Ofcom Overview 2006

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The Communications Market 2006 1 Overview Published : 10 August 2006 11

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Ofcom review of the UK Communications Market 2006

Transcript of Ofcom Overview 2006

  • The Communications Market 2006

    1 Overview

    Published : 10 August 2006

    11

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    Contents 1.1 Introduction 131.2 Key communications themes 141.2.1 Communications consumers get more for their money 14

    1.2.2 Young people are moving away from old media 14

    1.2.3 Competition in bundling heats up 15

    1.3 The year in communications 171.3.1 Introduction 17

    1.3.2 Availability: 3G and LLU extend reach of communications services 17

    1.3.3 New services over existing platforms 20

    1.3.4 New services over new platforms 23

    1.3.5 New ways of watching and listening 25

    1.3.6 Competition and technology help to deliver lower prices 27

    1.3.7 Take-up: digital TV penetration grows, broadband now mass-market 29

    1.4 The communications industry 321.4.1 Introduction: the emergence of bundled products 32

    1.4.2 New technologies may require new pricing structures 33

    1.4.3 Overall broadcasting and telecoms revenues reach 50.6bn 33

    1.4.4 Subscriptions drive TV revenue growth, with advertising slowing 34

    1.4.5 The financial markets 36

    1.5 The communications consumer 381.5.1 Introduction 38

    1.5.2 Spend declines despite increased usage 38

    1.5.3 Consumption more broadband, more TV, less radio 39

    1.5.4 Consumption patterns are changing for young adults 40

    1.6 Spectrum 441.6.1 Introduction: an important component of the communications market 44

    1.6.2 New uses of spectrum 44

    1.6.3 Spectrum auctions 45

    1.6.4 Spectrum trading 46

    1.6.5 Digital Dividend Review 46

    1.6.6 Ultra Wideband (UWB) 46

    1.6.7 Cave audit 47

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    1.1 Introduction This report is the third in a series of annual Communications Market reports, the latest of which was published in August 2005. This edition covers developments across the electronic communications and media sectors in the UK for the calendar year of 2005 with additional analysis for the period to June 2006 where available. The Communications Market supports Ofcoms aim to provide best-in-class research to which stakeholders have regular access. It aims to give a comprehensive picture of the radio, telecommunications and television sectors, with a round-up of recent developments and the latest available data on:

    industry size, structure and financing; availability, penetration and use of products and services; and consumer attitudes and behaviour.

    This edition follows a year in which consumers have started to feel the impact of converged communications services. At the device level, phone calls can now be made over the internet while the internet can be accessed using mobile handsets; equally television and radio programmes can now be enjoyed over both broadband and mobile phones. Also, at the operator level, the distinction between broadcaster, mobile operator, and fixed-line or broadband provider is blurring in each case there are examples of industry players bundling services together in innovative ways, in an effort both to attract and retain customers.

    While this report contains separate sections for the radio, telecoms and television sectors, descriptions of converged services can often be found in more than one section for example the recent trials of radio and television to mobile phones feature in all three. In each case we try to look at such services from a different perspective. In future reports, as services converge further, we will aim to present our analysis in a way which reflects the way they are offered and used more closely.

    Ofcom welcomes comment on the content and style of the Communications Market report to help inform future publications. Suggestions and queries should be sent to: [email protected]. The information set out in this report does not represent any proposal or conclusion by Ofcom in respect of the current or future definition of markets and/or the assessment of licence applications or significant market power or dominant position for the purposes of the Communications Act 2003, the Competition Act 1998 or other relevant legislation. We endeavour to ensure that the data in this report are the most accurate currently available.

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    1.2 Key communications themes 1.2.1 Communications consumers get more for their money In 2005, for the first time in five years, average UK household spend on communications fell slightly, from 4.63% to 4.60%, as a proportion of total household expenditure. Despite growth in take-up of many key services 3.8m more broadband connections, 5.8m more mobile connections and 2.7m net additional digital TV households (of which 441,000 subscribed to pay TV) total 2005 communications spend per household rose in real terms by just 0.6% (54 pence) to 87.67. This was almost entirely because of falling prices, particularly in the fixed-line sector, where average household spend decreased from 25.90 to 23.60/month, largely offsetting increased mobile, broadband and broadcasting spend. We can see this more clearly if we apply 2005 telecoms usage levels to 2001 prices; average spend on telecoms services would have been 15% higher in real terms at 71.94 per household in 2001, against 60.96 in 2005. These data show that, in simple terms, consumers are using more and paying less. This is largely due to a combination of increasing competition, new delivery platforms, innovative pricing and marketing, and regulatory intervention where necessary. However, this trend looks set to continue: further increases in competition, combined with innovative service bundling, could increase the downward pressure on prices over the next year; wide-scale local loop unbundling (LLU) should give operators new ways of packaging and pricing broadband and fixed-line services; and new ways of delivering TV and radio programming (primarily via broadband and mobile platforms) could result in increasing competition and a broader range of service offerings.

    1.2.2 Young people are moving away from old media In 2005, we noticed a further shift in communications consumption patterns among the young (16-24 year old) age group. While it is true that usage of media, telecoms and technology has always varied by age, this difference has become more marked over the past year. Younger people have embraced the multitude of new technologies and means of communication, to the detriment of traditional platforms and services. For example, in a multi-channel TV world, younger viewers now watch less public-service broadcasting output than ever before (share of viewing to terrestrial channels among 1624 year olds is down from 74.3% of their viewing time in 2001 to 58% in 2005) opting instead for newer digital channels that might better reflect their values and interests. In radio, too, this age group is listening to proportionately less analogue and local commercial output than average and is instead replacing it with digital listening and output from the newer national commercial services. A similar theme emerges in telecoms, where young adults are forsaking fixed-line telephony in favour of mobile calls and texts 16-24 year old subscribers make on average seven more calls and send 42 more texts per week than the population as a whole. They also spend more time online; young adults who use the internet do so for 21 more minutes per week than the UK average and at least 70% of them have used websites for keeping up contacts (against 41% of all adults). These are the children of the internet age, many of whom have never known a life without home computers, games consoles, mobile phones and online connectivity.

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    They are accustomed to more on-demand delivery of services: they want to contact their friends whenever and however is most convenient; they expect to watch TV programmes and listen to radio stations which interest them; they want to create their own online presence, and connect directly to others with similar tastes and interests.

    1.2.3 Competition in bundling heats up Throughout 2005 and early 2006, many operators started combining a number of different communications services known as bundling. The first players to bundle services were the cable operators, which were able to offer TV and fixed-line telephony from their inception in the mid 1990s. The bundling aspect of these early offers was usually merely a single billing relationship for customers, and sometimes a single point of customer service. When the cable companies also began to offer broadband internet, in the early 2000s, they started giving discounts to customers who took two or three services. Until around 2003, the cable companies were the only operators that could offer any kind of cross-platform bundles: every player in the communications sector only owned or operated one type of service (mobile, fixed-line, broadband, TV), with the exception of BT which has operated fixed-line and broadband services since 2000, but marketed them separately. However, the introduction of commercially-viable wholesale line rental (WLR), which gave any company the chance to sell voice and broadband products over fixed lines rented from BT, opened the door to the first fixed/broadband bundles. At the same time, WLR gave operators with existing strengths in other platforms (TV and mobile for example) the opportunity to bundle their core product with broadband, or fixed-line voice, or both. This received fresh impetus with the introduction of changes to the regime for local loop unbundling (LLU) in 2005. LLU gives operators the chance to effectively take over operation of local exchange lines from BT, thereby establishing a unique fixed-line relationship with the consumer. In August 2005, BT voluntarily reduced the fully-unbundled line rental charge from 109 to 80 per annum, and Ofcom subsequently set price ceiling rules to guard against future LLU price increases. While BSkyB had tried a basic TV/fixed-line bundling strategy in the 1990s by establishing a marketing deal with BT, by 2005 it could use LLU to bypass BT altogether. BSkyB signalled its intention to do just that with its acquisition of Easynet, one of the UKs largest LLU operators, in October 2005. Other operators that introduced new bundled offers during 2005 and early 2006 include:

    Carphone Warehouse used LLU to offer new subscribers free broadband

    for life provided they took the fixed-line rental plus calls bundle. This offer surpassed the companys expectations, with over 340,000 new subscribers pre-ordering the service in the first eight weeks after the announcement;

    Orange rebranded its Wanadoo broadband ISP and began to offer free

    broadband to customers who spent more than 30 each month on an Orange mobile contract;

    O2 appeared to follow suit by acquiring LLU operator Be in June 2006;

    BSkyB announced the introduction of free broadband for all of its pay TV

    subscribers in July 2006;

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    BT trialled a fixed/mobile offering in 2005; and

    Ntl acquired Virgin Mobile in early 2006, giving it the potential capability to offer quad-play services: TV, fixed voice, mobile and broadband.

    We may see bundling becoming more intelligent meaning that there is some level of true service convergence, rather than a series of stand-alone services being offered under the same marketing and billing umbrella. For example, mobile/broadband bundles could make it possible for subscribers to remotely access their central email and diary functions more seamlessly, regardless of whether they were at their PC or away from home using their mobile device. The evolution of TV over broadband also brings a potentially new element to the bundling product set.

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    1.3 The year in communications 1.3.1 Introduction During 2005, the UK communications market played an increasingly important part in consumers daily lives. Take-up of new digital services proceeded at pace driven by increased availability, greater choice, innovative consumer offerings and falling prices. We examine each of these factors in turn in this section.

    1.3.2 Availability: 3G and LLU extend reach of communications services 2005 was a year where sections of the telecommunications industry continued to push aggressively to maximise their potential customer base. Although many platforms (2G mobile, fixed-line, satellite TV) had already reached near-universal availability, during 2005 and early 2006 there were increases in the availability of 3G, broadband and unbundled local exchanges (LLU) (Figure 1.1).

    Figure 1.1: Availability of digital communications services

    Platform

    UK wide 2006

    UK wide 2005

    Increase on 2005

    (percentage points)

    England Wales Scotland N Ireland

    Fixed line 100.0% 100.0% 0.0% 100% 100% 100% 100%Mobile (2G) 1 99.9% 99.0% 0.9% 100% 100% 99% 100%3G 2 90.5% 82.0% 8.5% 97% 76% 68% 89%DSL 3 99.9% 96.0% 3.9% 100% 100% 100% 100%LLU 4 44.0% 34.0% 10.0% 49% 15% 29% 0%TV over DSL 5 10.0% 5.0% 5.0% 12% 0% 0% 0%Digital cable 6 45.0% 45.0% 0.0% 48% 23% 37% 30%Satellite TV 98.0% 98.0% 0.0% n/a n/a n/a n/aDTT 7 73.0% 73.0% 0.0% 73% 57% 82% 58%DAB digital radio 89.0% 89.0% 0.0% 92% 8 73% 8 92% 8 92% 8

    1 From Q3 2005. Percentage of postal districts where at least one operator reports at least 75% area coverage2 From Q3 2005. Percentage of postal districts where at least one operator reports at least 25% area coverage

    4 Percentage of premises connected to an LLU-enabled exchange at January 20065

    Represents availability of Homechoice, the only UK television delivered via DSL6

    Total cable availability (including analogue) reached 50.4% of the population in March 2006 (source: operators)7 Figures relate to availability of signals from all six multiplexes8 Figures relate to local multiplex licensed population coverage rather than transmitter coverage

    3 Percentage of premises connected to a DSL-enabled exchange based on data reported by BT in January 2006; however, some premises may not be suitable for delivery of broadband services due to local technicalities, such as distance from exchange or poor quality of networks

    Source: Ofcom / operators / licensees

    Note: For a more detailed explanation of availability figures please refer to Ofcoms Communications Market: Nations and Regions report, published in April 2006. At the end of 2005, second generation mobile services were available from at least one operator to a 75% geographic coverage level in 96.9% of postal districts, and 82.4% of postal districts were similarly covered by all four operators (Figure 1.2). When mapped onto population density in those areas, our analysis shows that 99.9% of the UK population live in postal districts with 75% geographic coverage by at least one 2G mobile operator. 90.5% of postal districts had a minimum 25% geographic 3G coverage offered by at least one mobile operator, while 46.2% received services from four or five operators

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    (our criteria for coverage require operators to be able to provide downlink bandwidth levels of at least 128kbit/s one of a number of possible thresholds for advanced data and video services. The postcode coverage threshold is lower than for 2G services owing to both technological considerations and to reflect the newness of 3G services).

    Figure 1.2: Geographic coverage of mobile services by postal district

    3G coverage (25%)2G coverage (75%)

    Four operatorsThree operatorsTwo operatorsOne operatorZero operators

    Five operatorsFour operatorsThree operatorsTwo operatorsOne operatorZero operators

    Source: Ofcom / operators, Q3 Q4 2005. According to BT, by Q1 2006 99.9% of UK premises were connected to a DSL-enabled exchange. However, some premises within these exchange areas are not suitable for delivery of broadband services, or only broadband at lower speeds, owing to local technicalities such as distance from the exchange or poor quality of networks. Local loop unbundling (LLU) entails physically disconnecting BTs local lines from its network and connecting them to other operators networks, enabling them to provide their own services to customers. The number of unbundled lines started to rise steeply in late-2005 and early-2006, following wholesale price reductions from BT and the introduction of a price-capping regime by Ofcom. In December 2005 there were 210,000 unbundled lines, but by June 2006 a further 370,000 lines had been added, taking the total to 580,000. Following the closure of Kingston Interactive Television (KIT) in February 2006, which had been available to 105,000 homes in the Hull area of East Yorkshire, TV over DSL (delivered over an unbundled exchange) was available to approximately 2.4m homes in the London area by May 2006. These services were provided by Homechoice, which has stated that it plans to work with alternative providers of unbundled services to extend its coverage area throughout 2006 and 2007. The UKs newly merged main cable operator ntl:Telewest also provides broadband connectivity. Its broadband service is delivered via fibre-optic and coaxial cable (rather than BTs copper wire local network), and delivers speeds of up to 10 Mbit/s. Digital cables availability to 45% of UK homes has remained unchanged over the

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    last year (Figure 1.3) and ntl:Telewest has stated its intention to extend its reach via local loop unbundling of BT lines, rather than by building new cable.

    Figure 1.3: Availability of digital cable and digital terrestrial television, DTT Cable coverage DTT coverage

    Source: Ofcom Note: Coverage areas are indicative only Satellite remained the digital television platform offering the widest coverage in 2005. Although the footprint covers the whole of the UK, actual availability to households can be limited due to factors such as obstruction to the line of sight to the satellite, local topography and planning restrictions. According to BSkyB, 98% of households in the UK and Ireland can get the Sky digital satellite service. Digital Terrestrial Television (DTT) coverage also remained constant during the year, with 73% of UK households able to receive services from all six multiplexes (Figure 1.3). The Highlands and Islands of Scotland and upland areas of England and Wales still had significant reception problems by the end of 2005. Also, in Northern Ireland there were only three transmitters as of December 2005, limiting coverage to the region. Availability of DAB (Digital Audio Broadcasting) digital radio remained static in 2005, with 89% of the UK population covered by at least one and in most cases all three of the multiplexes operated by Digital One, the BBC and local commercial broadcasters (Figure 1.4) (In addition digital radio services are available to digital TV and internet homes).

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    Figure 1.4: DAB digital radio coverage 2006

    Source: Ofcom Note: Coverage areas are indicative only

    1.3.3 New services over existing platforms During 2005 and early 2006, a number of factors including technology developments, accessibility to multiple delivery platforms at low cost, and innovative business models all helped consumers to listen to, view, interact with, use and store information in new ways, and to get more from their communications services. The number of broadcast digital TV channels and radio stations increased again; operators launched TV services to mobile devices; the amount and variety of audio and video content available via the internet continued to rise and the number of households with personal video recorders (PVRs, capable of recording television on a hard disc drive) grew rapidly during the year. New television and radio services Reduced costs and ample capacity through the use of digital technology have made it easier for broadcasters to target a more narrowly defined audience with niche channels. In 2001, three years after digital television launched on satellite, BSkyB offered 198 non-terrestrial channels on its Sky service and these channels commanded approximately 39% of multichannel viewing. The remaining 61% share was to the main terrestrial channels, BBC1 through to five, and their associated digital spin-offs. The following four years witnessed rapid growth in the number of channels, with the launch of a further six terrestrial spin-offs (excluding the relaunches of BBC Choice and BBC Knowledge) and a net addition of 138 non-terrestrial channels (Figures 1.5 and 1.6). This increase in channel choice was a key driver of consumer take-up of multichannel television, which doubled between 2001 and 2005 to over 18 million households.

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    Figure 1.5: Spin-off channel launches from the five main channels

    December 2005August 2000December 2002November 2004November 2005March 2006March 2006

    ITV NewsITV2ITV3ITV4CITVITV Play

    ITV

    November 1998January 2001August 2005October 2005

    Film Four*E4*Quiz CallMore4

    Channel 4

    November 1997September 1998September 1998June 1999February 2002February 2002March 2002February 2003

    Launch

    BBC News 24BBC ParliamentBBC ChoiceBBC KnowledgeCBBCCBeebiesBBC FourBBC Three

    Channel

    BBC

    Operator

    February 2003March 2002

    Closed/replaced

    December 2005August 2000December 2002November 2004November 2005March 2006March 2006

    ITV NewsITV2ITV3ITV4CITVITV Play

    ITV

    November 1998January 2001August 2005October 2005

    Film Four*E4*Quiz CallMore4

    Channel 4

    November 1997September 1998September 1998June 1999February 2002February 2002March 2002February 2003

    Launch

    BBC News 24BBC ParliamentBBC ChoiceBBC KnowledgeCBBCCBeebiesBBC FourBBC Three

    Channel

    BBC

    Operator

    February 2003March 2002

    Closed/replaced

    * Launched originally as subscription services Source: Ofcom

    Figure 1.6: Channel availability

    198

    336

    5

    5

    7

    13

    0

    100

    200

    300

    400

    2001 2005

    Terrestrial spin-offs

    Main five terrestrial

    Non terrestrial

    Source: Ofcom / BARB However, in some ways, the five mainstream channels taken together with their spin-offs have benefited more than new operators from the growth in multichannel television; viewing share of their spin-off channels rose from 3% to 9% in multichannel homes between 2001 and 2005, more than offsetting the 1.2 percentage point drop in share of the parent channels. The share of non-terrestrial new channels meanwhile fell from 39% to 34% in multichannel homes, as audiences grew but fragmented (Figure 1.7).

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    Figure 1.7: Multichannel share of viewing in multichannel homes, 2001 2005

    9.1m Total multichannel homes 18.1m

    Non terrestrial

    34%

    Main five terrestrial

    57%

    Terrestrial spin-offs

    9%

    Non terrestrial

    39%

    Main five terrestrial

    58%

    Terrestrial spin-offs

    3%

    2001 viewing share 2005 viewing share

    Source: Ofcom / BARB The radio sector, too, has also been able to offer greater availability and choice through digital distribution. Many stations have embraced television, the internet and DAB, as a means of increasing their coverage (Figure 1.8)

    Figure 1.8: Radio stations launching on the national DAB multiplex

    Nov 1999Nov 1999Jan 2000

    CorePlanet RockLife

    GCap

    Nov 1999Aug 2000May 2001

    Feb 2002Mar 2002Aug 2002Dec 2002

    Launch

    PrimeTimeITN News RadioBloomberg Radio

    5Live Sports Extra6Music1XtraBBC7

    Station

    Other

    BBC

    Group

    May 2006Jul 2002Dec 2002

    Closed

    Nov 1999Nov 1999Jan 2000

    CorePlanet RockLife

    GCap

    Nov 1999Aug 2000May 2001

    Feb 2002Mar 2002Aug 2002Dec 2002

    Launch

    PrimeTimeITN News RadioBloomberg Radio

    5Live Sports Extra6Music1XtraBBC7

    Station

    Other

    BBC

    Group

    May 2006Jul 2002Dec 2002

    Closed

    Source: Ofcom However, as with television, the existing national groups have often been the key beneficiaries of wider availability. Share of listening to national stations increased from 49% in 2001 to 55% in 2005. Although the number of local radio stations increased by 37 to 366 during this period, their share of listening declined by 5.7 percentage points. Clearly listening share is affected by factors other than just increased availability. However, a look at the strategies of the BBC, Virgin and Emap illustrates how some of the larger radio groups have taken advantage of the digital opportunity: The BBC has launched new stations 6Music, BBC7, Five Live Sports Extra, the

    Asian Network and the World Service on DAB, digital television and the

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    internet. These stations contributed to an increase in the BBCs total share of listening of 2.4 percentage points over the four years to 2005.

    Since 2005, Virgin has launched a series of stations on DAB, digital TV and the

    internet, including Virgin Radio Classic Rock and Virgin Radio Groove. The new stations have helped to off-set some of the share loss on Virgin AM.

    In 2003, Emap Radio launched the four magazine-branded digital stations Heat,

    Kerrang!, Q and Smash Hits. With distribution over the internet, Freeview and some DAB local multiplexes, these stations have benefited from cross-promotional opportunities and wide digital distribution.

    New telecoms services In the telecoms sector a number of services either came to market or evolved significantly during 2005 and early 2006. Among these was residential voice over IP (VoIP), which moved from being a niche product towards becoming a much broader consumer offering. This evolution was driven by a number of factors, including greater overall consumer awareness of VoIP, and new devices which simplify the user experience. In May 2006, for example, Vonage introduced a VoIP handset which plugs straight into an ADSL-enabled wall socket, rather than requiring the user to switch on their PC; and in June 2006 BT launched its new Home Hub, which allows users to plug any handset straight into a phone socket on the hub itself. Other developments in telecoms services included a continued rise in the volume and breadth of mobile content from new ring tones to user-generated video channels. Similarly, in broadband, new content is continually being added with notable growth in intelligent websites such as last.fm, a music download site that interrogates users PC music libraries and suggests further music they might like.

    1.3.4 New services over new platforms TV over broadband The continued rapid uptake of broadband to the home has provided a significant addressable base to which rights holders can distribute their content. This has benefited not just the major broadcasters, for whom the internet offers a new way to reach new (and existing) customers, but also small rights holders and even individuals, who can now distribute their programming. During 2005 and early 2006 significant barriers were overcome and internet distribution now seems to be a key strand in the growth strategies of many broadcasters. New service launches and trials at the beginning of the year were designed to optimise this internet viewing experience; BSkyBs Sky by Broadband service and the BBCs integrated Media Player (iMP) trial both exploited peer to peer (P2P) file sharing technology to overcome the limitation of a 500kbit/s internet connection and deliver reliable, high quality video by exploiting free storage in the form of the consumers computer hard disk drives (HDD) to store the content before viewing. During the course of the year broadband technologies and speeds continued to improve, with up to 2Mbit/s broadband connections becoming increasingly common and up to 8Mbit/s available in some areas. These developments, along with improvements in video compression technologies, have resulted in a growing number of operators offering video services which are streamed in real time, without the need for local storage on the viewers computer. Details of some of the key services currently available include:

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    The BBC commenced the trial of its integrated Media Player (iMP) in

    September 2005. It allows users to download TV and radio programmes from the bbc.co.uk website to their PC for consumption up to seven days after transmission;

    BSkyB launched Sky by Broadband, its video download service in January

    2006, offering movies and sports clips via the internet. The service is available to eligible Sky digital customers at no extra charge;

    AOL launched its IPTV service, In2TV, in November 2005, with full-length

    episodes of popular TV shows and interactive programmes, including quizzes and games;

    Channel 4 launched FourDocs in June 2005, which gives viewers an

    opportunity to showcase their own four-minute documentaries, and offers an online archive of Channel 4 documentaries; and

    MTV launched Overdrive in April 2006, featuring music, news and video

    trailers. Although these organisations use software to manage and protect their digital rights, the continued threat of piracy and illegal downloads remains an issue for many content owners. In an Ofcom survey, 83% of internet users were aware that there are illegal ways to access films, music and computer software on the internet but 33% of these believed illegal downloads should be legal (Figure 1.9). Interestingly, this figure jumps to 50% when looking at the younger 16-24 age demographic.

    Figure 1.9: Attitudes to downloads that are currently classified illegal Percentage of internet users aware that there are illegal ways to access content

    67%

    40%

    57%

    53%

    54%

    20%

    50%

    24%

    37%

    33%

    13%

    10%

    18%

    10%

    13%

    Aged 55+

    Aged 16-24

    Dial-up users

    Broadband users

    All users

    Should be illegal Should not be illegal Don't know if it should be illegal

    Source: Ofcom research, summer 2005 TV to mobile devices In addition to broadband distribution, most of the UKs mobile network operators have introduced TV services to mobile devices over the last year. Development has occurred on two fronts; higher speed mobile data connections provided by 3G networks have allowed streamed television and downloaded video clips to be

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    delivered to mobile handsets, while trials seeking to bring the efficiency of broadcast networks to deliver television services to mobile phones have also taken place. The first generation of television services on mobile phones are delivered using 3G technology on traditional one-to-one mobile data connections (known as narrowcasting as opposed to broadcasting or one-to-many). Consequently, if two customers watch the same broadcast content at the same time, they each use capacity on the 3G network. Although most network operators now offer such services, adoption is relatively low and so this inefficiency of transmission is not a major concern. However, as take-up increases, alternative technologies may need to be deployed to address this scalability issue. BT Movio and Virgin Mobile have recently completed trials in London of a broadcast technology that allows television services to be broadcast via the DAB digital radio network. Using this DAB-IP technology, users with compatible mobile handsets are able to receive both digital radio and digital television services and, as it is a broadcast technology, there is no limit on how many users can receive the service at any particular time. The trial offered radio alongside a limited range of television channels and resulted in consumption of around one hour of television per week alongside 95 minutes of radio. While DAB-IP is an evolution of the standards developed for digital radio, an alternative technology called DVB-H (Digital Video Broadcasting - Handheld) is a derivation of the technology behind digital TV. In conjunction with Nokia and broadcast network operator Arqiva, O2 conducted a trial in Oxford in 2005 using a DVB-H network, which revealed that viewers watched on average just over three hours of mobile TV per week.

    1.3.5 New ways of watching and listening PVRs By March 2006, there were over 1.4 million subscribers to BSkyBs Sky+ personal video recorder (PVR) service, with 0.8 million net additions since December 2005 alone. At the heart of these devices is a hard disk drive (HDD) which allows digital TV programmes to be stored, randomly accessed and replayed with no reduction in picture quality. The capacity of the standard Sky+ set top box has increased from 40 to 160 gigabytes, while retail prices have fallen. The reducing price of HDD storage is leading to the inclusion of PVR functionality in an increasing number of consumer devices. Key PVR offerings which have come or are coming to market include:

    Telewest launched its TV Drive PVR in March 2006. It is HD (High Definition) capable, and can simultaneously record two programmes while the viewer watches a third;

    BT has announced that its BT Vision hybrid DTT/IPTV set top boxes will

    include a local HDD;

    A number of new Freeview PVRs have been launched. The Freeview consortium has announced a marketing campaign later this year under the Freeview Playback brand; and

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    Top Up TV (the subscription service available over the Freeview platform) has announced its intention to launch its Anytime PVR product in autumn 2006.

    Having an accessible base of HDD-enabled set top boxes may provide platform operators with an opportunity to introduce new services in which broadcast programmes, advertising and other content can be pushed onto the disk and then made available to the consumer on demand, or potentially, in the case of advertising, based on user behaviour and preferences.

    Video and audio on the go The advent of the MP3 system for compressing digital audio, along with the iPod device and iTunes download service from Apple, were both important in reinventing the idea of music on the go. However, there is evidence of a similar trend emerging in video, TV and radio content. Portable TV sets have been available for many years; indeed Seiko produced one integrated into a wristwatch in 1982 and cheap mass market hand portable units were available by the end of the 1980s, but take-up has been limited. However, with the growth of digital technology there are now many devices which allow the viewing of stored digital video on the move, in addition to broadcast mobile television. Examples include:

    Portable DVD players The most common device for watching stored video

    on the move is a portable DVD player with integrated screen. These have fallen rapidly in price and are now available for under 100. Due to the constraints of accommodating the DVD disc they remain fairly large and power hungry items.

    Hard disk based portable media players The latest version of the iPod is

    equipped with a colour screen and can display videos and photos stored on its hard disk. The UK iTunes download service now also supplies video as well as music, with music videos and animated short films available. In the US, iTunes also offers TV shows and some full length DVDs for download. Other portable media players are available, some of which have larger screens optimised for video display, such as those made by Archos, Creative and iRiver.

    Sonys Playstation Portable (PSP) While primarily a games console, this

    device can also play videos stored either on its own optical disk format (called UMD) or the devices memory card. Over 100 movies are available on UMD. Sony also offers a free video download service with clips ranging from film trailers to music videos and interviews. The company has announced plans to launch a movie download site, hoping to do for films what iTunes did for music.

    Paces planned PVR2GO device operates much like a standard PVR, but

    includes a removable unit containing a hard disk and small screen for viewing while away from the TV set. This suggests the line between in-home personal video recorders (PVRs) and portable media players may be starting to blur.

    Radio too is addressing customers desires to control their listening and viewing habits. The BBC Radio Player which offers on-demand listen again services had a record month in March 2006, with more than 20 million hours of online listening and

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    12 million on-demand requests. In April 2006, The Archers was the most demanded programme with over 650,000 requests. While listen again programmes are only available for seven days after broadcast, and are streamed through an internet connection, MP3 downloads can be kept indefinitely; podcasting is simply an automated form of MP3 downloading. Although there is no definitive list of the most downloaded podcasts, iTunes reported that the most downloaded shows via their application were:

    Baddiel and Skinner (Times Online);

    Ricky Gervais free video podcast;

    Best of Moyles (Radio 1);

    The World Cup on Guardian Unlimited; and

    The Now Show (Radio 4).

    High-definition TV As the cost of digital storage reduces, and the speed and capacity of digital networks continue to improve, the data requirements for digital TV are set to increase further with the introduction of more channels and the advent of high definition TV (HDTV). HDTV services typically require 4-6 times the amount of data to carry video information as standard definition services. Using current compression technologies, such as MPEG2, this would significantly increase the amount of storage and network capacity required. The commercial deployment of the latest compression technologies, such as MPEG4, over the last year, promises to reduce these requirements significantly, reducing the costs associated with delivering these services to consumers. BSkyB and Telewest both currently offer commercial HDTV services in the UK, and a trial of HDTV over the digital terrestrial platform is underway in the London area. The Sky service costs 299 for an HD set top box (which also has the PVR functionality of the Sky+ service), and an additional 10 monthly subscription for a selection of content from Sky One, Skys sport and movie channels, together with HD versions of National Geographic, Artsworld, Discovery and a BBC HD channel. Telewests service has no upfront cost, but for an additional 10 or 15 a month (depending on the TV package to which they subscribe) customers get an HD-enabled PVR. The Telewest service currently has two channels BBC HD and ITV HD.

    1.3.6 Competition and technology help to deliver lower prices During 2005 and the first half of 2006, increased competition in the communications sector, coupled with advances in technology, have benefited the customer in terms of greater availability of services, more choice from a broader product offering, and, in many cases, lower real prices. Prices in the pay-TV sector remained broadly flat over the year, although the cost of new products and services such as high-definition TV and PVRs was passed on to subscribing customers. However, the price of telecoms services fell again; our analysis suggests that spend on a selection of these services, based on 2005 average household consumption levels, fell by 6.2% in real terms between 2004 and 2005, and was over 15% lower than in 2001 (Figure 1.10). For example, in 2001 it

  • 28

    would have cost the average household 31.32 to use mobile voice and text services at 2005 levels, compared to 30.45 for the same usage levels in 2005. This reflects the fact that the fall in prices over this period has more than offset the increase in the number of mobile subscribers per household.

    Figure 1.10: Real cost of average household telecoms consumption per month, 2005 prices

    10.8 10.8 10.5 10.6

    18.8 18.1 16.8 14.9 13.0

    31.3 31.4 31.3 32.1 30.5

    10.4 8.4 7.4 5.65.4

    10.6

    2.1 2.1 2.1 2.01.6

    73.37 70.80 68.19 65.1660.96

    0

    20

    40

    60

    80

    2001 2002 2003 2004 2005

    Broadband

    Dial-up

    Mobile voiceand textFixed voicecallsFixed access

    Source: Ofcom / operators Note: Assumes consumption is at 2005 levels across all years. Includes VAT; excludes NTS voice calls. Although there have been real falls in the price of fixed voice services and mobile calls and text, the biggest drop since 2001 has come in broadband, where improved technology has allowed operators to offer ever-higher speeds without concurrent price increases. Retail offers are continually changing, but a subscription to an entry-level service typically cost less than 10 per month by May 2006. This compares with a 1-1.5Mbit/s connection costing between 30 and 35 per month in December 2004 (Figure 1.11).

    Figure 1.11: Average UK residential broadband subscription prices per month

    27.0 26.023.0

    10.0

    45.0

    30.035.035.0

    15.0

    41.0

    50.0

    16.0

    0

    10

    20

    30

    40

    50

    2001 2002 2003 2004 2005

    512kbit/s

    1Mbit/s

    >1Mbit/s

    Source: Ofcom Note: Prices are an average of the top four UK ISPs, and are for stand-alone broadband subscriptions. Most operators no longer market a 512kbit/s product. In addition, bundling of services to the customer has become a key part of operators strategies to reduce broadband prices. The biggest surprise in the competitive pricing model was probably Carphone Warehouses (CPW) free broadband offer, introduced in March 2006 and designed both to grow its broadband base and also to entice its TalkTalk fixed-line subscribers to a bundled broadband product. Orange

  • 29

    responded to CPWs price drop in May 2006, offering free broadband to customers who also took out an 18-month mobile contract at 30 per month or more.

    1.3.7 Take-up: digital TV penetration grows, broadband now mass-market The mobile and broadband sectors were the key drivers of growth in the UK telecoms industry in 2005, while digital terrestrial television and DAB take-up also grew strongly. Figure 1.12 shows penetration of key communications services and devices as at Q1 2006, plotted on the technology adoption S curve.

    Figure 1.12: Adoption curve for communications services and devices, Q1 2006

    Innovators EarlyAdopters

    EarlyMajority

    LateMajority

    LateAdopters

    2G mobile

    Broadband

    DAB Radio

    Digital TV

    3G mobile

    PVR

    Portable music player

    VoIP

    Take

    -up

    100%

    0%

    50%

    75%

    20%Games console

    Fixed line

    Source: Ofcom Note: penetration of DAB radio, 3G mobile and VoIP are based on individuals; other technologies are based on households Total mobile subscriptions grew by 5.8m in 2005 to 65.5m. This figure represents over 100% of the UK population, reflecting the increasing number of users with multiple subscriptions and increased business use. Household penetration of mobile phones (i.e. homes with at least one mobile subscription) was approximately 90% as of Q1 2006 a near-saturation figure compared with 71% in 2000. By comparison, fixed line penetration was 90%, having declined from 94% since 2000. 3G mobile adoption also increased markedly during 2005, growing 66% to 4.8 million subscriptions (8% of the population), reflecting a significant marketing push from the main mobile operators. 3UK retained the greatest market share at 77% of subscriptions, with Vodafone at 15%, and the remainder split between Orange, O2 and T-Mobile. By May 2006, there were more than 11 million broadband connections to homes and smaller businesses in the UK. We estimate that DSL broadband (at a minimum of 512kbit/s) is now available to over 95% of homes and businesses in the UK, in addition to the 45% of UK homes passed by cable broadband (which can currently deliver broadband internet at up to 10Mbit/s).

  • 30

    Penetration of digital TV reached 73% in the first quarter of this year, or 18.3 million households. Digital terrestrial was the main driver, with over 7 million homes now using Freeview on their primary TV set outnumbering the number of analogue-only households for the first time. Digital switchover is due to commence in 2008 beginning with the Border region, at which point take-up can be expected to accelerate. It is interesting to see how much more quickly consumers are adopting digital technology than analogue. Figure 1.13 shows that it took over 40 years for analogue television sets to penetrate 73% of households. However, for digital television the same position has been reached in just eight years (although many digital homes still have unconverted sets) (Figure 1.13).

    Figure 1.13: TV penetration - all TV households and digital TV households Percentage of households

    0%

    20%

    40%

    60%

    80%

    100%

    1935 1945 1955 1965 1975 1985 1995 2005 2015

    All TVhouseholds

    Digital TVhouseholds

    Colour TV introduced

    Multichannel TV introduced

    Digital TV introduced

    HDTV introduced

    Digital switchover

    Freeview introduced

    Source: Ofcom, BARB Ownership of audiovisual devices has also grown strongly over the past year. Ofcom research suggests that household penetration of portable music players increased from 18% in December 2005 to 35% by March 2006, driven by growth in MP3 players; ownership is skewed towards males and 15-24 year olds (Figure 1.14). And in addition to the 2.5 television sets per household, there has been strong growth in the number of computers that allow owners to watch TV or video. This has been accompanied by increased take-up of devices which affect the way programmes are watched; DVD player ownership is stabilising at around 70% of households, but now that penetration of PVRs has reached around 8% (and 29% of households own recordable DVD devices) we may start to see some substitution of the VCR, or at least see it being moved to second and third TV sets.

  • 31

    Figure 1.14: Take-up of other household audiovisual devices Percentage of households

    80%85%85%87%87%82% 82%

    70% 73%

    28%38% 41%

    50%59%

    70%69%

    5%

    17% 27%

    45%

    68%

    35%29%

    2% 3% 6%8%

    18%

    11%10% 13% 11% 20%

    28%

    29%

    1% 2% 3%5% 8%

    0%

    20%

    40%

    60%

    80%

    100%

    2000 2001 2002 2003 2004 2005 Q1 2006

    Video recorder

    Digital television

    DVD player

    MP3 player

    PC with TV/videocapability

    PVR

    Source: Ofcom research / estimates A comparison of availability and penetration of the major digital communications services reinforces the fact that, while take-up always lags availability, the mobile, broadband and DTT service providers have been particularly successful at reaching their addressable market in a comparatively short space of time (Figure 1.15).

    Figure 1.15: Availability and penetration of digital services

    99.9 98.0 99.989.0 90.5

    73.0

    41.011.1

    10.0

    51.8

    33.1 27.611.0 8.0 0.2

    90.0

    2.0%

    24.7%37.8%

    8.9%12.4%

    41.0%33.8%

    90%

    0

    20

    40

    60

    80

    100

    Mobil

    e (2 /

    2.5G

    )

    Satel

    lite TV

    Broa

    dban

    d

    DAB d

    igital

    radio

    3G M

    obile

    Digita

    l terre

    strial

    TV

    Cable

    TV

    TV ov

    er DS

    L

    Perc

    enta

    ge o

    f UK

    hou

    seho

    lds

    0

    20

    40

    60

    80

    100

    Perc

    enta

    ge o

    f add

    ress

    able

    mar

    ket

    Availability Penetration Penetration of addressable market

    Source: Ofcom / operators / licensees, end 2005. Note: Figures for radio and 3G are for individuals not households

  • 32

    1.4 The communications industry 1.4.1 Introduction: the emergence of bundled products Before examining revenues and sources of funding for the communications industry, it is instructive to look at some of the new business models and pricing structures being adopted by service providers. During 2005, many major communications service providers re-evaluated their revenue, cost and investment models to reflect changes in the market. Consumers increasingly perceive communications services as commodity products, with purchase criteria driven largely by price. In such an environment, some operators can add value by branding, grouping and marketing their services in innovative ways. A significant manifestation of this is the increase in service bundling, which is evolving to become a critical tool in offering better value to the consumer. Through bundling, operators hope to increase revenue and margins, reduce churn, and achieve efficiencies through increased cross-service use of infrastructure. (In this report, we define bundling in its broadest context: that of an operator offering multiple services under a single brand with a bundled retail price and a single bill covering the bundle. Bundling may also include a truly converged package where services are available across multiple networks and devices). One illustration of this focus on bundling has been the recent offers of broadband services by some mobile network operators. A key enabler of this has been the improved ability to offer retail services directly to customers rather than taking wholesale products from BT. By accessing the local loop, operators typically incur higher fixed costs to install equipment at the exchange but lower wholesale charges, which can result in higher operating margins. Consumers have demonstrated considerable interest in some of these products; Carphone Warehouses new bundle, which incorporates free broadband and will be available to customers in July 2006, was demanded to such a great extent after its announcement in March that the company has warned there will be delays in connecting new customers. Figure 1.16 below illustrates the evolution of bundled services since the cable operators first started offering TV and telephony in 1995.

  • 33

    Figure 1.16: The evolution of communications service bundling

    Time

    Carphone Warehouse

    BT Fusion Orange

    (Wanadoo)O2 (Be)

    NTL/ (Virgin)

    BSkyB

    1995 2002 2003 2005

    BTCable

    Operators

    March2006

    June2006

    May2006

    April2006

    2

    3

    4

    Num

    ber o

    f ser

    vice

    s in

    bun

    dle

    Broadband offered via LLU

    Cable Operators

    Time

    Carphone Warehouse

    BT Fusion Orange

    (Wanadoo)O2 (Be)

    NTL/ (Virgin)

    BSkyB

    1995 2002 2003 2005

    BTCable

    Operators

    March2006

    June2006

    May2006

    April2006

    2

    3

    4

    Num

    ber o

    f ser

    vice

    s in

    bun

    dle

    Broadband offered via LLU

    Cable Operators

    Source: Ofcom Note: Chart refers to time when bundles were first announced

    1.4.2 New technologies may require new pricing structures Voice over Internet Protocol (VoIP) could potentially prove disruptive to the business models of some mobile operators. If substantial voice traffic were to be delivered by VoIP, operators could experience revenue erosion. This threat might be mitigated through adoption of flat rate charging structures for broadband access; for example, as part of Carphone Warehouses free broadband offer, customers must also subscribe to a fixed line call subscription of 9.99 per month (in addition to a line rental of 10.99 per month). Another area where pricing models are still evolving is on-demand, broadband delivery of television and radio programmes, where consumers propensity to pay has not yet been heavily tested. Much IPTV content (such as that in the BBC trial) is currently free, and those operators that have a pay offering have not marketed it particularly aggressively. Channel 4 and MTV have only offered a limited number of signature programmes as part of their pay offerings, although the AOL Film Download service suggests online content pricing could reduce rental or purchase prices for consumers as a result of lower distribution costs. Most of these new operator strategies and revenue models are still in their infancy, and their impact has yet to be fully felt in reported results.

    1.4.3 Overall broadcasting and telecoms revenues reach 50.6bn Overall broadcasting and telecoms retail revenue increased by 5% to 50.0bn in 2005, equating to 4.1% of GDP (Figure 1.17). The bulk of this (38.3bn) and the biggest annual rise (2.0bn) came from the telecoms sector. Growth in 2005 television revenue was 4%, compared to 9% growth between 2003 and 2004. Combined net radio advertising and BBC radio spend declined marginally to 1.1bn.

  • 34

    Figure 1.17: UK communications retail sector revenue bn % GDP

    30.3 32.2 34.4 36.338.3

    1.0 1.11.1 1.2

    1.18.6 8.99.3 10.2

    10.6

    4.1%4.1%4.1%4.0%4.0%

    0

    20

    40

    60

    80

    2001 2002 2003 2004 20050%

    1%

    2%

    3%

    4%TV

    Radio

    Telecoms

    % GDP

    Source: Ofcom / licensees / operators / BBC In 2005, the mobile sector contributed 13.1bn of retail revenue a 9% increase on 2004. The fixed-line market continued to decline, with a reduction of 800m, or 8%, year-on-year. Internet and broadband revenues grew from 2.9bn to 3.4bn. Other retail telecoms revenue (which includes elements from the wider telecoms value chain, such as mobile handset subsidies and a range of other value-added services) increased by 11% to 9.1bn (Figure 1.18).

    Figure 1.18: Analysis of UK telecoms retail sector revenue bn

    12.4 12.2 11.6 10.9 10.1

    7.9 9.0 10.4 12.0 13.11.7 2.0

    2.5 2.9 3.42.5 2.66.2

    6.8 7.58.1 9.1

    2.32.22.1

    0

    10

    20

    30

    40

    2001 2002 2003 2004 2005

    Other retail

    Corporatedata services

    Internet andbroadbandMobile voiceand data

    Fixed callsand access

    Source: Ofcom / licensees / operators

    1.4.4 Subscriptions drive TV revenue growth, with advertising slowing TV industry revenue rose by 401m (4%) in 2005 to reach 10.5bn (Figure 1.19). Subscriptions (including pay television, PVR, high definition and multi-room services) totalled 3.9bn; net advertising revenue rose to 3.6bn; while public funding contributed 2.4bn. The growth in total revenue was driven largely by an increase in subscriptions earned by BSkyB, NTL and Telewest. These rose by 8.5% in 2005 to reach 3.9bn and now exceed net advertising revenue by a 10% margin. This is a result of a slow down in net advertising revenue growth to just 1.9% in 2005 (following two years of average 5% per annum growth) which contrasts with five-year average growth of 14.5% for the pay-TV sector. This is turn has been driven by:

  • 35

    an increasing subscriber base; a change in the mix of subscribers; price increases; and take-up of new services.

    Public funding continued to play an important role in UK broadcasting. In 2005, Ofcom estimated that the funding allocated by the BBC to television stood at 2.4bn, up 5% on 2004. Other revenue (which includes non-broadcast revenue such as pay-per-view, retail sales from shopping channels and premium rate telephony) has remained steady, at 0.7bn (Figure 1.19).

    Figure 1.19: TV revenue 2001 to 2005 bn

    2883

    3,3853,147

    1,9342,216 2,302 2,319

    2049

    32523585

    3,891

    2476

    3,471

    3,2423,481 3,548

    2,433

    1,820

    650 749397

    781534 746

    0

    1,000

    2,000

    3,000

    4,000

    5,000

    2000 2001 2002 2003 2004 2005

    Subscriptions

    Net advertisingrevenueLicence feeallocated to TVOther

    Source: Ofcom / licensees / BBC In radio, total industry revenue declined by 1.7% in 2005 to 1.15bn the first fall since 2001. This decrease was principally due to a fall in commercial revenue of 43m to 519m, with national commercial down 32m to 269m (despite an increase in listening share of 0.5 percentage points) and local commercial down 11m to 164m (Figure 1.20). The BBCs expenditure on radio in 2005 was estimated by Ofcom to account for 55% (626m) of radio industry funding.

    Figure 1.20: Radio industry revenues bn

    1.02 1.081.13 1.17 1.15

    0.52 0.570.58 0.61 0.63

    0.500.54 0.560.51 0.52

    0.29 0.29 0.31 0.30 0.270.14 0.15 0.16 0.18 0.16

    0.06 0.07 0.07 0.09 0.090.0

    0.4

    0.8

    1.2

    2001 2002 2003 2004 2005

    Total

    BBCexpenditureTotalcommercial

    Nationalcommercial

    LocalcommercialCommercialsponsorship

    Source: Ofcom

  • 36

    The combined net advertising revenue of commercial TV and radio grew by less than 1% in 2005 to 3.98bn, comprising a 1.9% increase in television to 3.6bn, offset by a 7% decline in radio to 0.43bn (Figure 1.21).

    Figure 1.21: Growth of UK broadcasting net advertising revenue bn

    3.47 3.39 3.15 3.243.48 3.55

    0.33 0.290.29 0.31

    0.30 0.270.14 0.14

    0.15 0.160.18 0.16

    0

    1

    2

    3

    4

    2000 2001 2002 2003 2004 2005

    Radio - localcommercial

    Radio - nationalcommercial

    TV

    Source: Ofcom / licensees An analysis of the wider advertising market shows that total spend on display advertising grew by 2.1% in 2005 to 16.0bn (Figure 1.22). While newspapers, television, and direct mail accounted for 71.1% of this, internet advertising grew by 73% year-on-year to 1.1bn, increasing its share of total display spend from 4.2% to 7.1%. Internet advertising has now overtaken business magazines to become the fourth largest display advertising medium in the UK; it is nearly three times larger than radio advertising and more than a third the size of television.

    Figure 1.22: UK advertising spend by medium bn (2000 prices)

    4.7 4.7

    3.6 3.6

    0.8 1.31.2 1.1 1.01.0 1.00.8 0.8 0.90.9 1.0

    4.8 4.9 4.6

    3.5 3.8 3.8

    2.22.32.42.32.2

    0.40.20.2

    0.8 0.8 0.80.8 0.80.60.6

    0.50.50.50.2 0.2

    0.20.2 0.2

    0.0

    4.0

    8.0

    12.0

    16.0

    2001 2002 2003 2004 2005

    Cinema

    Radio

    ConsumermagazinesOutdoor andtransportBusinessmagazinesInternet

    Direct mail

    TV

    Newspapers

    14.1 14.1 14.5 15.2 15.3

    Source: The Advertising Association Revenues at constant 2000 prices

    1.4.5 The financial markets Shares in the UK telecoms and media sectors have underperformed the FTSE100 since the start of 2005. The telecoms index (fixed and mobile) rose by 2% in the

  • 37

    period to late June, while the media sector (including broadcasters, publishers and advertising agencies) was unchanged; by contrast, the FTSE 100 index gained 17% (Figure 1.23).

    Figure 1.23: Telecoms and media sector share index

    80

    90

    100

    110

    120

    130

    Jan-05

    Feb-05

    Mar-05

    Apr-05

    May-05

    Jun-05

    Jul-05 Aug-05

    Sep-05

    Oct-05

    Nov-05

    Dec-05

    Jan-06

    Feb-06

    Mar-06

    Apr-06

    May-06

    Jun-06

    FTSE

    Media

    Telco

    Source: uk.finance.yahoo.com The Price to Earnings (P/E) ratio, a commonly-used valuation measure which relates share price to earnings per share, has reflected downward revisions to growth prospects for the telecoms sector, particularly in mobile. For Vodafone, by far the largest component of the UK telecoms index, the P/E ratio was a relatively low 11 in late June 2006 compared to an average for FTSE100 companies of 12.6 and for the telecoms sector as a whole of 11.6 (Figure 1.24).

    Figure 1.24: PE ratio and dividend yield in media and telecoms sectors

    Measure Jun Dec Jun 2005 2005 2006 Telecoms sector PE ratio 13.8 13.5 11.6 Dividend yield 3.1% 3.3% 5.1% Media sector PE ratio 20.7 19.1 23.8 Dividend yield 2.3% 2.3% 2.5% FTSE100 PE ratio 14.7 14.0 12.6 Dividend yield 3.2% 3.1% 3.3%

    Source: FT.com; data points for the last working day of the month A similar pattern is reflected by changes in dividend yield (annual dividend payments per share expressed as a percentage of the share price). The average dividend yield on telecoms stocks was high in late June, at 5.1%, compared to the UK base rate of 4.5% and an average yield among FTSE100 stocks of 3.3%. By contrast, the media sector is seen by investors to be a higher growth area, with an average P/E ratio of around 24, and a dividend yield of 2.5%, This sector contains a broad range of stocks, which may explain its resilience in spite of share price falls for broadcasters such as ITV and GCap, which were affected by lower advertising revenue growth than was expected by analysts.

  • 38

    1.5 The communications consumer 1.5.1 Introduction Use of communications services in 2005 continued its recent upward trend. However, despite increased consumption, average spend on media and telecoms services declined as a percentage of household income for the first time in five years an indication that the communications sector is delivering better value for the consumer. In this section we explore how consumption has changed in 2005 generally, and then focus on emerging trends in consumption among the young.

    1.5.2 Spend declines despite increased usage From 2001 to 2004, increased availability and choice, coupled in some cases with cheaper services, have contributed to a significant increase in consumption, reflected in a rise in communications spending as a proportion of total household spend from 4.07% in 2001 to 4.63% in 2004. The biggest increase was attributable to mobile voice and text, followed by television services. However, in 2005, average monthly household spend on communications services levelled out at 87.67, up 54 pence on 2004 in real terms. This was echoed by a fall, albeit a slight one, in communications spend as a proportion of total household expenditure, from 4.63% to 4.60% (Figure 1.25).

    Figure 1.25: Average monthly household communications spend per month, 2005 prices Share of total household spend

    30.7 29.7 27.9 25.9 23.6

    19.4 22.8 26.2 29.2 30.5

    3.6 4.45.6 6.1 6.9

    19.521.9 23.0

    23.6 24.32.32.5 2.4

    2.4 2.4

    4.60%4.63%4.55%4.37%

    4.07%

    0

    20

    40

    60

    80

    100

    2001 2002 2003 2004 20050%

    1%

    2%

    3%

    4%

    5% Radio

    TV

    Internet and broadband

    Mobile voice andmessagingFixed voice

    Communications asshare of total spend

    Source: Ofcom / operators / licensees / BBC A closer comparison of 2005 spend with 2004 shows that the reduction was driven by a fall in average spend per month on fixed-line services of 2.82, although this was largely offset by increased mobile, internet and television spend, leaving a net monthly increase of 54 pence per household (Figure 1.26).

  • 39

    Figure 1.26: Change in real household communications spend (2004 to 2005) Change in average monthly communications spend (2004-2005)

    -2.31

    1.280.85 0.70 0.02 0.54

    -3.00

    -2.50

    -2.00

    -1.50

    -1.00

    -0.50

    0.00

    0.50

    1.00

    Fixed voice Mobile voice andmessaging

    Internet TV Radio Total

    Fixed voice

    Source: Ofcom / operators / licensees / BBC Note: Based on constant 2005 prices. Apportionment of BBC licence fee to radio and TV based on Ofcom estimates.

    1.5.3 Consumption more broadband, more TV, less radio Total time spent consuming and using communications services showed a modest increase over the four years to 2005 (Figure 1.27). Average television viewing went up by 11 minutes to 25 hours and 34 minutes per week, while radio listening experienced a decline of 24 minutes per week over the same period. Time spent by mobile subscribers making calls and sending SMS text messages both grew strongly but in absolute terms time spent online by internet users went up most, reflecting growing penetration and the increasing number of always on broadband connections.

    Figure 1.27: Weekly communications consumption

    Usage per week 2001 2005 Change TV viewing hours 25:23 25:34 +11 minsRadio listening hours 20:30 20:06 -24 minsTelephone call minutes

    fixed 1:11 1:10 -1 minmobile 0:20 0:22 + 2 mins

    Number of SMS texts 5.5 11 + 5.4Internet hours 2:10 2:29 + 19 mins

    Source: Ofcom / operators / RAJAR / BARB / TGI-BMRB Note: TV and radio hours are per individual; call minutes and SMS text messages are per connection; weekly internet hours are for Q4 of each year for adults 15+ who have used the internet in the last 12 months. Perhaps another driver of internet use is the growing popularity of social networking and blogging websites. Sites such as MySpace, Friendsreunited and Bebo, used to establish and re-establish social contacts and communicate with communities, are among the top 50 most visited in the UK. Blogs (a type of website where users post entries in a chronological order, which can be publicly viewable or limited to particular users or user communities) are also generating great interest: there were over 35 million blogs worldwide in April 2006 and a new one is created every second, according to tracking service Technorati. In addition, the internet is increasingly used

  • 40

    for downloading content to personal devices, including MP3 file sharing, movie downloads and audio and video clips.

    1.5.4 Consumption patterns are changing for young adults Our research and analysis suggests that young adults (16-24) have embraced new technologies to a far greater degree than the general population, while they use the more traditional media of television and radio considerably less (Figure 1.28). Mobile phone (calls and texts) and internet use are well above average for this age group and our research suggests that 16-24 year olds regard the mobile phone as their primary telecoms platform (for example, 85% say they would use a mobile text or call as the preferred method of arranging to meet a friend, compared to 46% for all age groups).

    Figure 1.28: Weekly communications consumption by age group

    Usage per week All age groups 16-24 Difference

    TV viewing hours 25:34 18:21 -7h 13minsRadio listening hours 20:06 18:18 -1h 48 minsMobile phone use Number of mobile calls 20 27 + 7 calls Number of SMS 28 70 +42 SMSInternet hours 2:29 2:50 + 21 m

    Source: Ofcom / operators/ RAJAR / BARB/ TGI-BMRB Note: TV and radio hours are per viewer/listener; SMS is the self-reported number of messages sent per mobile user; weekly internet hours are for Q4 of each year for adults 15+ who have used the internet in the last 12 months. At the same time, this age group has embraced online communication activities our research shows that 70% of internet users aged 16-24 have used social networking websites (compared to 41% of the general population), with over half doing so on a weekly basis. They are also much more likely to contribute content: 37% of 18-24 year olds have posted material online (compared to 14% across all age groups), while close to one in five have their own website or blog (section 3.4.17 discusses this in greater detail). The drop in listening and viewing hours of young adults is probably also partly explained by their higher ownership of most new technologies than the population as a whole. For example, over half own a games console and / or an MP3 player and they also appear to have a higher propensity to consume in an innovative manner; 38% of young adults view TV over their PCs, compared to only 24% of all individuals (Figure 1.29).

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    Figure 1.29: Use of entertainment devices in the home Percentage of adults

    5%

    24%

    24%

    29%

    57%

    62%

    66%

    73%

    7%

    38%

    56%

    55%

    71%

    51%

    72%

    59%

    0% 20% 40% 60% 80%

    PDA

    PC for TV viewing

    Games console

    MP3

    Internet

    DVD

    Video Recorder

    Teletext TV

    15-24 year olds

    All adults

    Source: Ofcom research, April 2006 16-24 year olds watch substantially less television than older people and their viewing is declining at a faster rate, down by over one and a half hours, to 18 hours and 18 minutes per week, over the past four years (against a 1% rise for the adult population). In addition, their exposure to television is declining; just 84% watched at least an average of 15 consecutive minutes per week in June 2006, whereas the all individuals figure was 92% (Figure 1.30).

    Figure 1.30: Average weekly reach of television (2001 2005)

    93%92%

    94%93%

    92%

    87%

    84%

    86%85%

    84%

    80%

    85%

    90%

    95%

    100%

    2001 2002 2003 2004 2005

    All inviduals

    16 - 24 year olds

    Source: BARB Note: 15 minute consecutive reach This fall may be due to a desire among young adults for a different type of content offering. This hypothesis is reflected in the growing share of their viewing to multichannel television up from 30% in Dec 01 to 41% in Dec 05 (Figure 1.31).

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    Figure 1.31: Channel share by month for 16-24 age group (all homes, all day)

    70%72% 69% 68% 69% 65% 60% 58% 59%

    30% 28% 31% 32% 31% 35% 40% 42% 41%

    0%

    20%

    40%

    60%

    80%

    100%

    Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05

    Non-terrestrialchannels

    Terrestrialchannels

    Source: Ofcom / BARB Of course, lower viewing of the main terrestrial channels is mirrored among the general population as multichannel penetration increases. However, Figure 1.32 shows the disproportionately higher fall among 16-24 year olds for each of the last four years.

    Figure 1.32: Change in percentage share of viewing to terrestrial channels

    -2.4 -2.6-3.4-3.8

    -1.9

    -4.2

    -6.4

    -1.6

    -8

    -6

    -4

    -2

    0

    2

    4

    2001 2002 2003 2004 2005

    All individuals 16-24 year olds

    78% 70.5% 76.4% 68.6% 73.8% 64.4% 70.4% 58%

    Terrestrial viewing share

    74.3%80.4%

    % reduction in share year on year

    Source: BARB In radio, too, there appears to be a shift towards newer services and different consumption patterns among young adults. Although total listening among this age group has risen by 5% over the past five years, this has been driven by a 118% increase in listening to the newer national commercial services (and a 12% rise in BBC radio listening), offsetting a 12% fall in local commercial services which have on average been around longer (Figure 1.33). In addition, a greater proportion of their listening time is spent listening to digital when compared to other age groups. It is also interesting to note the 17% fall in listening among 25-34 year olds again largely driven by less local listening to commercial radio (down 30%).

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    Figure 1.33: Change in radio listening between March 2001 and March 2006 Percentage change in annual hours listened

    8%

    -10%

    0%5%

    -12%

    12%

    -17%

    5%

    -30%

    -3%

    3%

    30%

    -11%

    14%

    1%

    26%

    -6%

    2%

    11%6%

    10%

    20%

    -35%

    -25%

    -15%

    -5%

    5%

    15%

    25%

    35%

    National commercialRadio universe Local commercial BBC all

    237%118%

    Children 15-24 25-34 35-44 45-54 55+

    8%

    -10%

    0%5%

    -12%

    12%

    -17%

    5%

    -30%

    -3%

    3%

    30%

    -11%

    14%

    1%

    26%

    -6%

    2%

    11%6%

    10%

    20%

    -35%

    -25%

    -15%

    -5%

    5%

    15%

    25%

    35%

    National commercialRadio universe Local commercial BBC all

    237%118%

    Children 15-24 25-34 35-44 45-54 55+Children 15-24 25-34 35-44 45-54ChildrenChildren 15-24 25-34 35-44 45-54 55+ Source: RAJAR Ofcom research suggests that among internet users the activity which has suffered most as a result of being online (either because less time is available or because the internet provides the required information) is TV viewing with 18% saying they watch less (Figure 1.34). However, again there is a markedly different pattern for young adults (15-24 year olds). For all categories of media, except television, more young adults reported a greater reduction in consumption than the population as a whole, suggesting the internet has a far greater substitution effect on other media for young adults. But the more established media of newspapers, magazines and radio were particularly affected, although interestingly games console use also fell significantly.

    Figure 1.34: Reduced consumption resulting from increased internet use Percentage of respondents

    -5%-7% -8% -8% -8%

    -14%

    -18%

    -12%-15%

    -21% -22%

    -12%

    -27%

    -13%

    -2%-5% -5%

    -2%-4%

    -8%

    -18%

    -30%

    -20%

    -10%

    0%

    Use gamesconsoles

    Listen toradio

    Readmagazines

    Read localnewspaper

    Watchvideo/DVD

    Readnational

    newspaper Watch TV

    All individuals 15-24 year old 45-64 year old

    Source: Ofcom research, April 2006 Question: since using the internet for the first time, which if any of the following activities do you believe you undertake less?

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    1.6 Spectrum 1.6.1 Introduction: an important component of the communications market The availability and efficient use of spectrum is important in a well-functioning communications market. Figure 1.35 below shows that the defence sector still commands the greatest single proportion of available spectrum (despite the release of parts of its allocation to the commercial sector over the past ten years). The next largest user of spectrum is the fixed/satellite sector this includes point-to-point microwave communications links which form part of the telecoms network, and satellite uplink/downlink. Interestingly, cellular spectrum (i.e. the spectrum used for mobile communications) comprises only 5% of the total.

    Figure 1.35: UK spectrum use weighted by frequency (weighted)

    Other7%

    Fixed / satellite 24%

    Cellular 4%

    Business radio5%

    Emergency services

    2%

    Broadcasting13%

    Science1%

    Aeronautical and maritime

    14%Defence

    30%

    Source: Ofcom Note: This has been weighted such that a 1MHz allocation at 100MHz is given equal weighting to a 10MHz allocation at 1GHz.

    1.6.2 New uses of spectrum Over the past two decades, a number of new technologies which make more efficient use of spectrum have emerged. These technologies have evolved from research laboratories through to full commercial availability, and many now play an important part in consumers everyday lives. They include: Digital Audio Broadcasting (DAB), a technology developed by a group of

    manufacturers and broadcasters to provide radio services in a digital format. In 1995, the BBC carried out the first DAB broadcast in the UK and services now operate in VHF Band III (217.5-230 MHz).

    DAB uses spectrum more efficiently and is based on a standard which utilises

    techniques to make the radio signal robust against sources of interference and weather conditions unlike FM transmissions, where these adverse effects are translated into a hissing or crackling sound.

    Wireless Fidelity (WiFi), a wireless technology, operating in the licence-

    exempt bands at 2.4 GHz and 5 GHz, that allows users to connect to an access point to from a wireless local area network (WLAN). Users can also

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    access the internet if the access point has appropriate connectivity. WiFi access points (also known as hotspots) typically have a range of about 100 metres. As WiFi operates in licence-exempt bands, it is subject to power restrictions to minimise the effects of interference.

    WiFi is based on variants of the IEEE 802.11 standards and latest versions

    support a data rate of around 100Mbit/s using MIMO (multiple input multiple output) technology. BT Openzone was one of the earliest service providers to offer WiFi hotspots in the UK in 2003, and as of mid 2006 there were approximately 14,600 public hotspots in the UK, in locations such as airports, hotels, railway stations and town centres.

    Bluetooth, a short-range wireless communication technology aimed at

    replacing the use of cables for connecting mobile and/or fixed devices such as mobile phones, headsets, MP3 players, printers and PDAs.

    Like WiFi, Bluetooth operates in the 2.4GHz licence-exempt band. However,

    to minimise interference with other wireless technologies operating in the same band, Bluetooth uses an adaptive frequency-hopping technique to detect and avoid the frequencies used by neighbouring devices. Bluetooth is a low-power technology: most Bluetooth-enabled devices have a range of about 10 metres and support data rates of 1-3Mbits/s.

    3G, or the Universal Mobile Telecommunications System (UMTS), the third

    generation mobile communication system and the successor to the 2G Global System for Mobile communication (GSM) standard. Both UMTS and GSM have been widely adopted in Europe and beyond, which has led to economies of scale and made roaming easier for users who travel internationally.

    3G services are licensed in the UK in the frequency bands 1900-1980 MHz

    and 2110-2170 MHz. The former band is used to transmit signals from the mobile to the base station (uplink) and the latter to send signals from the base station to the mobile (downlink). In March 2000, the Radiocommunications Agency (RA) held an auction for five 3G licences in the UK, raising just under 22.5 billion, while similar auctions were subsequently held in other European countries. Three years later, 3UK started the first commercial 3G network in the UK.

    3G services support higher data rates than GSM (up to about 384 kbit/s),

    which has enabled use of new services such as mobile video telephony and mobile music track downloading. As UMTS establishes itself further, operators are already looking to boost its speed using HSDPA (High Speed Downlink Packet Access) and HSUPA (High Speed Uplink Packet Access) technologies.

    1.6.3 Spectrum auctions The first spectrum auction since Ofcom was established took place on 20 April 2006. This was in line with the recommendations made by the Spectrum Framework Review to allow market forces to have a greater say in determining how spectrum is used. Following publication of a consultation document and a statement in July and November 2005 respectively, Ofcom made available for auction twelve licences at the frequencies 1781.7-1785 MHz paired with 1876.7-1880 MHz. The licences are technology neutral but are on a low-power basis. Possible uses include private GSM

  • 46

    mobile phone networks in office buildings or campuses. Fourteen companies participated in the single-round sealed bid auction, and the total licence fees paid were 3.8 million. Further UK-wide auctions are in the pipeline for a number of bands including:

    412-414 MHz paired with 422-424 MHz 872-876 MHz paired with 917-921 MHz 1452-1492 MHz 10, 28 and 32 GHz

    A further spectrum auction in conjunction with the Republic of Irelands telecoms regulator, ComReg (Commission for Communication Regulation), is planned for the 1785-1805 MHz band, with one licence being made available in Northern Ireland and one in the Republic of Ireland.

    1.6.4 Spectrum trading Towards the end of 2004, Ofcom authorised spectrum trading allowing the holders of certain categories of wireless telegraphy licences to transfer all or part of their rights and obligations under a licence to another party. The first spectrum trading in the UK occurred in 2005-2006. Fourteen applications for licence trading were received by Ofcom during the year. Eight of these trades had been completed by May 2006, and consent had been granted by Ofcom for the remaining six. This represented a little under 2% of the licences for which spectrum trading was available during the year. In April 2006, Ofcom published a consultation document on spectrum usage rights (SURs) proposing a new way of specifying the emissions that a licence holder might transmit in neighbouring bands and locations.

    1.6.5 Digital Dividend Review In September 2005, the UK Government announced that analogue television would be gradually phased out between 2008 and 2012, and replaced by its digital counterpart which is about six times more efficient. The switchover to digital services will result in the release of up to 112 MHz non-contiguous spectrum in the UHF band. This freed-up spectrum known as the digital dividend could enable the launch of a wide range of services encompassing advanced business and broadcasting services, wireless broadband services and additional television channels using standard or high definition. In November 2005, Ofcom announced the launch of its Digital Dividend Review, which will examine issues such as possible uses for the digital dividend, technical limits on spectrum use to prevent interference, and mechanisms for making this spectrum available to the public. Ofcom aims to publish a consultation document before the end of 2006, before taking its final decision by mid-2007.

    1.6.6 Ultra Wideband (UWB) At the beginning of 2005, Ofcom consulted on the position it should adopt in Europe on ultra-wideband devices in the 3.1-10.6 GHz band. Following feedback from manufacturers, operators, other national stakeholders and results from research projects, we outlined the UK position with respect to UWB. This was then used as an input to broader discussions on UWB at European level.

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    1.6.7 Cave audit In 2002, Professor Martin Cave published a study, The Review of Radio Spectrum Management, dealing with the application of market forces to commercial spectrum management. More recently, in December 2005, an audit of public spectrum holdings was carried out by Professor Cave and a team of experts based at Ofcom. The audit was intended to encourage the public sector to make more efficient use of its spectrum holdings, by identifying spectrum where immediate or medium-term reallocation is feasible. It also investigated the possibility of extending market mechanisms to the public sector, and the provision of incentives for more effective spectrum management. In an atmosphere of ever-increasing demand for limited spectrum, the Cave audit recognised that public spectrum holdings represent the majority of spectrum which will have to be made available for additional commercial use in the future. In this respect, the audit recommended that Recognised Spectrum Access should be used to define the spectrum rights of Crown bodies. Furthermore, it recommended an increase in bandsharing through appropriate incentives to bodies managing the bands, and the investigation of new technologies to allow bandsharing in bands that were previously excluded for such purposes. In case public bodies lack the commercial expertise to engage with commercial organisations, the report suggested the appointment of a third party to liaise between the public and commercial sectors.

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