Transcript Slide 1

Quiz 1: Case study
Evidence A
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1. How might we understand the concept of a ‘Public Service’
broadcaster in traditional economic terms?
As the provider of a merit good. The ‘public service’
points towards a broad benefit for society as a whole,
not just the immediate viewers.
2. Why might it be difficult to say how great or small these
benefits are?
Educational programming and the political and social
benefits of impartial news channels provide benefits
over the long-term. These will be extremely difficult to
measure as so many other factors will come into play in
determining viewers’ outlook on life.
Evidence A
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3. Why is the ‘compulsory annual licence fee’ a regressive tax?
Because every household with a television pays the same
size of licence fee, poor households pay a higher
proportion of their income than rich ones. This is the
definition of a regressive tax.
4. What features of the Licence Fee makes it less regressive
than a simple tax per person?
Households where one occupant is over 75 do not
have to pay it. And the elderly are more likely to be poor
 Large families are also more likely to be poor, yet only
need the one licence while deriving more benefit from it
Evidence A
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5. What other examples are there of Sky’s andVirgin’s
business model, whereby income is generated by both direct
purchases of the product and also advertising?
 Newspapers: most rely on both a cover price and
advertising revenue
 Online stores, which will often take advertisements
as well as direct payment for goods
 Public transport, which sells tickets and also sells
advertising space
Evidence B
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6. How does Evidence B illustrate the chain of distribution?
Some of its partners such as National Geographic
and Discovery Channel are pure content providers.
YouTube acts like a shop: it is the means by which the
product is delivered to the final customer.
7. Why then don’t we have to pay to watch these channels on
They are funded by advertising, and also act as a
‘shop window’ to lead interested viewers to Pay-TV
websites where they will have to pay.
Evidence B
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8. Why might advertisers prefer ‘pre-roll’ advertisements to the
traditional ‘alongside’ advertisement?
They are much harder to ignore.
9. What is the danger of too many lengthy pre-roll advertisements
They will damage the willingness of viewers to use the
Evidence B
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10. Why challenge doesYouTube present to conventional TV
networks, such as those mentioned in Evidence A?
 YouTube provides the same basic product, namely
video content. Enormous quantities are available ‘on
 Its online presence is of immense importance as
average hours spent in front of a PC continue to
 It may reach a ‘critical mass’, where it contains so
much of the video people want to watch that it
becomes the ‘default’ platform in most people’s
Evidence C
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11. What is the (brief) history of the licence fee?
It is almost a century old. It was the original way to pay
for radio broadcasts back in the 1920s, and was
extended to television in the 1940s – before the first
competitor arrived in the shape of ITV in the 1950s.
12. What is the fundamental justification for the licence fee?
The fact that it is used to fund ‘Public Service’
broadcasting. This concept includes the impartial
dissemination of news, educational content and a
commitment to cover minority-interest subjects.
Evidence C
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13. What is the fundamental objection to the licence fee?
The fact that it is illegal to watch TV without a
licence, even if you never watch any of the content
you are paying for.
14. What change in market structure presents a challenge to
the Licence Fee?
The rapid expansion in the number of channels from
just four in the 1980s (two of which were the BBC’s)
to over 400 now.
Evidence C
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15. What sort of tax is the Licence Fee?
It is a tax which is raised for just one purpose, in this
case to fund the BBC’s Public Service broadcasting.
Such a tax is known as an ‘hypothecated tax’. The
BBC contracts out the collection of this tax to a
variety of private firms, and the money goes first to
the Government. The Government then hands it
over together with roughly 16% extra to cover the
cost of free licences for households where someone
is over 75.
Evidence D
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16. The ‘Switchover Help Scheme’ is a scheme to help the
registered disabled and over-75s switch from analogue to
digital television. Given that the take-up for this scheme
was less than anticipated, why could the BBC not simply
spend the money on its other Public Service obligations?
The whole concept of the Licence Fee is in question,
as the number of channels proliferate. The decision
reflects declining public support for the Licence Fee.
17. Why did the BBC argue for the surplus to be given back
to the public?
Because it is desperate to maintain the convention
that the BBC receives the entire Licence Fee.
Evidence D
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18. Why did Ofcom suggest it the surplus be given to ITV
and Channel 4?
Because they also have Public Service obligations. As
TV audiences have fragmented, so it has become
harder for ITV and C4 to fund these obligations out
of their only source of income, namely advertising
Evidence D
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19. How would Ofcom’s suggestion have radically changed
the nature of the Licence Fee?
It would have changed it from a tax used to support
the BBC to a tax used to support Public Service
broadcasting – whoever provided it.
20. What is the fundamental argument in favour of Ofcom’s
It would have brought real competition into the
provision of Public Service broadcasting and into the
use to which the Licence fee is put. Currently, the
BBC has a monopoly on its use.
Evidence E
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21. How does the decline in the BBC’s market share compare
with that of the main channels funded by advertising?
They declined at very similar rates over 1997-2008.
The BBC declined from 42.4% to 29.6% - a decline
of 30%. ITV, C4 & C5 combined declined from
45.8% to 31.6% - a decline of 31%.
22. What is the fundamental explanation for this decline?
The increase in the number of channels from 5 in
1990 to over 400 in 2008 [Note: the market share
attributed to Sky and Virgin is actually the market
share of all other channels combined].
Evidence E
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23. What is the name for the many niche providers, who
collectively take away market share from the market leaders?
The ‘long tail.’
24. To what can we attribute the growth of this long tail?
The main reason is the advances in technology which
have increased the number of possible channels from
five analogue, terrestrial channels to many hundreds.
Satellite transmission, and digital transmission are
the main drivers behind this multiplication of
possible channels.
Evidence E
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25. What further technological advances are currently
multiplying the number of channels yet further?
 Broadband access is breaking down the distinction
between TV and the Internet – video content may
now be watched on any one of literally millions of
 Then Internet Protocol TV (IPTV) is making it
possible to view that content through household
television sets
 And mobile TV is bringing video to hand-held
Evidence F
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26. Why would the Competition Commission get involved in a
market likeVOD, which is still in its formative stages?
That’s the very best time to get involved. If they allow a
merger to create a monopoly as the industry gets under
way, then potential entrants may find it impossible to get
a foothold later on.
27. What was the key fact that led to project Kangaroo being
turned down?
Kangaroo would have controlled ‘the vast majority of
UK-originated content’ (lines 11-12). Elsewhere in the
report, the CC makes it clear that overseas content was a
poor substitute for UK content in viewers’ minds.
Evidence F
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28. What is the flaw in the argument in the final paragraph,
which points at ITV’s and Channels 4’s current financial
The issue is whether the proposed merged entity
would wield market power. This has nothing to do
with the current financial strength of the individual
29. Why was BBCWorldwide involved rather than the BBC?
BBC Worldwide is the commercial arm of the BBC,
and is responsible for selling BBC content around the
world as well as managing spin-off, potentially cashgenerating activities such as VOD.
Evidence F
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30. What is the best argument made here in favour of
allowing the merger to go ahead?
It is Michael Grade’s comment that Kangaroo would
be ‘competing against dominant global brands’ –
presumably the likes of Time Warner and Disney. It
is sometimes possible for global competition to
provide the same benefits to consumers as domestic
competition. The CC turned down this argument
because its research indicated that overseas content
was a poor substitute for UK-origin content. If this
view is correct, then Kangaroo would have had real
monopoly power.
Evidence G
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31. How does President Sarkozy’s proposal illustrate the
mixed motives of so many major political decisions?
While an economic case could be made for freeing
French state TV from the need to accept
advertisements, it is also the case that the President’s
personal friends stand to make a lot of money.
32. Why might the EC Competition Commissioner want to
minimise state subsidies for Public Service broadcasting?
So that competition flourishes in the wider
broadcasting industry – without unfair, subsidised
competition from the Public Service broadcasters.
Evidence H
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33. The table shows that the Licence Fee model, as a means of
supporting Public Service broadcasting, is very common across
Europe. What is the historical explanation for this?
The BBC led the way in the early 1920s with Public
Service radio funded by a 50 pence Licence Fee. It was
widely admired – and emulated – across Europe.
34. What is the theoretical benefit of Licence Fee funding
compared to a government grant?
It should make the state broadcaster more independent
of government – but this only works if the size of the
Licence Fee is set independently of government.
Evidence H
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35. What is the obvious benefit of allowing advertising on
Public Service (i.e. State) TV?
The Licence Fee can be lower. Almost all the
countries in the Table which accept this advertising
have lower Licence Fees than those which do not.
36. What is the obvious drawback of allowing advertising on
Public Service TV?
It will be under commercial pressure to maximise
viewing figures, which may conflict with its
educational and news-gathering priorities under its
Public Service objectives.
Evidence H
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37. Which three countries in the Table rely entirely on the
Licence Fee to fund Public Service broadcasting?
Denmark, the UK and France (though French state
TV has in reality not yet abolished advertising).
38. Denmark and the UK are the only two countries whose
Public Service channels rely entirely on a Licence Fee. Why,
other things equal, does Denmark’ s Licence Fee need to be
over 50% higher?
The UK benefits from economies of scale. Denmark
has a population of under 10% of the UK’s 60
million. So the cost per household of providing a
remotely equivalent service will be much higher.
Evidence H
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39. Does the Table provide support for the principle of funding
Public Service broadcasting through a Licence Fee?
Not necessarily. All it shows is that a lot of other EU
countries use this method. In the 1980s , Britain led a
global shift towards privatising state-run industries. It is
always possible that the UK could set a similar lead here.
40. Does Public Service broadcasting have to be funded out of
taxation i.e. by a Licence Fee or a government grant?
Probably. While ITV and C4 fund their Public Service
obligations from advertising revenue, as television
audiences fragment so does the advertising revenue. This
model is becoming increasingly difficult to sustain.
Evidence I
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41. Does this information support the idea that TV viewing
is a demerit good?
 Only at the margin. Most of the adverse health
impacts of watching too much TV generate costs
which are primarily internal, not external
 Correlation does not prove causation e.g. being
obese and in poor health might cause you to spend
more time watching TV – not the other way round
 We also have to bear in mind the external benefits of
watching TV, which lie behind the whole principle of
Public Service broadcasting