Home > About Ofcom > Accountability > Annual Reports and Plans > Ofcom Annual Report 2005 - 06 > Chief Executive's Report

Chief Executive’s Report

Our aim for the financial year 2005/6 was to drive delivery: externally, of positive changes for the sector; and internally, of new ways of working which capitalised on the post-merger efficiencies gained in previous years.

During the year, our main focus lay in four areas:

• implementation of the outcomes of the strategic sectoral reviews; in telecommunications, in television public service broadcasting, in radio and in spectrum, particularly trading and auction preparation;
• the establishment of new approaches to two increasingly critical challenges: consumer policy and international engagement;
• removal of unnecessary regulatory obligations upon industry, and the continued imposition of a high hurdle to challenge calls for the addition of new regulations; and
• internal simplification, greater operational efficiency and cost reduction; for the third year running, Ofcom operated under an RPI minus budget, yielding lower regulatory fees to industry.

The sector and Ofcom

The conclusion of the Strategic Review of Telecommunications in September 2005 marked the beginning of a period of significant change in the traditional fixed-line industry and, over time, potentially across the wider communications sector as a whole.

The prospect, for the first time, of access to BT’s local access infrastructure on terms identical to those previously only offered to BT’s own retail activities has stimulated broad interest in the potential for new services over the local loop. In parallel, our work to stimulate and support wholesale competition in fixed-line telecoms markets has brought about real benefits to consumers and businesses; average call costs have fallen by 25 per cent since 2003; and average broadband costs have fallen by over 50 per cent while typical connection speeds have quadrupled. By the end of the reporting period, more than 10 million households and small businesses had broadband connections (compared to 1.8 million at the start of 2003), with more than 80,000 households a week signing up to broadband for the first time.

Ofcom’s Spectrum Framework Review – and its associated release to the market of 400 MHz of prime spectrum over the next few years – has begun to open up the potential for innovative new broadcasting and wireless communications services. Many of these services will depend on the re-use of spectrum released when analogue television broadcasting ceases as a result of digital switchover between 2008 and 2012. In 2005/6 we started the preparatory work for Ofcom’s Digital Dividend Review, which will assess how this finite and valuable national resource should be made available. During the year, wireless communications providers began to experience the benefits of Ofcom’s deregulation, trading and liberalisation policy in spectrum management, with the removal of unnecessary administrative processes and restrictions in maritime, amateur and citizens’ band radio.

In 2005/6 Ofcom authorised the transfer of rights to use 15 Wireless Telegraphy Act licences, allowing market forces rather than the regulator to dictate the optimal use of this valuable resource. In April 2006, shortly after the period under review, Ofcom held its first auction of spectrum in which, for the first time, winning bidders were free to decide how best to use the spectrum made available to them.

During the year, television broadcasters began to respond more rapidly to the emerging changes in UK viewing habits, eroding historical assumptions about the scope and role of television public service broadcasting (PSB). As of April 2006, more than 70 per cent of all UK television householders were watching digital television; and the UK now has the highest digital television penetration of any country in the world.

As identified in Ofcom’s PSB Review, digital switchover will not be the only challenge to the regulatory agreement which for half a century has mandated that programmes should be made for the public good in return for access to scarce spectrum and large (and therefore lucrative) audiences. Just as analogue is giving way to digital multichannel, for a new generation of viewers, traditional linear broadcasting is being succeeded by mobile, internet and on-demand content, in the process raising new challenges over rights ownership; questions which lay at the heart of our review of the television production sector.

The BBC – underpinned by a new Charter – will be in a uniquely powerful position to meet these new audience needs. During the year, Parliament decided there needed to be an objective counterbalance to assess the point at which public value ends and market foreclosure begins. In future, Ofcom will undertake Market Impact Assessments to assess whether the BBC’s proposed new services – or changes to existing services – would function to the detriment of others in the market who provide the welcome stimulus of competition.

In radio, where 35 per cent of adults have listened through their digital television sets, 20 per cent over the internet and a large proportion of major radio networks now offer podcasts as standard, Ofcom completed its review of the sector with a commitment to grow the medium further by expanding the range of services available over DAB digital networks. Cumulative sales of DAB radio sets has now passed the three million mark and the number of people listening to digital radio has nearly doubled in 12 months.

As a result of the expansion in DAB services set out in Ofcom’s Radio Review, over the next few years local DAB multiplexes will be advertised to bring the benefits of local digital radio to those areas currently unable to receive these services; and new national services will be available on a second national commercial multiplex, significantly expanding listener choice and consolidating DAB’s role as the home platform of digital radio in the UK. Unlike television, analogue remains a significant and relevant platform in radio, with an estimated 150 million FM/AM radios still in use in the UK alone. Demand for analogue licences remains high; during the financial year Ofcom awarded 15 local commercial radio licences, 92 community radio licences, four long-term restricted service licences and 495 short-term restricted service licences.

Over the coming years, consumers will benefit from an even greater choice of higher-speed broadband, internet voice, television and video-on-demand services, new digital television channels, digital radio stations and devices which move seamlessly from home to mobile networks while offering television, radio, digital downloads and more.

For providers, as for consumers, traditional boundaries between communications industries are becoming increasingly blurred. Carphone Warehouse’s entry into the broadband market, BSkyB’s acquisition of Easynet, ITV’s acquisition of Friends Reunited and various trials of mobile television services by BT, Virgin Mobile, O2 and Arqiva are just some of the examples of collaboration and consolidation which bring together broadband, broadcasting, mobile and fixed-line services to shape new kinds of businesses.

Convergence – of companies, of industries, of content, of platforms and of devices – has been much-heralded but often, at best, incompletely delivered over the last 20 years. However, in future, 2005/6 may come to be seen as the year when the term began the final phase of its passage from 1990’s think-tank concept, through millennial legislative foresight in the Communications Act to today’s industrial reality, with digital networks and digital media approaching ubiquity in millions of UK homes and workplaces.

Consumer policy

With those new opportunities comes greater complexity; for industry, in managing the transition from analogue to digital and from switched to next-generation networks; and for consumers, for whom informed choice may require greater understanding, and who will continue to be the target of scams designed to exploit that complexity.

The development of Ofcom’s consumer policy – with the appointment of a new Director and establishment of a dedicated team – was an important development in the year. Ofcom’s Consumer Policy review addressed two main areas; the need to ensure consumers are properly informed, and so are able to play a part in a well-functioning market; and the need to take action against emerging consumer detriment from unfair or ineffective market structures and corporate malpractice or fraud.

International

As in much of UK public policy, developments within the European Commission and across the EU have an increasingly significant bearing on Ofcom’s work. There are also important lessons to be learned from other markets beyond the EU which can have a direct influence over the development of the sector in the UK, for example in the field of international technical standards or in spectrum management.

International engagement was a key priority for Ofcom throughout the year and will continue to be so in the future. We have benefited in this work from the insights gained by my Executive Board colleague Kip Meek in his role as Chairman of the European Regulators Group, a role he took up in January 2006.

During the year Ofcom worked with the Department for Culture, Media and Sport to raise its concerns about changes to the Television Without Frontiers Directive proposed by the European Commission. These include a proposal to extend the scope of statutory regulation to include audio-visual content on the internet; a move which both Ofcom and the UK Government consider to be inappropriate.

Ofcom also began work to contribute to the European Commission’s review of the EU Framework for Electronic Communications, which sets out a harmonised approach to telecommunications regulation across the EU; and to the Regional Radio Conference of the International Telecommunication Union, held in May/June 2006 to co-ordinate international decisions on radio spectrum management which will have an important bearing on digital switchover and the digital dividend.

Deregulation

As a comparatively new institution, Ofcom is, I think, unusual among UK regulators in that the contemporary principles of better regulation are incorporated into our statutory rule-book, the Communications Act 2003.

A commitment to reducing the regulatory burden upon industry underpins all of our work; both in seeking to remove existing rules which have been overtaken by market developments and are past the point of usefulness; and by resisting, through vigorous internal challenge at Executive and Board level, all attempts to establish new regulation where the case for such an imposition is anything less than crystal clear and unambiguous.

During the year we took substantial steps to remove, reduce or simplify regulation; see Figure 1 for some examples.

The Government’s response to the Better Regulation Task Force (BRTF) report, Less is More, committed all Government departments to publishing rolling programmes of simplification. These should identify regulations that can be simplified, repealed, reformed or consolidated, and should bring forward proposals to reduce administrative burdens.

While Ofcom is an independent statutory corporation rather than a Government department or non-departmental public body, we fully support both the principle and practice of the BRTF proposals, together with Philip Hampton’s report, Reducing Administrative Burdens: Effective Inspection and Enforcement.

During the reporting period, Ofcom published its own Simplification Plan. This describes our approach to regulation; highlights our planned deregulatory activities; provides further information about the administrative burdens we believe we place on our stakeholders; and explains how we intend to reduce those burdens.

Figure 1: Ofcom deregulation

Telecoms	Spectrum	Broadcasting
Retail price controls Proposals to allow retail price controls on BT line rental and call charges to lapse following Ofcom’s Strategic Review of Telecommunications. Large business pricing Proposals to deregulate rules governing the amount BT charges large businesses for telecoms services. International voice markets Removal of regulations on international direct dial voice calls market. Wholesale narrowband markets Relaxed regulations on the way calls are conveyed in two wholesale telecoms markets.	Trading Introduced spectrum licence trading between companies. Spectrum release Released spectrum to the market, allowing new licence holders to decide how best to use the spectrum. Amateur radio Introduced lifetime amateur radio licences, removing the requirement for regular renewal. Ships’ radio Removed annual licensing process for maritime users; replaced with a simpler, cheaper process. Radio Frequency Identification (RFID) Allowed RFID technology to be used without the need for a licence. Interference Moved from routine interference inspections to ones focusing on cases where there is the greatest risk of serious interference.	Broadcasting Code Published a shorter, simpler Code which reduces restrictions on content so long as it is properly labelled. Cross-promotion Proposals to relax the rules governing the cross-promotion of television channels. Product placement Proposals to relax the rules on product placement on television. Television sponsorship Proposals to extend the sponsorship of commercial television and radio channels. Radio Review Removed regulation on inputs, instead focusing on outputs, allowing radio stations greater flexibility in studio location. European engagement Highlighted the costs of extending the existing European Television Without Frontiers Directive to include video content over the internet.

Reducing costs and improving efficiency

Ofcom is predominantly funded by industry. Our operating budget is a net cost to the bottom line of companies who are at the heart of a sector of growing national importance. The knowledge of that fact informs our constant desire to minimise operating costs and increase internal efficiency.

Three years ago we committed the organisation to a year-on-year operating budget reduction, in the best regulatory finance tradition, of RPI minus x; in other words, a real-world reduction in our spending that would deliver, over time, a demonstrable reduction in the cost of regulation to our stakeholders.

We have delivered on that commitment each year since; our operating budget for 2005/6 was 8 per cent lower than that for 2004/5 in real terms. We also strive to achieve greater savings during the course of the financial year; at the end of the reporting period, we delivered our work for the year £4.0m under budget, and remitted this sum back to industry in the form of lower average regulatory fees. The RPI minus x commitment continues going forward; the operating budget for 2006/7 is 5 per cent lower than the previous year and 12.6 per cent lower than the operating budget for 2004/5.

Ofcom’s headcount as of 31 March 2006 was 776; for context, the five organisations we replaced had a combined headcount of 1,152.

Ofcom’s approach to pension provision continues to yield a long-term benefit to our financial liabilities. Colleagues who join Ofcom directly (as opposed to those who joined from the legacy organisations) are offered a pension allowance, which may be contributed to a defined contribution stakeholder scheme, rather than membership of a defined benefit (or final salary) pension scheme, which remains the public sector norm. Unlike defined contribution pension schemes – where fund growth is derived from the capital markets – defined benefit pension schemes expose the provider to significant financial risk in later years. As of 31 March 2006, 75 per cent of Ofcom colleagues were employed on terms with a pensions allowance; up from 72 per cent as of March 2005.

During the period under review, we also began a major overhaul of all information services (IS) systems. When Ofcom was established, we inherited some 45 different IS systems from the five legacy organisations who preceded us. During the first two years of operations it would have been unwise to have made decisions about the organisation’s long-term IS needs; amid all of our early work to build the organisation’s capabilities and assess priorities for action, those needs were unlikely to be clearly identified. The legacy systems were therefore incorporated as a stop-gap pending a thorough review.

That review was undertaken during the year, and the outcome – a significant multi-year programme called Project Unify to enhance capabilities in areas as varied as licensing, field operations, finance, human resources, project management, the Ofcom Contact Centre and more – was put into motion in February 2006, together with Ofcom’s new IS partner, Capgemini.

We have also continued to rationalise our portfolio of properties which, as a smaller organisation, are surplus to our requirements. When Ofcom was created it inherited 45 properties from the five previous regulators; 21 properties have now been disposed of or surrendered to the landlord. In 2005/6 this included the disposal of our office in Whyteleafe, Surrey, which raised £2.9m. In addition, three floors of Ofcom’s London headquarters at Riverside House were let to new tenants and a fourth floor is on the market.

During the year we also implemented an organisational restructure to increase our internal operating effectiveness. This involved a number of changes in executive responsibilities – including the appointment of Senior Partner Ed Richards as Chief Operating Officer – to target skills and resource at Ofcom’s main areas of focus.

Ofcom has developed a detailed process to evaluate its own performance, both for the purpose of internal administrative simplicity and to ensure appropriate external accountability. Our evaluation framework measures outputs achieved against a broad range of specific criteria. In this report, for the first time, an analysis of our performance is set out in full within the Operating and Financial Review; details can be found on page 66.

Looking ahead

The year ahead holds the prospect of a number of significant developments in the sector, which Ofcom will seek to reflect in its work.

In telecoms we will seek to promote competition and innovation in voice and broadband services by ensuring effective implementation of BT Group plc’s Enterprise Act Undertakings. We will also develop our understanding of the evolution of next-generation networks and services and will consider the implications of these for the future of regulation, particularly as new fibre optic-based access networks begin to move from concept to construction.

We will continue our programme to release new radio spectrum to the market – with a further six awards to take place in 2006/7 – while deregulating and liberalising wherever possible to maximise innovation in the use of this vital national asset. We will also publish proposals on how we intend to reap the greatest benefits for consumers and audiences from the digital dividend released by digital switchover.

In television we will undertake further work to underpin the future of public service broadcasting in an era when digital television and broadband-enabled homes dominate and households watching analogue television only represent a rapidly dwindling minority. This will include a financial review of Channel 4 to help ensure the broadcaster is effectively placed to deliver its PSB obligations in future; the conclusion of work to resolve the rights ownership questions which are central to the television production sector; further development of the Public Service Publisher concept to extend public service content beyond its traditional analogue heartland; and further research on local television.

During 2006/7 we will increase the choice and range of digital radio services with the award of new multiplexes. More broadly, we will consider the long-term direction of the radio industry, including an analysis of the future of the AM and FM bands and of emerging digital radio technical standards which may offer the prospect of enhanced services.

With effect from 15 October, I will be standing down as Ofcom Chief Executive. As I said when my decision was announced by the Board in May, there is never a good time to leave a great job; but with Ofcom now firmly established and the communications industries delivering real results, it is now time for someone else to lead the organisation through its next phase of development.

I would like to thank my colleagues for their hard work; and I would like to thank our many stakeholders for their rigorous scrutiny, constructive challenge and positive engagement throughout the year. Their contributions have led to what are, I hope, better-informed decisions about the right approach to this most dynamic and fascinating of sectors.

Stephen A. Carter, Chief Executive

next section

Back to top