National Association of Broadcasters: briefing

Meeting report

COMMUNICATIONS PORTFOLIO COMMITTEE
4 October 2000
PRESENTATION BY NATIONAL ASSOCIATION OF BROADCASTERS

Documents handed out
Slides on the Future of South African Broadcasting - National Association of Broadcasters: text outline only (See Appendix 1)

SUMMARY
The National Association of Broadcasters expressed concern that there is not enough investment in the media sector because investors consider it to be too high risk. They called for an intervention to allow the industry to grow and develop further.

They believe that in order for the industry to grow a regulatory environment that is both stable and flexible must be established. The regulatory framework must set out key principles but it must also be able to adapt to circumstances. Establishing a balance between flexibility and stability is the key to meeting the challenges of the digital age. NAB made 10 recommendations for interventions. These are intended to start a debate and discussion in the industry and are not intended to be conclusive answers. The issues must be addressed in a co-operative way involving all stakeholders.

MINUTES
In welcoming representatives from National Association of Broadcasters, PricewaterhouseCoopers as well as members from the parliamentary committees on Trade and Industry and on Arts and Culture, the Chairperson noted that communications was the third largest economic sector in the world that influences all aspects of people's lives.

Summary of National Association of Broadcasters presentation
Status quo of the SA Broadcasting Industry
The industry does not have enough investors. The investment community generally feels that the media industry is not a lucrative area for investment because it has high risk factors attached to it. On the whole the media industry has been going through difficult times.

The first intervention was conducted in 1994. Another major intervention is necessary to push the industry forward and to allow the industry to grow.

Stakeholder survey and legislative goals
There is not enough attention to growth and investment in the sector. Certain factors have been identified as being negative on growth. These include outdated ownership restrictions, lack of transformation in the advertising industry and sponsorship restrictions. The SABC restructuring has also created uncertainty in the whole broadcasting industry. The industry must be aware of the changes sooner so that they can assess the impact on the industry.

NAB believes that establishing a regulatory environment that is both stable and flexible is what the industry needs to grow. This is the essence of their recommendations.

The way forward
They need solutions premised on national legislation that is predictable on the one hand but flexible on the other hand. The regulatory framework must set out key principles but it must also be able to adapt to circumstances. Such a framework policy will be able to keep up with technology. Thus, the balance between flexibility and stability is key to meeting the challenges of the digital age.

Recommendations for interventions
The industry is eager to see further growth and transformation. The recommendations made are intended to start a debate focusing on these issues. They are not intended to be conclusive answers but only questions raised for debate and discussion in the industry. The issues must be addressed in a co-operative way involving all stakeholders. The recommendations for discussion are:

1) There should be a review of the ownership restrictions. Due to the current situation, investors are reluctant to invest. Some want to invest but they cannot because of the ownership restrictions. The 1993 limitations are outdated. They are not suggesting that the restrictions be abolished but rather that they be re-examined to determine if they are appropriate or not. Reviewing foreign ownership limitations would attract foreign investment particularly in capital intensive sectors.

2) A new plan for licencing community radio. A creative new licencing effort could stimulate growth in the sector. For example they make available regional licences which combine viable areas with less viable under-served areas.

3) New options for local content rules. There could be more flexibility in the way the local content rules are conceived. They could explore things like "pay or play". In terms of this a station will be fined if it plays less than the quota. They could also give broad credit for African content. This means that African content could count as local content.

Other proposals are:
4) Broadcasters currently pay a number of levies. There should be protection from additional levies.
5) The industry needs clear regulatory criteria on empowerment
6) Community radio has struggled to access financing. They need strategies to alleviate the burden.
7) There must be a framework for satellite broadcasting.
8) SA must develop a strategic framework on digitalisation
9) Allow networking and syndication arrangements
10) The regulatory processes must be streamlined.

Discussion
Chairperson Kekana commented that the Committee is guided by the policy of the day because they themselves are not experts in the field of technology. For this reason dialogue with organisations like NAB are important.

Ms Vos (IFP) asked if they foresee a downward spiraling of the industry if they do not get the responses that they need. What will happen to the industry? Are the results that they need possible in the short-term?
Reply: Without a second intervention, there will be stagnation although there will not be collapses. Investors will continue to say that there is less risk in other sectors therefore there will be more investment there. It will not be a bright situation. The short-term impact of changes would be significant.

Mr Pieterse (ANC) commented about the ''play or pay'' policy. If a station plays more than the required amount of local content, there is no reward for them. There is only a penalty if they play less than the quota. Paying the penalty may impact on a small station but for a big station it is not significant. Big stations can afford to pay the penalty.
Reply: It is not simply a matter of charging a tiny fee which allows people to get away with not playing local content on an ongoing basis. There must be some degree of cooperation between institutions. In Australia for example if a radio station plays 5% local content the broadcaster says they must increase it to 15% in 2 years time. At the same time then the record companies must develop content for that market. Thus they have some degree of co-operation between institutions.

Dr Davies asked for a comment on cross-border activity in respect of the issue of globalisation.
Reply: Globalisation is a key trend. There is a drive from global companies to have an outward look. It should be the same for SA. SA should create content which can be exported. Presently this is not being done. SA must produce things with an international appeal. In Africa generally there is not great broadcasting activity. Opportunities are there for SA to go beyond the SA market. ''We need to sort out our house here first''.

Mr Zita (ANC) commented that culture in relation to communications is a sensitive issue. It cannot be left entirely to market concerns. In light of this he asked:
- how does one strike a balance between profit and relevance?
- has there been consultation with other roleplayers?
Reply: Sensitivity to cultural issues is a balancing act. Legislation sets out the goals of empowerment, diversity and growth. However the social goals will fall behind if there is not continued investment. The one depends on the other. They seek the balance, it was achieved six years ago in the legislation but now the legislation needs to be reviewed and updated.
In terms of consultation with other roleplayers they are doing a number of presentations this week. They are going to have an industry summit which will deal with such issues in March 2001.

An ANC committee member referred to NAB's recommendation on the review of the restrictions. He commented that, in light of the general influence of broadcasting, subjecting control to outsiders/foreign investors who have different interests would ultimately have a negative impact on South Africa.

The Chairperson asked the panel to give a reasonable figure as to what percentage of foreign influence there should be.
Reply: They did not have a figure on the desired level of foreign influence. This is also a balancing act which has to be performed. They are going to address the issue through research by setting up structures and procedures to focus on it.

Chairperson Kekana commented that SA is committed to opening and liberalising the market but the advertising industry is not meeting them. He asked what pressures NAB was putting on the advertising industry to change their ways. He also asked why international roleplayers have been successful in global consolidation and SA has not.
Reply: International media companies have been successful in consolidation because they have been able to sell their content in addition to their airtime. SA has not been able to do this. This is the key difference. For example Walt Disney is focused on exploiting intellectual property on a large scale (such as selling concept-related T-shirts). The SA industry has some way to go before it gets to this point.

The role of the advertising agencies is a key point and they want to encourage advertising agencies to take a fresh look at the role that they must play. The debate must be taken to that industry but NAB indicated that they are wary of an intervention in this regard.

Chairperson Kekana replied that something must be done. NAB has a responsibility to do something, they must ''flex [their] muscle''.

Ms Van Wyk (NNP) said that Afrikaans provides the biggest source of revenue on television (SABC 2). If this potential was exploited better then more revenue would come in. Secondly she said that there are many local arts festivals which provide local content. These should be designed so that they are suitable for broadcasting. Broadcasters are in a position to create the taste of the public. People are easily conditioned; they like what they become accustomed to. She asked what the percentage of local cultural content was on radio and television.
Reply: NAB should encourage broadcasters to play a greater role in cultural events beyond simply promoting the events. They should stimulate this beyond the quota system.

A minority party member asked what (besides the new licencing effort) could be done to stimulate growth. He also asked what could be done to overcome the problem relating to support for community radio.

Reply: The regulator must provide more platforms and the industry must make the platforms successful. Community radio is in its potential next round of licencing. They must look at audience sizes and at the primary and the secondary market. These are the formats which are going to be viable. After the primary market is successful one moves on to secondary markets. If the platform is there for formats and they prove to be successful then the advertisers will come.

Viability lies in the way radio stations are set up. They must look at community-based stations in a special way. How does one get the advertisers to come in confidently and advertise on the station? The question of how to sell is a challenge but they will succeed if they get everyone aboard. They need to run the stations as a business if they are going to succeed. The Authority needs to say that they are going to be flexible. Bush Radio for example runs on sponsorships and overseas donors because in light of the regulations that government imposes they cannot run on advertising alone.

Concluding comments by Chairperson Kekana
- The industry summit next year is a good idea.
- He suggested that they engage in talks with Independent Communications Authority of South Africa and put pressure on them to deal with certain areas. NAB can then come to the Portfolio Committee and make the committee aware of the blockages exist.

The meeting was adjourned.

Appendix 1

The Future of the South African Broadcasting Industry

National Association of Broadcasters

October 2000

INTRODUCTION & BACKGROUND
Introduction

· The National Association of Broadcasters (NAB) wishes to thank you for the opportunity to make this presentation on the future of broadcasting in South Africa

• This presentation is made at a time when South African broadcasting is not growing as it should
• After the transformation of the industry post-94, it is our view that a second wave of intervention is needed to foster growth and development
• This intervention could see the broadcasting sector realising its potential and driving our country into the new economy

Background to the presentation

• The NAB, in conjunction with PricewaterhouseCoopers, have:
• Conducted a survey amongst the television and radio broadcasters, as well as members of the investor community in South Africa and abroad;
• Examined the key trends in media and broadcasting internationally;
• Examined the status quo of the SA broadcasting industry;
• Identified the critical success factors needed to promote growth in this industry; and finally
• Made recommendations on the way forward

This presentation sets out our findings and attempts to address the key requirements to achieve growth in the broadcasting industry

THE SA BROADCASTING INDUSTRY

The status quo of the South African broadcasting industry

• The media industry as a whole has been going through difficult times of late
• Stock prices of media companies on the JSE have been depressed, a number of business failures have been reported and institutional investors seem reluctant to invest further capital into the industry
• Since re-regulation there have been a number of changes in ownership, sometimes because assets were not delivering the returns anticipated. In fact, a recent survey by PwC confirmed that the majority of media companies in South Africa were destroying value
• The public broadcaster has been going through a difficult financial period in the last couple of years
• The regulator has sometimes not been able to meet the turnaround times in decisions called for by the marketplace

The SA media industry has out-performed because of a "first wave" of intervention, IPO's and technology adoption

[PMG Editor's Note: Graphs not included]

Future value creation relies on a combination of growth and operating efficiency, which shows a "second wave" of intervention is required

[PMG Editor's Note: Graphs not included]

Total adspend in SA has remained relatively unchanged over the last 5 years between the various mediums…

[PMG Editor's Note: Graphs not included]

It is evident that the radio stations focusing on the upper LSMs have the highest share of revenue vs share of audience

[PMG Editor's Note: Graphs not included]

Radio Stations in the lower LSM groups have a large audience but generate a low share of revenue vs share of audience

[PMG Editor's Note: Graphs not included]

Which leads to a lot of questions for South African media players

• What room is there to improve margins given that we are now equivalent to global benchmarks?
• What can be done to drive more sales from the same capital base or reduce the capital base?
• How can the market optimise returns of current and future capital outlays?
• Can the media market sustain all the listed players?
• How can regulation assist future growth and success for the market?
• How do we achieve the objectives of empowerment, diversity and growth & investment?

Stakeholder Survey & Legislative Goals

From the survey, industry players believe that relatively little attention has been paid to growth and investment as a national goal

[PMG Editor's Note: Graphs not included]

Factors impacting on industry growth

• Broadcasters identified the following factors as impacting negatively on industry growth:
• Outdated ownership restrictions
• Lack of transformation in the advertising industry
• Sponsorship restrictions
• Lack of flexibility and consistency in regulatory processes
• Lack of viable licence opportunities for radio
• Continued uncertainty about the SABC restructuring

Growth and investment is key for the achievement of national goals

• South Africa's broadcasting policy framework rests on the assumption that with a vibrant broadcasting industry, broader goals of diversity, empowerment, access, nation building, democratisation, education and foundation for a new economy will be established
• It is the shared responsibility of government, the regulator and the different sectors of the broadcasting industry to meet these goals
• There is a commitment in national policy and legislation to:
• Promoting free and fair competition so that the SA broadcasting system can be globally competitive (White paper, p11)
• Encouraging investments in the broadcasting sector (White paper, p17)
• The Competition Act also emphasises growth and investment in striving to:
• Achieve a more effective and efficient economy in South Africa
• Create greater capability and an environment for South Africans to compete effectively in international markets

KEY INTERNATIONAL TRENDS

Globalisation and technological convergence are transforming the industry

• Proliferation of media channels and formats have escalated the importance of content creation and ownership
• Relaxed government rules and regulations have contributed to a wave of acquisitions and players have benefited by exploiting the cost and revenue opportunities from consolidation
• There is increasing competition for advertising revenues from other media platforms, such as the Internet and outdoor advertising
• Globally, there has also been an increasing demand for more niche oriented programmes

Based on global research, the following have been identified as critical success factors for broadcasters
[PMG Editor's Note: Graphs not included]

For developing economies, however, the challenges are greater…

This is because of:	Which implies that
· The scale of the market	· Consolidation is likely
· The maturity of the media	· Partnerships need to be explored
· Limited technology & infrastructure development	· Additional markets should be identified
· Scarcity of skills	· A flexible and stable regulatory environment is essential
· Pressing social objectives which must also be achieved

 

How does South Africa measure against the global critical success factors?

Technology & Synergy

• A number of platforms but no licensing framework for multi-channel broadcasting
• Unclear whether the ownership restrictions still apply
• Foreign ownership is still capped at 20%
• There is no roll-out plan for digital services

Managing risk:

• Concentration limits impede investors
• Non-tradability of assets increase risk

Quality of assets:

• Local content quotas have seen a commitment to South African content
• SA broadcasters' access to quality content is affected by the prohibitive cost of local content
• The local music industry does also not produce sufficient local music to accommodate the formats of stations
• Human resource development has been prioritised -greater pool of available talent for broadcasters
• May need more co-ordinated strategies

How does South Africa measure against the global critical success factors?

Scale

• Growth restricted by concentration limits and the cross-media limitations.
• Regulator sometimes reluctant to licence up to maximum limit
• In radio, no new licensing opportunities

Capital Investment

• Empowerment groups have sometimes found it difficult to access capital
• There is no clear direction from policy makers on what is meant by empowerment

THE WAY FORWARD

What are the interventions needed to promote growth for the industry? Flexibility, responsiveness and predictability of national policy

"In a fast moving area such as communications, it makes sense to have a regulatory framework that sets out key principles but can then adapt to circumstance" (UK Dept. of Culture, Media and Sport, 1999)

• Other countries have recognised that this balance between flexibility and stability in broadcasting policy is key to meeting the challenges of the digital age:
• In the US the FCC has a duty to review all telecommunications regulations every two years and repeal or modify rules no longer necessary
• In Germany new laws must be tested one year after enactment to determine whether they are achieving their objectives
• In this light, we have ten ideas intended to start dialogue on what could be done

1. Review the ownership restrictions

• South Africa has companies with the capital to invest - they are discouraged
• Best investors in broadcasting are broadcasters
• Limitations conceived in 1993 - possibly outdated
• Reviewing concentration restrictions would allow consolidation particularly among exiting radio players
• Reviewing foreign ownership limitations would attract foreign investment particularly in capital intensive sectors

2. A plan for licensing of commercial radio

• Greenfields licences were granted + four years ago - still only 6% market share
• A creative new licensing effort could stimulate growth:
• Could make available regional licences which combine viable areas with less viable, underserved areas
• Could link licences to underused formats
• A plan would give clarity on which licences, if any, will be issued over the next few years
• Must be seen in tandem with ownership review - many existing players would not be able to participate if concentration limits aren't reviewed

3. New options for local content rules

• Broadcasters support SA content and the observation of quotas
• When the quotas are reviewed there will be room for more flexibility in devising the kind of contribution broadcasters make to local content
• Incremental increases over a period of years
• Pay or play options
• Staggered increases according to the type of service, format, genre and coverage
• Credits for African content

4. Protection from additional levies

• Broadcasters currently pay a number of levies
• Proposed needletime levy will not solve problems of SA music industry
• NAB committed to finding other solutions

5. Regulatory criteria and position on empowerment

• Broadcasting industry has led empowerment
• Recent setbacks - now only 5.9% of firms on JSE are black controlled
• Need clear direction and criteria taking changed economic climate into account

6. Support for community radio

• Community radio contributes to development, diversity and training
• Has struggled to access financing
• Pace of issuing 4 year licences has compounded difficulties
• Need further strategies to alleviate burden

7. Framework for satellite broadcasting

• Legal obstacles to regulation must be removed
• Lack of regulatory certainty leads to instability in broader industry

8. Plan for digital services

• Digital divide a threat to development
• Broadcasting can assist in bridging the divide
• Crucial that we develop a strategic framework sooner rather than later
• SA has "e-leadership" - must maximise this to move forward on digitisation

9. Allow networking and syndication arrangements

• A practical way for broadcasters to exploit synergies
• Broadcasters are currently unable to fully exploit these possibilities
• Could improve programme quality

10. Streamlining of regulatory processes

• Awarding, amending and renewing of licences is time-consuming
• Monitoring commitments are currently a burden to industry and regulator
• Streamlining of these processes would be in everyone's interests
• Needs to be seen in the context of the adequate resourcing of the regulator

What about the industry's responsibility?

• The broadcasting industry is committed to working as a partner with policymakers in driving growth and transformation in this industry.
• We, as industry representatives, therefore commit to:
• Support policymakers in the achievement of the national goals for broadcasting
• Work with policymakers on a job creation strategy for the industry
• Support policymakers in a plan for digitisation
• Produce internal codes and standards in line with the IBA's recommendation of 1998

Conclusions & Discussions