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01|11|06

Ofcom Annual Lecture - David Currie, 1 November 2006

Good Afternoon and welcome to Ofcom’s Annual lecture based on the data in our yearly bumper book of facts, the Communications Market Report. The annual lecture is fast becoming another of Ofcom’s newly-minted ‘traditions’.

I am delighted to be here to speak to you this afternoon and I would like to thank Derek Wyatt for kindly hosting this event.

Last year’s lecture was delivered by our then Senior Partner for Strategy, Ed Richards. This time, I agreed to give the lecture, because when the invitations were sent out we were between chief executives and did not know who it would be or even that we would by now have completed the appointments process. I am very pleased that we have, and that last year’s lecturer, Ed, is now Ofcom’s very recently appointed Chief Executive.

Another difference is that last year, I am reliably informed, Ed accompanied his lecture with all-singing, all-dancing colour charts and graphs. As the Communications Market report shows, technology has continued to develop apace. So it’s a good thing we have a digitally-adept CEO. Unfortunately, Ofcom has, in this respect at least, a very analogue Chairman. So I will deliver this year’s lecture from old-fashioned notes and not risk anything fancy in the new media line. A particular example of the risk of a digital divide – a key theme in this year’s report.

Lower Prices

The most encouraging trend in the communications market over the past year is that consumers are getting more for their money. For the first time in five years the average household spend on communications has fallen.

What makes this more significant is that this has occurred despite the fact that consumers are using more services – 3.8 million more broadband connections and 5.8 million more mobile connections. Prices have fallen and I anticipate that they will continue to do so.

More, Faster Broadband

In a fast moving sector the fastest development of all over the last year has been the growth of broadband. By the end of March 2006 43% of homes in the UK had a broadband connection compared to 39% in 2005.

The acceleration of the take-up of broadband, accompanied as it is by increasing speeds and falling prices, is rightly exciting for the richness of content broadband-based services are able to deliver.

Convergence is therefore genuinely with us and I pay tribute to parliament for putting in place a converged regulator ahead of that.

A further development is of course the bundling of services, to offer combinations of TV, broadband, fixed line and mobile together for one price.

Intensified competition in this area has even given rise to “free” broadband such as that offered to Carphone Warehouse customers who took the fixed line rental plus calls bundle and Sky’s offer of free broadband to pay TV subscribers.

There have been consumer issues, as would be expected in a newly developed market, and problems with consumer switching have been to the fore. But we have been addressing them in conjunction with providers and I am confident that the market will rapidly settle down.

A key driver in broadband’s growth has been the changes to the regime for local loop unbundling, allowing operators to take over local exchange lines from BT. Within broadband, local loop unbundling is growing at 30,000 homes a week.

In turn this has been accelerated by the full operational separation of BT brought about by Ofcom last year. This provides Equality of Input - access to infrastructure for BT and its competitors on the same terms.

One of the future challenges for access regulation, including LLU, will arise following the roll-out of Next Generation Access Networks. These networks are upgrades to the existing copper based access networks, and could take the form of a number of technologies including optical fibre, cable, terrestrial fixed or mobile wireless services, or upgrades to the current copper network.

The key task ahead is for Ofcom to refit Equality of input for next generation access networks. But we believe that the principles we laid out in the Telecoms Strategic Review remain relevant to this task, namely:

To ensure efficient investment incentives are not distorted, particularly as a result of disproportionate regulation; and
To promote competition at the deepest levels of infrastructure where it will be effective and sustainable

Spectrum Liberalisation

One of Ofcom’s statutory duties is to ensure the optimal use of the UK’s valuable radio spectrum.

The benefits are difficult to overstate. In its own right the spectrum is valued at many billions of pounds and accounts for hundreds of thousands of jobs – and the indirect benefits of spectrum in other sectors are probably many times more.

Spectrum is a key input into many services, not just mobile voice and broadcasting. Technologies such as Wi-max – and many more - offer the prospect of nomadic or mobile broadband, Voice over IP and other media rich services.

Ofcom’s vision for spectrum management, is that market forces should play an increasing role in determining how spectrum is used, in contrast to the command and control approach of the past.

This brings maximum efficiency in spectrum use. We have a big programme for making new spectrum available to the market and 400 MHz of prime spectrum under 3Ghz will be awarded over the next three years.

This is a very substantial quantity of spectrum that will be an enormus enabler for new services and platforms and potentially a massive boost for the UK economy.

And then there are the spectrum rights that are already assigned, and what happens when the winner of an auction finds their big idea isn’t all it seemed – spectrum trading.

What we can do is make it easier for demand for spectrum to be fulfilled more efficiently when the next big thing does emerge.

By encouraging trading and liberalising licences it will become simpler, cheaper and quicker for new applications and technologies to emerge, faster for innovative companies to bring new services to market, and quicker for consumers to benefit from them.

Young consumers and new media

We need only look at how the consumption patterns of tomorrow’s electorate are changing to understand the true worth of a flexible system of spectrum allocation

While it is true that usage of media, telecoms and technology has always varied by age, this difference has become more marked over the past year. Younger people have embraced the multitude of new technologies and means of communication, at the expense of ‘traditional’ platforms and services.

You can glean from our Communications Market Report that young people are now watching seven hours per week less television than the average. And within that they watch less public-service broadcasting than ever, opting instead for newer digital channels. In radio too, this age group is listening to less analogue and local commercial output than average and is instead replacing it with digital listening and output from the newer national commercial services.

16-24 year olds also spend more time online, use social networking websites much more for keeping up contacts and send 42 more text message per week than the average.

The ‘on-demand’ delivery of services is becoming a reality for younger consumers;

they want to contact their friends whenever and however is most convenient;
they expect to watch TV programmes and listen to radio stations which interest them, rather than just to view what’s on at the time;
they want to create their own online presence, and connect directly to others with similar tastes and interests.
they feel comfortable creating and then distributing their own content wherever they are;

Now, that age group have always tended to be more moving targets and, thus for the advertisers, hard to reach. TV broadcasters used to rely on the ‘grey curve’: as that cohort settled down and had families they had less disposable income, stayed in more and, so, watched more TV.

But many have become increasingly sceptical about whether the grey curve will kick in this time. In this case, where the young audience has gone, the mainstream audience may go in the future.

We are not yet at the tipping point but I predict that by 2012 when digital switch-over has happened successfully and the London Olympics are being staged that cohort will be parents with young children for whom broadcast television will have ceased to be the lead medium.

Consumers’ and citizens’ experiences, their needs and their interests are going to be more fragmented, more different and more diverse.

Inevitably, these changes will cause immense disruption to business models. As broadcast television overtook radio, then newspapers, so internet-delivered video content will overtake broadcast television. And advertising will follow suit, causing shifts in traditional business models.

Further constructive disruption will be caused by Voice over IP presenting challenges to established business models for fixed telephony and driving mobile and fixed line communications together.

This is bound to cause anxiety for consumers:

choosing a bundled service from the multitude offered is far more complex than renting a fixed line from a monopoly supplier.
automation in calling centres has precipitated a rise in silent calls which although not malicious can cause consumers considerable distress.
switching telecoms supplier is not always as straightforward as it should be and there have been problems in the market with slamming where customers are transferred to another supplier without their permission. Such problems are not necessarily surprising in a newly created market, but they must be fixed.

We are committed to taking direct regulatory action where it is needed. We have tackled the most prolific slammers in the market and we are now taking action against the larger companies who still offending.

Some groups of consumers such as older people, those living in rural areas and disabled customers are particularly vulnerable in the new communications landscape. Here we will promote media literacy to ensure that people can access, understand and interpret the communications services available to them.

AVMS

The public concern about standards in content has provoked the debate taking place in Brussels around the draft Audio Visual Media Services Directive. The concept being promoted there is that of platform neutrality: standards applied in the same way, regardless of platform.

Platform neutrality is a seductive but overly simplistic concept: standards regulation needs to reflect not just content, but context as well. In this case, that is the degree of control the viewer has about what is watched; and the degree to which the aggregator, such as the electronic programme guide you find on a Sky+ box, can control the content.

This is not just a matter of principles, it’s also about practicalities. A channel packager is licensed and can, therefore, be state regulated. Someone who has no known domicile or name cannot be, and we should not pretend that they can.

Instead, we need to recognise that there are vital distinctions that can be drawn in TV delivery platforms.

At one end there are open platforms like the internet.

At the other end there is free-to-air broadcast television.

The feasibility of and precedent for regulation on both platforms is clear.

Between these two extremes, the world of digital distribution has created a middle ground. It looks and sounds like broadcast telly, but is delivered differently.

Unlike the open internet, however, it is delivered on ‘boundaried’ platforms, where a single operator has oversight of the content that is offered.

We can imagine a limited extension to the scope of the existing directive, to those things, like video on demand, which have always been regulated in the UK by self-regulatory schemes like ATVOD.

I agree with Rick Haythornthwaite, Chair of the Better Regulation Commission in his recent report on risk and regulation when he stated that classic regulation had become the “default response” and that we must seek “a new understanding between government, regulators, the media and the public that we all share a responsibility for managing risk”. I would of course add industry into the mix here to take their share of responsibility.

AVMS is an important issue for Parliament because this directive will soon land at its door to become UK law. The degree of flexibility that we are allowed in the regulation of new media will be crucial to the future economic success of the communications industry.

Future of PSB

In a post-switchover world where much audiovisual content will be delivered online the methods by which we deliver Public Service Broadcasting will also have to change.

It is clear that the market can – and in the future increasingly will – provide content that meets PSB purposes. Channels such as Sky News, Arts World and the History Channel are just some examples in the traditional TV world.

So the market can deliver but even in the future it may not deliver enough.

It will become impossible to impose all but minimal PSB obligations on broadcasters in exchange for licences after digital switchover because those licences will no longer be scarce.

In fact it is clear that this analogue compact will come under pressure and break down. The pressures on PSB that we first highlighted in the PSB Review have accelerated faster than we anticipated. In 2006 TV advertising overall is likely to be 5% down, more for ITV.

Of course the future of PSB is matter for Parliament, our role is to provide the analysis and propose options to ensure that viewers can continue to enjoy PSB.

One of the options we proposed last year was the creation of a new publicly funded organisation – which we called the Public Service Publisher (PSP) – to provide competition in public service new media.

It would commission public service content but not be tied to a traditional linear TV model and it could distribute public service content across platforms.

With Government support we have recently begun to develop the PSP concept further and have involved a number of creative people from new media to help us understand what the PSP could do.

Radio

Radio, particularly local radio is under the similar pressures to PSB. The market is changing faster than any other in the media industry but the regulatory framework hasn’t moved at the same pace. In fact the Comms Act didn’t really change radio regulation at all.

The question we as regulators must ask ourselves is whether regulation is the best way to achieve the public policy goals that we have for localness in radio.

The good news in radio is that with convergence consumer choice over how they listen and what they listen to is increasing rapidly. DAB after a slow start is now offering more choice for consumers. Many people are listening on freeview or over the internet. We will be advertising the second national digital multiplex plus several local muxs by the end of the year.

Implications for politics

So what does all this mean for the practice of politics?

The proliferation of new sources of information and content has precipitated a decline in trust for television and a decline in local news programming. But in parallel with this, modern technology has arguably facilitated a more informed electorate.

The rise of social networking websites and weblogs is enabling the public to debate every issue instantly and directly, without the need for third party interlocutors.

That raises the very real prospect of a citizenry that is more – not less – engaged in political discourse, and who stimulate and participate in the debate instead of passively observing its outcomes.

Already, political blogs independent of any party such as Iain Dale’s diary, are recording impressive readership figures. Much of the reason for this is the capacity of readers to join in the discussion, and link these discussions to other debates.

A future in which communications technology allows more people to join in your discussions and influence your deliberations is bound to be of interest in an age where disengagement in politics is the principal cause of concern.

The question is how politicians respond to and engage with a new world where press releases to the local newspaper and appearing on the local news may not be the principal way of communicating with your constituents. Just as the linear model of TV delivery is under pressure from newer ‘on-demand’ platforms, so the linear model of broadcast and receive in political communication may have to be revised.

Such a shift raises issues of its own, such as ensuring that participation is not open disproportionately to those who are more media literate, or who for other reasons can make greater use of the technology. But the new communications landscape offers huge opportunity, and I believe passionately that the benefits to our economy, to society and to our political system can be immense provided that we open ourselves to the opportunities of the new digital age.

Thank you