 5, had it been for sale, on not just one but two separate regulatory grounds: the ban on foreign ownership and the 20:20 rule.

¶5.3 By the time that the 2003 Act became law, the position on both fronts had been reversed.

There was no ban on foreign ownership and the 20:20 rule, insofar as it applied to Channel 5, had been dropped. It is true that a public interest plurality test had been inserted which would have had to be applied to any bid by Mr Murdoch for Channel 5 but that was only as the result of determined campaigning against the Government by Lord Puttnam. The regulatory door had been opened, by the Labour Government, for Mr Murdoch, amongst others, to bid for the terrestrial channel, if it came up for sale. How did the change come about? Is there any merit in the suggestion (made at the time) that there was a 'deal', between Mr Murdoch and

¶I the then Labour Government?168 What influence, if any, did the media have on this policy?

¶These are the issues to be explored.

¶5.4 Many of the arguments deployed by diverse interests during the course of the consultations

and debates which took place remain pertinent to the question of media plurality today but are not fully explored here. Current and future plurality issues are considered later in the Report.169

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¶The Legislative Process 5.5 The development of policy on media ownership and the resulting legislation which gave

life to the policy, rested jointly with the Department for Culture, Media and Sport (DCMS) and the Department for Trade and Industry (DTI). The Secretary of State for Culture, Media and Sport was initially Chris Smith, now Lord Smith, and, later, Tessa Jowell. Stephen Byers, and later Patricia Hewitt, were their counterparts at the DTI. Tony Blair was consulted at key stages and was involved in the decision making on a number of issues as to the direction of the legislation.

¶5.6 Striking features of the legislative process were both the length of time it took and the

extensive consultation, scrutiny and debate which occurred, each indicators of the importance and sensitivity of the subject matter. A Communications White Paper A New Future for Communications Cm 5010 (the White Paper) was published in December 2000 by Lord Smith and Stephen Byers but the Act did not receive Royal Assent until 17 July 2003. In between there were extensive consultations, a draft bill published in May 2002, pre-legislative scrutiny by a Joint Committee (described by Ms Jowell as a relatively unusual process), as well as considerable debate in both Houses, notably consideration of a number of amendments by the House of Lords.170

¶5.7 Of some significance is the fact that Ms Jowell felt it necessary, shortly after her appointment

as Secretary of State for Culture, Media and Sport, to ask Mr Blair in terms whether or not he had reached a 'deal' with Mr Murdoch on the reform of cross media ownership rules. It demonstrates that even within the Cabinet there was suspicion that an arrangement might have been reached:171

"Q. Can I start by asking you whether you had any conversations with the prime minister of the time when you took up the portfolio? A. Yes, I did. From memory, it was, I think, the day after or within a couple of days of being appointed, once I had had time to assess what the priorities were for me as an incoming Secretary of State, what was in the in-tray. ... I saw the Prime Minister, as I say, within a couple of days of my appointment, and I had a conversation with him which was, I think, necessary, and I asked him whether or not any deal had been done with Rupert Murdoch on the reform of the cross-media ownership rules. He gave me an absolute assurance, which I completely accepted, that there had been no prior agreement, so that it – to a great extent, I had no constraints on the conclusions I might reach..." I

¶5.8 Mr Blair confirmed Ms Jowell's account of the conversation and that there was no implied

deal with Mr Murdoch. He was not surprised by his Minister's question, a fact which says something at least about contemporary perceptions about the relationship between Mr Murdoch and Mr Blair:172

¶"Q. Were you surprised that she asked you that question?

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A. Not particularly, I mean, you know, we're talking 2002, are we, around about? Yeah. By then, this issue to do with me and Rupert Murdoch and so on, so it didn't surprise me that she asked that question."

¶5.9 Throughout there was a good deal of lobbying by interested parties. Amongst the many

lobbyists were News International and BSkyB. Views were received through written submissions, formal meetings, if requested, correspondence and participation in conferences and seminars.173 News International contended that competition law was all that was required adequately to regulate the industry:174 "They want all restrictions on foreign ownership removed and would prefer media markets to be regulated solely through competition legislation, which they felt could be further improved by the removal of the special newspaper regime that currently exists."

¶5.10 News International was not alone in their view. All broadcasters, except Channel 4, maintained

that there should be no restriction on ITV/Channel 5 joint ownership save for competition law.175 Bloomberg LP forcefully pressed the case for the removal of the foreign ownership rules,176 as did Telewest. DMGT complained, via a letter to Charles Clarke, then Minister Without Portfolio and Party Chairman, about the competitive disadvantage which it felt arose from the domestic regulatory regime:177 "The fact is that foreign media companies are able to use the more relaxed regulatory climate of their home countries to build the kind of powerful domestic base that enable them, through acquisition, to become major global players. The irony is that these foreign firms are then able to acquire major British media companies that are denied to the Daily Mail & General Trust – an all British company – because of this country's regulatory climate". It contended: "For the future, DMGT wants clear, consistent rules and an open and transparent regulatory environment..."

¶Policy objectives

¶5.11 The policy objective was to: "preserve plurality of media ownership while not placing

unnecessary and unreasonable restrictions on growth and the workings of the market."178 The key principles were described as being: ensuring universal access to a choice of high quality services; deregulation to promote competitiveness and investment; self-regulation wherever appropriate, backed by tough measures to protect plurality and diversity; and ensuring that public service principles remain at the heart of British broadcasting.179

¶I

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¶5.12 A briefing note from the period succinctly sets out the then Government's thinking on democracy, plurality and diversity:180

"Our democracy and our cultural vitality depend on the availability of a range of different media voices, views and styles. The ownership of our newspapers, television and radio is therefore of the utmost importance. That is why the Government is concerned to ensure that citizens can receive a diversity of media content from a plurality of sources. "Diversity is about having a wide range of content and in the White Paper, a New Future for Communications, we set out the commitments to public service broadcasting and positive content regulation that we believe will be sufficient to ensure this diversity. "Plurality is not about content but the source of that content, the "voice" behind it – the owner. A plurality of voices should: – ensure no individual has excessive control over the democratic process;

– provide a plurality of sources of news and editorial opinion, preserving the culture of dissent and argument on which our democracy rests;

– prevent the emergence of any one source able to control the news agenda by the inclusion / omission of particular stories;

– maintain our cultural vitality by ensuring that different companies exist to produce different styles of programming and publishing, each with a different look and feel.

"We therefore need regulation that is specifically directed to ensure plurality and that is why we have imposed rules on media ownership".

¶5.13 The evidence discussed in more detail below is consistent with the pursuit of these policy

objectives throughout, although there was considerable debate about the best kind of rule to apply and the precise formulation thereof so as adequately to protect plurality whilst at the same time minimising the impact upon economic growth and the market.

¶Foreign ownership of terrestrial television 5.14 At the start of the legislative exercise the Government's position was that the existing

prohibitions on foreign (non EU/EEA) ownership of, inter alia, analogue terrestrial television should be maintained. The purpose of this prohibition, as expressed in the Communications White Paper, was to help ensure that European consumers continued to receive high quality I European content. It was further felt that "without reciprocal reforms in countries like the US or Australia that put restrictions on British companies, we cannot justify lifting our ban at the present time".181 However, the downside to the rule was that it excluded investment from many countries, notably a number of countries with developed economies, and vibrant media industries, including the United States, Australia and Japan. As Ms Jowell explained:182

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"So the very important and balanced judgment that we had to make was the extent that we could open up the possibility of American investment, Japanese investment, Australian investment in our British media without prejudicing the quality and without jeopardising plurality."

¶5.15 News International lost no time and lobbied energetically on the issue from an early stage. It

took issue with the status quo in its formal response to the White Paper.183 Les Hinton wrote to Ms Jowell and Kim Howells (then the newly appointed Parliamentary Undersecretary of State at DCMS) in June 2001 to congratulate them upon their appointments and sought a meeting. He met Mr Howells on 26 July 2001, following up first with a brief letter the same day in which he wrote: "I am particularly delighted to hear that, contrary to the White paper, the Government is prepared to consult on the foreign ownership prohibitions"184 and then with a longer letter dated 8 August 2001 fully articulating News International's position on this issue and on cross media ownership.185 The letter contained a thinly veiled threat to litigate relying upon Article 10 of the ECHR (freedom of expression), read with Article 14 (prohibiting discrimination) and concluded:

"Foreign ownership prohibitions are unnecessary, anachronistic and discriminatory. Furthermore, they are an insult to those foreigners such as Roy Thomson and Max Beaverbrook, whose contributions made Fleet Street what it was – not to say to those foreigners who are currently active in this industry."

¶5.16 The Government initially was not persuaded. As the consultation document was launched Ms

¶Jowell briefed the Prime Minister in November 2001 in the following terms:186

"Foreign ownership of broadcasting: our working assumption is that we stick to the line in the White Paper that there will be no lifting of foreign ownership restrictions. We invite views on whether we should develop reciprocal arrangements with those countries which might lift restrictions on UK companies, or put this issue on the table for WTO discussion."

¶5.17 The documentary evidence shows that arrangements had been made for both Ms Jowell and

Patricia Hewitt to meet Mr Hinton on 26 November, although the indications are that that meeting was subsequently postponed.187 Ms Jowell was again due to meet Mr Hinton on 23 January 2002, although it is unclear whether this meeting in fact went ahead.188 There was no documentary record of such a meeting having taken place amongst the DCMS' disclosure and so the meeting may not in fact have gone ahead.

¶5.18 The first sign of a shift in the Government's position on foreign ownership appears in an internal briefing document prepared for Ms Jowell on 30 January 2002, following consideration I of responses to the formal consultation process, which had been launched in November of

the previous year. On the issue of foreign ownership an official recommended removing the existing restrictions on foreign ownership. The recommendation was founded in an analysis

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of the consultation responses and fully reasoned. The author of the document noted that all the major British companies (TV and radio) had argued for reciprocity. Foreign companies (News International, Bloomberg, Telewest) had called for the restrictions to be removed. Some independent voices had argued for the retention or strengthening of the rules to maintain levels of high quality European content. Six considerations were set out in support of the recommendation:189

"1. Tier 1 and 2 requirements will guarantee original production, independent production and UK regional production and programming. Non-EEA companies could bring welcome inward investment. "2. There is arguably no difference in principle between French or German ownership, which we currently allow, and US or Australian ownership which we ban. To remove the ban is to remove an anomaly. Other European countries (eg Germany, Spain, the Netherlands) have removed foreign ownership rules without any obvious adverse effect. "3. Foreign owners are already allowed into the newspaper market, where there has been no obvious loss of "British" content. "4. The Radio Authority argue that foreign ownership will dilute the "local" nature of services, but there seems no reason why a large US company should have any more reason than a large UK company to degrade the service offered in any local area. "5. Foreign ownership can be difficult to identify, eg in the case of Sky, which the ITC do not consider to be a foreign-controlled company. "6. A position of reciprocity would in effect add up to a ban on American companies, given that the US is extremely unlikely to remove their rules on foreign ownership in the foreseeable future."

¶5.19 Ms Jowell did not accept the recommendations uncritically. An internal minute of 7 February

2002 evidences the fact that she called for a note from the Radio Authority on foreign ownership. The official who considered that note did not feel that it provided a strong case for maintaining a ban on non-EEA ownership. The internal minute also records preliminary legal advice about the strength of the ECHR challenge which had been threatened by News International (see 1.14 above) and Bloomberg. The view of the Department's lawyers was that the matter was not clear cut and that the argument advanced against the secretary of state would involve an extension of the current law if it were to prevail.190

¶5.20 In the result, both Ms Jowell and Ms Hewitt were persuaded that the best course was the

I abolition of the restrictions on foreign ownership and recommended the same to the Prime Minister in a joint letter to him about media ownership rules dated 7 March 2002.191 After discussion, Mr Blair accepted the recommendation.192 In due course the decision was accepted by the Cabinet and incorporated into the Draft Communications Bill which was published on

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7 May 2002. On the issue of foreign ownership, in the course of her statement about the Bill, Ms Jowell told the House:193

"We also intend to scrap the inconsistent rules that prevent the non-European ownership of some broadcasters. It makes no sense that French, Italian or German companies can own television and radio licences, but Canadian, Australian or United States companies cannot. The resultant inward investment should allow the UK to benefit rapidly from new ideas and technological developments. New blood and new competition will help to give our industry the edge."

¶5.21 In her evidence to the Inquiry, Ms Jowell, also explained how the change in policy thinking

in relation to foreign ownership was interrelated with Ofcom's emerging content regulation role:194

"...we were very concerned to avoid a situation where we lifted the restriction on foreign ownership of terrestrial television in a way that invited dumping of low quality content. So the decision on relaxing foreign ownership really moved alongside the development of our thinking on the content regulation role of Ofcom.."

¶5.22 The history above has been set out at some length because it demonstrates an entirely

proper and reasoned approach to a significant policy decision. News International lobbied with characteristic determination (something that they would not have needed to do had there been a pre-existing deal). The records show that in fact the change of policy on foreign ownership occurred as a result of the consideration of responses to a formal consultation process. Indeed further views were sought from the Radio Authority, and preliminary legal advice taken about whether or not maintenance of the ban on foreign ownership would be discriminatory as alleged by News International and Bloomberg, before the Ministers made their recommendation to Mr Blair. These are not the actions of persons seeking to advance a particular agenda, but those of persons seeking to make an informed decision.

¶5.23 The reversal of position is consistent with a trend towards incorporating more, rather than

less, deregulation as the policy developed. Both the removal of the ban on foreign ownership and the relaxation of the 20:20 Rule in relation to Channel 5 (see below) exemplify this trend. The Ministers plainly took account of, and were influenced by, the responses to the consultation process. It was the responses of large foreign owned media companies which proved more persuasive.

¶Channel 5 I 5.24 Consideration of the relaxation of the 20:20 rule in relation to Channel 5 first requires some

background. At the material time, Channel 5 was not for sale. Nor had either BSkyB, or News Corporation, indicated a firm intention to bid for the channel if it did come onto the market. BSkyB was, however, potentially interested as is evidenced by an internal Sky memo, obtained by DCMS through an undisclosed means, in which the possibility, amongst others, of a bid for Channel 5 is countenanced.195 The memo is striking because it also appears to

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show that representatives of BSkyB had previously met James Purnell196 and discussed what would happen if BSkyB bid for a Channel 3 licensee:197

"For the record, shortly after Carlton made its bid for UN&M and Granada made its bids for both Carlton and UN&M, Irwin and I met with James Purnell. He confirmed that the Government would not rely on the 20:20 Rule to block a takeover bid by Sky for a Channel 3 licensee (and one would assume that the same approach would apply to Channel 5). James anticipated that any such bid by Sky would be referred to the Competition Commission (as was the case with bids by the ITV companies for each other). Assuming that the Competition Commission did not find such a bid by Sky to be against the public interest, the Secretary of State would use the statutory power to amend the 20:20 Rule to ensure that it did not block that bid" (emphasis added).

¶5.25 It is not necessary to determine whether or not Mr Purnell did in fact say what is attributed

to him in the note because whatever he did say was overtaken by events when the rule fell to be considered at the highest levels of Government as described below.

¶5.26 After publication of the draft Communications Bill, BSkyB's potential interest in Channel 5 was

confirmed by Tony Ball, then chief executive of BSkyB, who told the Guardian that a takeover of Channel 5: "could be interesting if the price was right".198

¶5.27 Channel 5 was in some difficulty because it had not lived up to financial expectations and

was rapidly losing money. It was entirely realistic to believe that it might be offered for sale to a large media organisation. One of its significant shareholders, United Business Media plc (UBM), had expressed the view to Ms Jowell, that its future best lay as a part of a larger media organisation and had gone so far as to identify BSkyB amongst others as a potential buyer. Lord Hollick, on behalf of UBM, wrote:199

"...As you know we own 36 per cent of Channel 5 which you visited recently. I was responsible for persuading the then Government to consider the award of a further terrestrial franchise in the early 1990s. At the time I told the Government and the ITC that I anticipated that Channel 5 would have a brief and hopefully profitable career, as a stand-alone station but would soon become part of a larger broadcasting and media enterprise where its small but innovative and different voice would thrive. I had three particular options in mind; it should either become ITV 2 (to provide ITV with competitive bulk equivalent to the BBC), Sky 5 (where it would merge with Sky 1 and become the terrestrial arm of Sky), or Cable 1 (where it would become the terrestrial arm of the cable companies). Channel 5 has indeed made a bright start and its ratings have exceeded our I expectations but unfortunately its financial performance has fallen far short of the plan and with its fifth birthday approaching it is still losing well over £50 million per year. The strategic and economic case for a merger of Channel 5 into a larger media

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organisation which would both strengthen its service to viewers and substantially reduce the administrative and programme acquisition costs it is burdened with by operating on a stand-alone basis, is now overwhelming..."(emphasis added)

¶5.28 Quite properly, Ms Jowell responded to UBM assuring Lord Hollick that his comments would

be considered closely but being careful to state: "You will appreciate that I cannot discuss the detail of our thinking at this stage ..."200

¶5.29 Channel 5 had a very small audience share and did not enjoy universal coverage.201

Nevertheless, the concern in some quarters was that if it was acquired by News Corporation, or BSkyB, then with the benefit of heavy investment it could grow in influence and audience share and be used to cross-advertise BSkyB's satellite channels. The scenario was taken seriously enough to have been specifically covered in Ms Jowell and Ms Hewitt's briefing ahead of their appearance before the Joint Pre-Legislative Scrutiny Committee.202 It is in this context that the Government's modification of the 20:20 rule falls to be considered.

¶5.30 Despite a general wish to deregulate, the direction initially and jointly taken by Ms Jowell and

Ms Hewitt in relation to Channel 5 was in favour of maintaining the 20:20 rule. Thus, on this point, their joint recommendations to Mr Blair, made by letter dated 7 March 2002, following the formal consultation, and in preparation for the publication of the draft Bill, were:203

"Cross media ownership – removing most media-specific rules, leaving it to competition rules to prevent undue dominance; maintaining restrictions on significant cross-ownership of newspaper and TV assets;..." (my emphasis)

¶and were detailed in annex 3 thereto as meaning:204

"A continuing restriction on large newspaper groups and subsidiaries (News International and Sky, Trinity Mirror, and possibly Associated Newspapers in the near future) owning any significant share of ITV or Channel 5 companies. Other newspaper group, with less than 20% of the national market, would now be able to invest in terrestrial TV without the acquisition having to pass a public interest test." (my emphasis)

¶5.31 The change in direction came as a result of discussions, shortly thereafter, with Mr Blair, and

is evidenced by a discussion paper sent to him by Ms Jowell and Ms Hewitt. It is notable that Mr Blair was not seeking to impose a particular solution, rather he was seeking further to explore different options. The recommendation specifically to remove all restrictions on the ownership of Channel 5 came from the Secretaries of State and not from the Prime Minister:205

¶I "At our meeting this week, you asked for some further discussion of the merits and

defects of the different approaches we could take to the rule preventing anyone owning 20% of both the national newspaper market and a Channel 3 or Channel 5 service. Our original recommendation was to keep this rule. Three other options are discussed in the pages that follow. Of these, we would recommend Option 3, which

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removes all restrictions on the ownership of Channel 5, to allow free investment and growth in that channel, while protecting the independent voice provided by ITV, by far our largest commercial public service broadcaster."

¶5.32 Having said that, Ms Jowell, recalled that this exploration of deregulatory options was itself the result of Mr Blair encouraging her to go further than she might otherwise have gone:206

"I have no detailed recollection of the conversation at that meeting ten years ago, save to say that the Prime Minister's instincts in relation to this were, I think, more deregulatory than mine. He pushed me further than I might have gone myself on exploring deregulatory options, but that was a constructive part of the process."

¶5.33 As to the recommendation, it was itself carefully reasoned in the discussion paper:207

"OPTION 3 – KEEP A 20% RULE FOR ITV, BUT NOT FOR CHANNEL 5 Possible effect – News Corporation/BSkyB own Channel 5; ITV companies (or perhaps eventually a single ITV) separately owned by a separate media giant with no British newspaper interests – Bertelsmann, or Disney perhaps.

– Channel 5 would be free to benefit from all sources of additional investment, allowing it to grow over time into a more serious competitor to ITV. ITV will also be able to benefit from new sources of investment, as long as that investment doesn't come from the British newspaper industry.

Advantages – This suggestion would be proprietor-neutral – it allows anyone to buy and invest in Channel 5.

– ITV would survive as a voice independent of newspapers' editorial agendas, but will still be able to benefit from new sources of investment.

– There are some obvious justifications for making a distinction between ITV and Channel 5:

C5 doesn't cover the whole of the UK population, has low viewing figures and few public service broadcasting commitments. ITV has a much more defined public service role, and comprises 15 regional licences that cover the whole country. These regional licences are already the focus of a 20% rule, and cannot be joint-owned with more than 20% of a I region's press. – We could try to protect the independence of Channel 5 by maintaining or even strengthening its public service requirements.

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Drawbacks – Although Channel 5 is small in terms of viewing figures and influence now, with increased investment it may grow its share of both over the coming years, to remove the most obvious distinctions between it and ITV.