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In 2004/5 Ofcom sought to deliver against four key priorities. These were:

1. to put in place swift and effective solutions to remove unnecessary regulation, resolve market distortions, reduce prices and take action to protect consumers;
2. to make significant progress in our strategic reviews of the sector;
3. to consolidate the post-merger efficiency gains of the prior year of establishment in order to improve effectiveness; and
4. to do all of this with an operating budget eight per cent lower in real terms than the operating budget for 2003/4.

During the period under review, the four major strategic reviews - in telecommunications, spectrum, public service television broadcasting and radio - either reached conclusion or passed important milestones. Section B of the Report sets out the main decisions and outcomes. In 2004/5 Ofcom also took immediate steps to further market development and to protect the interests of citizens and consumers.

In telecommunications, we:

• took action to support lower prices and greater competition in broadband, including a 70 per cent reduction in local loop unbundling wholesale rental costs;
• took action to protect consumers from abuse of sales and marketing techniques, such as mis-selling and slamming, in fixed-line telecoms;
• required a reduction in mobile phone network termination charges, leading to lower prices for consumers;
• took action to protect consumers from misleading sales and marketing in the pre-paid international calling card market;
• took action in the premium rate services market to strengthen consumer protection and increase confidence in the governance of the industry; and
• removed regulation to allow new Voice over Internet Protocol (VoIP) services to enter the UK market.

In spectrum, we:

• took action to support progress towards digital switchover in television, including clarity on timing, establishment of SwitchCo and incorporation of switchover obligations in commercial public service broadcaster licences;
• made proposals to remove unnecessary regulation in ships' radio licensing; and
• made proposals to encourage new Ultra Wideband services by exempting these from licensing requirements.

In broadcasting, we:

• delegated regulation of broadcast advertisements to the industry self-regulator, the Advertising Standards Authority (ASA);
• finalised the new Broadcasting Code, with simplified rules and greater protection for children and protection of freedom of expression for adults;
• completed research into the role of television advertising in the context of the wider public debate on childhood obesity;
• took action to strengthen rules governing television advertising of alcohol;
• agreed measures to ensure broadcasters meet statutory obligations to provide access services such as subtitling and audio description;
• launched the new FM local commercial radio licensing process with greatly simplified rules, and began to award licences for new radio stations across the UK; and
• launched the UK's new third tier of radio - community radio - for local groups interested in not-for-profit broadcasting with a simple, low-cost licence.

Deregulation

Unnecessary regulation imposes costs on business, stifles innovation and provides a barrier to market entry - as a consequence, increasing prices and diminishing choice for consumers. Therefore, as a matter of operating principle and in line with our statutory mandate, it is our ambition to be a deregulating regulator wherever feasible.

The Communications Act 2003 requires that Ofcom's activities should be proportionate and targeted only at cases in which action is needed; the Act also encourages Ofcom to seek, promote and facilitate opportunities for self-regulation. Ofcom's own regulatory principles state that in all of our work we will operate under a bias against intervention, with a commitment to seek the least intrusive regulatory mechanisms to achieve our policy objectives.

In operational terms, as a matter of mandatory internal process, proposals from the Executive to the Ofcom Board are required to contain a full analysis of the 'do nothing' deregulatory option in response to market developments. Figure 1 sets out those areas where we have removed inappropriate and intrusive regulation.

Figure 1

Ofcom deregulation

Telecoms	Spectrum	Broadcasting
Voice over Broadband (VoIP) Removed regulation for new VoIP services seeking to enter the UK market.	Spectrum trading and liberalisation Removed regulatory command-and-control mechanisms in spectrum management, replaced with a new market-led approach.	Public service television broadcasting review Removed obligations which were less valued by viewers, costly and unlikely to survive as analogue-only viewing declines.
Condition 43 Removed regulation from a wide range of BT's retail services.	Ships' Radio licensing Draft proposals to remove annual licensing process for maritime users and replace this with a simpler and cheaper lifetime licence.	Broadcasting Code Relaxed sponsorship rules, published simpler standards, with a less interventionist approach on programmes for adults.
Non-conveyance of a public emergency call service Removed existing micro-regulation in favour of reliance on informal undertakings from BT.	Audio Distribution Systems licensing at special events Liberalisation to allow programme-making spectrum to be used to deliver audio distribution services at events and conferences.	Broadcast advertising co-regulation Contracted out day-to-day regulation of broadcast advertising content to the Advertising Standards Authority.
Number portability charge control Removed regulation in favour of reliance on informal undertakings from BT.	Community Audio Distribution Services (CADS) Pilot liberalisation to allow Citizen's Band radio to be used to broadcast services by religious and community organisations.	Radio licensing process Streamlined the process for companies applying for new FM commercial radio licences.
Network charge controls in inter-tandem conveyance and inter-tandem transit services Draft proposals to remove charge controls on BT for these wholesale narrowband services.	International coordination for satellite networks Proposed relaxing the requirement to maintain a satellite control centre within the UK for those systems filed at the ITU.	Radio review Draft proposals include a less interventionist approach to studio location, automation, networking and local news delivery.
Hardwired telephones Removed formal price controls on rental of hardwired phones.		Competition policy
Independent Office of the Telecommunications Adjudicator Enables swift resolution of disputes over LLU implementation without recourse to a full-blown regulatory investigation.		Complaint/dispute handling New guidelines (introduced in February 2004) governing Ofcom's approach to handling complaints and disputes have reduced unwarranted regulatory intervention and allowed Ofcom to focus on the most serious competition issues in the sector.

Reducing costs and liabilities, improving efficiency

The large majority of Ofcom's funding is derived from fees paid by communications providers, broadcasting licensees and grant-in-aid to cover the costs of spectrum management. Ofcom's costs are therefore of importance to the sector which bears them; and we continually seek to reduce these. For example, Ofcom's headcount (753 staff and 30 secondees from the DTI as of 31 March 2005) is now 32 per cent lower than the combined headcount of the five organisations we replaced (1,152 in 2003).

In 2004/5 Ofcom was able to deliver greater efficiency savings than anticipated. By delivering projects below our planned operating budget - and also through the rephasing of work which will now be completed (and, therefore, funded) in 2005/6 - we were able substantially to reduce the cost of regulation for the sector in 2005/6. Specifically, this means that regulatory fees for 2005/6 will reduce by an average of:

• 26 per cent for television licensees, a total cost reduction to the industry of £8.5m in real terms;
• 29 per cent for radio licensees, a total cost reduction to the industry of £1.3m in real terms; and
• eight per cent for telecoms companies and communications providers, a total cost reduction to the industry of £2.0m in real terms.

Employees of public sector organisations are typically offered membership of a defined benefit pension scheme as part of their remuneration. These defined benefit schemes carry with them significant financial exposure for the public purse as retired employees place uncapped demands on public sector funds. All five of Ofcom's predecessor organisations offered defined benefit pension plans; and colleagues joining Ofcom from those organisations were legally entitled to retain the contractual terms of their previous employers. Ofcom therefore inherited the potential financial exposure associated with those liabilities.

During the period under review, Ofcom took action to reduce that exposure and move as much of it as possible off the public payroll. Our approach includes:

1. A departure from the public sector norm in pension provision; all external recruits to Ofcom are offered remuneration which includes a defined contribution pension scheme in place of a defined benefit scheme;
2. Offering three options to colleagues joining Ofcom from the predecessor organisations:
   • to move to the same Ofcom terms and conditions offered to external recruits, with a defined contribution pension scheme;
   • to move to Ofcom terms and conditions with a defined benefit pension option, but which capped Ofcom's exposure by limiting the level of pay increase which would attract defined benefit pensions; or
   • to remain on their previous employment terms.

This approach has proven to be successful in minimising liability whilst also ensuring colleagues are able to set aside funds for retirement. In total, 72 per cent of Ofcom colleagues are employed on terms with a defined contribution pension plan; 23 per cent are on Ofcom terms with the capped exposure defined benefit pension plan; and just five per cent remain on the existing terms inherited from the previous organisations.

This strategy, which will significantly reduce Ofcom's financial exposure in the longer term, will be completed in 2005/6 with the bulk transfer of past service pension rights also currently scheduled for completion in 2005/6. This innovative approach to reducing liability received external acknowledgement when Ofcom won the award for Most Effective Pensions Strategy at the Employee Benefits Awards 2005.

The sector

The UK's contribution to the global communications sector is widely acknowledged, from our leadership in digital television and radio and the programmes and formats of the creative sector to the development of mobile telecommunications and research into new radio spectrum technology.

In 2004/5, consumer enthusiasm for all things digital - particularly digital television and radio, faster broadband connections, digital music files and digital photography - drove an even greater pace of transformation across the sector than in previous years.

In the business world, the rate of change is no less significant. From the growth of corporate Voice over Internet Protocol services - previously the preserve of large corporates but now well within reach of SMEs - to the increase in both geographic reach and cost-effective bandwidth of broadband connections, enabling almost all businesses to develop an online presence; the move to digital continues to have a dramatic impact on the UK workplace.

Ofcom's approach to the markets we regulate is informed by research and the need to secure evidence ahead of making our decisions; in the course of our work in 2004/5, our market researchers spoke to more than 70,000 people across the UK. Our view of developments in the sector is also informed by constant engagement with our stakeholders, by the trends emerging from almost 300,000 complaints and queries from the public addressed by the Ofcom Contact Centre and by the insights provided by Ofcom's advisory bodies.

Significant developments in the sector during the year included:

• the growth in radio listening as companies exploit the benefits of convergence to ensure that the oldest electronic medium is available - and listened to - on the newest digital platforms, from mobile phones to the internet;
• a major shift in the economics of television as, for the first time, total UK revenues from digital multichannel subscriptions exceeded total revenues from all UK television advertising;
• continued growth in digital television as the UK's analogue-only households became the minority and existing digital households began buying their second or third set-top box for other televisions in the home;
• an acceleration in the rate of adoption of new broadband connections, now at almost a quarter of a million additional households each month, making broadband one of the fastest-growing new consumer technologies ever; and
• the growth in importance of all forms of wireless communications, particularly in mobile telecommunications, where the convenience and versatility of mobile devices encourages consumers to use these in preference to fixed-line phones for a growing proportion of their daily calls.

These rapid shifts in consumer aspiration and in business markets present companies in the communications sector with major challenges as well as opportunities. For the consumer and business customer, the digital age means the availability of new devices and services which are constantly faster, smaller and cheaper than those which they replace. But for manufacturers and providers, those same factors can often translate into more up-front investment and more research and development - but with lower margins and with diminished certainty about return on investment. Constant change increases the risk that tomorrow's long-term investments in new technology become today's stranded assets. Paradoxically, therefore, there is a risk that the market's insatiable appetite for innovation can also act as a brake on investment in innovation.

Providing regulatory certainty - a key aim for Ofcom - can help offset some of that risk for investors; each of the strategic reviews of the sector is driven by our understanding that markets need regulatory clarity for the long-term.

Another solution lies in gaining scale; a particular challenge in the near future as the emergence of next-generation networks and local loop unbundling obliges telecoms companies to reassess their core business strategies and the growth of digital multichannel, with a consequent increase in audience fragmentation, puts pressure on traditional advertiser-funded models in broadcasting. Whilst there was less merger activity in the sector (with the exception of GCap Media plc) than was prophesied 18 months ago as the Communications Act came into effect, some form of consolidation in the sector seems probable in the near term.

Performance and evaluation

In addition to reducing its costs and improving efficiency, Ofcom continually measures its performance in a broad range of functions and evaluates achievement against specific criteria. The Report sets out details in each relevant area; in some cases and where relevant, this includes measurement against the key performance indicators inherited from the five previous organisations which Ofcom replaced. We have tracked our performance against our 2004/5 Annual Plan and against our key regulatory principles. Key conclusions from this are that around 80 per cent of the decisions and outcomes identified in the 2004/5 Annual Plan were delivered during the period under review, despite the inherent uncertainties in planning such as the impact of external developments beyond our control. Most of the outstanding work will be completed over the summer of 2005.

In most key areas, Ofcom is operating on - or close to - the targets which we believe are required in order to meet stakeholder needs as efficiently as possible. In particular, new guidelines on Ofcom's approach to the investigation of competition complaints and disputes between companies have significantly reduced the proportion of regulatory investigations which prove to be unwarranted or unnecessary. This in turn has allowed a greater focus on more substantive complaints and disputes of wider importance to the sector, all of which were addressed within the time limits we have set down. The Freedom of Information Act 2000 came into effect during the period under review. Between 1 January 2005 and 31 March 2005 Ofcom received a high volume of requests under the Act. Effective internal procedures enabled Ofcom to respond to 98.7 per cent of requests received within the statutory time limits.

The year ahead

The next 12 to 18 months will be critically important for the sector.

Telecommunications companies will need to make some hard decisions about infrastructure investment; key influencing factors will include developments in wholesale broadband access and local loop unbundling, the implementation of BT's 21st Century Network and the conclusion of our strategic review of telecommunications.

We will implement further reforms to the way we manage spectrum, including further deregulation where possible and moves to allow greater market flexibility and facilitate market entry. As a corollary to this, we will continue to re-evaluate our operational spectrum management processes to ensure that these keep pace with changes in Ofcom policy, the evolution of wireless communications technology and wider developments in the market.

In television, plans for digital switchover are fast approaching an inflection point; the newly incorporated SwitchCo - and the Government - will need to take forward recommendations from Ofcom and turn these into concrete actions if the proposed timetable is to be met. We will also begin major new projects to assess the television advertising market, the content production sector and the evolution of digital multi-media content.

Later this year we will complete our review of radio; conclusions on the future expansion of digital radio will be of particular significance to the industry as companies continue successfully to exploit the benefits of convergence.

I would like to thank all of my colleagues for their hard work over the year. I would also like to thank our stakeholders for their willingness to help us develop new approaches to a sector which is central to the UK's economic activity and which plays a vital role at the heart of a modern democracy.

Stephen A Carter, Chief Executive

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