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Regulating media and broadcasting networks in a changing media environment: speech at the Australian Broadcasting Summit 2007



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Australian Broadcasting Summit 2007

Regulating media and broadcasting networks in a changing media environment

5 March 2007

Graeme Samuel, Chairman

Introduction

Broadcasting as we know it today is at a crossroads. For years discussions about the future of the industry have been dominated by debate over whether another commercial television network would be viable; the impact pay

television would have; and what threats might be emerging in the form of new technologies.

Today, we see a range of new factors coming into play. Digital radio is about to arrive, mobile systems are now so advanced that we are able to watch television and download music on our phone, and the internet continues to grow at a rampant pace, bringing with it new ways of consuming information and entertainment.

We also have businesses breaking out of their previous pigeon holes, with telecos beginning to show an interest in providing content, rather than just the means of providing it. Newspapers and other ‘old’ media are also rushing to reposition themselves for the new digital age. To top it off, major media players are reported to be poised in the blocks waiting for the Commonwealth Government to fire the starter’s gun on new media laws that may open the way for more mergers to take place than have been possible over the last two decades.

For broadcasters, who until recently have had a clear distinction as to where they sit in the market, change means an end to certainty.

New opportunities for the established players means a range of challenges, as the rules on who can be a ‘media provider’ and even what constitutes ‘news’ continue to be re-defined by journalists, entrepreneurs and media companies.

These changes also mean new challenges for regulators. Regulation is only meaningful if it is kept up-to-date with the changes occurring in the market.

One thing that does not change however, is the grounding philosophy of the Australian Competition and Consumer Commission (the ACCC) - to promote vigorous and effective competition for the benefit of all Australians.

Today I want to talk about these opportunities and challenges for both industry and the ACCC in some detail. Looking first at the technology changes around us, including digital television and digital radio, I’d then like to talk about the important changes that are happening to our cross-media laws and some of the important work the ACCC and the Australian Communications and Media

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Authority (ACMA) are doing to prepare for the new laws on cross-media ownership, once they are proclaimed.

The changing media landscape

On the technology front, these changes are largely being driven by the digitisation of content and the roll-out and take-up of internet services that enable digital content to be delivered to a range of new devices.

In the past, the main forms of content - text, audio and moving images - were very much tied to the primary forms of delivering media - that is, newspapers, radios and television sets, which were generally considered as in separate markets. Digitisation is putting an end to that with users now able to choose any number of different ways of receiving their news and entertainment fix - be it on a computer screen at work, on a mobile device on the train or podcasting their favourite radio show for listening at a more convenient time.

Alternative platforms are emerging on a nearly daily basis. I was reading with interest recently about the way computer games consoles are now evolving into multimedia devices and are no longer simply for playing games. As well as handling photos, videos and web browsing, these devices are now positioning themselves to run IPTV. Microsoft has announced that IPTV could be available by the end of the year via its Xbox 360 console in a number of countries in cooperation with several major partners, including AT&T, BT Group PLC, Deutsche Telekom, T-Online in France and Swisscom.

The technology is mind-boggling - we’ve already seen the arrival of internet fridges - and frankly, we don’t really know what will be coming next.

What we do know however, is that most of these devices will depend very heavily on improved ways of delivering content, be it over standard copper cables, new fibre optic networks, mobile phone or other wireless systems or through more traditional forms of broadcasting. We can see all of these delivery

platforms as pipes down which the information flows - and the pipes are getting bigger all the time.

One of the most important pipes is the broadband access network. Over time, the reach and capacity of this pipe has grown considerably, as network owners continue to upgrade and extend their fixed line and mobile networks. There are also several proposals to build fibre optic networks and the ACCC is currently in discussion with several groups about how these networks might be introduced. In addition, continued advances in digital technology, such as improvements in compression technology, is increasing the amount of content that can be delivered to consumers over both fixed line and wireless networks.

The fact that more content can be delivered through these pipes and reach a growing number of consumers has significant implications for media proprietors - not only does it expand their possible business models, it may also make it easier for new players to enter the field.

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The reach of terrestrial broadband continues to increase and is now available - at least wirelessly - to 98 percent of the population.

Maximum broadband download speeds for retail users are also increasing. Around 91 percent of the population is connected via the copper network to local exchanges offering ADSL or ADSL2+ broadband speeds, which range from up to 8 Mbps to 20 Mbps. To put that in some perspective, that’s fast enough to deliver DVD-quality television in most cases.

The ACCC’s February 2007 Broadband Snapshot shows that broadband take-up continues to grow at a rampant pace. The report estimates that as at 30 September 2006, broadband take-up across business and household users has increased by over 1.2 million services, or 51 percent from the September

2005 figure of around 2.4 million.

The Australian Bureau of Statistics’ Internet Activity Survey report released in February this year shows that broadband Internet use is booming in households. Based on ABS figures, it is estimated that household broadband penetration is now 42 percent, which is around a 130 percent increase over the

last 18 months. Interestingly, wireless now makes up around 5 percent of all broadband connections.

Not only are different types of content converging and being delivered to a single device, content is increasingly going mobile.

The rollout of 3G mobile networks is proceeding apace, with Optus announcing its plans to build a new 3G mobile network with a national footprint only four months after Telstra launched its NextG network.

Mobile carriers are already delivering short video clips to third generation mobile handsets, and Telstra is offering Foxtel services to mobiles over its NextG network. Initial reports suggest these services are well received - according to Hutchison, its 3 Mobile users spent a mind-boggling 542 500 hours watching 3.5 million video streams from the 2006 Big Brother series last

year.

The number of digital platforms available in Australia is set to increase, but there are other developments beyond the rollout of new broadband services that will have a profound impact on the broadcasting industry.

Digital TV

As part of the recent media reforms, national licences for two new digital channels - Channel A and Channel B - will be allocated. These channels have been set aside for new and innovative digital services, which, in the case of Channel B, may include mobile TV services. The licences are expected to be allocated this year by ACMA.

As you will be aware, the ACCC will have a role in administering access arrangements for Channel B. This will involve ensuring potential bidders for the Channel B licence have submitted an acceptable access undertaking to the

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ACCC prior to their participation in ACMA’s allocation process. Following the allocation, the ACCC will have an ongoing role in overseeing the access regime, including any subsequent variations of the undertaking.

The ACCC recently concluded a first round of public consultation on the proposed access arrangements. The ACCC’s Discussion Paper and public submissions are available on our website.

Submissions were received from a range of stakeholders, including traditional media content providers including the ABC, Seven Network and Fairfax, as well as new media players, including Reeltime. Converging companies such as the four mobile network operators also provided views on the likely uses of the channel, potential competition concerns and proposed access arrangements.

It will not be clear which services will be provided using Channel B until the licence is allocated. However, most of the submissions to the ACCC suggest Channel B will likely be used to provide broadcast mobile TV integrated with 3G mobile phone services. Others proposed in-home TV or IP based services.

The likely demand for this service is obviously harder to assess, as broadcast mobile TV is currently unavailable in Australia and is still a nascent service overseas.

The ACCC is considering stakeholder submissions carefully as we continue to develop the decision-making criteria for assessing undertakings and general guidance for industry. Our objective is to minimise any potential competition concerns that could arise from the allocation of the Channel B licence while ensuring an appropriate degree of overall access by other content providers and encouraging further roll out of new services.

We also recognise the importance of a high degree of certainty for potential bidders going into the allocation process and the need to ensure access undertakings contain transparent obligations and procedures to minimise any difficulties access seekers may face. We also understand that this is an important new form of infrastructure and we must be careful to ensure it does not become a closed shop where one operator is able to limit what is offered to the public.

The ACCC is hoping to release a further Discussion Paper on the decision-making criteria and procedural rules for industry comment in the near future.

Of course, I should note for completeness that potential bidders for either Channel A or B licences may need to approach the ACCC to seek clearance under section 50 of the Trade Practices Act 1974 (the Act) in the normal fashion before participating in the allocation process.

Digital Radio

The other new platform, of course, is digital radio. The Government has set 1 January 2009 as the launch date for new digital radio services. Commercial radio broadcasters view digital radio as a long term investment and are

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expected to spend an estimated $400 million in building a digital network, rolling out digital services nationally and driving consumer uptake of the new technology. Car manufacturers are already looking at introducing digital radios into their upcoming models in time for the official start date.

Digital radio services could offer not only crystal clear audio but also the ability to pause and rewind live radio. There may also be scope to display additional information, such as text and images, on certain devices. This added functionality has obvious advantages for consumers and advertisers alike, and is another example of how traditional media boundaries are blurring.

The Government has said that the ACCC will have a role in overseeing access arrangements for digital radio to ensure commercial and community broadcasters can deliver new services over this platform. Spectrum allocation and licensing arrangements will continue to be managed by ACMA.

The ACCC and ACMA’s roles in assessing media mergers

As you will all be aware, the Parliament last year passed a number of significant reforms to Australia’s foreign and cross-media ownership laws, and we expect those laws to come into effect at some stage this year, once they are

proclaimed by the Minister.

Much has been made of the new rules that limit owners to controlling no more than two of the three media platforms of television, radio or print in any one market.

There is of course also a voices test in the legislation, which prevents the number of independent media operators falling below five voices in metropolitan areas and four in regional and rural markets.

These in themselves will be important tests that media companies will need to satisfy to gain approval of a merger, and these safeguards will be monitored by ACMA.

It is important to remember that these new hurdles are additional to existing requirements, including perhaps one of the most important tests, the need to satisfy section 50 of the Act, which will be the ACCC’s focus.

There are likely to be times when both the ACCC and ACMA are looking at a proposed merger at the same time, each applying its own tests. I can announce to you today that to aid that process and avoid overlap as much as possible during our investigations, the two regulators will be requesting a waiver from merger parties allowing confidential information provided to one agency to be shared with the other.

This will be done in such a way as to protect the privacy of the parties providing the information, but at the same time allowing the regulators to conduct a smooth, coordinated assessment of the various aspects of a proposal. This arrangement will have many benefits, including potentially speeding up the assessment and investigation process, avoiding repeated requests for the

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same information and avoiding the risk of parties providing different information to the two parties.

ACMA will have its job to do in assessing any media mergers that arise, and so will the ACCC. Working in a more coordinated way allows both agencies to do their job more efficiently, which of course also benefits the parties involved.

Regardless of what other tests media companies need to pass before mergers can proceed, they will not be allowed to proceed if they appear likely to lead to a substantial lessening of competition.

Recent market activity - when is an acquisition likely to lead to a substantial lessening of competition?

There have been some significant purchases or other financing arrangements by several major media owners in recent weeks and months, which many have interpreted as a jockeying or positioning in preparation for a merger frenzy once the new media law changes come into effect.

I’m not sure I entirely agree with some of the breathless predictions that media barons are preparing to pounce, but nevertheless such major acquisitions in the media sector do register as more than just a blip on the ACCC’s radar. It’s important to remember however, that any purchases happening at the moment must still satisfy existing foreign and cross-media ownership restrictions.

But these purchases or positioning if you will, do raise some interesting questions for the ACCC charged with ensuring competition is not threatened by competitors taking shareholding interests in each other.

It is important to remember that the prohibition contained in section 50 is against any acquisition of shares or assets that “would have the effect, or be likely to have the effect, of substantially lessening competition in a market”.

In connection with its assessment of the application of this prohibition to any acquisition of shares, the ACCC must consider whether the acquisition gives rise to circumstances which, after taking account of the analysis of relevant markets, and competition in those markets, would be likely to lead to a substantial lessening of competition.

The Act does not prescribe the circumstances where the acquisition of specific shareholding interests, for example small minority shareholdings, might give rise to these competition concerns. That becomes a matter for examination by the Commission having regard to all the relevant circumstances.

Without being prescriptive, issues that we would initially examine are whether the shareholding interest concerned either alone or taken together with other “friendly” or “supportive” shareholding interests would enable one or more parties to control or substantially influence the operations of the target company.

Under the current media ownership legislation, owners of one form of media in a market, say, a newspaper, are not allowed to control another form of media in

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the same market, for instance a radio or television station. Normally, acquiring more than 15 percent of another form of media is regarded, by the media ownership legislation, as gaining control.

Some interpret this limit of 15 percent as the point where ownership begins to look more like a controlling interest under the Trade Practices Act, and thus potentially throws up questions of competition. Others would point to other numbers as the point where alarm bells should start ringing.

However the matter is more complicated than a simple line in the sand. Many here today will remember Kerry Packer famously testing that 15 percent limit when he purchased a 17.7 percent stake in newspaper company Fairfax in 1995. Despite crossing that threshold, Packer, the owner of a television network, was found by an Australian Broadcasting Authority investigation not to have been in a controlling position because his share in the company was still less than that owned by rival Conrad Black.

Parallels can be drawn with the current debate over control. An ability to influence control over a company may kick in well below the 15 percent mark, if for example two significant shareholders decide to use their combined voting

powers to influence the direction of a company. But it is impossible to give a concrete answer on when competition concerns might be triggered, as every case is unique. I note simply for comparison that under the Corporations Law, the threshold at which control becomes an issue in the context of a takeover is generally accepted to be 20 percent.

Our analysis is an exhaustive process of examining and defining the market, talking to involved parties, their competitors and their customers and making a sober, informed decision on the level of competition based on the facts, rather than emotive responses or comment in the press.

What is perhaps even more important than individual ownership levels is the watch we keep over potentially anti-competitive behaviour. This sort of activity can occur regardless of the level of ownership an individual may hold in another business. Where there is evidence that they may be attempting to harm a competitor through anti-competitive conduct, be it via a financial interest in that competitor or otherwise, the ACCC stands ready and well-equipped to respond.

Companies are not required to notify the ACCC of mergers before they proceed. However, we encourage them to do so, as the ACCC will conduct its enquiries regardless of whether the parties involved have approached us in the first instance or not. Where a merger is likely to raise concerns, the ACCC does not hesitate in seeking injunctions to block deals proceeding, or where they have already occurred, seeking forced divestitures or unwinding of arrangements.

Media merger guidance

Before we can make any assessment of whether a merger is likely to raise competition concerns, the ACCC first needs to define the markets that the two

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parties involved operate in, and how much overlap there is and whether they provide competitive tension for each other.

In mid 2006 the ACCC released a paper providing broad guidance on the Commission’s approach to assessing future media mergers. This paper is available on the ACCC’s website.

In the past, the ACCC has regarded the media as four distinct products - free-to-air television, pay television, radio and print. Those products have been thought of as having little overlap in content or advertising.

With the technological changes I have just mentioned under way, it is clear we can no longer rely on these neat pigeon holes that have been reasonably reliable in the past.

As those traditional media boundaries blur, focus may shift from the way information is delivered to the actual products media companies offer. If, as we have already noted, television stations, newspapers and radio stations begin offering content in a similar format - let’s take video updates of selected news stories as an example - do they suddenly cease to be different? And does that mean that where in the past they may have been considered to be separate markets, does this now make them direct competitors?

For a consumer, it may make little difference if they are downloading their morning update from the NineMSN, Sydney Morning Herald or 3AW websites.

In this regard, we now consider there are three main categories the ACCC will investigate as part of its assessment of any proposed merger: the supply of advertising opportunities to advertisers; the supply of content to consumers; and the acquisition of content from content providers.

Other more specific products - such as premium content; classified and display advertising; and the delivery of news, information and opinion - may also be critical when considering particular mergers.

It may be that the 4/5 number of voices test may not be the only point at which the different opinions and points of view being offered by media players comes into consideration. That diversity of voices is a particularly pertinent concern in rural and regional areas that do not have the same number of operators as the cities, and I will come back to this issue in a moment.

But having said this, the general framework for merger analysis will remain the same for media mergers as it is for all mergers.

So if we take supply of content as an example, if the price of one source of content rises, or its quality falls post merger, the question is the same one that arises in all mergers - what are the real alternatives for consumers?

Where new services develop or look likely to do so in the foreseeable future, we will take them into account in assessing media mergers and acquisitions under the provisions of the Act. But we won’t base our decisions on mere speculation.

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And at all times, the ACCC will be looking closely at any content, advertising or news and information markets where concentration appears to be occurring.

Not only in Australia as a whole, but also in regional markets, as the Act requires.

Regional markets

As I mentioned, there have been specific concerns raised about the level of media diversity in regional markets that do not enjoy the same level of choice as the larger metropolitan areas. It is a perfectly valid concern from those living in regional areas that they not be left with reduced choice as the result of mergers or acquisitions proceeding. This has been an issue of particular concern to operators of radio stations in regional areas, who have expressed concern that diversity safeguards introduced with the new media rules may impose onerous obligations that threaten the viability of some of their operations.

There are specific protections built into section 50 of the Act that require the ACCC to consider the impact of proposed mergers on markets in regional Australia. Consequently, the ACCC will take into account the differing circumstances in rural and regional Australia compared with urban areas. The

ACCC understands the importance of local content in these areas and that consumers rely heavily on local suppliers of news and information, as compared to consumers in urban areas who have greater access to a variety of media choice. We also understand that much of the additional choice being opened up by the internet and other more global forms of communication is not always a suitable substitute for local information. CNN or the BBCWorld Service might be very handy for finding out what’s happening in the Middle

East, but you’re likely to be disappointed if what you really want to know is what time the local dog show starts.

Competition in those local markets may be more vulnerable following a merger than competition in the larger cities. As such, the ACCC will continue to consider implications at the local and regional level when assessing mergers proposed for those areas, as we did in the Macquarie Bank case.

Media diversity

One of the major issues that has been focused on by the media in its discussion of media reforms over recent times has been the issue of diversity, and it's about that that I want to make a few comments.

It's been suggested that the issue of diversity is purely a social issue, and not an economic one, and thus not able to be dealt with under section 50 of the Trade Practices Act. Let me say quite clearly that diversity is not, in the view of the ACCC, solely either a social or an economic issue; it's both. We cannot guarantee diversity into the future, but lest this is interpreted as saying that the ACCC cannot deal with reductions of diversity flowing from media mergers, I want to make it quite clear what our position is.

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Diversity needs to be seen from three perspectives: content producers such as editors and journalists in the context of news and information, advertisers, and consumers. A lot of the current debate about diversity is flowing from content producers - editors and journalists - who have their own views as to the desirability of the diversity of opinion from their viewpoint as producers of that content. But diversity is about providing a choice of content, views and style. Competition motivates and forces suppliers of content to serve the diverse needs and demands of advertisers and consumers. As to content, in terms of

entertainment, news, information and opinion, and as to the means of distributing that content to consumers so that they can receive it in the manner that they want to receive it.

Inevitably there is a desire by media outlets to distinguish themselves from their competitors. Competition will force content producers to produce diverse content. Above all, competition is directed towards and ensuring that, as far as possible - and this is important - it's the demands and preferences of consumers that are the drivers, not the views of legislators, media proprietors or content producers.

How would these principles apply to a media merger? Simply put, one way a media merger would generate competition concerns would be if the merged company could substantially reduce the quality of the content it supplies to

consumers. Taking newspapers as an example, a publisher who is less constrained by competition could downgrade the general presentation and layout of its newspaper. The proportion of advertising to content could be increased. The use of colour might be decreased, and so on.

But the publisher could also reduce the quality of its newspaper by reducing the diversity and coverage of content provided to readers. Clearly, the potential for the newspaper to do this is increased if consumers do not have alternative sources of equivalent content, for example, news content.

But newspapers also earn revenue from advertisers and there is an important connection between local content and advertising that is important in discussions about diversity. For free-to-air television networks and radio, advertising is their only source of revenue. And any advertiser would be concerned about their advertising reaching fewer prospective customers because the media proprietor has reduced the quality and diversity of its content.

Acquisitions or mergers can adversely affect the quality of a newspaper for example by downgrading the general presentation or layout of their publication or by reducing the diversity of its content. The ACCC recently considered these issues in detail in our assessment of News Ltd’s acquisition of FPC Community Media Group in Sydney.

In the short term, cutting content may reduce the costs to the owners of the newspaper, but in the longer term, it is likely to impact on the number of readers bothering to pick it up.

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Even in markets where a community paper may be delivered free to front lawns, it is possible to hurt readership by making the product less appealing. Our investigations tell us the most likely way a community paper would try to exercise market power would be by reducing quality.

But with a reduced readership comes the issue of less appeal for advertisers. Advertisers after all are primarily interested in having their products and messages displayed to the largest number of eyeballs possible. If readership declines the paper loses advertising appeal and therefore revenue, thereby only hurting its own business.

In the case of suburban newspapers such as those considered in the News Ltd/FPC case, there is a strong incentive for owners to continue to provide relevant local content, as this is what appeals most to readers of these publications, potentially increasing the number of readers and therefore making them attractive to advertisers.

This is why measuring the potential effect on advertisers is a critical aspect of assessing how diversity might be affected in the context of potentially reduced competition.

Lessening the total number of media owners in an area may have the effect of reducing diversity of content, but it is important to remember that owners are constrained to a point by the reader/advertiser relationship. It is also worth

noting that retaining separate owners in a market does not guarantee quality or diversity. Owners are always free to unilaterally change their format, increase the ratio of advertising to content or narrow the range of content they provide in an attempt to cut costs.

Mergers do not therefore automatically mean diversity is likely to be reduced if it is commercially sensible for the new owner to maintain it. Likewise, separate ownership does not necessarily always ensure diversity for customers.

So, in any media merger, the ACCC will also be considering whether advertisers have real alternatives to the merged media company. If they don’t, again this would increase the potential for a media merger to substantially lessen competition.

I would stress that, in all media mergers, the ACCC will carefully consider all evidence provided to it suggesting that a media company would be likely to reduce the diversity of its content post-merger. But the ACCC is not the diversity police. A reduction in diversity could occur, and indeed can occur right

now under current law, by the unilateral action of an existing media proprietor. Specifically, commercial conditions may push proprietors to broaden or narrow the range of content they provide, because such a change would protect their profitability.

But in a merger context, a reduction in competition can lead to a reduction in diversity. Where this arises, the ACCC will take this into account as part of its competition assessment under section 50 of the Trade Practices Act.

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Conclusion

Much of the recent media debate has centred around speculation on prospective deals affecting ownership of existing media organisations.

But convergence is potentially opening up a vast array of new channels for distribution of audio visual and print entertainment, news, information and opinion. With new delivery channels comes the possibility of new forms of content emerging as well, thereby potentially increasing choice for consumers.

The ACCC’s challenge during this evolution of the media market will be to promote competition and not allow incumbents to impede the development of competitive choices for consumers.

Thus, the ACCC is focussing on ensuring minimal roadblocks to efficient investment in new infrastructure that will open up channels of distribution. Where it is economically inefficient to duplicate infrastructure our job will be to ensure access is provided on reasonable terms to competitors and the owners of the infrastructure, thereby providing competitive choices to consumers. In other words, we’ll be trying to keep the pipes clear of blockages.

The ACCC is also focussing on control of content and content producers. With an increasing diversity in distribution channels, it is essential that content and content production is not concentrated in a manner that can inhibit competitive choices for consumers.

This is the process whereby the Trade Practices Act 1974 and the ACCC can make a contribution to preserving and potentially enhancing diversity in the media offered to the Australian community.

Finally, let me place the role of the ACCC in its proper regulatory perspective. When we observe potential anti-competitive arrangements or conduct about to or having taken place, or when we have before us a potential or proposed

media merger, we will deal with these matters independently and objectively. This will occur after conducting rigorous analysis, with appropriate stakeholder and public consultation. Our decisions will be made on an informed basis and consistent with our responsibilities under the Trade Practices Act.