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29|06|05

Conclusion of the review of Channel 3 and Channel 5 financial terms

As required under Section 227 of the Communications Act 2003, Ofcom has today published the conclusion of its review of the financial terms of the Channel 3 licences held by ITV plc, SMG plc, Ulster Television plc and GMTV Ltd and of the Channel 5 licence. These reflect the value of all the rights and obligations in the licences, and in particular the value of access to scarce spectrum.

This decision is the last in a series taken by Ofcom over the past two years which, when taken together, allow commercially-funded public service broadcasters the scope to plan with certainty for all-digital television services across the UK.

The other relevant decisions are summarised in the briefing document attached to this news release; today’s decision should be viewed in the context of the previous regulatory decisions set out in the briefing document.

In 2003, under the current licence terms, annual payments to HM Treasury for all Channel 3 and Channel 5 licences combined were approximately £270m. In 2004, under the current licence terms, this fell to £230m, primarily as a result of the growth of digital households.

In 2005, under the current licence terms, and as the growth of digital multichannel television increases, this would fall to approximately £180m in 2005. If licensees accept the revised terms offered today, which take account of the expected completion of digital switchover by 2012, Ofcom estimates that total payments for all Channel 3 and Channel 5 licences in 2005 would be approximately £90m.

The actual level of future payments is dependent upon advertising revenue and digital take-up during the year. Ofcom does not disclose individual licence payments by licensee.

The relevant factors

Ofcom’s approach seeks to set terms which are reasonable within the context of the current market environment and which continue to be reasonable for the period of the licence, from 2005 to 2014. By assessing each licence within the context of a coherent single process, Ofcom has been able to take into account the progress towards digital switchover, developments in the television advertising market and the outcome of its Public Service Broadcasting Review.

Since previous reviews in 1999-2001, the value of access to the analogue spectrum has declined significantly, with under 40% of UK households relying solely on analogue for their television viewing. As homes continue to migrate from analogue to digital, the share of advertising derived as a result of access to the analogue spectrum will continue to decline and the proportion of advertising revenue earned by analogue channels overall is likely to fall. Ofcom has taken account of these trends, alongside the licensees’ public service broadcasting obligations, in setting the new terms. In accordance with the statute, Ofcom has also valued each licence singly, as though it were being auctioned separately.

Under the statute, licence payments consist of both an annual cash payment (which increases in line with inflation) and a Percentage of Qualifying Revenue (PQR). In setting new terms, Ofcom is required under the statute to determine a new PQR and a cash payment as though the licence were being put up for auction.

Ofcom will seek to recover up to 95% of the value of the licences through PQR. It is important to note that in collecting the payments, the PQR is applied only to advertising and sponsorship revenue attributable to analogue-only households. Therefore, as more households turn to digital, these payments will also decline. At the point of digital switchover for each licence, the analogue rights for each licence will cease to have any value, also on a licence-by-licence basis.

Background

The financial terms were originally set after a competitive tender process conducted 14 years ago in the case of the Channel 3 licences and 10 years ago for Channel 5. The terms were subsequently reviewed and determined, on a licence by licence basis, over a scattered range of dates.

When Ofcom assumed its powers, it therefore inherited multiple, separate licence terms, with differing timescales and differing processes for review and revaluation. Ofcom subsequently brought the review of financial terms into a single unified process, intended to create a coherent financial and licensing regime for commercially-funded public service broadcasting.

This is likely to be the last time that reviews on this scale are undertaken.

Next steps

The licensees have until 25 July 2005 to inform Ofcom that they wish to accept the terms. If accepted by the licensees, the revised terms will be backdated to apply from 1 January 2005 and will run to 31 December 2014. The monies raised are collected by Ofcom, but then paid to the Consolidated Fund of HM Treasury.

Ulster Television plc, which holds the Channel 3 licence for Northern Ireland, has already informed Ofcom that it is accepting the new financial terms announced today.

The financial terms announced today (including cash sum and PQR figures by licensee) can be found in the full background note available online at www.ofcom.org.uk

The briefing document putting today’s decision into the context of previous relevant regulatory decisions follows below.

BRIEFING

Financial and licensing regime for commercially-funded public service broadcasting

Today’s decision should be viewed alongside other Ofcom conclusions in six separate but linked areas of television broadcasting regulation:

1. Analysis of rationale for the merger of Granada plc and Carlton plc to form ITV plc and implementation of CRR remedy	Completed November 2003
2. The outcome of Ofcom’s Public Service Broadcasting Review.	Completed February 2005
3. Public service broadcasting commitments in the Nations and Regions.	Completed June 2005
4. Indicative timetable for digital switchover; Establishment of SwitchCo; and Details of post-switchover coverage.	Published February 2005 Completed April 2005 Published June 2005
5. Codes of Practice governing terms of trade between broadcasters and independent producers.	Completed January 2004
6. As published today (and included here for completeness), the conclusions of the reviews of Channel 3 and Channel 5 financial terms.	Published today

Separately, and as previously stated in its Public Service Broadcasting Review, Ofcom will assess options for the future funding of Channel 4, to be completed in 2006/7. By this point the Government will also have reached its decisions - through the White Paper and Charter Review - on the future of the BBC in the context of public service broadcasting as a whole.

1. Merger to create ITV plc

Ofcom provided analysis to the Competition Commission in its assessment of the proposed merger between Granada plc and Carlton plc and supported the merger rationale as a means of strengthening the delivery of commercially-funded public service broadcasting. Ofcom also took on responsibility for implementing the Contract Rights Renewal (CRR) remedy, overseen by the independent CRR Adjudicator, to protect the interests of the advertising community.

2. Public Service Broadcasting (PSB) obligations

Commercially-funded public service broadcasters commit to fulfilling public service obligations in return for privileged access to spectrum. As audience share and advertising revenues derived from analogue broadcasting decline amid the growth of digital multichannel, the value to those broadcasters of access to analogue spectrum declines accordingly.

In concluding its Public Service Broadcasting Review, Ofcom identified this reality. It set out its proposals for maintaining the public service broadcasting obligations which were sustainable through the transition to digital and which extensive audience and market research revealed mattered most to viewers.

These were specifically:

1. News: Sustained commitment to regional, national and international news and current affairs;
2. Original programming: High levels of original programming across a range of genres; and
3. UK production: Further investment in original production from a range of production centres across the UK.

In Ofcom’s view, the combination of these three core obligations will form the bedrock of commercially-funded public service broadcasting throughout the transition from analogue to wholly digital broadcasting.

3. The Nations and Regions

With the publication of the final report of its Public Service Broadcasting Review and after further consultation, Ofcom recognised the particular and distinctive public service broadcasting obligations which are most valued by viewers in the Nations and Regions.

These include detailed measures to ensure the continuance through the transition to digital of National news, non-news and indigenous language programming which reflects the characteristics of each Nation.

4. Progress towards digital switchover

Four years ago multichannel television reached 38% of UK households; as of June 2005, 62% of households receive digital multichannel, with a current rate of growth of around 60,000 additional households a week. The financial terms announced today take into account the transition to a wholly digital television world expected to be achieved between 2008 and 2012.

5. Independent production sector

Ofcom’s approval of the Codes of Practice governing terms of trade between broadcasters and the independent production sector provide greater certainty for companies in the creative sector to invest for the long-term.

With more effective access to capital secured through clearer ownership agreements on intellectual property rights, independent producers will continue to play an integral role in the supply of public service broadcasting through switchover and beyond.

6. Conclusion of the reviews of Channel 3 and Channel 5 financial terms

Finally, and as explained in the accompanying news release, Ofcom has today published the conclusion of its review of the financial terms of the Channel 3 licences held by ITV plc, SMG plc, Ulster Television plc and GMTV Ltd and of the Channel 5 licence.

Ofcom Chief Executive Stephen Carter said: “Digital television transfers control from broadcaster to viewer. This process puts pressure on commercially-funded public service broadcasting.”

He added: “We have now done all we can to give broadcasters regulatory certainty. It is now up to the broadcasters to deliver; and it is for Government to assess whether other sources and recipients of funding for public service broadcasting will be needed. We believe that they will be.”

Ends.

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