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The Future of Radio: the next phase

Foreword

Over the last three years radio has occupied two parallel universes.

One universe consists of the experience of millions of listeners for whom things have seldom been better. In terms of choice, listeners not only have more than 300 FM and AM commercial radio stations, a diverse suite of services from the BBC and a range of new community services. Many can also access at least 25 radio services through digital terrestrial television and satellite users can choose from over 90 stations. Through DAB, listeners in the majority of UK cities have access to over 35 digital stations. You can pause and rewind live radio programmes; you can discover more information about radio programmes through text and data services. UK broadband subscribers, now over 50% of the population, also have access to thousands of stations across the world. The BBC’s i-Player and the RadioCentrePlayer position radio at the centre of on-demand developments in the media sector. And the quality of programming is strong too, as radio continues to fulfil important public purposes, illustrated by radio’s importance to communities caught up in floods across the UK this summer.

So from the listener’s perspective, the picture is bright in terms of choice, range, quality of programming and innovation, right across the UK.

But there is another universe. This is the one occupied by those directly involved in running commercial radio stations, where financial pressures have been making it harder to provide those things that the audience expects.

Commercial radio revenues have been declining for several years. While there are some signs of recovery in recent months, the decline in revenues may partly be structural as advertisers move to new media. Competition from the wide choice of stations on digital platforms and from the calls other media place on listeners’ time is fragmenting audiences. These two factors together could mean that the business models of many local commercial radio stations, particularly the smaller ones, cease to be viable.

At the same time, the partial migration of radio to digital has increased transmission costs, generating a debate about whether, like television, we should set a date for radio to abandon analogue broadcasting.

These are serious issues and that is why, in April this year, Ofcom published a consultation entitled The Future of Radio. We recognised the need to try to pull the disparate strands of the radio debate together into an over-arching narrative; but we also recognised the risk of over-simplifying a set of issues which do not easily lend themselves to crisp, over-arching solutions.

Ofcom’s basic stance, however, is very clear. Our job is to interpret and apply the detailed statutory framework which Parliament has created for radio, much of it only four years old, and to advise Government where we see a case for adjustment. It is, of course, up to Government and Parliament whether and when to change this legal framework again.

The current framework is designed to ensure that commercial radio in the UK serves diverse tastes and interests; that it meets the needs of local audiences and that it is protected by ownership rules from the kind of excessive concentration which would jeopardise the plurality of voice which audiences value highly. In the 2003 Communications Act, Ofcom was also given the responsibility to expand the scope of radio. We have done this by licensing a network of community radio stations across the UK – 149 so far. We have also licensed a second national DAB radio multiplex, which was awarded to 4 Digital Group, led by Channel 4 in July this year, and further local DAB multiplexes.

For this statutory framework to be successful, however, commercial radio also needs to thrive as a business. So, in thinking about the application of the legal framework, and its possible modification, Ofcom must balance the goals set by Parliament, and the passions of listeners, against the changing commercial circumstances of the industry. When we propose change, it must be change which makes sense from a commercial perspective, as well as from the listener’s perspective.

Achieving this balance requires Ofcom to make judgments about the likely further development of digital radio. In The Future of Radio consultation document we argued that while it is not yet time to consider establishing a date for a switch-off of analogue radio, we need to think about providing the flexibility for such an outcome. This remains a subject of the utmost importance, but it is also one which requires the direct involvement of Government, as well as Ofcom, broadcasters, manufacturers, consumers and other stakeholders. So we are delighted that James Purnell, Secretary of State for Culture, Media and Sport, has recently announced the formation of a new Digital Radio Working Group, to carry forward this discussion. Ofcom will play a leading role in the group’s work, which we expect to be the focus for further work on the conditions which would need to be achieved before digital platforms could become the predominant means of delivering radio.

There are, however, some specific issues which need not await resolution of the big digital question, and it is on these that this document focuses. Some of these changes are substantial, others more detailed. All go in the direction of reducing regulation – some will say too fast, others not fast enough. But it is our view that this is the pace justified by the evidence, and by our overriding responsibility to listeners. The digital debate has been brought forward and is about to begin - now is not the time to tear up the analogue rulebook.

The immediate issues we tackle here fall under four headings: commercial radio content regulation; commercial radio ownership rules, other radio spectrum issues and rules specifically applying to community radio.

The tensions between the parallel world perceptions of UK radio mean that there will continue to be a vigorous debate about the issues addressed in this document. Ofcom is confident that radio will remain a highly valued part of the UK communications spectrum and we remain committed to playing our part in shaping this important industry’s future.

Ed Richards, Chief Executive David Currie, Chairman

Executive summary

1.1 In April this year Ofcom published its consultation on The Future of Radio. This consultation was based on our understanding of the challenges faced by commercial radio, which has seen competition increasing both from digital radio and from other media and what we believe may be a structural shift in the advertising market in favour of new media to the detriment of traditional radio.

1.2 We recognised that the way analogue commercial radio is regulated may need to change in the light of this changing competitive situation and so we considered the content and ownership regulation of commercial radio. The review of the ownership rules is a statutory review required by the Secretary of State.

1.3 We also considered how, if radio is to become primarily a digitally-delivered medium, we could achieve the flexibility to free up analogue radio spectrum when the time is right.

1.4 Finally we considered the rules around the newly emerging community radio sector, in response to a request from the Secretary of State for a review two years after the first station launch.

1.5 This Executive Summary captures the main proposals set out in this document, along with a brief account of the context for each decision.

1.6 Our thinking is based on our long-term aims to see a radio market which delivers a wide range of innovative UK-wide commercial stations providing plurality of provision in all major genres, a wide range and diversity of local and regional commercial services catering for local tastes and interests and a community service for every community that wants one and where suitable frequencies are available. We want to see these provided alongside a strong, independent BBC and all supported by multimedia services where viable: on-demand, downloads, archive, text and graphical information and available where and when audiences want, on devices which offer real consumer benefits.

1.7 In pursuing these aims, Ofcom will apply the statutory framework for radio regulation established by Parliament, whilst recognising that this can only be satisfactorily delivered if there is a thriving radio industry.

1.8 In recent months, we have made further progress towards our aims, by licensing a second national DAB digital radio multiplex to 4 Digital Group, led by Channel 4, which will offer a wide range of national services to complement those already offered by Digital One and the BBC, and a number of additional local DAB multiplexes. We have also licensed over 140 community radio stations in the past three years.

1.9 This report focuses on each of the areas we consulted on in April 2007. Where we can we have come to conclusions or final recommendations for Government to consider as they see fit. In the case of our ownership proposals, we recognise the case for some relaxation, and suggest ideas which Government may wish to consider. We offer to work with Government to develop this thinking further over the coming months. We have not taken forward all of our original suggestions regarding the flexibility to free-up spectrum in the long-term, as these areas will now be considered by the Digital Radio Working Group which has recently been set up jointly by the DCMS and Ofcom and with the strong support of the radio industry, including the BBC.

Commercial radio content regulation (section 3)

1.10 Ofcom is required by statute to regulate local analogue commercial radio to secure diversity of output and a suitable amount of local material, an appropriate amount of which should be locally-made. This is currently achieved by the inclusion in each licence of a Format which includes a description of the character of service which is designed to secure diversity; and specific requirements (e.g. the number of hours that a station must provide locally-made programming) designed to secure the provision of localness, together with published guidance. Compliance is ensured by sample content checks and the maintenance of an online public file for each station.

Formats: Delivering programme diversity

1.11 Increasingly, diversity of programming, such as different types of music, is being provided at both a national and local level by digital stations. Currently analogue Formats are a lot more detailed than digital (DAB) Formats, while stations on other platforms have no Format regulation at all. We suggested in April that analogue Format regulation should be relaxed so that these Formats contain only the same level of detail as DAB Formats. This would still preserve the overall character of each radio station, but would remove many more detailed requirements.

1.12 Responses to this proposal were broadly supportive, with those opposed generally more concerned about the loss of local programming than the loss of diversity.

1.13 Taking into account the responses received on this issue, the interests of consumers and case for increased flexibility for the industry, we believe the proposal should stand and that analogue radio Formats should be simplified.

Formats: Amount of localness

1.14 The amount of local material and local production is currently different for each station and is enshrined in its licence, based on the promises in its own licence application. Often the smallest stations have the highest obligations to deliver local material, locally-made (many 24 hours a day). Stations may request a change to their local hours but Ofcom currently provides no guidance for stations as to the number of locally-made hours that would be generally acceptable and so there is little regulatory certainty for stations.

1.15 We suggested in April that Ofcom could give guidance on appropriate minimum levels for the amount of locally-made programmes and local material (local programming) to be provided by analogue local commercial stations, according to the size and type of station. These proposals would represent a significant reduction in the amount of local programming that the majority of stations would have to produce, often reducing the requirement for locally-made hours by between a third and a half.

1.16 The main industry response regarding the regulation of localness was provided by commercial radio's trade body, RadioCentre, supported by most of the major commercial radio groups. They called for self-regulation of localness, focused on the delivery of local material (rather than the regulation of locally-made programming) on the grounds that licensees know best how to serve their listeners. They later put in a further proposal suggesting a minimum local programming requirement of three hours a day on weekdays for most stations and seven hours a day for the largest stations.

1.17 The BBC, the Community Media Association (CMA), Ofcom’s Advisory Committees for Wales and Scotland and others urged caution and argued for the protection of localness.

1.18 In the light of these and other responses we have carried out further audience research this summer which, added to our earlier analysis, confirms our belief in the importance of locally-made programmes containing local material throughout most of daytime. This belief was further strengthened during the floods which affected a number of areas of the UK this summer. In addition, while Ofcom operates under UK-wide statute we also recognise that the different nations of the UK increasingly have their own defined interests and that commercial radio has an important role in catering for these.

1.19 Our previous analysis of the experience of other countries, such as France and the United States, suggests that, left to itself, the market would not deliver local radio services ubiquitously across the UK, due to the financial pressures to maximise shareholder returns. As a result we believe the regulation of a minimum level of localness is still required.

1.20 We are confident that our revised localness guidance proposals strike the right balance between the financial pressures faced by the industry and safeguarding the interests of listeners as citizens and consumers.

1.21 The revised localness guideline proposals for FM stations are for a minimum of ten hours a day of locally-made programming during weekday daytimes (which must include breakfast) and four hours per day during daytime at weekends. Smaller stations may request to be allowed to share some daytime programmes on a sub-regional basis. AM stations should provide a minimum of four hours a day of locally-made programming, but at least ten hours during weekday daytimes (including the four hours of locally-made programming) should be produced in the nation to which the station broadcasts. No station should be required to produce more locally-made programming or more local material than at present. We welcome views on this proposal, which is set out in more detail in section 3.

1.22 Our original proposal was to introduce changes to the regulation of both the character of service and the amount of localness when digital listening reaches a certain threshold. However, we think that our revised localness proposals are sufficient to safeguard listener interests and that our Format proposals will protect the core character of service of every station. We therefore propose to implement both changes as soon as the localness proposal is finalised following consultation.

1.23 In the longer term, as the process of digital migration matures, there may be a case, as RadioCentre argues, for some form of co-regulation of content issues. But at present that case has not been made and the alignment of industry and consumer and citizen interests, which would be required for a successful co-regulatory scheme, is not obvious. We remain open to ideas on this subject, but for now we do not propose to take this issue further.

Commercial radio ownership rules (section 4)

1.27 Currently, there are four types of rules relating to plurality of radio ownership: those applying to local analogue services; those applying to local DAB programme services; limits on ownership of multiple digital radio multiplexes and cross-media ownership rules.

1.28 In April, we suggested that the local analogue and DAB service rules could be brought together into a single simplified system based on DAB coverage areas and could include future terrestrial platforms broadcasting local radio services; that the local DAB multiplex ownership rules should be simplified but that the national DAB ownership rule should be retained; and that the cross-media ownership rules should be retained but should look across analogue and digital radio as a single radio platform.

1.29 The radio industry argued strongly against the current radio-specific ownership rules on the basis that the radio industry is much smaller than other media industries which have no such regulation, that consolidation was in the interests of both industry and listeners and that competition law alone would suffice in ensuring a plurality of ownership.

1.30 In June 2007, Ofcom published research into audiences’ use of different news sources. This showed that while radio has declined somewhat since 2003 as a source of news, it is still important at both national and local levels. At a local level, commercial radio still has three times the audience of BBC local radio.

1.31 Ofcom’s latest research on localness shows that while news is one of the core elements of local content, other elements of local programming are important too, such as debates on community issues, coverage of local events and phone-ins.

1.32 Nevertheless we accept that there is some force in the argument that further consolidation could be in the interests of listeners by increasing the ability of the industry to invest in programming. We also recognise the case for any future legislation to be flexible to adapt to changing market conditions but also to provide as much predictability as possible for business.

1.33 Our recommendation to Government is that there may be a case for significantly simplifying the analogue and DAB radio services rules, allowing further consolidation while protecting plurality, along the lines we suggested in April. We propose to keep this matter under review and will be ready to work with Government over the coming months to help develop thinking in this area.

1.34 Similarly we believe the DAB local multiplex ownership rule could be simplified. We suggested in April that the only overlaps that should matter are those where there are two or more DAB multiplexes covering substantially the same area. We suggest that Government may wish to consider relaxing the existing rule, perhaps in the way we suggested or perhaps going further and abolishing the rule.

1.35 At a national level, given the increasing importance of national commercial radio relative to local commercial radio, we continue to believe, as we suggested in April, that the existing rule, whereby one person can only control one national multiplex, should also remain both for plurality and competition reasons.

1.36 Ofcom’s recent Review of Media Ownership Rules found that plurality of voice in a local area remains important, even though radio itself ranks behind television and newspapers as a source of news. Taking local newspapers and local radio together under common ownership could unacceptably diminish the range of voices in an area, suggesting that cross-media ownership rules remain important.

1.37 The ownership rules are a matter for Government and Parliament. Ofcom is happy to work with Government over the coming months to help develop a new set of ownership rules for radio, fit for a digital future.

Achieving flexibility in licensing and the use of spectrum (section 5)

1.38 In April, while we stated that it is not yet time to consider a switch-off date for analogue (FM and AM) radio, we noted that the spectrum these services currently occupy could in future be used for other things, for the benefit of citizens and consumers. But we also set out how the current statutory licensing framework would make it very difficult to free-up the spectrum, potentially for other uses.

1.39 We made a number of suggestions about how consideration of these issues might be taken forward. But, in light of the formation of the Digital Radio Working Group, bringing together the Government, Ofcom, broadcasters, manufacturers, consumers and other stakeholders, it would not be appropriate at this time for Ofcom to develop its own proposals further. Ofcom will play a leading role in the working group.

1.40 However, there are some issues which need to be considered now, in particular the re-advertising of licences under current legislation. A number of existing analogue commercial radio licences (national and local) will expire before any new legislation is likely to have been enacted (the timing of which is, of course, a matter for Government), and therefore Ofcom needs to determine its re-licensing policy. We proposed in April that all licences re-awarded under the current statutory framework should be granted with an expiry date of 31 December 2015. This proposal was considered the best option to maintain flexibility ahead of any new legislation.

1.41 The response to the proposal was mixed, with some suggesting postponing a decision for the Digital Radio Working Group to consider. However, the re-licensing process cannot await the outcome of that group’s report. The proposal in the consultation document was intended simply to ensure that any re-awarded commercial radio licences would not expire before any new legislation is enacted, at which time it is hoped that a new statutory licensing framework will be established.

1.42 Our conclusion is that all national and local commercial radio licences which are re-awarded under the existing statutory framework will be granted for a five-year period or with an expiry date of 31 December 2015, whichever constitutes the longer period.

1.43 Section 5 of this document also makes detailed suggestions about the award of technology and spectrum neutral licences, and the extension of existing DAB local areas. It also sets out our further thinking on mono and stereo broadcasting on DAB, on which we are consulting further.

Community radio (section 6)

1.44 In The Future of Radio consultation we set out some initial thoughts concerning the future licensing and regulation of community radio services.

1.45 Community radio services are currently licensed under the terms of the Community Radio Order 2004. We suggested that while the underlying community radio characteristics should remain unchanged, there might be scope for simplifying the detailed selection criteria in such a way as to encourage applications by providing greater flexibility of interpretation, while maintaining the distinctive nature of community radio. We also considered how some other specific requirements contained within the current order might also be simplified by future legislation.

1.46 In relation to a number of questions there was a lack of enthusiasm for major changes at this early stage in the life of community radio. There was general agreement that the unique nature of community radio should not be diluted through any future changes to legislation and regulation. So in the areas of funding limits, ownership, and economic impact assessments, we argue that it is too early to draw any firm conclusions. We suggest a further review of these areas in two years’ time.

1.47 In some specific areas however demand for early change is apparent. We therefore make specific suggestions to Government in two main areas:

We suggest that the statutory selection criteria should be simplified so as to give greater flexibility in Ofcom’s ability to award licences
We recommend that community radio licences should be eligible to be extended for up to a further five-year period, on one occasion only (without having to be re-advertised), subject to the licensee meeting specified requirements.

1.48 In addition, we plan to recognise the financial value of volunteer time when it comes to assessing turnover. Further details are given in section 6.

Conclusion

1.49 Taken together, the decisions, further proposals and recommendations to Government made in this document will have the effect of supporting Parliament’s and the public’s desire to see commercial radio continue to play its role as a provider of diverse services with a strong local character and to encourage the further development and sustainability of community radio.

1.50 They will also reduce the regulatory burden on commercial and community radio, providing material cost relief to the commercial radio industry, especially to smaller stations to safeguard their viability and their ability to provide local programming. Changes to ownership rules could provide further cost savings. For community radio the inclusion of volunteer time as a source of income provides greater funding flexibility.

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