Home > Media and Analysts > Speeches and Presentations > 2007 > Jan > 24 January 2007

24|01|07

Speech By Peter Davies To The Radio Centre Conference

I want to talk today about some of the major challenges facing the radio industry. But I thought I would start with a brief look backwards.

Ofcom has now been around for just over 3 years – we started at the end of 2003 – not very long in the overall scheme of things or even in the history of commercial radio, so I thought it would be interesting to take a look back over the past three years to see what, if anything, has changed in the world of radio since Ofcom came into being.

Well, during that time David Mansfield and Keith Pringle have left GCap, Fru Hazlitt has come … and gone at Virgin, Chris Moyles replaced Sara Cox on the Radio 1 breakfast show and in the London breakfast market, Johnny Vaughan replaced Chris Tarrant, Jamie Theakston replaced Jono Coleman and Christian O’Connell moved from Xfm to Virgin.

Ofcom has licensed 34 new FM local commercial stations, including Xfm in Manchester , Brunel in Swindon , Original in the Solent region, Seven FM in Ballymena, Swansea Bay Radio, and Talk 107 in Edinburgh. Digital line-ups have changed with some stations such as Primetime disappearing and new ones like Chill and the Jazz launching.

And of course we have had lots of consolidation – GWR merged with Capital and Emap took over SRH. But they weren’t the only changes. I’m going to test you now… Who would like to guess what percentage of the 300 UK commercial stations have changed hands in the past three years.

The answer is 50% - 151 of the 300 stations – apart from the two big deals I mentioned, other deals included UTV buying the Wireless Group, Northern Media buying the Q Network in Northern Ireland, Chrysalis buying Century in the East Midlands, Tindle Radio acquiring stations from TLRC and Milestone and most recently, GMG snapping up the two remaining Century stations and Saga Radio. So this is certainly not a static industry.

But all of that, while important, is relatively superficial compared to some of the major shifts that are underway.

Ofcom’s primary concern in radio is to look after the interests of the listeners. We have duties to ensure there is a wide range and diversity of radio services across the UK catering for local tastes and interests and that an appropriate amount of local material is broadcast on commercial local radio, with a suitable proportion of it locally made

We do that by licensing stations – AM, FM, DAB – and by ensuring that stations keep to their Formats - the one page document that every station has, written by the station itself and included in its licence. We also have duties to protect listeners from harm and offence and to ensure that they are being treated fairly and that their privacy is being respected. That we do through the Ofcom Broadcasting Code.

So part of our role is a policing one, but part of it is also making sure that commercial radio can compete and flourish, without too much regulation, because without a strong, healthy commercial radio sector, stations won’t be in a position to offer listeners the best possible service and the things that Ofcom has a duty to ensure are provided.

Last November, we published a discussion document on the Future of Radio. The reason we want to begin a debate now about the future is because we believe that those major shifts I mentioned will threaten the very existence of commercial radio as it currently operates and that if we are to protect the interest of listeners then the structure of the industry and the way it is regulated will need to change.

We believe there are three main changes underway.

1. COMPETITION FROM OTHER TECHNOLOGIES

First of all, competition for traditional analogue radio from other technologies is growing. While overall listening hours have been reasonably constant and half the population still listens to, and values, local commercial radio, the number of young adults who listen to radio is beginning to fall as they consume media in new ways via the internet (for myspace or youtube for example), or by playing computer games or listening to their iPods. This group is becoming disengaged from traditional media. For example, new Ofcom research shows that the proportion of 16-24 year olds who say they use radio to listen to the news has fallen from 60% in 2002 to just 44% in 2006.

2. RADIO ADVERTISING STALLING

Secondly, radio advertising is stalling as advertisers switch to the internet. Although overall radio listening is constant, radio advertising growth has stalled both in absolute terms and as a share of total advertising. We believe this is being partly driven by a process of structural adjustment in favour of new media; a trend we believe will continue, putting huge pressure on the commercial radio sector – and in particular on local stations.

40% of all small local commercial stations currently lose money. For example, on average, stations covering between 50,000 and 100,000 people make an annual loss of £50,000. Of course there are some notable exceptions to that but in general, that position is just not sustainable in the long-term. While l arger stations are still making money, even they are under pressure. Commercial radio revenues fell by 4.5% (£m) in the year to September 2006; local revenues fell by 9%, national revenues by 5% both offset by growth in sponsorship income. Annual revenues have fallen in each of the last 6 quarters. Commercial radio’s share of total display advertising fell to 6.2% (its lowest since 2000).

In 2004, internet advertising overtook radio and is forecast to become the third largest advertising sector, behind regional newspapers and TV, in 2007.

As far as radio is concerned, these trends may be cyclical to some extent and there may be more that radio can do to win new revenues, such as a move from spot advertising to sponsorship or the sale of music downloads, but a straw poll of advertising agencies suggests they have little optimism that commercial radio can participate in the growing new media sector of marketing investment.

3. DIGITAL LISTENING INCREASING

The third major change is the increase in digital listening. Digital radio is taking an increasing share of radio listening putting greater pressure on local analogue stations.

When Ofcom began, less than 1% of homes had DAB. By Quarter 3 2006 that had risen to 13%. Listening on other digital platforms has also grown rapidly – At the end of 2003 some 20% of adults sometimes listened to radio via digital TV. By September 2006 that figure had almost doubled to 39%.

A s of June 2006, 16% of all commercial radio listening was via digital platforms: based on current trends, we forecast that this will grow to around 90% in ten years time. Digital listening is the main reason why national commercial stations are increasing share while local commercial stations overall are losing share.

This means that the pattern of local analogue stations, which has been built-up over a number of years may have been sustainable in a steady state world, but as new platforms emerge the financial pressures on smaller stations in particular are growing. There is a real threat to the survival of those (particularly smaller) commercial radio stations not carried on digital platforms.

WHAT OPPORTUNITIES ARE THERE?

All three of these trends create serious challenges for commercial radio.

In its response to our discussion document, the BBC argued that “a failure by the commercial sector to invest in content over the past few years may be partly responsible for their relative decline in audience share”. That’s easy to say when your own income is very much larger than the competitors and is not subject to commercial fluctuations. Nevertheless, I think we would all agree - and have always known - that offering listeners what they want - high quality programming catering for different tastes and interests – is the key to success. It’s just that that becomes more and more difficult when you are under increasing financial pressure. Innovation and creativity become ever more important in attracting and maintaining listeners’ attention.

But there are no easy answers and it is certainly not for Ofcom to tell commercial radio how to programme its stations or run its business. Every station is different and each will have its own keys to success.

For some stations, localness is paramount. By keeping in touch with and involving their local communities, they win their loyalty.

For other stations, the focus may be the type of music they play or a key demographic group. In a world of increasing competition, brands become increasingly important, whether that is a local brand, such as Radio City or Spire FM, or a national brand (albeit often with local output) , such as Xfm, Kiss or Galaxy, which can focus on key audiences and attract advertisers. Commercial radio has some great brands and there is scope to build these and to develop new ones.

One way of doing this of course is on digital radio. Here, there are opportunities for the traditional national brands, such as Classic FM, TalkSport, Virgin and for newer ones: Oneword, the Jazz and Planet Rock, Another way to build brands on digital radio is by developing quasi-national brands by building a patchwork of local stations, such as Kiss, Xfm, the Arrow, Chill and Real Radio. And of course many of these are not only available on DAB, they are available on numerous different platforms – Sky, Freeview, cable and the internet.

Such national or quasi-national brands allow commercial radio to develop ways to offer something new to listeners and compete against the BBC and that is the main reason why we have been so keen on licensing a second national commercial DAB multiplex

Not only does digital technology offer far more choice for listeners, and opportunities for commercial radio, it also offers opportunities for new revenue streams, from podcasts, to the ability to buy and download music, to new ways for advertisers to reach audiences through screen displays.

WHAT DOES THIS MEAN FOR REGULATION?

But what about local analogue stations? – What future do they have and what can be done to ensure their continued viability in this world of increasing competition?

At the moment, analogue local commercial radio is regulated far more heavily than DAB radio, in terms of the requirements placed upon it. DAB in turn is regulated far less than radio via other broadcast platforms. And radio via the internet is not regulated at all.

The three trends I have just talked about, taken together, mean that the way that commercial radio has been regulated, particularly in terms of Formats and localness conditions may need to change. We had a large number of responses to our discussion document – over 200 in fact – and there was general support for us to consider these issues further.

So what is Ofcom planning to do about it? Well at the moment we are looking at all the options and plan to publish our proposals in a couple of months for public consultation. The sorts of things we will consider are whether current analogue Formats are too detailed; and whether the amount of local programming stations are required to produce is sustainable or whether they should be given greater flexibility. But we need to balance the pressure for deregulation, to ensure that commercial radio remains strong, against the need to protect the interest of listeners. There is also a question about when any such changes should be introduced.

One thing we have already allowed in certain circumstances is co-location. We said a couple of years ago that what matters most is what comes out of the speaker rather than how the programme is made, but we said that it was still desirable for local material to be locally made, but that we would allow co-location of stations in exceptional circumstances. Of course some people will argue that local programmes should always be locally made because that is the only way that a station can keep in touch with its audience. We agree that this is desirable, but unfortunately the commercial realities of modern radio don’t always allow that. We believe that it is generally more important to maintain local programming, even if that means the programmes come from a studio up the road, rather than see the station disappear completely. So we have set out the sort of things we will consider when we get a request from stations to co-locate – and it is up to the stations involved to argue their case and set out their reasoning as to why they want to co-locate.

The first thing is the size of the station. Generally we believe there may be a stronger case for co-location where at least one of the stations has a licensed area with a population of fewer than 250,000, and especially those under 100,000, although we would not rule out requests from larger stations.

Secondly we will consider the distance between the stations and the affinity between the areas in question. There is likely to be a stronger case for co-location where the stations concerned are not too far apart geographically and are able to demonstrate a cultural affinity between the two areas.

Thirdly we will look at the station’ financial position. There may be a stronger case for co-location where stations can demonstrate that it is required to ensure the financial viability of the stations concerned.

One of the other things we plan to look at in our review is the ownership rules. At the moment there are quite complex rules about who can own stations in which areas, depending on how many stations there are and how much they overlap each other. There are also separate rules for analogue and digital station ownership and for DAB multiplex ownership. We plan to look at these to see if they can be simplified.

FREEING UP OF SPECTRUM

Apart from all these trends that I have talked about, there is a fourth reason for looking at the future of radio now.

Very soon, Ofcom will have to begin the process of re-advertising existing analogue FM and AM radio licences. This process will take a number of years, as each station’s licence expires depending upon when it was originally licensed. Existing licensees are entitled by legislation to a 4 year extension plus a 12 year renewal if they are carried on DAB. As new local DAB multiplexes are launched, local stations gaining carriage on those multiplexes will become eligible for renewal.

So, at present, all FM local licences will expire between 2009 and 2027, but the bulk of licences expire between 2010 and 2015.

When these are re-advertised, new licences would last for up to 12 years with the potential for a further 12 year renewal for those stations which also provide a station on the relevant local DAB multiplex.

The question we have to ask is, if digital listening is really going to account for 90% of all listening in ten years time, so hardly anybody is listening to these stations on FM any more, is it really sensible to carry on licensing analogue FM stations in 2010 for a period which could tie-up that valuable spectrum until 2034.

We know that there are other potential uses for that spectrum – what we don’t know yet, and don’t want to even guess at, is what the best use for that spectrum might be – it could be mobile TV, it could be more digital radio, it could still be FM radio (perhaps for community radio or smaller stations which can’t go digital), or it could be something that nobody has thought of yet. At this stage, it doesn’t matter.

Ofcom’s general approach is to let the market decide on the best use of spectrum unless there are strong public policy reasons for allocating it for specific uses. It is too soon to know whether there might be such specific uses for any released FM spectrum. But what we do know is that if we carry on re-licensing FM radio as current licences expire, we will never have the opportunity to see whether there are other options. Some of those alternative uses may require the FM spectrum to be divided in different ways, and so to achieve maximum flexibility would require most or all licences to expire around the same time. That is why one of the things we are looking at is how to give ourselves – i.e. the UK – the flexibility to use it for other things, perhaps by aligning the end-dates of most if not all licences. How we might do that will be the subject of our public consultation in a couple of months.

And of course that raises the potential for a switch-off of FM, or at least for an end to digital / analogue simulcasting, for both commercial radio and the BBC. Any future policy for FM use across the UK would also have to be discussed with the BBC and a co-ordinated approach agreed. It is too soon to name a date, but we need to start a debate now about the factors that would have to be taken into account in setting a date.

MEDIUM WAVE

For Medium Wave AM stations the situation is slightly different. There is the same process of re-licensing, the bulk of which happens between 2013 and 2015, although the national licences Virgin and TalkSport expire before that. This will raise the same questions as for FM about the licensing process and the length of the licences.

For the national licences in particular, there are urgent questions to be answered. Under the existing legislation, when they expire in 2012, they would be auctioned off to the highest bidder – subject to some programming restrictions – for AM services. If we want to do anything different to that, we need to start thinking about it now.

But on Medium Wave the alternative uses are more limited – the main one being DRM, or Digital Radio Mondiale, the digital radio technology for Medium Wave. The Medium Wave spectrum we have available in the UK could offer at least half a dozen national, digital quality radio services and a host of local digital stations. On Medium Wave DRM is likely to be a one or two station per frequency service and so coverage areas can be tailored much more easily to individual local station requirements than DAB. So while DAB is the cornerstone of digital radio in the UK , DRM could offer a complement to DAB.

On Medium Wave there is much less need to align licence end dates as, for technical reasons, the spectrum cannot be divided in different ways and alternative technologies can make use of it earlier. Also, listening to AM stations has been declining rapidly in recent years – with notable exceptions such as TalkSport, Radio 5 Live and the Asian stations. In 2006, listening to stations on AM was just 3.8% of all radio listening – and that figure includes listening to those stations on digital platforms. It may therefore be possible to free-up Medium Wave spectrum for alternative uses at an earlier date than for FM.

Much more work is needed before any decisions on these issues are taken including a full cost benefit analysis and there would be a full public consultation.

SMALLER STATIONS

One of the issues in considering the future licensing programme and any potential switch to digital is the question of smaller stations.

DAB is currently too expensive for many of the smaller stations, and there is sometimes no room for them on the existing local multiplex, which often covers a much larger area than the station’s own coverage area.

At the moment there is the fear of being left behind in what some see as the FM backwater which digital listeners will never switch back too.

We have been aware of this issue for a long time but we still don’t have the solutions. We want to facilitate a route to digital broadcasting for these stations, but it is really important to point out that no local station has a guaranteed right to digital migration. However a number of possibilities are emerging which may help smaller stations:

The first is that DRM will offer a solution. DRM sets are now starting to come onto the market and in time, DRM could be built into every new digital set.

A second possibility is simply to stay on FM, but for the vast majority of sets to be platform-invisible – that is they would have a single menu of stations covering DAB, DRM and FM and that the technology they are using and the waveband they broadcast on would be invisible and irrelevant to the listener.

A third possibility is that new coding on DAB (of which more in a minute) will offer much more capacity on existing multiplexes, so cutting the cost per station and providing room for those who cannot gain carriage today. This solution would also require new sets.

What all of these possibilities require is for the radio industry, both commercial and BBC to work together through the DRDB to persuade manufacturers to produce sets which are future proof and which do all of those things – combining all standards of DAB, DRM and FM – and maybe even wi-fi radio - into a single seamless menu. This may not be quite as much of a pipe dream as it sounds as the benefits for manufacturers are great too. As the rest of Europe wakes up to digital radio, with France and Germany both about to re-launch DAB using new coding schemes and many countries interested in DRM, there is the possibility of creating a new mass market internationally for such sets. (For the same reasons we may even see digital radio finally becoming more ubiquitous in cars). But this solution will require major effort on the part of the industry and Ofcom is willing to play its part.

DAB SOUND QUALITY

That brings me on to the question of sound quality on DAB. Of the 210 responses we received to our discussion document on the future of radio, 70% were complaining about sound quality on DAB , arguing that we could not contemplate switching off FM until DAB sound quality improved. It’s worth making three observations on this subject;

Of course we are not yet planning to switch-off FM, but we want to ensure we have the flexibility to do so when the time is right
Given the responses to the discussion document, we decided to carry out our own independent research into DAB sound quality. That research is not yet completed, but early indications are that only a tiny proportion of people are dissatisfied with DAB sound quality and only a tiny percentage think that it is worse than FM.
It is worth setting the record straight on the new DAB coding standard known as AAC . AAC does not necessarily equate to better sound quality. It simply means more can be squeezed into existing capacity. Broadcasters have to make a trade-off between sound quality and the number of stations. With the existing DAB standard that trade-off has been made and the evidence is that they got it about right - most listeners prefer more choice to better sound quality, provided that sound quality is good enough.

With any implementation of AAC, broadcasters would have to make the same trade-off between sound quality and other things as they have with the existing standard. AAC may be used to offer improved sound quality for existing stations, or it may be used to offer an even greater number of stations, or to offer more data services alongside the radio, so there are certainly benefits to it, but the link with sound quality is not automatic.

Other countries, which do not have high DAB take-up as we do can implement AAC now. But for us, the problem is that AAC is not compatible with any existing DAB radio set and no AAC sets will be available until at least the end of this year. So for us to announce now that we are going to adopt AAC would risk stalling DAB sales completely and undermining the reputation of the platform at a time when it is finally taking off.

At some point in the future we may switch some or all services to DAB AAC, but not until the vast majority of sets area equipped to receive such services – another reason for the industry to work with manufacturers now to get future-proof sets into the market as soon as possible.

ILLEGAL BROADCASTING

Finally today, I wanted to say a few words about illegal broadcasters, or pirate radio stations as they are commonly known.

We all know the story of the pirate stations in the 1960s which operated because of a loophole in the law and how Radio 1 was set up to counter the problem, and the loophole was closed. But illegal broadcasters have continued to flourish, regardless of the arrival of commercial radio in the 70s and specific attempts in the 80s and 90s to offer legally the sorts of services the pirates were offering – hence stations like Kiss, Choice and Xfm.

Despite that and despite Ofcom’s efforts to take the illegal broadcasters off air, we estimate that there are currently around 150 illegal broadcasters in the UK , with more than half of them operating in London . At any one time, there are up to 80 illegal broadcasters transmitting within the M25 area, with notable clusters in Harlesden, Stoke Newington, Southwark and Lambeth.

Illegal broadcasting causes problems of interference for listeners who want to hear legitimate stations. It can also have a major impact on those legal stations affected by indirectly or directly reducing their advertising - and of course the illegal broadcasters avoid the obligations the legal broadcasters have, to pay tax, rents, national insurance and licence fees.

Illegal broadcasters have in the past threatened and assaulted neighbours and local authority staff to obtain access to rooftops for transmitter sites and flats for studio locations. Sometimes, to feed the transmitter, the illegal broadcaster will tap into the building's power supply, often by diverting electricity from the lift motor room – in the process putting the lift out of action for the residents. Raids on studios of illegal broadcasters have uncovered weapons, including firearms. Illegal broadcasting also fuels theft: legitimate commercial broadcasters and transmission companies have been targeted by thieves seeking high-quality equipment such as transmitters, encoders and audio processors.

Most serious of all, illegal broadcasters can cause interference to safety-of-life radio networks, such as those used by air traffic control and the fire service. In 2005, Ofcom responded to 41 safety-of-life cases. In these cases, it is normal for Ofcom staff to seize the main transmission equipment as a ‘quick-fix’ to the serious interference issue.

Nevertheless, while Ofcom does not condone illegal broadcasting in any way, we have recently carried out research – to be published shortly – which demonstrates that there is a substantial audience for these services, which is not being catered for by legitimate broadcasters. We need to think about what we can do to find legitimate ways of serving these audiences.

So what is Ofcom doing about it? Well there are a few things we are already doing:

We have allowed some of the smaller stations in London to increase their transmitter powers to counter the interference from illegal stations.

We have advertised, and licensed community radio services across the UK , including London , although very few pirates are interested in the obligations to social gain and training or in the small coverage areas that community radio currently entails.

And of course we continue our enforcement activities, although we have limited resources to do so. The exact nature of the enforcement activity we carry out is based on the nature of the complaint. That could be targeting the advertisers on the illegal service, alongside action against the illegal broadcast station itself or targeting premises owners, advertisers, nightclub events and suppliers of equipment.

In other cases we remove the transmitter, but very often this has limited impact as the studio is in a different location and the station is often on air again within hours. And s et up costs for these stations are minimal: a transmitter costs around £350 and a good-quality studio can be assembled for £2,000. The transmitters are relatively easy to find – it is much harder to find the studios or the people responsible.

Ofcom has a field force of 70 people whose job it is to investigate and take off-air illegal broadcasters. In 2005, Ofcom undertook 770 separate operations against illegal broadcasters, including the seizure of transmitters and raids on illegal broadcasters' studios.

But we realise that enforcement alone will never solve the problem and so we are launching a project to take a fresh look at the possible solutions. We know there are no easy answers and that many things have been tried before, but we will try again.

CONCLUSION

So, to wrap up, we at Ofcom recognise that the industry faces major challenges going forward – from increased competition, from the move to digital, and from illegal broadcasters. We want to do what we can to protect the interests of listeners and to help commercial radio survive and prosper over the coming years.

PETER DAVIES