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1.4 Finance

1.4.1 The balance of industry finance shifts

If VoIP is adopted by the major incumbent service providers of both voice telephony and internet services, it could radically change the revenue and cost structure for these service providers – particularly for the dominant residential voice carrier, BT. This is because VoIP cannot be charged on a traditional “per minute” basis, in the way that many voice calls are charged today. VoIP will mean that voice is carried as packets of data, and will be priced as such – either on a monthly subscription basis (perhaps including usage caps), or, less likely, on a “per capacity” basis – this second scenario is less likely since it would serve to highlight the fact that simple voice traffic over IP is far less bandwidth-hungry than most data transfer, particularly pictures and video.

Aside from VoIP, the voice and internet market are moving towards a flat-rate charging structure in any case. Broadband internet access is almost exclusively charged on a flat monthly subscription basis, sometimes with usage caps; voice calls over both fixed and mobile networks are increasingly being offered as bundled packages that include line rental and a certain amount of calls per month.

In radio and TV, the financing structure has changed less over the past year. TV funding continues to be dominated either by licence fees, advertising revenues, or pay TV subscriptions. One significant move was the introduction of Top Up TV over Freeview, giving subscribers access to a wider selection of channels than the basic Freeview package for a monthly subscription. In addition, Top Up TV is offering its Xtraview ‘sample’ service for £1 per day, which may perhaps herald a move towards more “on demand” pricing of premium content.

In radio, a small number of groups still dominate the UK industry; the BBC takes over half of all UK listening hours, while six groups (counting GWR and Capital separately) take over three quarters of the remaining listening hours. Again, licence fee and advertising are the dominant funding mechanisms.

1.4.2 Growth in broadcasting and telecoms revenues

Revenues reported to Ofcom by operators in the UK communications sector amounted to £55.9bn in 2004, of which £8.6bn was from wholesale telecoms. Ofcom estimates that in 2004 end user spending on regulated communications services was £47.4bn (Figure 1.9), up 6% on 2003. These figures exclude some unreported revenues, notably from installation, maintenance and hardware.

Figure 1.9: UK communications sector revenues
£ bn

Source: Ofcom / licensees / operators / BBC

The increase in communications spend was slightly faster than for the economy as a whole, although revenue as a proportion of GDP was stable at 4.1%. The bulk of the revenue figure (£36.1bn) and the biggest annual rise (£1.8bn) came from telecoms, although television had the fastest revenue growth (up 9% from £9.3bn in 2003 to £10.1bn). Total radio advertising and BBC radio spend increased by 4% to £1.2bn in 2004 (Figure 1.10).

1.4.3 Strong growth in TV advertising, but commercial radio advertising revenues overtaken by internet advertising

The continued upturn in advertising was a key growth driver for the television industry, which generated revenues of over £10bn in 2004 (Figure 1.10). Nevertheless, subscriptions remained the largest single source of revenue for the television industry, ahead of advertising income. Subscriptions rose by 10% in 2004 to £3.6bn, while advertising revenues (NAR) were up 7% at £3.5bn. TV Subscription revenues overtook advertising revenues for the first time in 2003 and the gap between the two was unchanged in 2004.

Figure 1.10: TV revenues 2000 to 2004
£bn

Source: Ofcom / licensees / BBC

The share of the licence fee that Ofcom estimates can be allocated to the BBC’s television services was unchanged at £2.3bn, accounting for 23% of total TV revenues. “Other” revenues (which include program sponsorship, sales from shopping channels, use of premium rate telephony and interactive services) showed the biggest annual increase of all TV revenue streams (up 40%) at around £750m. The majority of ‘other’ TV revenues are made up of TV shopping, interactive services (which include premium rate telephony) and pay-per view.

As Freeview grows it is changing the dynamics of the TV market. E4 became the first channel to move from a pay TV to a free-to-view model in May 2005, showing that future advertising revenues earned by a slot on digital terrestrial television could outweigh pay-TV subscription revenues from inclusion in a basic tier pay TV package. Competition for new Freeview slots is increasingly fierce, with ITV plc and Channel 4 reportedly paying more than £5 million for access to new slots for one year only in early 2005. ITV plc paid £134 million for SDN, one of the multiplex operators that provide capacity for Freeview, despite SDN only having revenues of £3.9 million in 2004.

In 2004, total radio industry revenues (including BBC radio spend) were £1.2bn, an increase of 4% on 2003 (Figure 1.11). Ofcom estimates that there was an increase of 4% in the BBC’s licence fee spend on radio to £0.61bn during 2004 (the basis of reporting in the BBC’s Annual Report changed this year so a direct comparison is not possible). Growth in advertising revenues in the commercial sector was slightly slower at 3%, with revenues of £0.56bn in 2004 compared to £0.54bn in the previous year. The BBC’s spend on radio accounts for 52% of the total size of the radio industry.

Figure 1.11: Growth of UK broadcasting advertising revenues
£bn

Source: Ofcom / licensees

Growth in UK advertising continued in 2004 (figure 9). NAR reported by broadcasters rose 6.6% from £3.7bn to £4.0bn. The biggest growth came from local commercial radio which rose 7.6% to £175m but television also performed well, up 7.4% to £3.5bn. National commercial radio advertising revenues fell by 2.2% in 2004 to £299m (Figure 1.12).

Figure 1.12: UK advertising spend by medium £bn

Source: The Advertising Association

According to The Advertising Association total display advertising grew by 5.3% to £14.0bn in 2004. The internet was the fastest growing advertising medium last year with 46.3% revenue growth. The internet accounted for 4.3% of display advertising during the year, the same proportion as radio and in early 2005 internet advertising exceeded radio advertising for the first time as the increase in residential broadband connections extended reach. The internet accounts for a larger proportion of advertising spending in the UK than in most European countries, reflecting the dominance of the English language on the websites.

(Note: there have been revisions to the Advertising Association’s display advertising data since last year.)

1.4.4 Mobile growth continues as fixed revenues decline

Total end-user spend on telecoms services increased by 5.2% in 2004 to £36.1bn. The biggest increase was in mobile telecoms where revenues increased by £1.7bn or 16% to £12.3bn. The largest drop was in the fixed calls and access market where revenues fell to £10.5bn from £11.2bn in 2003, a drop of 6.2%. In revenue terms mobile telephony was worth 17% more than the fixed market in 2004, whereas only as far back as 2002 the fixed market had been the larger of the two markets in terms of revenues.

Internet revenues grew by just 6.8% to £3.2bn in 2004 despite the number of broadband customers almost doubling during the year. This growth came as competition between service providers led to significant broadband price falls coupled with increasing download speeds for end-users. “Other retail telecoms”, consisting of corporate data services, leased lines and mobile handset sales in tied shops rose 6.3% to £10.1bn.

1.4.5 Television programming spend increases

In total, the UK’s TV broadcasters spent nearly £4.8 billion on programming in 2004, a little over half of which was spent on the five main channels. Programming spend on the five main channels increased in 2004 after having fallen in 2003 due to a drop in BBC ONE’s spend. The fall in 2003 was the first since 1998 and despite the increased spend in 2004, terrestrial programming spend was below 2002 levels in real terms. The BBC spent over £230m on programming for its digital channels in 2004, 4% more than in 2003 although this spending is still dwarfed by its analogue spend – the average cost per hour across the BBC’s digital channels was £7K in 2004 compared to £100K an hour on BBC ONE.

1.4.6 The financial markets

Shares in the UK telecoms sector have risen by about 10% over the last 12 months, slightly less than the 12% achieved by the broader FTSE index of 100 leading shares (Figure 1.13). Despite continuing worries over competition and price erosion, the larger telecoms companies such as BT, Vodafone and, following its recent recovery, C&W, have been able to announce increased dividends and share buy-backs.

By comparison, the UK Media and Entertainment sector has performed poorly, achieving a rise over the year of only 2%. BSkyB shares have recovered steadily since their sharp fall in August 2004 following disappointing results, but remain considerably below their year ago level. ITV shares, after touching a low point in August last year before recovering, are virtually unchanged over the year. Radio company shares, despite the Capital-GWR merger, have been particularly weak in the last month or so, hit by growing worries over a deteriorating outlook for consumer spending, and therefore advertising revenues, and also fears that some companies may over-pay for future acquisitions

.Figure 1.13: Telecoms and media sector share index
Index: Jan 2nd 2004=100

Source: www.yahoofinance.co.uk

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