The shape of screens to come

Why is there so little that’s good to watch on traditional TV channels these days? A new Ofcom report explains the rapidly changing viewing trends and the implications for public service broadcasting.

David Elstein
29 August 2019, 1.15pm
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In just seven years, subscription streaming services, led by Netflix and Amazon Prime, have signed up nearly 50% of all UK households. Indeed, because many homes subscribe to more than one service, the total number of such subscriptions is over 19 million. The US cable giant Comcast last year paid a fancy price to buy Sky, even though that company’s core UK business (pay-TV channels, owned or packaged by it) has been declining in recent years in terms of subscribers, and possibly in terms of revenue. But – as so often when faced with competition – Sky has fought back, more than making up the lost customers by launching its own streaming service, NOW TV, which offers segments of its main service for a monthly fee. Perhaps the Comcast gamble will pay off, especially in the Sky territories outside the UK.

The challenge of on-demand

After all, for both Sky and Virgin Media (the UK’s cable TV provider), which package up telephony, broadband and large bundles of channels topped up with an array of “box-set” offers, there is another defence against the “streamers”: co-option. They can accommodate the insurgent SVOD (subscription video on demand) services, soon to be joined by Apple TV, a Disney proposition, a Warner service and probably one from NBC, within their own delivery systems, providing one-click access to Netflix and Amazon Prime (and no doubt the others in due course).

For the UK’s traditional broadcasters, SVOD is not a direct challenge. It does not compete for revenue with ITV, Channel 4 or Five – indeed, they can earn useful extra cash from their own modest video-on-demand offerings and from advertisements on their on-demand and catch-up free-to-air services, piggybacking the on-demand consumer mentality Netflix and Amazon Prime generate. As for the BBC, it has exclusive access to the licence fee till at least 2027 to cushion it against external financial pressures.

Yet in two respects the rapid take-up of SVOD threatens the well-being of our public service broadcasters. Firstly, a shift in viewing from live TV to on-demand might in due course undermine advertising revenues (hence the current call from the commercial public service broadcasting channels for Ofcom to loosen the limits on the number of commercials they can broadcast every hour). And secondly, a key content genre – high-quality drama – may become so dominated by the SVOD providers that the five designated public service broadcasting channels (BBC1, BBC2, ITV, Channel 4 and Five) could find themselves marginalised in the arena of “appointment to view” television.

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Giving up on broadcast TV?

Already, 42% of adults tell Ofcom that online is their main viewing option. More eye-catching still was the finding that 38% of those surveyed said they expected to have given up broadcast TV within five years. Amongst younger viewers, the trend is even more marked. 16-34 year-olds spend just 42% of their “screen time” with broadcast TV, and only 23% of that is “live”: YouTube’s share is 18%, and SVOD services win 15% of viewing. An even younger demographic, 16-24 year-olds, spend just 69 minutes a day watching live TV (the average for adults is 192 minutes, and for those older than 65 it is 340 minutes). These youngsters spend 73 minutes a day with YouTube and 47 minutes a day with SVOD services.

Inexorably, the older, heavy users of broadcast TV will die out. If the younger generations carry their viewing habits into middle age, the steady fall in viewing of broadcast TV (down 20% in the last seven years) will accelerate. How the public service broadcasting channels respond to this process – and how long they can survive it – is a question that Ofcom has put at the centre of a “nationwide forum” it launched in July on the future of public service broadcasting (no, I hadn’t heard about it either, until I read Ofcom’s report this month on what it calls “Media Nations”, from which nearly all the statistics in this article are drawn).

The concept of public service broadcasting is rooted in spectrum scarcity. For over 50 years, available bandwidth for live television was allocated to just the BBC (for the first 20 years) and then ITV and Channel 4 (Channel 5 arrived nearly a decade after the launch of satellite television heralded the end of spectrum scarcity). The BBC was granted not only bandwidth, but money, in the shape of the licence fee, on condition that it took no advertising or sponsorship and used those resources to create content of value to the public, the nature of which it was left to decide for itself.

The original ITV franchises were awarded to fifteen different regional licence holders along with one national licence (breakfast). In exchange for the grant of spectrum, each was assigned a set of programming requirements to be fulfilled either locally or collectively (regional news and current affairs, national news and current affairs, religion, education, children’s, documentaries, factual, arts) and were judged every year by an industry regulator (first the ITA, then the IBA, and then the ITC), not just for their fulfilment of the specific quotas, but for the quality of all their output, including categories outside the “public service” group, such as drama and entertainment. As the licences were renewable by competition, defined in terms of quality, incumbents worked hard to please the regulator. When Channel 4 was launched, it was given a testing list of obligations, which it was required to meet, even though – as a publicly owned enterprise – it could not actually be dislodged by a challenger.

Whither regulation?

The launch of Sky in 1988 effectively put an end to spectrum scarcity, but the concept of public service broadcasting persisted. Unfortunately, the consolidation of most of the ITV franchises into a single company, and the eventual removal of competition for licences, created a strong incentive for ITV plc to shed or shift public service obligations in order to increase profits. The replacement in 2003 of the ITC by Ofcom – a regulator that made little attempt to judge quality of output – has seen quota requirements steadily loosened; and Channel 4, too, has largely been freed from specific genre quotas, and encouraged to create new definitions of “distinctiveness” (its founding principle). Channel 5 (or Five as it is now called) has never had more than modest public service obligations.

Meanwhile, the BBC, effectively self-regulating, tracked the commercial PSB broadcasters in reducing output of most of the previously recognised “public service” categories, including education, religion, arts, current affairs and documentaries – though children’s and regional output have been partially protected, even as ITV retreated from both genres. Meanwhile, all five PSB channels have assiduously encouraged the notion that everything they broadcast (from quizzes to “reality” to celebrity contests) somehow constitutes “public service broadcasting”, thereby blurring the old distinction between “what the market can supply” and “what the market does not, will not, or cannot supply”. Which version of public service broadcasting the Ofcom forum is designed to inquire into is by no means clear.

In any event, the most recent version of the PSB “trade-off” is rapidly eroding. The PSBs were granted privileged access to digital terrestrial broadcasting spectrum when analogue broadcasting was phased out, and the right to launch non-PSB channels on the spare capacity they were gifted: that interim technology has given them two decades of breathing space, but soon the cost of terrestrial broadcasting from fixed masts will come to seem a burden, now that fast broadband allows all comers to gain access to household screens.

Screens, and the tipping point…

There are two key defences for the PSB channels: inertia and large screens. Even if respondents in surveys rather dismissively differentiate between “filler TV” (as provided by the broadcast channels) and “appointment to view TV” (as represented by the SVOD services), they still currently spend a majority – just – of their screen time with those broadcast channels. Clearly, that position will continue to erode, as more and more subscriptions are taken out, and more and more time is spent with the thousands of hours of high quality content available on those services. But will there be a “tipping point”? Remember the ubiquitous DVD? The old idea of a box-set DVD has been almost entirely displaced by broadband delivery of SVOD “box-sets”: DVDs now take up just 1% of the average adult’s viewing time.

Large screens are another bulwark against the SVOD tide. Ofcom found that laptops, personal computers and tablets are actually in decline as screens for viewing TV-style content – instead, 79% of adults now have internet-enabled smart-phones, enjoying 4G connectivity, allowing more convenience and personalisation in watching certain types of content (especially YouTube). By contrast, retail research shows a shift to larger and larger television sets, especially “smart” TVs – that is, connected to the internet and capable of downloading long-form programming rapidly. 80% of homes now have fixed broadband, and 66% have what Ofcom calls a superfast connection. Large screens are particularly appreciated when high-budget dramas are the viewing choice, or shows that appeal to multiple viewers in the same home. The episode of “Love Island” that reported 20% of its viewership on smart phones was unusual.

As long as the big screen is the prime medium for watching content in the home, the PSB channels can benefit from “default” viewing, especially among the older age groups, for whom the soaps (despite their audiences having halved in less than ten years) and the daytime diet of quizzes remain attractive “easy viewing”. But a time will surely come when an organisation like Amazon will make available, at low prices, large screens that have no TV tuner attached, but just connect directly to the internet. These would be marketed as a means of saving over £150 a year by legitimately avoiding payment of the TV licence fee. With the government committed to a policy of rolling out high-speed broadband to all households as quickly as possible, the protection afforded the PSB channels by large screens might be transformed into their Achilles heel.

In Ireland, the “tipping point” has already been reached. Evasion of the licence fee there is about double the UK rate, and a further 12% of homes no longer use TV sets to watch content; so the government has announced that a “device-neutral” levy will replace the licence fee in just over five years, with the collection process in the meantime being taken away from the Irish Post Office by putting it out to tender, in the hope of cutting evasion.

Would such a shift make sense in the UK? The claims by the BBC to collect and keep the proceeds from a “device-neutral levy” might seem less than obvious to policy-makers should such a mechanism replace the historic TV licence fee. The argument would be much stronger for the BBC to join the services funded by subscription, allowing the new levy to be charged at a much lower rate, and used solely to fund content which was demonstrably “public service” as opposed to “commercially viable”; and the fund might be fully contestable, rather than allocated automatically to the BBC. There might even be a case for that public service fund to be sourced directly out of general taxation, eliminating the entire apparatus of collection and enforcement costs.

How to shore up public service broadcasting

But that is an argument for another day. More urgent – and hence the Ofcom “nationwide forum” – is the short-term issue of how to shore up what is left of our system of public service broadcasting. One proposal – urged by Claire Enders, founder of the formidable consultancy Enders Analysis – is to make up for the decline in viewing of current PSB provision by requiring the new streaming services to give greater visibility to such content: rather like the “due prominence” obligation placed on Sky and Virgin Media to display the five PSB channels at the top of their electronic programme guides.

The problem is that streaming services do not have channel guides, just menus; nor are they involved, except marginally, in “live” broadcasting. Even if there were legal or regulatory mechanisms requiring them to include, say, a “BBC” or “PSB” icon on the first page of offered content, who would pay for that content to be licensed by a Netflix? The BBC is scarcely going to give away its entire library for free. Yet, if only the least attractive BBC content were to be provided at no cost, what incentive would there then be for that streaming service to license more valuable content, from a supplier whose existing material was agreed by both parties to be sub-standard? Or would the regulator deem certain content (arts, documentaries, current affairs, religion, children’s, regional) to be “public service”, as compared with “Holby City” or “Strictly Come Dancing” (something the BBC would, on past form, strongly resist)? Would it then insist on its being freely available on streaming services, just as it is on cable and satellite on first transmission, but perhaps as a kind of PSB catch-up window?

A billion pounds has been cut from investment in content

It perhaps makes more sense to view the problem from the other way round: that the difficulty with PSB is not the steady decline in viewing so-called PSB channels (and therefore their content, whether or not one tries to differentiate between different genres, or treats it all as “public service”): it is the steady decline in investment in content, year by year, as reported by Ofcom in a separate section of its “Media Nations” report (this is over and above the sharp decline in the volume of core public service genres).

This section shows that the five PSB channels have, between them, reduced their spending on first-run UK originated content (the most basic definition of public service provision) by a billion pounds a year in real terms since 2004, or 28%. The BBC has cut most (37%), and Five least (3%), with ITV (31%) and Channel 4 (16%) in the middle. In that period, the BBC’s income has steadily risen (though Ofcom calculates that this year has seen a slight decline, as part-funding of free TV licence fees for the over-75s has kicked in). ITV’s revenue has declined (but by far less than its cut in spending on first-run UK origination). Channel 4’s spending on first-run UK origination declined by 24% between 2004 and 2014 but it has since 2014 invested an extra £40 million a year. Five has almost fully restored a 50% drop between 2004 and 2010, but, accounting as it does for only 5% of the 5-channel total, its recovery barely affects the overall pattern.

Ofcom is responsible for reporting on the state of public service broadcasting, but in that 15-year period has never deemed it necessary to call for this startling decline to be treated as a crisis. Yet the steady reduction in investment in content has perhaps been part of the reason why new entrants have been able to do so well, whilst the incumbents have experienced a year-by-year reduction in the amount of time the public spends viewing their programming.

ITV is a case in point. Even a dozen years ago, ITV was providing its viewers with 7 hours of drama a week (compared with BBC1’s 4 hours), and drama was its proudest offering. Now, it broadcasts less than 2 hours a week, a 72% decline. If ITV shareholders wonder why ITV’s viewers have gone walkabout, along with brand value and the share price (down 62% from its most recent peak), look no further.

The retreat from home-produced drama

ITV has led the retreat from drama, but all the other PSB channels have done the same, to greater or lesser extent. For nearly two decades, the PSB channels found themselves increasingly outflanked by US cable channels such as HBO, AMC, FX and Showtime in provision of high-quality drama series, with the American productions enjoying budgets three or four times larger than their UK equivalents. The UK response was to seek co-production relationships with these new players, and then with the new streaming services, rather than try to match them directly in spending terms. Over the last decade, the PSB channels have also been active in finding third-party investors in content they produce, typically by taking up-front payment from international distributors (and the streaming services themselves) for secondary rights. Such input has doubled in the last ten years, and most of it has been allocated to drama.

UK-produced “high-end TV” drama also climbed on board the tax-concession wagon that had been set rolling by the UK film industry, generating hundreds of millions of pounds of input to top up the declining investment by the broadcasters themselves. So although collective spending by the five PSBs has halved over the last ten years, the external cash flows have in most years probably exceeded the underlying reduction. Taxpayers may be surprised – even alarmed – that they are contributing over £140 million a year to UK-made “high-end TV”, not just because the results are so underwhelming, but because nearly all this largesse goes to the BBC (already in receipt of £3.5 billion a year in licence fee income) and ITV, which makes profits of around £500 million a year.

Indeed, it is only because the number of hours of drama broadcast by the PSB channels has fallen almost as quickly (53%) as the reduction in spend (57%) in ten years, that hourly costs for PSB drama have been kept at £770,000 per hour (it was £846,000 in 2006). The remaining two-thirds of the actual (£2.1 million) hourly cost of PSB dramas has been borne by co-producers, investors, distributors and HMRC.

Some have argued that the injection of cash into UK drama production has mostly resulted in rapid inflation of wages and other overhead costs, rather than in significantly higher production values. Whether that is true or not, if drama is acknowledged as the main battlefield in the fight against the streaming services, the PSB channels may have become too reliant on external finance, creating an existential risk if the providers of that finance choose to use their resources differently. If the primary broadcaster is reducing investment, a point in time comes when third parties decide they can spend their money more effectively elsewhere.

According to the Ofcom figures, drama has declined over the last decade from 18% to 10% of expenditure on first-run UK origination by the PSB channels, with more spent on each of news and current affairs, factual programmes, sport and entertainment. Spending in peak time has fallen faster than spending in daytime: it seems that the PSB channels have calculated that their best chance of hanging on to viewing is to concentrate on areas where the new players barely compete. Perhaps that makes sense as a defensive posture, but it essentially represents a strategic retreat in the key battle for “appointment to view” content.

i-Player vs Netflix

In terms of hours provided, nearly 60% of Netflix and Amazon content is drama, compared with barely 2% for the PSB channels. There are 18,000 hours of drama available on Netflix, and 13,000 on Amazon – and that does not include movies. Ofcom also reveals that 736 titles on the Netflix service (11% of the total) are UK-made, and that the streaming companies offered 221 hours of UK-made programming last year, nearly all at the upper end of the quality scale. Indeed, and perhaps ironically, Ofcom accepts that, as far as the consumer is concerned, choice, and quality of content, have “never been better”, even though PSB investment accounted for just 15% of all spending on “high-end” content in the UK last year.

Ofcom recently authorised the BBC to extend the “playback window” on i-Player from the current one month to twelve months, as part of a fight back against the SVOD challenge. Yet even if it manages to persuade independent producers (who are responsible for about 75% of the drama the BBC broadcasts) to make their content available on the i-Player for the longer period – for which they will undoubtedly want financial compensation – a hundred or even two hundred hours a year in total will make only the smallest dent in the streaming giants’ dominance.

Not only will the extension of the i-Player window cost the BBC money, but it is also likely to drive away some of its current co-producers. Netflix might be willing to wait a month, or even three months, to exercise its rights in second position – but twelve months? Given that the streaming services are intent, over time, on fully funding and controlling the original content they commission, this step seems designed to accelerate that process. Netflix already spends more on movies than the rest of the Hollywood studios combined, as a way of offsetting the loss of titles previously licensed from them, but in future to be deployed competitively in streaming services by the likes of Disney and Warner. The more the BBC imagines the i-Player to be a competitor to Netflix, the less likely Netflix is to be a long-term co-production partner.

The i-Player extension also complicates the supply of BBC content to its new joint venture with ITV, called Britbox. Given the modest amounts ITV is injecting into this UK-branded streaming service, it is unlikely ever to challenge the big beasts: a niche, hopefully profitable, is all that can be reasonably expected. All in all, it seems that the main strategic thrust of the i-Player extension is to try and woo some of the younger viewers who have grown up with streaming. If so, it will be an uphill task. According to Ofcom, the average 18-24 year-old currently spends just 2 minutes a day on i-Player.

And what of the licence fee?

To add to the BBC’s problems, it has botched the issue of free TV licences for the over-75s, having failed to take the initiative in 2015, when the Conservative government announced that it would stop funding those 4 million households in 2020. The BBC should have said, loudly and clearly at the time, that the concession would come to an end at that point, and assigned the responsibility unambiguously to the Chancellor of the Exchequer, George Osborne. Then the opprobrium would have landed on those responsible for the decision, who might have been forced to reconsider if the protests had been threatening enough.

Instead, the BBC allowed itself to be sucked into the funding of the concession, and to be represented as being the party that would decide how and whether the concession would be sustained after June 2020, so becoming effectively an arm of the welfare state. A belated public consultation on how to handle the issue left the BBC with a series of bad choices, ranging from full funding (at an impossible cost of £750 million a year), no funding (so incurring the full wrath of the powerful lobby for the elderly) or some point in between. By plumping for exempting just those households that qualify for pension credit, the BBC became party to means testing.

As it happens, only a minority of those thought to qualify for supplementary income over and above their pension entitlement (the “pension credit” households) currently claim it, though even providing free TV licences for that cohort of households will cost the BBC £250 million a year. Inevitably, the realisation that they could save £154.50 a year by applying for the pension credit to which they are entitled, over and above the value of the credit itself, will spur a surge of applications, thereby pushing the BBC’s welfare bill to over £400 million a year (that the government will have to fork out half a billion or so extra in benefits is only minor consolation for the BBC).

But that is not the end of the problem. Somewhere between two and three million households currently exempt from buying a TV licence will now be pursued by the BBC’s enforcers. Some, no doubt, will accept that they are more than able to pay, and will quietly comply. But many are likely to be annoyed or distressed by a sudden demand for money, and might refuse or fail to pay. For the BBC to drag tens or even hundreds of thousands of aged people to court for non-payment would be a public relations disaster, and the amount actually recovered – net of the costs of enforcement – might be somewhat disappointing.

Of course, these older people are by far the most loyal consumers of PSB channel content. If, for any reason, they drop out, the impact on the viewership statistics will be marked. If some of them transfer to just watching non-live content – perhaps if Amazon pick up the idea of a tuner-free screen – the negative outcome will be reinforced. The challenge is hard enough for the PSB channels in competing with SVOD. A BBC own-goal of these proportions could not have been worse timed.

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