CONFIDENTIAL
Comparative Review of
Content Regulation
A McKinsey Report for the Independent
Television Commission
1 May 2002
SUMMARY OF KEY FINDINGS
This report contains the findings of a review of content regulation in ten
countries undertaken by McKinsey & Company for the Independent
Television Commission. The countries reviewed were:

Europe: France, Germany, Italy, Finland, Sweden

Asia/Pacific: Japan, New Zealand, Australia

North America: United States, Canada
The review has highlighted four overarching trends in the regulation of
content around the world – trends that are affecting all countries, albeit to
varying degrees.
1. Access is emerging as the key theme of modern content regulation.
Regulators everywhere are seeking to ensure the widest possible access to
content, especially through new networks. In doing so, they are confronting a
fundamental dilemma – how to encourage financial investment in these new
networks and services, whilst minimising the risk of potential market
dominance:

Modern regulation is increasingly concerned with ensuring
widespread access to content, delivered through new networks and
services (such as digital television, mobile telephony and
broadband). In most countries, this is viewed as essential to both
economic and cultural dynamism. It is also a critical element in
social policy, since there is an evident risk of a growing digital
divide.

There is an increasing need, therefore, for regulation that supports
and encourages investment in these new networks and services. As
recent events in several countries have illustrated, the investment
required to enable speedy and ubiquitous roll-out is considerable –
and it will only happen if investors feel that there is an appropriate
balance between risk and reward.

On the other hand, the network access business is inherently
susceptible to market dominance (either outright monopoly or at
least oligopoly). So, regulators are equally on their guard against the
risks of market dominance either by seeking to ensure effective
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competition amongst alternative service providers, or by mitigating
the effect of a single dominant player.

This dilemma between investment and competition is exemplified
by the current debate on how to encourage the speedy roll-out of
broadband networks and services. Most countries are concerned
that broadband roll-out will not happen quickly enough under
‘normal’ market conditions – but their solutions vary. A few are
investing public money to ensure rapid market penetration (Korea,
Sweden and Japan). But most are limiting public investment to
targeted subsidies aimed at outlying communities (US, France,
Australia), focusing instead on regulatory measures to encourage
effective competition. And some have foresworn any direct
intervention in the market (New Zealand).
2. Editorial standards require new and innovative regulatory approaches.
Regulators around the world continue to view the preservation of editorial
standards as a primary focus. Services of all kinds need to command assent,
and there is continued watchfulness on issues such as accuracy of news,
decency and child protection. But the proliferation of content through
multiple outlets makes the task of standards regulation ever more complex:

There are now far too many sources of content to regulate in a
uniform way across the board. Content delivered across hundreds
of television channels and thousands of websites requires a new and
more differentiated approach. Regulators are actively seeking ways
to segment content sources, and to identify those that pose the
greatest risk to the preservation of standards. Most are holding to
the principle that regulatory controls should be proportionate to the
pervasiveness and impact of the service involved.

In pursuit of that principle, regulators continue to maintain active
monitoring of editorial standards across traditional mass-market
media, notably the leading free-to-air television channels.
Notwithstanding the emergence of other outlets, these channels still
capture the lion’s share of media consumption, and are therefore the
most important priority for standards regulation.

Regulators are tending to take a lighter touch approach to new niche
or encrypted channels, aimed at an inherently smaller and more selfselecting audience. And this principle of self-selection applies even
more strongly on the Internet, where standards regulation is at its
lightest.
2

In the face of ever-increasing content proliferation, there is a
perceptible trend around the world towards ‘self-regulation’.
Content users are being supplied with a growing array of ‘selfregulation tools’ such as ratings mechanisms and content filters –
although currently these tools are more prevalent and effective on
encrypted, subscriber-based media.

The next few years will test the efficacy of a self-regulation regime
for multi-channel television and the Internet. Some countries are
clearly tempted to pursue a more interventionist approach, and there
have been several recent examples of judicial bodies seeking to
impose legal liability for content carriers, including in the U.S.
3. Regulators are taking an increasingly structural approach to ensuring a
range of high quality domestic content is available to national audiences.
There is growing concern in most countries about the effect of multiple
television channels and Internet websites on the range of high quality
domestic content available to audiences. Given the economic forces that tend
to favour imported content and cheaper derivatives, there is a widely shared
need for regulatory intervention to nurture domestic production businesses.
Again, different countries are addressing this concern in different ways:

Only the US has a domestic market of sufficient size to be confident
in the preservation of content quality through a thriving indigenous
production industry. Everywhere else, there is a perceived need to
encourage and support content quality and domestic production
through some form of regulatory intervention.

In most countries, the primary regulatory mechanism is the funding
of one or more public service broadcasters (PSBs), which are
mandated to deliver key aspects of quality and diversity to the
national audience and to selected audience segments. Most
countries around the world continue to support public service
broadcasting, primarily through the licensing of specific public
service channels. Limited experiments with subsidies for public
service content delivered across commercial channels, such as in
New Zealand, do not seem to have worked.

As commercial pressures on media owners increase, there is a
growing perception in most countries that behavioural regulation of
content quality is declining in its effectiveness. There is an
accelerating trend towards the use of structural regulation, and an
expanding menu of structural mechanisms – restrictions on foreign
ownership (France, Germany, Australia); investment targets and/or
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quotas (France, Canada, Australia); privileges given to commercial
networks in exchange for public service obligations (France, UK).

The effect of structural regulation can be seen most directly in the
level of spending on domestic content production, adjusted for
market size. On that measure the UK currently comes close behind
the US and well ahead of most other countries – a function
apparently of a regulatory structure that ensures high levels of
funding for public service broadcasting and an intensively
competitive commercial market. Countries that have limited public
funding and/or constrained commercial competition appear to be
putting content quality and domestic production at risk.
4. Increasing media convergence is creating an expectation of a more
coherent regulatory approach. Audiences around the world are increasingly
able to access the same or similar content through multiple different media
outlets. There is growing pressure, therefore, for common approaches to
regulation across media – or at least for clarity about why different media are
regulated in different ways. This is leading to changes both in regulatory
structure and style.

Several of the countries surveyed have taken steps to integrate
previous separate regulatory bodies, or to consolidate and reinforce
an already integrated structure (U.S., Canada, Japan, Finland).

These and others have also sought to evolve the style of regulatory
monitoring and intervention. There has been a growing emphasis
on co-regulation in collaboration with industry participants. And
regulators everywhere are adjusting their processes to make them
more open and transparent.

Impending UK legislation, enabling the creation of Ofcom, will
embody these changes in regulatory structure and style, ensuring
that the UK has a world-class regulatory regime for media content
and services.
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A. OBJECTIVES AND TOOLS OF CONTENT REGULATION
Regulatory Objectives
Our review has identified that most countries are pursuing four principal
objectives in the regulation of content – albeit that they are pursuing those
objectives in different ways. The objectives are:
1. Ensuring access to networks and services. Traditionally, this has meant
promoting widespread access to basic content. A clear example is the Federal
Communications Commission of the United States, an element of whose
mission is to ensure universal access to basic broadcast services “so far as
possible.” Section B discusses why industry changes are creating specific access
challenges for new platforms and services.
2. Setting standards. Most countries pursue some sort of control over content
standards. Most are concerned that citizens should be protected from harmful
content, with the definition of “harmful” varying from country to country. For
example, the French CSA aims to “safeguard fundamental principles such as
respect, human dignity and public order”.
The second focus of these standards revolves around a desire to maintain
impartial, accurate news and current affairs reporting. An example of this is
the imposition by the German regulator of the requirement “to distinguish
between information and comment.” In the UK, “due accuracy and impartiality” has
been required of broadcast news for over 50 years. These standards are
analogous to Tier 1 regulation as proposed in the Government’s White Paper
and Communications Legislation.
3. Promoting quality. This objective has three broad dimensions with
countries pursuing one or more of these dimensions simultaneously.

To encourage content that promotes a shared sense of national
identity. This area has drawn increasing attention recently and
includes the promotion of minority cultures. Canadian
programming, for example, is required to reflect “Canadian creativity,
talent and linguistic duality”.

To encourage diversity and plurality of programming in subject and
intended audience. In Italy, for example, RAI’s programming
mission includes diversity “in order to satisfy the tastes of everyone.”
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
To promote investment in high-quality programming. For example,
the Australian Broadcasting Act is designed to “promote diverse,
innovative and quality programming”.
4. Ensuring a healthy, technologically up-to-date industry. This dimension
aims to introduce an element of innovation into the regulator’s objective
function. It has been stated less frequently as an explicit objective and is often
subsumed within objectives 1 to 3 (where fulfilling those objectives would
necessarily be done through a healthy, technologically up-to-date industry).
However, some countries do choose to discuss it explicitly. Finland’s
regulator aims to ensure consumers have access to “competitive and technically
advanced communications services”.
The countries reviewed can be characterised according to whether they have a
light touch approach to these objectives, characterised by non-intervention or
correction of market failures only, or whether they take a more goal-oriented
approach to delivering positive outcomes.
Regulatory Tools
The regulatory tools used appear to fall into three broad categories:
1. Rules plus penalties: for example, codes governing editorial standards,
production quotas or detailed content and scheduling requirements;
2. Targets plus incentives: targets that are more generalised and less
prescriptive than rules and may be linked to incentives; for example, tax reliefs
designed to encourage investment in infrastructure or content;
3. Structural alignment: where the industry framework is designed to support
desired behaviour, for example by funding public service output, whilst
avoiding detailed prescriptions.
Countries may use a combination of these tools or apply specific tools to
specific purposes. The UK, for example, has proposed in new legislation to
apply codes and penalties to editorial standards in broadcasting and a
combination of investment targets and funding interventions to support
diversity and quality of content.
The countries reviewed can be plotted on a matrix (Exhibit 1), with the extent
to which they pursue positive goals and objectives on the Y axis, and the tools
used to achieve them on the X axis. The arrows on the chart indicate that a
number of countries are moving towards more goal-oriented objectives, but
that the tools used are increasingly structural and incentive based and
decreasingly reliant on rules and penalties.
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Exhibit 1: Regulatory framework by country

Exhibit 1 positions the United States at one corner of the matrix.
With relatively limited objectives (mostly focused on anti-trust law)
and employing few direct rules to shape market behaviour, the US is
clearly pursing a non-interventionist approach to content regulation,
and appears to be moving further in the direction of limited
intervention.

At the other extreme, countries like Canada and France clearly
intend to guide the content providers towards specific goals (in both
cases, centred around the promotion of specific national cultural
elements). These two countries differ in how they support those
objectives, with France relying more on rules and penalties, and
Canada more likely to employ incentives.

A group of countries, including Canada, Germany, Finland and
Sweden, have quite substantial commitments to the objectives of
regulation but are moving away from rules based tools towards
reliance on structural interventions only, for example, by funding
public service output.

The UK would appear towards the bottom left of the matrix, with
substantial policy goals for the sector but an increasing reliance
under new legislation on industry structures and incentives and a
reduction in regulation based on rules and penalties.
7
What emerges from this analysis, is that there are several different models of
regulatory approach being pursued around the world. Three particular
models seem worth of emphasis:
1. Regulation of market competition (e.g. U.S., Japan). Some of the larger
countries place their primary emphasis on defining the competitive framework
within which market players will operate. Often this approach is coupled with
limited prescription of a regulatory vision for content.
The US has effectively no direct rules for intervention. The country relies on
rigorous application of antitrust law, to the point that industry attempts to
implement a self-regulating Code of Conduct were banned by an antitrust
ruling in 1982. The objective of regulation is primarily to deliver a competitive
market; little specific standards regulation is applied, partly due to the
strength of free speech limitations in the US Constitution.
However, these countries are moving towards increasing positive
interventions to encourage infrastructure developments, through tax
incentives to encourage broadband infrastructure rollout in the US and
government-led, direct funding in Japan.
2. Regulation of industry structure (e.g. Sweden, Finland). In several of the
smaller countries, the market is not robust enough to bear the burden of using
market mechanisms. Most of these countries, therefore, use structural tools to
enable domestic content supply – the most common tool being the licensing of
a public service broadcaster with a specific mandate to promote and deliver
quality content. Differences in objectives have driven differences in the role
that countries assign to their PSBs. For example, Sweden has created a strong
PSB and only one other FTA channel.
Historically Finland created a unique relationship between its PSB and its
commercial company to ensure that the PSB remained free of advertising
while not relying purely on state funding. This close relationship also
prevented rivals from entering the market. The system has now been
abandoned, but Finland has continued to use structural mechanisms to deliver
its objectives - for example awarding the operating license for a 4th commercial
channel in 1997 to Ruutunelonen which helps keep the Finnish broadcasting
system in the hands of national owners.
3. Regulation of content supply (e.g. France, Canada, Australia). This
approach continues to be quite common, although increasingly countries are
moving away from command and control enforcement due in part to the
difficulties in enforcing regulation as access and content proliferate, and in
part to trends in international trade law. In particular, domestic content
typically continues to be protected/encouraged through straightforward
quotas.
8
The French regulator continues to have the clear goal of promoting French
culture and language through strict quotas. The industry views this
framework favourably as it is seen to be aligned with their interests in
protecting their market position.
In Australia, both ownership controls and quotas are used to ensure domestic
control of the industry. Aggregate foreign ownership of a channel cannot
exceed 20%. Domestic content quotas include 55% of daytime programming
and 200 hours of Australian first release drama broadcast each year (this is
similar to Canada, with 60% Canadian content required out of total broadcast
time).
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B. IMPACT OF MAJOR INDUSTRY CHANGES
Rapid and accelerating changes in industry structure and performance are
significantly changing the economic context in which content regulation is
undertaken. These changes are reducing the effectiveness of some of the tools
that regulators have traditionally deployed to fulfil their objectives. They are
also altering content regulators’ view of what the regulatory objectives mean
and their relative importance. Our review has identified four major industry
trends with significant implications for content regulation.
1. Explosive growth in content. The diversity of content and its availability
have grown significantly in the past 15 years, with the proliferation of
commercial TV channels, interactive TV, and the Internet.

Much of this content is international in origin and hence less easily
controllable than domestic content

Anyone can be a content producer for many of these content types,
facilitating entry and exit

Diverse ranges of content types have emerged – some with very
narrow scope (e.g. TV channels specialising in certain programme
types), others with a broad scope (e.g. Yahoo! websites)
2. Significant discontinuities in how content is used. Technological change is
increasing the ability of content users to draw on content when it is needed
and to tailor it to their individual tastes or needs (streaming video to a PC or
delivering websites to a TV). Overall, there is a move towards interactivity
(and hence individual control) rather than passive reception on the part of the
end user.
3. Proliferation in access platforms and devices. These include the Internet,
broadband, and third generation mobile receivers. Consumers have increasing
choice and may become increasingly indifferent which platform is used to
view which content.
4. Growing financial difficulties. Financial pressures have recently been
inhibiting the roll-out of new services. The high costs of new networks and
services have (at least temporarily) outstripped consumer willingness to pay,
leading to a slowdown in take-up and some prominent business failures.
10
Exhibit 2: Summary of key industry trends
These trends are raising a number of significant issues for each of the 4 key
regulatory objectives (promoting access, setting standards, promoting quality,
and ensuring a healthy industry). While the forces affecting regulation appear
to be similar from country to country, the relative strength of each force, its
challenge to existing regulation, and the regulatory responses differ.
1. Promoting Access
There has been strong growth in the penetration of pay television and the
Internet in many countries, but technological and economic constraints are
likely to limit ubiquitous market penetration. In traditional broadcasting, the
principle of universal access is firmly established. The focus now is on what
degree of access the regulator will aim to ensure for new access platforms.
Our review has identified the following observations:

All countries are providing some incentives for digital TV rollout.
There is a widespread desire to encourage the move to digital
television as a way of supporting universal access to some of the
new content. Most are creating incentives for the move to digital by
announcing a date for analogue switch-off. The addition of new,
11
digital FTA channels is meant to further encourage consumers to
move (e.g., in Sweden, Australia and the UK).

Two opposite approaches to pay TV. While the debate is often not
made explicit, some countries are taking the view that access to pay
TV is not a regulatory objective (e.g., Germany), while others believe
that access to pay TV should be included in the definition of ‘access’
(e.g., Netherlands).

No clear position on broadband. All countries reviewed are
concerned with ensuring that some sort of broadband rollout takes
place, and most believe that wide access to broadband ultimately
should be an objective of policy. However, there is no consensus
either on whether the regulator should intervene or, if a decision to
intervene is taken, how to do this effectively. The general approach
with some exceptions (such as Sweden, which has devoted funding
to encourage deployment in uneconomic areas) has appeared to be
to take small incremental actions, or no actions in the short run.
In addition to deployment, there is increasing focus on the financial
challenges faced by potential broadband providers and on the
challenge of ensuring the economic viability of platform providers.
A major question is how to fund significant investment in the
upgrades needed while at the same time boosting profits. In the
absence of direct government funding, the resolution of this
challenge appears to be leading to reduced competition between
networks and to limited and sequential rollouts of the broadband
platform in the medium term.
More broadly, countries are increasingly evaluating the relative importance of
content and access to prioritise the deployment of their regulatory resource
and policy effort. There appears to have been some trend towards
emphasising access, given the major hurdles that stand as barriers to broad
access. However, as can be seen from Exhibit 3, most countries are still taking
an approach that limits government intervention on access issues. 1
1
Korea, although not part of the review, is included in this Exhibit and in the discussion on access because of its
aggressive promotion and funding of broadband.
12
Exhibit 3: Country classification: Approaches for regulating quality and
access
Even if a policy of widespread access to new platforms is adopted, there are
significant barriers to delivering against this objective:

Digital TV. While there is agreement that universal DTV access is a
regulatory objective, the key question is who will fund it. This has
not been answered in any of the countries reviewed, although a wide
range of solutions is being considered.

Pay TV. Those countries that aim to expand access to pay TV are
finding it difficult in view of the financial difficulties of the industry.
–
Some countries reviewed are taking measures that actively
restrict the growth of the sector. For example, in Germany the
decision to preserve ‘killer’ content such as sports and movies on FTA
means that pay TV has struggled to add subscribers. The
collapse of Kirch Media was a recent, high profile example of the
difficulties for pay TV.
–
Some countries are imposing access price caps on pay TV (e.g.,
Netherlands). While this is intended to ensure a wider swathe of
the population can afford access, it also significantly worsens the
economics of rollout for pay TV providers.
13
–
Other countries seem to be reassessing the industry and
considering measures to boost its health. This has been
precipitated by the precarious financial state in which pay TV
finds itself in many of the countries reviewed.
Broadband
Countries appear to be following one of three broad approaches to address
issues surrounding the rollout of broadband.

Light touch. Some countries are taking only small-scale actions to
support rollout. In NZ, for example, the government has rejected
direct subsidies to broadband, but has required Telecom NZ to
upgrade its network to ensure access to narrowband for 99% of its
users. This light touch may typically include:
 Creating transparent regulatory frameworks that do not restrict
competition and access.
 Extending coverage of telephony universal service obligation
(USO) to the Internet
 Targeting specific instances of the digital divide (and slightly
boosting the industry). This can be achieved in its role as
purchaser (e.g., buying broadband connections for schools and
government offices in Switzerland) and through an online
presence (e.g., making it easier to file taxes online than on paper).

Co-operative. Other countries are using economic levers to
incentivise rollout. For example, in the US this has included direct
subsidies and tax deductions. Typically, this approach may also
include:
 Focusing on specific issues/areas where the regulator believes the
market will not deliver (e.g., France forcing France Telecom to
decrease DSL wholesale prices)
 Direct government funding available for last mile connectivity and
community/rural locations (e.g., US provides 50% subsidies to
cable networks rolling out services to sparsely-populated areas
and 20-90% subsidies on access to schools, libraries and health
care facilities)
 Tax subsidies for broadband connections, particularly for
professionals and small enterprises (e.g., Australian subsidy
scheme for end-users upgrading to faster access technologies;
14
French subsidies and tax deductions for firms and public
organisations to upgrade to broadband access)
 Subsidised or free programmes for education and training on the
Internet to help create demand (e.g., USA – e-rate subsidises
discounts of 20% to 90% on broadband services and applications
for school/library/healthcare facilities; France – allocate a percent
of education budget for online programmes)
 Funding available for R&D and for content (e.g., France)

Government-led. Direct funding of infrastructure expansion has
been adopted as the most effective alternative in some countries
(e.g., Korea, Sweden, and now Japan).
 Direct government funding for broadband infrastructure
deployment (e.g., Japan provides corporate tax deductions for
build out of backbone and local loop)
 Comprehensive government-funded education and training
programmes with explicit social and developmental objectives
(e.g., aim of putting country at the forefront in the digital
revolution)
 Reforms of the regulatory structure to ensure a competitive
industry in broadband delivery
 Fully subsidised R&D (e.g., Japan)
2. Setting Content Standards
With hundreds of new channels and thousands of websites, regulators are
finding it increasingly difficult to control content through direct regulatory
intervention. Content proliferation will require a much more differentiated
approach. Options are summarized in Exhibit 4.
15
Exhibit 4: Regulation of Standards
“Complaints and criminal
law”
“Brand value and
co-regulation”
“Regulatory
sanctions”
H*
Use ex-post
complaints
system to
monitor
“RISK”
(harm
M
created)
Proactively
involve top
industry players
(incentivised by
their brand value
etc.) in
regulation
Regulatory
sanctions for
highest risk
and impact
L
L
M
H
“IMPACT” (audience share)
* Countries also use harsh penalties for high risk content (e.g., criminal law) but some violations may slide through
Content can be classified by risk (severity of potential harm) and impact
(number of people affected if harm occurs). Depending on the classification,
content is being regulated differently:

High risk, high impact content such as free-to-air content on
national broadcast networks is generally subject to a combination of
legal penalties, regulatory sanctions and self-regulation.

High risk, low impact content such as violent or pornographic
internet sites are, of course, subject to criminal laws that apply to
such content, however published. But the law is hard to enforce and
there is much debate about imposing legal liability on carriers or on
content providers. Although specific liability on carriers has not yet
been imposed outside China and similar regimes, the courts are
increasingly imposing legal liabilities on carriers in the United
States. Administrative fines have also been introduced in the US for
offending content, and in France the courts ruled that Yahoo was
required to block French users from accessing illegal content.
16

Low risk, low impact content such as companies’ or organisations’
web pages tends to be co-regulated by involving industry players
and monitored through a system of ex-post complaints. Content
providers collaborate in the definition and enforcement of standards.
For example, Internet Watch is an industry association that operates
rating and filtering systems, supported by a hotline to report illegal
material on the web. It is funded both by the EU and the ISP
industry and works closely with government and police. This
approach also depends on ‘self-regulation’ by an increasingly
sophisticated group of consumers. For example, Net Nanny
software now allows parents to decide who in the family can access
what, using pre-programming and pin codes. In Australia, the
government has launched the Cyber Smart Kids programme to
educate users on how to avoid harmful content.
3. Promoting Content Quality
As traditional networks lose audience share, questions increasingly emerge as
to the best way of maximising the availability of high quality content. The
options include:

Strengthening the public service broadcaster and/or FTA channels.
This can take several forms:
 Strengthen the PSB to provide a quality alternative to commercial
channels (e.g., Sweden, NZ)
 Use the digital licensing process to influence who is awarded
licenses for terrestrial TV in order to ensure that digital TV
provides a quality alternative to pay TV (e.g., Australia, Finland).
 Preserve audience share on FTA by prohibiting certain forms of
content from pay TV (e.g., anti-siphoning legislation in Germany).
In Germany, premium sports content and movies were prohibited
from being moved onto pay TV by a court ruling (which
effectively created a nearly insuperable challenge for German pay
TV providers to overcome).

Extending the scope of quality content into new forms of content
(pay TV, Internet). This can include placing content requirements
on pay TV and commercial FTA licensees, as with Canal+ in France.
Alternatively, it may include providing a high-quality PSB presence
on the Internet (e.g. BBC Online).

Continued emphasis on content quotas, despite threat from
international trade law. In Australia, France, Canada and other
17
countries, content quotas continue to be applied to both commercial
and public broadcasters. However, this may be threatened by
international trade law, which may treat these quotas as impeding
the free flow of content.

Increasing emphasis on funding of particular content. Countries
that have not had strong PSB’s have considered direct funding of
certain programme services. For example, NZ on Air provided
direct funding to quality and minority-interest content production
for delivery on otherwise totally commercial channels. However,
recently, the New Zealand government moved away from this
approach and reconstituted TVNZ as a public service channel with
an overall remit to deliver quality and diversity across the schedule.
In the US, the National Endowment for the Arts serves a similar
purpose, providing direct funding to quality content. In the EU, the
Initiative for European Content provides training, financial support
for production, funding for distribution, and support for festivals,
inter alia.
4. Creating a healthy industry
The troubled financial situation of many players in the industry suggests the
need for some regulatory actions to improve the health of the industry. While
there is general agreement that this is an important objective, the challenge lies
more in the ’how.’ There are two emerging approaches:

The actions discussed above under access are also being weighed in
terms of their ability to deliver a healthy industry. For example, the
decision to impose pay TV price caps is designed to increase
penetration, but will limit the health of the industry. This trade-off is
being made differently in different countries.

Network convergence increasingly means that the health of a given
part of the sector cannot be viewed in isolation; regulators are
increasingly under pressure to ensure that the industry is regulated
in a holistic way. One of the key ways this is being delivered is
through convergence of regulatory structures, as discussed in the
next section.
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C. EVOLUTION OF REGULATORY STRUCTURES AND STYLES
Trends in the industry are not only affecting the ‘what’ and ‘how’ of
regulation. They are also causing changes in how regulatory bodies are
structured and the regulatory models with which they operate. In particular,
there appears to be a trend towards consolidation both across industries and
across functions. Our review has identified four alternative models of
regulatory structure and approach, as illustrated in different countries around
the world.
Exhibit 5: Trends in regulatory structures
1. Creation of an integrated communications regulator (US, Japan). This
structure uses one merged communications regulator, covering a broad range of
issues in broadcasting and telecommunications. This body is then supported by
competition law, which is applied to all sectors including communications. This
appears to be where the UK will be positioned as well, once OFCOM is put into
place.
19
Exhibit 6: Countries with merged broadcasting and telecommunications
regulation
2. Some functions remaining outside merged regulator (Finland, Italy,
Canada). In this case, there is a merged communications regulator but one or
more functions continue to be addressed outside this body. In the case of
Finland and Italy the functions outside the communications regulator are
licensing/spectrum allocation, and in the case of Canada broadcasting
standards set by the industry.
3. Some consolidation by function, but no stated intentions for further
consolidation. In these countries, the split between regulatory bodies for
different industries is being maintained. This includes NZ, Australia, France
and Sweden. Typically this will mean that the regulation of
telecommunications and broadcasting are still kept separate.
4. Highly fragmented, but moving towards consolidation. The current UK
structure for content regulation is more fragmented than other countries
reviewed. (Germany is also fragmented, but on a model of decentralised
regional regulation). However, the UK appears to be moving towards the
US/Japan model with the creation of OFCOM, which will be a major shift in
the degree of consolidation.
20
Exhibit 7: Countries retaining distinct broadcasting regulators
Changes in the regulatory style
Regulatory structure only goes part of the way to explaining the nature of the
interaction between the regulators and the industry. How rule-making is
handled, or what we have called regulatory style, is a key aspect of the
regulatory environment. This includes:

Transparency of decision-making,

Degree of consultation with industry in regulatory decision-making
and standards-setting,

Reliance on rule-making (i.e., as opposed to self-regulation with
post-hoc enforcement where necessary), and

Degree of ad hoc decision-making
21
This is a difficult area in which to categorise countries, since stated rules often
do not indicate the true nature of regulatory and industry behaviour. Broadly
speaking, however, countries follow one of 3 approaches:
1. Traditional rulemaking emphasis (e.g., France, Italy, Germany). In these
markets the regulators retain a strong degree of control over the rulemaking
process. As a result, it is often seen as somewhat unpredictable. Regulators
may seek the informal input of industry but there are few formal processes for
regular industry consultation. Consequently, the impact of one regulatory
decision can have a huge effect on the health of a given part of the industry
(e.g., the impact of blocking rights to premium content from pay TV players in
Germany).
In several of these countries, regulators have come under criticism for being
insufficiently transparent, and in particular for being influenced by political
pressures. Interestingly, however, at least certain industry sectors see
themselves as benefiting from this – to the extent that they either (a) have
found informal ways of having their views heard with the regulator or (b) are
having their views well represented (e.g., the French film industry). France
and Italy have recently restructured their regulators in an attempt to create
greater independence.
2. Open approach with relatively high degree of reliance on industry coregulation (e.g., Australia, New Zealand). In contrast, several regulators have
moved to increasing reliance on industry co-regulation for areas such as
setting standards. For example, Australia has defined broad standards for TV
broadcasting, but is relying on the industry to develop detailed standards
(although the outcome is currently unclear). Most countries are using this
approach to some degree or another (primarily of necessity, as discussed
earlier) to regulate the Internet.
3. Emphasis on rulemaking, but with reasonably open process (e.g., US,
Finland). A third group of countries continue to emphasise rulemaking by the
regulator but with a clear process for decision-making which includes industry
consultation. For example, in the U.S., rules are typically issued in draft form
with a specified period allowed for written responses and input through
hearings. This process creates less room for ad hoc regulatory decisions,
which could otherwise introduce significant risk and unpredictability for
industry players.
22
D. IMPACT OF REGULATORY POLICIES
It is difficult to demonstrate with certainty the correlation between regulatory
policies and market outcomes, especially given the influence of a range of
other cultural factors. However, a number of patterns do seem to emerge.
(1) Domestic content production. Not surprisingly, domestic content
production is strongly reinforced by domestic content quotas. In Australia,
these quotas have meant that over two-thirds of programme expenditure by
commercial TV licensees is spent on Australian content each year (see Exhibit
8). Viewing time, as a result, is spent 50-70% on Australian content as well.
Exhibit 8: Impact of quotas on provision of domestic content on
Commercial TV
Australian Example – Impact on commercial TV
% domestic content on broadcast
peak time commercial TV
Programme expenditure by
commercial TV licensees
70
864
267
60
Ch 9
50
Ch 7
Ch 10
596
40
187
30
153
20
120
19
26
Children’s Other Drama Light News Sport Total Foreign
entertainAustralian
ment
Source:
10
91
Total
0
1998
1999
2000
ABA
(2) Domestic control of content distribution. The degree of domestic control
varies significantly across countries (see Exhibit 9). Typically, FTA television
continues to be dominated by domestic ownership, but pay TV is increasingly
foreign-owned, with major international providers increasingly taking control.
Explicit measures have been taken that made it difficult for foreign companies
to play in the German market, and as a result the only foreign ownership is in
niche terrestrial channels on FTA and in 22% of the collapsed Kirch pay-TV
23
provider. In Italy, FTA channels are Italian-owned, but pay-TV is entirely in
foreign hands.
Exhibit 9: Degree of foreign ownership
Low
Medium
Terrestrial
U.K.
• Channel 5 is currently the only
terrestrial channel with any foreign
ownership (67% RTL)
France
• Largest commercial channel (TF1) is
French-owned
• M6 40% owned by RTL
Germany
• Major channels are German-owned
• Niche channels include ownership by
U.S. firms
Italy
• 90% of audience share is Italianowned (by Berlusconi interest)
Spain
• Main commercial channels Spanishowned except Telecinco, 40%
Mediaset
U.S.
• All networks are U.S.-owned (Murdoch
Pay TV
High
• BSkyB controlled by News Corp Telewest 50%
U.S.-owned (Liberty, Microsoft)
• NTL U.S. company
• ITV Digital (British-owned)*
• Both pay TV businesses (Canal+ and
TPS) are French-owned
• Kirch pay TV was 22% owned by News
Corp (via BSkyB) – Kirch has collapsed
and its future is uncertain
• Stream and Tele+ likely to merge with Vivendi
in control
• Italian investor Telecom Italia is exiting
• Via Sat controlled by Telefonica
• Canal+ majority owns Sogecable
• U.S. owned networks
has taken U.S. citizenship)
* Has gone into administration
Source: Zenith Media
(3) Consolidation of the media industry. Across all countries, there are
significant trends towards horizontal and vertical consolidation. In France, the
major broadcasters all have production arms. Horizontal consolidation (e.g.,
across cable companies in the US) seems in addition to generate pressure for
vertical consolidation to reap the benefits of scale. Exhibit 10 describes the
degree of consolidation in selected countries reviewed.
24
Exhibit 10: Degree of industry consolidation
Low
Degree of industry consolidation
Terrestrial
U.K.
• Strong BBC production
• Granada/Carlton large content
operations
• C4/C5 rely on outside producers
France
• Main commercial broadcasters have
strong production businesses
• PSBs also invest heavily in their own
production
Germany
• Commercial broadcasters hold minority
stakes in independent producers
• PSB invests in proprietary programming
Italy
• RAI shows predominantly own
production
• Mediaset shows significant amounts of
Hollywood films/TV
Spain
• Still relatively fragmented market
Medium
High
Pay TV
• BSkyB has strong channel business
• Telewest also has strong content business
• NTL is weak in content production
• Canal+ invests heavily in French content
• TPS also produces own content
• Kirch pay TV operated Germany’s sole
pay TV business and was heavily
reliant on U.S. programming – has
collapsed
• Both Stream and Tele+ invest heavily in
local sports rights
• Both pay platforms are reliant on
U.S. content
U.S.
• Increasing media concentration and
• Increasing as cable industry consolidates
integration - e.g., Time Warner AOL
Source: Zenith Media
(4) Level of broadcasting expenditure per capita. Overall spend per capita
appears to have an impact on content production. The level of funding in
broadcasting varies widely across different countries (see Exhibit 11). Total
spend in the US, Japan and the UK is far higher than in any of the other
countries reviewed. In Japan, the highest share of that spend is in advertising
(nearly 70%), with roughly 55% from advertising in the US and slightly under
50% in the UK. The UK’s public funding per capita is significantly higher than
any other country reviewed. The combination of a competitive commercial
market and high public funding means overall UK spend per capita is close to
US levels and well ahead of all other countries except Japan.
25
Exhibit 11: Broadcasting expenditure per capita
Broadcasting expenditure per capita
Advertising
Subscription
Public funding
Per capita, 1999, US$
Australia
89
Canada*
45
Finland
44
23
63
16
16
53
France
58
Germany
55
35
Italy
57
10 22
54
NZ
Spain
Sweden
46
160
Japan
Korea
36
29
34
U.K. public funding
per capita is the
highest of the
countries surveyed
44
38
39
33
56
51
U.K.
U.S.
6
23
2
47
129
154
46
71
72
122
1
* Canada figures 1998
Source: OECD, U.S. Census Bureau
26
E. SUMMARY OF CONCLUSIONS
Our review has identified how different countries around the world are
tackling the challenge of regulating a rapidly changing content industry and
market-place. While approaches inevitably vary between countries, we have
identified four broad themes:
1. Increased emphasis on access. Regulators are increasingly focussing on
network access, particularly as new digital and broadband networks are
deployed. Their challenge is to enable speedy and ubiquitous roll-out of these
networks, which will only happen if operators are able to secure an attractive
return on their investment. At the same time, however, they have to protect
against the risks of market dominance, by encouraging competition amongst
alternative service providers.
2. Differentiated approaches to editorial standards. Content proliferation is
complicating the task of regulating content standards – but issues such as
accuracy of news, decency and child protection remain paramount.
Regulators are having to develop differentiated approaches that are
proportionate to the pervasiveness and impact of the services involved – with
as much emphasis on self-regulation as possible.
3. Increasingly structural approach to content quality. As behavioural
regulation declines in its efficacy, regulators are taking a more structural
approach to content quality. Their primary focus is on structures that nurture
a strong domestic production industry, able to deliver high quality content to
the national audience – using mechanisms such as the licensing of public
service broadcasters, investment targets and quotas.
4. More coherent regulatory structure and style. As media outlets converge,
there is growing expectation of a coherent regulatory approach. This is
reflected in the increasing integration of regulatory structures to grow the
content industry. It is also reflected in changes to regulatory style – with
growing emphasis on co-regulation and on open and transparent processes.
The forthcoming legislation should enable the UK to meet these requirements
and create a world-class regulatory regime.
27