Dec 12 2013

Media Plurality Series: The Impact of a 20% Ownership Cap – Not so ‘Minor’

Rob Kenny mugshot 2Following the presentation of a policy brief we published modelling proposed media ownership limits, Rob Kenny of Communications Chambers counters one of the brief’s conclusions and explains why he thinks such limits would have significant impact on the media market. 

Last week Justin Schlosberg (of Birkbeck, University of London and the Media Reform Coalition) and I debated media plurality issues at an LSE event. We agreed (I think) on the objectives of media plurality, but had very different views on the merits and form of regulatory intervention.

At the event Justin presented a paper Modelling Media Ownership Limits. This paper contains much useful material, but I write now to question one of its conclusions.

The paper sets out various proposed media ownership caps to support plurality, and their likely impact. For brevity I will focus on the caps proposed by the Media Reform Coalition (MRC), which are typical. In brief, they are:

    • At a 15% share of a media market, behavioural remedies would be applied such as the appointment of an independent panel to oversee editorial policy
    • At a 20% market share, ownership limits would be applied to ensure no person or entity had a controlling stake in the media entity

Justin’s paper suggests that “the impact on markets [of these caps] would be relatively minor”. However, this seems a bold claim.

Selling off the Sun and the Mail?

Both the Mail and the Sun have shares of the national newspaper market of over 20%. Thus under the MRC’s rules, both these titles would need to be publicly floated as independent entities. It is not at all clear that there is much public demand for the shares of new newspaper companies, particularly ones that would have no ‘take over premium’, since they could never be acquired. Thus the value placed by the public markets on a new ‘Sun PLC’ or ‘Mail PLC’ might be well below its true value. Moreover, there would be the listing costs to be borne, and the future costs of being a public company. Ultimately these would all be costs borne by the current owner (since they would be factored into the initial sales price). The current owner would also face the loss of any synergies with the rest of the group, and the intangible costs of loss of control.

What would a rational owner do when faced with such a forced sale? Presumably seek to avoid it by bringing the title’s share down below the 20% mark – relatively easily done through a price increase (which would keep revenues flowing but reduce circulation). The result would be a further reduction in newspaper readership. Moreover, it would severely discourage any future investment in those titles that might once again increase their share, and trigger an enforce sale.

Nor do the problems end there – if the Sun and the Mail reduced their share, then someone else would gain it. The Mirror could easily find itself close to or above the 20% share mark, forcing it to be spun out, or potentially to reduce its own circulation to avoid that fate. There is a clear risk of a vicious circle, and at minimum an acceleration of the already alarming decline in newspaper circulation.

Putting Sky News out of business?

Serious though the implications for newspapers are from a ‘20% rule’, they are far from the most drastic consequences. Because of Sky’s provision of wholesale radio news, the paper suggests that Sky News would fail the 20% test. However, it is hard to imagine Sky News being viable as an independent company – it is substantially loss making. In such cases the paper allows that “an equity carve-out or the transferral of voting rights from shareholders to employees” would be appropriate. It is not clear what is meant by an equity carve out – who would be interested in owning any number of shares that had no prospect of paying dividends, but rather required constant subsidies?

Conceivably voting rights could be transferred to employees, but would this have any practical benefit? If a Sky News remained utterly dependent on its parent for financial support – and by extension, the employees remained dependent on the goodwill of the parent for their jobs – how much real editorial independence would they have? Indeed, why would we expect the parent to continue to support a loss making, uncontrolled entity? Ownership regulations could put Sky News’ life at stake.

Within wholesale TV news, ITN is close to a 20% share – a relatively small drop in BBC consumption or the disappearance of Sky News could push it over the threshold. Once again, there are real concerns whether an independent ITN would be viable as a public company. In 2012 it made a pre-tax profit of just £1.5m, which contrasts to its net liabilities of £60m – without the support of its parents, it could well be bankrupt.

Thus the rules proposed by MRC could jeopardise the future of some leading news providers, accelerate the decline of newspaper circulations and act as a major disincentive to investment. It is hard to reconcile these significant risks with a view that the rules’ impact would be “relatively minor”.

This blog post gives the views of the author, and does not represent the position of the LSE Media Policy Project blog, nor of the London School of Economics. 

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6 Responses to Media Plurality Series: The Impact of a 20% Ownership Cap – Not so ‘Minor’

  1. Justin says:

    In response to my brief on media ownership limits, Rob Kenny helpfully moves the discussion forward by questioning some of the claims and detail in that brief. Before offering my response in kind, it is important to make clear Rob’s interest as a member of Communications Chambers, which includes News Corporation among their list of clients, particularly as much of his arguments are made with a focus on Rupert Murdoch’s news assets. (I myself declared an interest at the outset of my brief to which Rob responds, stating that I have been actively involved in preparing evidence on behalf of the Media Reform Coalition).

    With that out the way, I will now turn to Rob’s response which is important because it reflects the prevailing opinion among commercial media lobbyists in response to any fundamental change in the status quo of ownership regulation. Rob understandably focuses on a crucial question in this debate: would a system of fixed ownership limits along the lines proposed in my brief necessarily threaten growth and competitiveness, particularly in ailing newspaper markets? He highlights that my brief comes out in favour of a firm ‘no’ to this question. But he takes issue with this finding in two areas. First, he points out that:

    Both the Mail and the Sun have shares of the national newspaper market of over 20%. Thus under the MRC’s rules, both these titles would need to be publicly floated as independent entities.

    He then remarks on the associated costs and risks of a public floatation and suggests that these would pose an additional threat to the stability and sustainability of newspaper markets. But it is not quite clear whether he is suggesting that a public floatation is part of rules advocated by the Media Reform Coalition (MRC), or whether a public floatation would be a necessary consequence of any attempt to dilute a controlling interest in a dominant media group. In any case, neither claim is quite accurate. First, MRC rules do not specify the need for floatation and second, it is quite conceivable that alternative remedies and means could be used to achieve the overall objectives of fixed ownership limits along the lines reflected on in my brief. Indeed, Rob goes on to address these alternatives in the second area that he focuses on, in respect of Sky’s overwhelming control of the wholesale market in commercial radio news. He points out that

    In such cases [Justin’s paper] allows that “an equity carve-out or the transferral of voting rights from shareholders to employees’ would be appropriate”

    He subsequently questions the practicality of the first alternative on the basis that no one would likely “be interested in owning any number of shares that had no prospect of paying dividends, but rather required constant subsidies”. This claim is questionable. There are certainly examples in other industries where consortia of NGOs and individuals have taken up the opportunity to own shares in companies as a means of holding them to account ethically, including the oil and arms industries. But even if this was not feasible for any reason, Rob’s critique of the alternative – transferring voting rights to employees – is particularly problematic.

    His arguments rest on a somewhat dubious set of assumptions and misconceptions about the ‘practical benefit’ of such a measure in terms of enhancing editorial independence, and the potential costs in terms of a threat to sustainability which “could put Sky News’ life at stake”. Such hyperbole is reflective of a general discourse of fear that routinely emanates from commercial media amidst the prospect of ownership regulatory intervention. For one thing, it is not clear why targeting the overwhelming dominance of Sky News Radio should threaten the viability of Sky News as a whole. But more acutely, Rob seems to dismiss out of hand just the kind of potential remedies that were acceptable to none other than Newscorp themselves in the build up to their proposed merger with BskyB in 2011. During that process, plurality concerns raised by Ofcom resulted in the suggestion that Sky News could be ‘spun off’ if the deal was to be approved with a prescribed limit on Newscorp’s stake. This was to be accompanied by the establishment of an editorial board made up of a majority of independent directors (with no other Newscorp interests), responsible for ensuring the news channel’s editorial autonomy and integrity. The latter undertaking constitutes precisely the sort of public interest obligations advocated by MRC and other civil society groups, in addition to structural remedies aimed at reducing proprietors’ direct influence over news making.

    Of course, Rob is right to suggest that such measures offer no panacea to the problems of media power exposed at the Leveson hearings. It is certainly conceivable that more robust forms of intervention might be considered than the undertakings accepted for the Newscorp-BSkyB merger (or that which has long already existed in respect of Rupert Murdoch’s purchase of the Times and Sunday Times newspapers in 1981). But he is simply wrong to suggest that any potential benefits would be outweighed by the assumed costs in respect of innovation or growth. Newspaper owners themselves – including both the Murdochs and Daily Mail owner Viscount Rothermere – were at pains to stress to Leveson that they considered editorial independence to be ‘good for business’. Rob himself argues elsewhere that the editorial influence of proprietors is waning amidst competing influences over content stemming from social media, as well as financial pressures. The implication is that the exercise of editorial influence by proprietors is more in conflict than in consonance with strategies of commercial survival. In effect, the inverse of what he is arguing here. If exercising editorial control is somewhat inimical to the commercial interests of media titles, why would holding media bosses to their word pose “a major disincentive to investment”? I am certainly not of aware of any evidence in support of this claim (including from countries that do have more stringent ownership limits in place, including France and Germany).

    Yet there is considerable evidence to the contrary. In fact, in several areas where there has been sustained and unchecked growth in ownership concentration within news markets, there has been a concomitant fall in standards, quality and ultimately, consumer demand. This was well documented in the US by Pew research just this year and has been similarly demonstrated in the UK in respect of the rapidly converging local and regional news market.

    Perhaps most concerning of all, Rob makes no mention of the social and democratic costs in respect of the intimate relations between media and political elites laid bare at the Leveson hearings. There is a reason why owners of smaller media groups do not – like Murdoch – get regular invites for tea at number 10 (and leave by the back door), or – like Rothermere – get to spend ‘private’ weekends with the Prime Minister at Chequers as he did last year. The reality is that whether or not consumption or exposure diversity is improving or getting worse (and we can cherry pick data to argue the case either way), size matters in respect of media power. If we are to place any value on democratic health as opposed to just competitive health of markets, then we need real plurality reform to address the real and existing accumulations of that power.

  2. Pingback: Media Plurality: The Impact of a 20% Ownership Cap, not so ‘Minor’ – Rob Kenny | Inforrm's Blog

  3. Robert Kenny says:

    Justin is right that we’ve done work for News (most recently in 2011), and though it is public knowledge, I perhaps should have mentioned it here. More recently we’ve also done projects for other clients including the BBC on plurality issues.

    Justin says that I am wrong to worry that no one would likely “be interested in owning any number of shares that had no prospect of paying dividends, but rather required constant subsidies”, since “there are certainly examples in other industries where consortia of NGOs and individuals have taken up the opportunity to own shares in companies as a means of holding them to account ethically, including the oil and arms industries.” The critical difference here is that the oil and arms industries are profitable, and do not require constant subsidies.

    There is an example closer to home which Justin might have mentioned – the Scott Trust, which supports the Guardian. However, this is not a particularly helpful precedent for his case. Firstly, there is growing anxiety about the future viability of the Trust – it is not clear that the Trust can sustain the level of losses the Guardian is making. Secondly, endowing an entirely new trust to support a loss making media organisation (on the Scott Trust’s model) would be a very substantial undertaking. Not impossible perhaps, but does Justin have in mind the organisations which he would expect to make the necessary multi-million pound donations?

    Looking at Sky News in particular, Justin points out that in the context of the proposed acquisition of Sky by News Corp, News was willing to sign up to an obligation to be the provider of subsidy to a largely independent Sky News. This is certainly true. However, this context is critical. News was willing to provide such subsidy in exchange for approval of a substantial transaction. What carrot is Justin now proposing to offer Sky in exchange for an agreement to fund an independent, loss-making Sky News in perpetuity?

    Finally Justin asks why some media owners get invites to Number 10 and others do not. I agree with him that politicians perceive that larger newspapers have power. The question is whether that perception is accurate. As Justin says ‘size matters’, and with each passing year newspapers sell 9% fewer copies. Perception may be lagging reality, but the reality is that the influence of newspapers is waning fast.

  4. Justin says:

    I’m grateful once again for your thoughtful responses to my points. In the spirit of constructive debate, I feel compelled to take issue with your general argument that proposals for media ownership limits do not take account of necessary incentives for investment in ailing news businesses. You use this argument first in dismissing the suggestion that civil society might take up the opportunity to invest in news media organisations as they have in the oil and arms industries when you state that “The critical difference here is that the oil and arms industries are profitable, and do not require constant subsidies.” This doesn’t quite make sense – the incentives for civil society actors investing in large oil and arms corporations clearly has nothing to do with profit. They are motivated by an opportunity to hold corporations to account through their shareholdings.

    You then use the same argument in connection with the agreed undertakings in respect of Sky News prior to the withdrawal of the Newscorp bid to buy out BSkyB. Clearly Murdoch was motivated to accept the undertakings by the commercial prospects of the merger. But I don’t think we can extrapolate from this that any investors in news require such incentives. Such a view is behind the curve – If we look at the spate of philanthropic and cross-subsidy from new media to old media in recent years (Amazon founder’s purchase of Washington Post; Ebay founder’s prospective news venture with former Guardian journalist Glenn Greenwald; Google’s settlement with news publishers in France and Belgium earlier this year, etc.) it is clear that incentives for investment in news are less and less about making profit.

    It may well be said that some of the drivers for news investment these days consist precisely in the capacity of an owner to exercise editorial influence. In other words, people only continue to invest in, or subsidise newspapers because they offer a return measured not in pounds but in power. But this only adds more weight to the case for ownership limits. And if they were to result in the withdrawal of subsidies or investment in titles that exist ultimately to promote the views or interests of their extremely wealthy owners, that is surely a gain more than a loss for plurality and democracy, lest we should favour a return to the days of media baronism.

    Ironically, some of the few successful news start-ups over the last twenty years – including the Centre for Public Integrity in the US which has grown steadily since its inception – have principles and commitments to editorial independence enshrined into their constitutions. And I’m not convinced by your skepticism in regards to the “future viability of the Scott Trust”. It owns very successful and growing commercial businesses – including Autotrader and the online dating site Soulmates – which it is using to cross-subsidise the Guardian’s losses. Provided those losses are kept in check – and there is every reason to believe that they are – this offers a sustainable model for the future. There are numerous other examples of news media organisations owned by trusts and constitutionally designed to protect editorial autonomy that are bucking the trend and proving more sustainable than their commercial rivals (eg Ouest-France).

    Finally, the point about perception lagging reality in respect of newspaper influence is a little confusing. Measuring actual influence is a very difficult thing to do in practice. The reality is that decades of research in this area has found that media influence is uncertain and cannot be judged from rather shallow survey data from which we can cherry pick figures to argue the case either way. They certainly can’t take account of the very real possibility that newspapers wield influence far beyond their readerships because of their agenda-leading role in respect of television, for instance. What we do know, as you acknowledge, is that there is a PERCEPTION among political actors that newspapers do still matter and continue to have, in the words of Tony Blair, ‘a very deep penetration’ among the British public. It is simply not sufficient to argue against fixed ownership limits on the basis that politicians’ estimation of media influence may not tally with your own. That is immaterial – the damage to plurality and democracy is caused by the perception itself which is directly related to size and clearly exploited by media proprietors.

  5. Robert Kenny says:

    Justin -

    Thanks very much for your reply. To continue the constructive debate, my point about oil and arms companies being profitable was not about the motives of civil society actors, it was about their financial capacity. It is one thing to invest some money in ArmsCo for a period, knowing you will likely get it when you sell later, plus dividends. It is quite another to buy shares in NewspaperCo, with little expectation of dividends and a high likelihood of selling the shares at a loss (if you can sell them at all). Only a few civil society actors would be able to absorb such a financial hit.

    Jeff Bezos can of course, and you mention his purchase of the Washington Post. But the very rules you propose would prevent him (or any other philanthropist) buying the Sun or the Mail, the two titles you would require to be sold by their current owners.

    I’m glad you’re optimistic about the Scott Trust – I would like to be, since the Guardian is my main newspaper and (far more importantly) a vital part of the media landscape. However, last year the value of its assets – including AutoTrader and other commercial ventures – fell from £592 to £511m. (Back in 2009 the figure was £754m). I’m not sure this is a great example of a ‘sustainable model for the future’.

    Twice you’ve talked about cherry-picking. At some point, if you keep putting your hand in the bowl and getting a cherry, you have to conclude you do in fact have a bowl of cherries. There seems to be a host of evidence that proprietors’ influence on citizens is being diluted: by declining readership, more diverse consumption, new sources of news and comment, direct communications from politicians (and other actors) and so on. What is the contrary evidence that their influence is increasing?

    To your final point that the reality of influence doesn’t matter, it is the perception that counts – this raises a host of issues. It is surely against natural justice to punish people for how they are perceived rather than their reality? From time to time feral back-benchers have got it into their heads that universities were corrupting the youth of the day by filling their minds with dangerous nonsense. Would it be right to fire vice chancellors because of this perception, regardless of reality?

    • Justin says:

      Thanks Rob

      I take your point about the difference between Armsco and NewspaperCo from the perspective of potential civil society investors. But you still seem to somewhat misconstrue the proposals put forward in my brief when you imply that they would ‘require’ the Sun and Mail to be sold by their current owner to dispersed shareholders, without consideration of whether this would be practical under existing market conditions. In both my original brief and responses to your comments I have repeatedly emphasised that this is not the case and that alternative structural remedies could be applied if the sale of shares is not feasible (including transfer of shareholder voting rights to employees, trusts, etc).

      In regards to the Scott Trust, again I take your point and I didn’t mean to suggest that all is rosey for the Guardian’s future. But the picture is unclear and it would certainly seem to me that substantive profits and growth in the Trust’s ancillary businesses will likely continue to provide a buffer for the Guardian, as will new revenues that may be derived as a result of its highly successful digital expansion. There are certainly examples of other trust-owned and not-for-profit news organisations around the world that have actually bucked the trend of decline even in the throes of the financial crisis.

      In regards to your suggestion that the rationale for fixed ownership limits is based on perception rather than reality of concentrated media power, I’m afraid that is a fundamental misunderstanding of my argument. Of course I was not suggesting that ownership limits should be imposed simply because politicians ‘think’ that media owners have too much power. The analogy you use is thus inaccurate and a little unfair. The problem is concentration itself which gives rise to the kind of endemic institutional corruption between media and political elites disclosed at the Leveson hearings. My point about perception was simply that concentrated media power can be a problem for democracy in facilitating influence over politicians, somewhat independently of influence over audiences. This is consistent with Ofcom’s twin-focussed definition of the plurality problem and is a rather uncontroversial point.

      But just because there MAY be a disjuncture between politicians’ perceptions and the reality of media influence, does not in any way mean that there IS such a disjuncture or that it is significant. I would reiterate the inherent difficulties in measuring and determining media influence which I’m afraid your analysis does not take account of and your findings in this respect are thus very shaky indeed. Decades of media audience research has consistently found influence to be uncertain and variable. You mention, for instance, ‘declining readership’ as evidence of declining influence. Apart from the fact that most national newspapers have increased their audience reach as a result of the internet (based on combined daily circulation and web traffic), your equation disregards everything from inter-media agenda setting to two-step flows of media effects which can have a significant bearing on influence irrespective of ‘declining readership’. As for diversifying media consumption, this is based on very limited survey-based methodologies that are flawed in a number of respects. For instance, respondents might cite Google as a news source even though they are actually consuming content provided by established media brands that appear as snippets on Google’s listings. Nor can such data account for subtle distinctions in the ways in which people consume news which can have far reaching consequences for the extent of influence. I might get my news first from social media but only form my views once I read about it or watch it on Sky, BBC etc. Does that mean that my diversified consumption reflects a waning of traditional media influence?

      As for contrary evidence to your findings, there have been a number of recent studies that have demonstrated the enduring power of legacy media in agenda setting and influencing audience’s cognitive responses to particular issues and events. I’d be happy to point you in their direction if interested. Ofcom’s own data shows that news consumption online is heavily concentrated around dominant media groups. In their report on the public interest test in 2010, for instance, they found that out of the top 50 online news providers by browsing minutes, five groups control more than 70% of the user base (BBC, DMGT, Newscorp, Guardian and Telegraph) and 37 have less than 1%, which is an indication of just how concentrated online news consumption has become. So my suggestion that you can cherry pick data to argue the case for audience influence either way was putting it a little politely. The cherries genuinely bolstering the case for waning influence really are, in my view, very few and far between.

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