Home > Media and Analysts > Speeches and Presentations > 2005 > Jul > The Radio Festival

04|07|05

The Radio Festival - Certainty or Security? The Path to Digital

Stephen A Carter
Chief Executive, Ofcom

Introduction

Good evening ladies and gentlemen and thanks to the Radio Academy for inviting me to give this year’s Guardian Lecture.

I spent the formative years of my life in Edinburgh and learnt much from being educated in Scotland, in particular, as a young child in a Scottish playground with an accent like mine, I learnt how challenging differences can be, how ambition can alienate some and inspire others, and how places with a particular history and identity can be limiting and often change averse.

I studied law in Aberdeen, to get away from home, and why would anyone from Edinburgh want to go to Glasgow to be educated? At that age, I dreamt of being an advocate and, in the main, that is what I have been. During my time in advertising, I was an advocate for many things.

As well as being in on the ground floor of WPP, and subsequently being hired by one of my clients, I learnt a few things which I still cherish. The value of cash flow and revenues that genuinely grow the top line, the critical importance of talent; attracting it, keeping it, and listening to it. The transformational effect of being ahead of, rather than behind, your customers, and the fact that truly successful leaders are those that are simultaneously across the detail, and the strategy.

So what can I tell this audience of radio professionals about radio? I have never worked in it directly, although I have filled quite a lot of its commercial airtime, worked with the key transmission provider, not to mention participated in funding a chunk of the digital multiplex capacity. I am a 41 year old, white married male who likes most parts of the Radio 4 schedule, runs to Magic 105.4 FM, but relies on my local South Hams station in the holidays, and increasingly does most of my domestic radio listening online or through DTT or DSat TV.

What happens elsewhere in the forest affects the radio glade

This evening, I will not give the sort of lecture that, if I had ever been the Chief Executive of the Radio Authority, I might have given. Why? because I cannot, as we at Ofcom do not just regulate radio; and therefore, by definition we do not see it in isolation.

The merger of five regulators into Ofcom has created a fundamentally different body to that which went before with an evolving set of relationships with the component parts of the communications sector.

I observe (perhaps wrongly):

- In telecoms; that the relationship between Oftel and BT was one of sometimes needless antagonism; in part because BT was the centre of Oftel’s world and its raison d’être and because BT saw Oftel as the enemy not as a potentially enabling force for a healthy industrial sector;

- In Spectrum; the relationship was one of delivering Government policy, unsurprisingly since the Radio Communications Agency was an Executive Agency of the Department of Trade and Industry;

- In television; the ITC saw the commercial broadcasters and in particular Channel 4 very much as their flock; and, again understandably focused heavily on the politics of television, and content controls. The ITC was not a competition authority in this sector;

- In radio; the relationship between the Radio Authority and the commercial industry seems to have had much in common with that between the old IBA and old ITV. The IBA, and its successor the Radio Authority, had been midwife to the birth and growth of the commercial industry and had a parental interest in its development and structure. As most of us find as we grow up, parental interest is vital in the early years, and often welcome subsequently; but the relationship has to change with maturity if interest is not to become intrusion, and the intrusion not to become interfering and irrelevant. It also had no purchase or responsibility over the BBC in either spectrum, service definition or competition consequences.

One theme today therefore is about radio regulation coming of age, and what it must mean for all of us, the regulator and the regulated.

The question we are often asked is “what is the outcome you are regulating to achieve?” For the Radio Authority, the answer to that question was how do you birth, build and buttress the commercial radio industry? Given that that has largely been done, beyond our statutory responsibilities and obligations, how does Ofcom answer that question?

So far, we have approached broadcasting radio with an ambition to allow it to;

be more accessible, to more people, more of the time, more easily, more cheaply;
have more routes to market, which digital and convergence makes possible;
have the freedom to get to market, which means making more capacity available.
that the industry is seen more as a whole rather than as a commercial/BBC divided universe;
and finally, that the industry and listeners take more responsibility for formats, outputs and preferences.

Finally, there is the reality of change, and the fact that the industry is living with increasing uncertainty about where the opportunities – or the threats – are coming from. In that sense the radio industry is like the television industry except for the levels of cash-flow and margins, although it may have some advantages in the strength of its airtime brands. Then of course there is the number of operators, a point which colours our view on consolidation, which I will turn to in a moment.

But the change in the nature of radio regulation is not simply a question of changed relationships. It is also a reflection of the change that is taking place across the communications sector.

Five or more years ago, the component parts of the communications sector could be likened to a series of businesses in one city: you might share membership of the local Chamber of Commerce but they were all still clearly distinct businesses.

Three or four years ago a closer analogy would have been sharing the same business park: the parts of the communications sector were very definitely next door businesses with an increasing common interest in the infrastructure; but not much more.

Today convergence means that those businesses are sharing the same office block – and in some cases the same office; and in some cases even more.

So, if you will forgive the apparent digression, I’d like to set out some of what we have been doing and why in the other parts of that office. Why? Because, with convergence, what happens in those other parts can have as great a bearing – or even greater – on the radio industry than what we do directly in traditional radio regulation. That, I hope, will set in context what we are doing in traditional radio regulation and some of the challenges and opportunities facing this radio industry.

This chart summarises just some of the technological growth merely since Ofcom came into being. Let me try to give some context of how we have contributed to some of those changes.

Some changes since 2003

	Summer 2003	Summer 2005
Broadband – number of connections - % of homes	2.2m 9%	6.2m 30%
Homes with access to broadband via DSL (%)	80%	97%
3G customers	< 250,000	>2.5m
DVD players (% of total homes)	49%	68%
PVR (Sky+)	<100,000	~700,000
Digital TV households (% of total homes)	50%	62%
DAB radios – cumulative sales (m units)	0.25m	1.4m
Mobile phones with camera (Europe, % of total)	9%	~70%
Music downloads (annualised)	3-4m	18m

Let me start with telecommunications. The central thrust of what we have done has been to drive broadband and the transition from analogue, switched networks to digital IP-based networks. Why? Because of what it will do for innovation and for consumer choice. BT – spurred by competition from cable – have had the commercial, strategic and political sense to roll out broadband coverage to 95 per cent plus of the country. But they and others are the first to recognise that always-on, voice and data at 512K speeds, was the start point not the end game. Competition is driving innovation: higher bandwidths with a blended average speed today of over 1 megabit, and video-capable broadband as the likely average in less than two years’ time; with falling prices making it affordable for more people; and more services, be it Podcasting, IP Television, Voice-over IP; and other services that, as regulators, we have not yet dreamt of. Local Loop Unbundling, and 21st Century Networks, may sound arcane but they have the potential to accelerate investment in competitive infrastructure, that will significantly alter how the content, that has traditionally been the preserve of sound radio, is consumed; and the additional competition for the finite amount of time consumers are prepared to listen to and watch content, and when and how they will do that.

In Spectrum, Ofcom’s approach has been two-fold. Firstly to make more Spectrum available to the civilian market; in short, to increase supply And secondly, to liberalise the uses that businesses make of it, subject only to ceilings on interference to other legitimate users. We are moving away from an era of command and control where the man in Whitehall – or even the man or woman at Riverside House - knows best, to a world of greater uncertainty with rewards for those who have the investment and entrepreneurial skills. Within international constraints our aim is to make two thirds of the civilian spectrum liberalised and tradeable within the next three or four years, allowing the market to innovate and develop new services for consumers.

That is not always popular with incumbents or pioneering businesses who may face new and unexpected competition. Some argue that this change in approach challenges legitimate legal expectations and, if not legal ones then certainly moral ones. That is something we take carefully into account before making our decisions. But our primary duty is towards the consumer and citizen interests rather than the industrial ones.

In radio in particular, this issue bites in relation to DAB, and support for the provision of additional multiplexes locally and/or nationally. I will come to the impact of spectrum release in that area in more detail in a moment.

In television, the leitmotif of Ofcom’s actions has been to facilitate the drive towards digital and within that to give ITV, Five, C4, SMG and UTV – those businesses that we most directly regulate – a clarity about their regulatory obligations so that they can plan, while the analogue cash-flows and advertising power ratios are high, for what a wholly-digital world will mean for them and their viewers. We have raised some unarguable questions about the future funding of public service broadcasting which the BBC have wrongly seen as an attack on their legitimate need to be fully funded. The BBC is, Public Service Broadcasting in both Radio and Television, for many people, but it is, and has not been, the sole provider for a long time, and it, and the viewer/listener has benefited substantially from this competition for quality. The truth in television is that today the march to digital is now a stampede, viewers now have a choice of delivery platforms, free-to-air, subscription and pay-per-view, and an ever-widening choice of channels and interactive services. 62 per cent of households today have digital. The number is growing at 60,000 a week. There is now a clear route-map with the broadcasters and an implementation organisation - Switchco - to deliver a rolling region by region switchover programme on the proposed 2008-2012 timetable. The platforms, commercial broadcasters, the BBC and the politicians have 3-4 years to plan for that. Getting there with a single monopoly provider of Public Service Broadcasting is something we will all live to regret, even the BBC itself.

For radio, television’s transition to digital has become another route to market, with 24 digital radio stations on Freeview, 40 on Cable and over 80 on satellite. Half of all digital television owners listen to digital radio via the TV at least some of the time.

So, in summary, Ofcom’s approach to the rest of the communications sector can be summed up as having four elements:

- stewarding the transition from analogue to digital

- expanding the available wireless spectrum for the market

- accelerating a range of services and applications, leading to greater consumer choice.

- Highlighting the political and policy consequences of the move to Digital across all platforms, so that proper plans can be put in place now, by the Politicians, by the platforms, by the Broadcasters, by the network manufacturers and supply chains, and importantly by the listeners and viewers.

Radio Regulation

So let me now turn directly to radio. One could argue, reasonably, that there is already a great deal of consumer choice. With over 275 licensed commercial radio stations, plus five analogue and five national digital stations from the BBC, and a further 46 stations of local and nations BBC radio, the UK has among the highest ratios in the world of radio stations per head of population.

Indeed, the question could be asked whether there is too much choice? Like the alternative network operators in telecoms, is the market structure in commercial radio too fragmented, for it to address the big challenges of continuous innovation and find the investment necessary to keep abreast of changing technology and changing markets. Then there is the power and presence of the BBC; the decline of advertising-monetised listening hours; the decline of the juke box, the fact that we are on the last round of new licences and that, therefore, all the operators will be focused on two questions.

What is the commercially successful path to digital, and
which are the brands that are capable of driving listener preference and therefore new forms of revenue

Our first radio decision was whether to continue the unfinished business from the old Radio Authority. Namely awarding the licences for the 30 or so remaining local FM areas. One approach might have been to focus on the future and to have said, as was done in television, “that is it, no more analogue spectrum will be released. Focus on the digital future”. On the one hand those FM licences are of real value. As one radio analyst has noted, the award of the Belfast licence to U105 added an immediate £10 million to UTV’s market value, and Manchester to xfm similarly £17.5 million to GCap’s. But applications absorb a significant amount of scarce management time and talent not just for the winner but for all the applicants. And, of course, it is adding more competition and flattening margins for some. So the decision was not, quite, a no-brainer.

In the event we decided to licence the remaining local FM areas but in a way that was intended to be faster, simpler and cheaper than what went before. To date we have been awarding licences at a rate 50% faster than the old Authority and with greater freedom for applicants to determine and express their own format rather than having to fit into a straight-jacket imposed from the centre.

Embodied in Ofcom’s approach to licence applications has been and will be that “Size does not matter”. That is we do not start from a bias for or against large or small radio companies although I think we are getting better at the analysis of the commercial and financial robustness of the licence evaluation process. Merit, the market and our statutory obligations are what matter in our licence award process.

Related to this is the question of consolidation. Of course its impact on competition particularly in the airtime sales market is relevant, as would be a major reduction in plurality. But absent those factors, Ofcom’s approach has been to facilitate market-led consolidation; not least because consolidated companies are more likely to have the economies of scale and scope necessary to meet the costs of investing to address the challenge of technology and market developments.

So what is the door to digital for radio? First it is a question of capacity. In the so-called Band III (174-230 MHz) we have proposed to make three new blocks of spectrum available for new local multiplexes. This will enable us to ensure that every region in the UK has at least one digital multiplex. By our analysis that means DAB coverage for 69% of stations by volume (94% by analogue commercial listening), though that still leaves 89 stations landlocked in analogue.

We are also consulting about a further one or even two national multiplexes and digesting, carefully, the responses that we have received. We will reach a decision on this over the summer.

The demand for innovative data services on DAB today is about where demand for DTT multiplex capacity or interactive TV services was 3-4 years ago. But this may change when we see the results of the Livetime trial which BT, Digital One and Virgin Mobile are just starting- a good example of convergence and one which Ofcom facilitated by changing the multiplex licence to let it go ahead. The current 20% ceiling on data services on DAB multiplexes may well be artificially low. And if the demand takes off we are ready to recommend raising it to 30% or even 40% of total mux capacity.

More space for innovation and convergence will be available in the L-Band spectrum (1452-1492 MHz): 16 blocks of DAB compatible spectrum which we plan to release next year.

Fourthly, at the other end of the range, we have introduced community radio. 15 licences were awarded two weeks ago, and we expect this new tier of radio to be a vibrant and innovative addition to the radio landscape. This is small-scale, not for profit radio with a social purpose as part of its remit. The legislation is clear about these requirements and we take them seriously. Some commercial radio operators I know are nervous about this new sector, and we shall review its impact. However, commercial radio and community radio are different and we are confident that these new stations will generally contribute to the radio market in a positive way. I wonder when and over what timescale will community radio and very local radio meet.

Finally, there is the relaxation of regulation which time, the market and choice is rendering less and less necessary. Some regulation remains necessary, particularly in analogue, because Parliament has required us to award the spectrum on a basis which appeals to a variety of tastes and interests. Fundamental to our approach is a shift from the detailed top-down regulation of inputs to a focus on the operator’s commitment to the ‘sound’ and character of their stations, a focus on what the audience actually gets; combined with greater self-regulation by the industry.

What has that meant in practice? In our Radio Review we have proposed moving away from input regulation by:

- allowing news hubs: what matters is that news reflects local concerns and local editorial priorities, not the location where it is processed or read from;

- removing the limits on automation since those limits are no longer a proxy for quality. It is up to stations to decide providing they meet their format and localness obligations;

- clarifying the rules on networking, allowing more syndication thus allowing the costs of higher quality or more expensive original content to be shared across more stations.

The corollary is a greater emphasis in analogue on the operator’s commitment to the format that they have proposed. We think it is right to say to licensees in the period immediately after the award “that’s what you bid for; deliver it or hand the licence back”. And to hold licensees to the format that they themselves have proposed for a reasonable period. But that should not be frozen forever in aspic, and, over time, formats should be able to evolve more flexibly to respond to changing local tastes, the changing availability of digital and other new media services (and, dare it be said, changes in what the BBC does).

Will the mindset that requires format regulation still be there once digital capacity and choice renders formats unnecessary?

But while we may guide on localness, we do not prescribe how to achieve it. Station owners and operators are better placed than the London based regulator on how best to meet local tastes and interests. A good example is xfm’s successful bid for Manchester which builds on the distinctive strengths of the Manchester music scene which commands a firm local following.

That in sum is what we are doing, and I might add in parenthesis doing at nearly £1 million lower cost in cash terms than the last year of the old Radio Authority.
It is radio regulation coming of age.

Not least because those regulatory issues which used to be life and death for the industry (or at least worth a good old-fashioned row) now pale into the background by comparison with the challenges and opportunities of the market, over which the regulator has very little influence either for good or for ill. Rightly, the radio industry is now the author of its own destiny.

It is to those challenges that I would like to turn in my closing remarks.

Challenges and Opportunities for the Radio Industry

Audiences

The first issue is what are audiences saying – and more importantly doing?

In terms of hours, after several years of steadily rising radio listening, this last year was flat. Of greater concern to the commercial sector was that, within that total, the BBC was up a bit a bit; commercial was down a bit. But those headline totals mask some wider shifts. National stations, particularly the commercial nationals [Talk, Virgin, Classic], have had a good year (up 12%) but local stations, both BBC and commercial, are down.

The biggest hit has been taken by chart-led mainstream music. In part this reflects the generic decline of the chart from something central to mass audience judgements on popular music, to a smaller part of the overall music scene. The gradual decline in main-stream chart radio listening over the past 5 years has accelerated: from 40% of commercial listening at the start of the decade, to 30% and still falling. Some interesting parallels with main-stream, mass audience television; but unlike mass television there are no rising power ratios to sustain the value of radio advertising.

Apart from the national stations the big gainers are the more specialist digital-only stations which now represent over 8% of commercial listening. The biggest gainers in station (as opposed to platform) terms and those who seem to have moved most aggressively into the use of new forms of distribution- be they streaming or PodCasting- are those radio groups whose portfolios were more weighted towards AM radio. Perhaps understandable: AM revenues and listening are already in decline. When there is a burning bridge the incentives to cross rapidly to the other side are more intense than when conditions are more stable. For those groups strong in FM radio there is the added challenge that a too-rapid embrace of digital-only and new media simply means added cost while cannibalising existing revenues.

The other big audience challenge is youth. Most of my generation grew up with radio. Memories of that first car, that first cigarette, that first pint of heavy, are for many of us inextricably bound up with particular pieces of music, particular radio programmes or DJs. Today, while television can still capture children up to their early teens and the challenge is simply getting them back in their twenties, for radio, is there a generation growing up who are simply not introduced to the habit and may thus not get the point as they mature. Two thirds of today’s young mobile users have their phones on and within easy reach for between 21 and 24 hours a day. I earnestly hope that radio- possibly using the mobile as delivery medium - can capture at least some of that time.

The technology

I have touched already on some of the technology opportunities and challenges which face the radio industry. For most in the industry, the most immediate technology question is ‘what about DAB?’ In particular, what about the smaller stations’ transition to digital.

The last time I gave a radio speech, in November last, DAB penetration stood at 670,000 sets. Today it stands at north of one and a half million. The DRDB forecast that nearly a third of UK households will have at least one DAB set by 2008. The points I made then about ‘great product, need to hustle the marketing’ were probably obvious: you had already got and were working on the message. Whatever, it seems to be working and needs to continue if DAB is not to be bypassed rather than complemented by broadband and other forms of digital.

There is always some worry when Ofcom says it is technology neutral. Does that mean that we do not care about DAB? The answer is of course we care, and I certainly do. The best answer to worries about whether it will remain the leading European standard is to make it a commercial success in the UK market. We will do our bit but we cannot and should not try to make that happen at the expense of other options. The first DAB national commercial multiplexes were licensed 6 years ago and there are 46 local multiplexes. DAB has a pretty substantial head start

The fact that manufacturers are now talking seriously of a combined chip that offers both DAB and the Digital Radio Mondiale standard, is good news. DRM is a complementary technology. And combined DAB/DRM sets in volume production could well assist the universal adoption of digital radio. How? It could overcome the economic hurdle facing the smaller stations making the transition to digital since DRM can be allocated on a single channel rather than single multiplex basis.

We are already working with Chris Smith’s Digital Radio Development Bureau’s task force to explore possible routes to an all digital future, including for smaller stations.

So if industry shares our analysis, we will look towards releasing some of the currently under-used short-wave or, even better, medium wave spectrum to enable such combined DAB/DRM chip radio sets; and work with our European partners to provide the clarity of direction, Europe-wide, to give the chip manufacturers the certainty to manufacture in volume and hence at low-cost.

The Money (and the BBC)

The other big question is, as ever, the money. After years of steadily rising advertising revenues and an increasing share of the total pot, radio has of late stagnated although more so for some than for others. This year it may even reverse. Some of that is down to special factors: the decline in retail consumer advertising, which is the mainspring of radio revenues. Plus a General Election which dints the CoI’s spend. When your biggest advertiser has several weeks without spending it is bound to cause a blip.

The big question is whether it is cyclical or secular, 2004 was to radio what 2003 was to ad-funded television: the year a rival overtook your traditional revenues. In television it was subscription. In radio it was internet advertising. In radio the picture may be more rosy- or at least more reversible: radio imported a set of TV advertising practices in recent years: share deals and agency deals. But now may need to think about some corollaries: a floor mechanism like SAP, a fixed advertising inventory and trading in sub-demographics rather than just ‘all adults’.

The internet scores because the measurement (paradoxically) is, if not more accurate, then more believed. The changes that RAJAR are currently considering are welcome, but they will need to ensure that they deliver more robust, up to date and granular ad delivery statistics. Only if they do the business will the investments in digital only stations and digital radio listening begin to repay the proper investment that the risk-takers have made. Certainly there is an oddity today that 8% of listening to digital-only stations converts into only £1million of advertising revenue.

Lastly, no radio speech would be complete without reference to the BBC. After all it represents 54% of adult radio listening. As David Brent would say: “BBC Radio is a success story. Fact.” Not merely in terms of listenership but in terms of building public value. BBC Radio is the bit of the BBC that is passionately loved. It is- despite being ‘free’ - what many people actually believe the licence fee is for; and it is undoubtedly the bit of the BBC that Charter-approving politicians endorse most.

It is a major conditioner of the market spending £610 million last year on radio (compared with £564 million by the commercial sector). Investment in its digital stations ranges from £1.7m to £5 million and is a major investor in online radio, streamed through Radio Player and soon PodCast.

In many ways that is a good thing: it has certainly helped drive digital. For the commercial sector, understandably ambivalent, that may be a double edged benefit.

A successful, high-investing BBC of course, makes the life of commercial radio harder. They have some gripes. Firstly, that BBC radio can change format at will. Radio 2 (and now Radio One daytime) are cited. As is cross-promotion.

First format change: Radio 2 used to cater for a 60+ audience. The commercial sector was happy. But were listeners? And has public value been increased by the changes? The answer may be yes even if the commercial sector has been discomfited.

The answer on format change is three-fold: Firstly the BBC Governors have themselves proposed service contracts to keep a tighter rein on format change; secondly we have proposed in our response to the Green Paper that “substantial” changes to existing services as well as new services should be subject to independent market impact assessments by Ofcom. And thirdly, as I have said we recognise that commercial formats need, over time, freedom to evolve to meet changing demands.

Lastly, to cross-promotion. A long-standing gripe. We can, and probably should, do little about the BBC being a great content aggregator. As long as it generates genuine public value. But again, we can level up. Increasingly, radio companies are part of multi-media commercial players. If commercial TV wants to cross promote commercial radio that is part of the same group then that too can be building public value and we will review the rules that we inherited to see whether there are unnecessary obstacles to reasonable cross promotion between television and radio in the commercial sector.

Finally, Ladies and Gentlemen, there is always more to say about the BBC and about radio more widely. That will, I am sure, come out in the Q&A. Let me finish with one thought. As radio and the world around it goes digital the issue is whether it is better to trade certainty against survival and growth; or security against survival and growth. Or, to put it more colourfully would you sooner be one of Henry VIII’s wives or one of Charles II’s mistresses? The only certainty is that certainty is not an option, and in my experience once you have got ahead of the technology it is brands, content, packaging and services that combine to create lasting differentiation.

We will do what we can to help ensure a radio industry that is more accessible, has more routes to market, has more freedom and more capacity, so that its path to digital is one of survival and growth.

Now, I believe Matt Wells is going to lead a gentle grilling on those matters I have covered and - if he is as forensic here as he is when I see him on BSkyB - then more likely on those that I have not.

Thank you.