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15|09|04

Speech to Social Market Foundation seminar on Digital Radio

by Stephen Carter, Chief Executive, Ofcom

David, thank you for inviting me to open this Seminar – ‘Digital Radio – Keeping the UK at Number One.’

My fellow speakers this morning, Jenny, Simon and Ralph are three of the leading lights of the UK radio sector, and particularly so in digital radio. Jenny has been a vigorous- and highly successful- advocate of a powerful BBC presence in digital radio. Simon has been a significant innovator and entrepreneur in regional and multi-platform services. And Ralph is a major figure in the commercial sector who, through GWR and Digital One, has consistently put his money where his mouth is for digital radio.

By contrast I have only two and a half claims to radio fame. Firstly, I like radio as a medium and am the proud possessor of 17 analogue radios, two digital radio sets and one handheld digital radio. Secondly, I can lay some claim for dragging an Advertising Agency that had hitherto never heard of radio as a medium into one of the top three in radio advertising. Thirdly, I was a shareholder in Digital One. So I have some understanding of the commercial returns (or not!) generated by the DAB platform and some knowledge of the regulatory tension between sound and data services.

Before I turn to digital radio, it is worth a moment on what Ofcom has been trying to do in radio more generally:

And it is not simply symbolism that caused us to lead with radio in Ofcom’s 2004 Communications Market Report, published last month. It is in radio that many of the most interesting developments are taking place.

Digital Radio for Everyone

Moving on to digital radio, I would say that this Regulator wholeheartedly endorses the objective of this seminar’s title. And in a few moments I will come to what we are doing and one or two ideas on what others too might do to fulfil that objective. But, first, where do things stand today?

When I was in Japan a few weeks ago, four things struck me about their communications sector.

Firstly, the extent of roll-out and take-up of next generation broadband at what is, in UK terms, enormously high bandwidth - 10 Megabits as basic standard; and 45 Megabits for about £20 a month. And the uses to which they are putting it. Japan is arriving at what Adam Singer describes as ‘disposable bandwidth.’ This raises interesting questions for us in our responsibilities in the telecommunications sector.

Secondly, the avid enthusiasm with which 3G mobile is being taken up. 4G is already coming down the pipeline in Japan and will no doubt get the same enthusiastic welcome there.

Thirdly, that, in television, NHK – Japan’s public service broadcaster - had that very satisfied air of those whose 20 year investment in, and tenacious belief in, High Definition TV was now at last coming good, with HDTV rolling out big-time in Japan and beginning to do so globally.

But fourthly, that the Japanese just don’t “get” radio. That seems a major oddity to any Westerner, particularly to me. Because, to us, radio is in our bones. So ubiquitous that, while we love it, we almost take it for granted.

Ask many people how many radios they possess and often the first answer is “two: one in the kitchen, the other in the bedroom.” If you ask them to think again the typical reply is “Oh, well there are the car radios of course… and the one in the alarm clock… and the one in the Hi-fi,… and in the bathroom and then there’s the kids’ ones; and if they are at the more tecchie end they’ll add: “errm… does listening to it on the Internet count or via the TV… or on the mobile?”

Nobody knows exactly how many radios there are in this country. Best estimates put it at somewhere between 110 million and 150 million; that is, 5 or 6 for every household. For the industry and the public, that’s a good thing; though it does have implications for the move towards a fully digital world in radio, which I’ll come to in a moment.

The radio market and convergence

Radio is, by and large, in good health in the UK.

The BBC, of course, continues as a powerhouse. There may be occasional arguments about, say, Radio 2’s distinctiveness but none about its popularity. In digital, the BBC’s new radio services(-1-) have genuinely enhanced choice and the overall attractiveness of the digital proposition to listeners.

In commercial radio, its share of total display advertising revenue has risen by 60 per cent over the last decade (to 4.5% of the total), and the industry has ‘sold’ radio very effectively as a good medium for advertisers. Income has risen from £372 million in 1998 to over £550 million now. But just to put that in context, that is about 80 per cent of C4’s ad revenue.

Over the past two years, the share of all radio listening gained by UK-wide national commercial stations has grown from 7 per cent to 10 per cent. Much of that growth has come from new, nationally-available digital stations; vindicating those in the commercial sector who were ready to make the investment in new digital services at a time when prospects for digital radio were much more uncertain than they are today.

Nor is this growth in new digital radio stations a zero sum game. Ofcom’s 2004 Communications Market Overview Report is our first annual “bumper book of facts”, free from our website. Among these are the listening, viewing and usage figures for the component parts of the market. The radio audience listen to 7 per cent more hours now than five years ago. So new services are not cannibalising the audience for established services. They are increasing the total size of the cake.

The average household now spends almost as much time listening to radio [22.9 hours a week] as we spend slumped in front of the television. Allow for sleeping time and it beats me how, as a Nation, we seem to have time to do anything else. It is a good job that one can do other things while listening to the radio!

As a medium, radio is of special interest to Ofcom, because of radio’s role as spear-head, in the move towards convergence. Certainly, convergence is becoming a reality; but not in the way that the prophets and hype-sters of the late 1990s thought. The predicted, single, all-purpose home device or home gateway for computer, telephone, TV and radio may happen at some point. But not for a while yet. Instead, convergence has spawned a proliferation in the number of devices. Content, sometimes reversioned, is becoming available on a wide range of platforms. And, to some extent at least, devices are becoming capable of receiving services from different platforms.

For now, diversity is the key. And mobility, for services and content going well beyond traditional voice telephony to radio, data and multi-media services, is increasingly prized, particularly by young people.

Radio, as an untethered, highly flexible medium is extremely well adapted evolutionarily, to current conditions. It is probably therefore no surprise that, for at least some of the time, 15 per cent of the total radio audience listen on the internet. Over 15 per cent listen to it on mobiles. And nearly 30 per cent listen to it via the digital TV; that is about half of all those who have access to digital TV sets. All that is listening to “digital radio.”

What many around the industry think of as “digital radio”, however, is terrestrial DAB sets. Where do things stand here?

After a long, slow start this too is now really beginning to take off. As at May, 607,000 sets had been sold in the UK. They are selling at the rate of 7,500 a week – that is, about half of all the new ‘kitchen radio’ sets now being sold. Digital radio sets may now be on the long sharp up-stroke of the typical “S-curve” for the adoption of all new successful technologies and devices. My store check of Dixons and John Lewis yesterday revealed anything from a dozen to nearly twenty different models at prices between £50 and £200, although the Sony sets are a mid-November reality.

It is timely, therefore, that the Secretary of State has asked Ofcom, by the fifth Anniversary of the national multiplex award, to provide a Statutory Report on the roll-out, take-up and prospects for digital radio. In the sonorous words of the 1996 Broadcasting Act : “for the purpose of considering for how long it would be appropriate for sound broadcasting services to continue to provided in analogue form”. Or , to put the questions we are asked more colloquially: “How’s it all going? And what can you tell us about when switchover might happen?”

The Review is still underway. We aim to publish our Statutory Report in November. So I hope you will forgive me if what I say today is still “work in progress” and that conclusions will be tentative at present.

Audience Research

As an evidence-based Regulator, Ofcom has, as we always do, undertaken quantitative and qualitative audience research for this review. The findings are just in. They are interesting and in some cases encouraging.

Of those who have used digital radio pm on any platform,

Those trends are more pronounced among the (smaller) sample who already had DAB sets.

Awareness is high: 92 per cent of the 1500 household sample had heard of digital radio. 56 per cent claimed to have heard of DAB digital radio. But understanding is not : only 7 per cent of the sample said that they knew more than “a little” about digital radio.

That is perhaps not surprising when you look at the answers to the question “where did you first come across digital radio?” Only 6 per cent had heard about it first on traditional radio. A figure that is dwarfed by the seven times as many who came across it simply by “flicking through the Sky, Freeview or cable channels.”

If these figures are right – and they do need a bit more testing – then there is still something of a marketing challenge for the industry.

But it is not as if there was not a good product to market. The feedback from the sample of those who already had standalone digital radio sets was very clear: post-purchase experience had exceeded pre-purchase expectation:

One attribute did not feature in pre-purchase knowledge. That was the text features.

Again the experience was very positive about the programme-related text information (though less so about unrelated information such as text news).

In the qualitative research, the owners of digital radio sets were positively evangelical about them. One caveat (and again possibly a marketing or product design challenge) is that the average age of the digital radio set buyer is still high : 51 years old. That is way higher than the normal ‘early adopter’ profile for new technologies and products.

I think the final, relevant price of research is price expectations. The proportion of those “certain to buy a digital radio set in the next 12 months” starts to rise significantly at price points below £60. It is at the £40-£20 price range that that demand curve rises exponentially. It is worth remembering that what drove take-up of digital television initially was the ‘free’ box. (Free to the consumer that is; at wholesale £200 a box cost to the platform operators).

Now, we must always be careful – and that is particularly true for regulators – about making market predictions on the basis of one round of quantitative and qualitative research. It is only one set of samples and real world behaviour changes over time. But it is reasonably safe to say that potentially we are on to a winner with digital radio

Towards digital radio for everyone

What, if anything, does all that enable us to say about switchover?

The first thing I would say is that, as it has sometimes done elsewhere, television has appropriated a term- in this case ‘digital switchover’- and imbued it with particular, television-centric characteristics. It is not a forensically accurate description of where radio is, or necessarily is going. That appropriation has some pluses. It creates a sense of force majeure for digital take up, generally - a good thing. The minus is that it can create the simplistic view that the process is the same. If there is one thing I do know about radio and television it is that they are different and nowhere is that more true than in digital.

In television our statutory Report to the Secretary of State said that there were three main reasons for switchover. Firstly, that it would make broadcast television more like a normally-functioning market. That may or may not need to be the case in radio. Secondly, it would release a national asset: the analogue spectrum- the potential value of which, in television is high- many , many times higher than the value of the analogue spectrum radio occupies. Thirdly, to increase choice. But, in radio, unless we can collectively solve the so-called small-stations problem, which I will come to in a moment, ‘switchover’ could have the effect of reducing choice rather than enhancing it.

So I do not think that Ofcom, or the radio industry talking broadly about “switchover”, even if only as understandable shorthand, is entirely accurate. What we believe we should be thinking about and talking about is how do we get digital radio for and to everyone. Or put another way, how do we get the audience to want the analogue signal to be switched off?

We may be able to say more about all this when Ofcom has concluded its Review and published its Statutory Report in November. I think what I can say today is that there are at least three important factors which might accelerate the provision and availability of digital radio for everyone.

Firstly, certainty about reliable coverage and scope for new services. I will come to what we are doing about that in a moment.

Secondly, the so called smaller-stations problem. Namely, how to create a technical and economic framework that enables the smaller analogue stations to convert to digital transmission in a commercially affordable way. Let’s take a hypothetical small station which has a turnover I would guess of between a quarter and half a million pounds a year. Its annual analogue transmission bill is probably between £50,000 and £75,000. In steady state its annual digital transmission costs should be a bit less. It is the hump in the middle – the conversion- that is the problem. A digital multiplex costs about £300,000 a year to run. That cost is the same whether there is one service or ten on that multiplex. The issue is not about ownership of the services. It is the number of services on the multiplex that a local market will support commercially – and thus, how many share the transmission overhead cost – that determines the viability and speed of a given local area’s conversion to digital transmission. The development of generic content or generic data and multimedia services might help to alter those economics. And that is one reason why we are looking at whether and how far we can liberalise the current regulatory constraints on new data and multi-media services on the platform. Alternative transmission technologies might also have a part to play. So we will carry on working with the industry to see if there are different approaches possibly involving L-Band or other technologies that offer a more promising solution.

The third factor is, of course, the extent of the digital to analogue price differential in radio compared with television. The cost of a basic digital converter box is 10 per cent of the cost of a mid range TV set. The price for an integrated digital TV set is, similarly, 10-30 per cent more than for a comparable analogue widescreen set. But the difference today between a digital radio set and a basic analogue radio set is as much as 500 per cent. That is a big differential to overcome.

In short, to get to digital radio for everyone, we need: critical platform mass; critical mass in volumes and thus in price; and possibly, critical mass in content and services. There does not need to be a single ‘Killer App.’ What there does need to be, as Freeview and digital satellite has shown in television, is simply a sufficient combination of services, technology, simplicity and price or discount to provide a value proposition for the consumer. We believe that digital radio is likely to be able, in time, to meet those conditions. And we will do what we can to help that process.

Ofcom’s role

So what will we do?

Let me say, firstly, that as in television and telecommunications, so in radio Ofcom sees its role as helping to steward the transition from the analogue world to tomorrow’s fully digital world. That is part of Ofcom’s core mission. Because a digital world brings choice, benefits to the consumer and to the citizen, greater competitiveness, greater efficiency and greater scope over time for the sector regulator to withdraw from regulation. All of those lie at the the heart of our statutory duties in the Communications Act.

So, we will be actively engaged in facilitating the drive to digital radio. How? Today, let me say two reasonably firm things (and raise one question)

Firstly, in terms of coverage, reception and critical platform mass. As some here will know, Ofcom inherited a review of what should be done with Band III spectrum. That review is continuing, but some important points are already clear. One is that - provided we plan things carefully - in time there should be enough extra spectrum to enable us to fill in the white spaces on the map for local digital radio (and, we hope, resolve the ‘I can only get it in my loft’ problem).

We may even be able to go further than that - we may be able to release other capacity, for use right across Britain. Just how much more, and whether it will be made available as “pure” Broadcasting Act capacity or using the more flexible arrangements in the Communications Act, are questions that we will need to address.

This capacity is not going to be available immediately - for one thing, we need to look at how existing users (like roving microphones in the theatre) can be accommodated elsewhere. But I can say that in time we believe there should be more capacity for digital radio, both locally and nationwide. Our statutory report will set out more details and plans, and we will consult on these.

That I believe will address the issue of critical platform mass for digital radio.

What about critical volume mass – essential to deal with the digital to analogue price differential. This will require action at a European level.

It is at European volume levels that manufacturers will be able to produce sets that get into the £40-£20 range where the demand curve rises exponentially. Or – better yet, where it becomes commercially sensible to incorporate digital radio capacity as standard in other devices such as stereos, in-car entertainment, MP3 players, 3G mobiles and the rest.

But, parts of Europe are going through exactly the same uncertainty point that hit Digital Terrestrial Television in around 1999-2000. Some of the early experiments had struggled commercially. The technology had proved harder to make work effectively than the optimists had hoped (the engineers saying at the point : “nobody ever reads the small print in our reports”). France and Ireland had postponed their DTT launches. It was quite possible that Europe as a whole could have turned its back on DTT.

It didn’t. In the UK today we have 4.5 million Freeview boxes. And take-up is still growing rapidly. In Berlin it is all-digital. Analogue has been switched off. The DTT programme is back on track across most of Western Europe.

As I say, in parts of Europe they may be going through that same stage of uncertainty about digital radio. What I can say today is that Ofcom will use all its powers of advocacy and persuasion for digital radio, alongside Government and the industry, wherever we can in Europe. If the industry wants Ofcom to be active in European digital radio forums to that end, our answer will be “yes”.

The best arrangement, of course, will be a thriving UK market that we can all point to as proof that it works.

That leads me to my one question: what do we need to do – if anything – to ensure critical mass in content and services? The BBC’s new digital stations and the new commercial stations are certainly a big step up on what is available on analogue. The new joint venture between GWR and BT opens the prospect of new data and multimedia services on digital radio from next year. The reported discussions between Channel 4 and UBC over OneWord may lead to strong cross-promotion and possibly reversioned content for that service too. That may well prove to be enough – particularly if the additional capacity we intend to make available permits a further range of new propositions to entice the consumer. But what if it is not?

Let me raise an issue. It might as well get an airing now, since it will come up during the BBC Charter review debate anyway. That is, the BBC’s radio services and content.

Personally, I do not see any great appetite in the debate for the ‘privatisation’ of any of the BBC’s radio services. It is far from clear that ‘privatisation’ would help progress towards digital. Indeed, the transitional disruption would be more likely to hinder it. Secondly, ‘privatisation’ is in any case a misnomer. The frequency could be reallocated. In extremis the money could be reallocated. But, outside North Korea, what you cannot compulsorily privatise is, say, Andy Parfitt, the presenters, commissioners and producers who make the heart of Radio One beat as it does. So beyond full asset transfer, let us move swiftly on from that to the question of access to content; specifically is the archive: unique with 80 years’ of history in the spoken word; a gem in terms of music and music-related programming.

I raise this, even as a neutral question, with some trepidation; partly because of the contentious pedigree of previous notions in this area. Most recently in Tony Ball’s 2003 McTaggart lecture of which this formed a centre-piece. His proposals were arguably self-interested, some would say self-serving; and were characterised, or caricatured-according to taste- as the straightforward expropriation of public asset for private gain. That idea - not surprisingly – quickly died a death.

My question is an altogether more modest and dispassionate one. It is this: would non-discriminatory, non-exclusive access – for a fair payment – to the BBC sound archive allow commercial services to enhance their offering to the listening public; and, crucially, do so without damaging the BBC’s ability and commitment to offer a strong digital radio service proposition?

If the answer to either or both parts of that question is no, then that is the answer. But I believe it is at least worth asking. Why?

In telecommunications, non-exclusive, fair-price access to the incumbent’s key assets is a commonplace solution to help make markets work for the consumer. And that is access to a privatised set of assets not publicly owned assets.

Closer to home, in television, a similar model already works and works well. It is the BBC Archive and the commercial UKTV stations. I recognise (a) that the BBC has a significant shareholding in UKTV and (b) that this was an exclusive deal. But exclusivity is no longer its core characteristic. Not since the advent of BBC3 and BBC4. Now, its continuing success is based on differential scheduling and different audience expectations of the commercial channels versus the public service broadcast channels. That is my point: there is room for the same archive programming on both commercial and public service channels.

Now, radio and television are different media with different audience characteristics. But if it is true in one, is it not at least worth exploring the other? I hope that this notion will get an honest, dispassionate appraisal. I am reasonably confident that it will. Michael Grade, Mark Thompson and the senior team at the BBC that has, rightly, regained its self-confidence, are looking constructively and imaginatively at new ways of releasing the value that is represented by the public venture capital invested in the BBC. This may be another string to their bow.

Conclusion

Ofcom’s Statutory Review of digital radio will, no doubt, throw up a number of other, interesting questions. One is already obvious; in analogue, the presumption has been that the case must be made for regulation and formats to change. In digital that presumption has been reversed. As the Nation increasingly switches to digital radio, for how long should that polarisation of presumption be maintained?

As a non-interventionist Regulator, Ofcom has no wish to impose heavy-handed rules in digital. So the question is when should we relax and how far in analogue? Not a straightforward question. But a good question to have; it is as the saying goes ‘a problem of success’. The success of digital radio. Something to which Ofcom is committed. I hope that today I have given you some notion of how we intend to contribute to that success in partnership with the industry and Government; and why we think it is important; to bring enhanced choice, service and quality to the people who really matter – the audience; the citizens and consumers of this country.

As Professor Trefusis used to say on Radio 4; ‘And if you have been, thanks for listening.’

Ends

Footnote:

1.- ive Live Sports Extra, 1Xtra, BBC6 Music, BBC7, BBC Asian Network


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