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1.2 Key communications themes

1.2.1 Digital communication grows as consumers convert from analogue

2004 was a year of growth across the digital communications sector, and one of slow decline for analogue services. Net household additions for broadband, mobile (2.5G and 3G), digital radio and digital television were all greater than in 2003, driving increased spend and usage.

Both conversion from analogue in broadcasting and product upgrades in telecoms have proceeded at pace, driven by:

• improved availability
• proliferation of services
• new and enhanced consumer offerings
• falling prices

In this section we analyse each of these drivers before looking at latest take-up figures.

1.2.2 Improved availability - rural communities getting connected

Availability of many digital telecommunications services increased during 2004. For some time now, fixed line and 2G mobile services have been almost universally accessible, and penetration is approaching saturation. This has led to a search for new revenue streams, spearheaded through investment in both wired and wireless networks which enable enhanced services via increased bandwidth (Figure 1.1).

Figure 1.1: UK DAB, DTT and broadband availability

 

Source: Ofcom
Note: Digital television and broadband access via satellite is available across most of the UK

Satellite remains the most widely available method of receiving digital television services, with coverage of almost all UK households apart from a few built-up and hillly areas, where line of sight to the satellite is unavailable. Both BSkyB’s satellite footprint and the reach of Digital Terrestrial Television (DTT) transmitters remained more or less constant in 2004. DTT availability will remain close to 75% population coverage until the phased switchover to DTT (and shutdown of analogue transmission) allows for a power boost to the digital signal. It is envisaged that the first phase of the digital switchover will take place in 2008, with the whole country converted by 2012.

For digital radio too, coverage is more extensive now than last year, with both Digital One, operator of the national commercial DAB multiplex, and the BBC building new transmitters and new local multiplexes launching since last summer in Cambridge and Plymouth / Cornwall. Digital One is now available to over 86% of the population of Great Britain (it is not licensed to cover Northern Ireland) while the BBC’s DAB services can be received by 85%. Local digital services are now licensed to cover 89% of the population, although coverage within these licensed areas is not complete. As both internet and digital television penetration grows, digital radio should become even more widely available, with the possibility of DAB chipsets in mobile phones also due to become a reality within the next year via the BT / Digital One Livetime service.

The majority of new broadband connections are supplied via asymmetric digital subscriber line (ADSL) technology, predominantly over BT’s copper wireline network. Like 3G, ADSL broadband availability is lowest in rural areas, so perhaps the most significant milestone for extending digital service accessibility in 2004 came in August when BT announced the scrapping of exchange distance limits, permitting consumers in more remote areas to receive a service. Until this point, customers living more than 6km from a broadband enabled exchange were unable to receive a service.

More recently, BT announced further exchange upgrades which, combined with the removal of distance limits, will make basic ADSL broadband even more widely available, reaching 99.6% of households by the end of summer 2005 (up from 96% in May 2005 and 90% a year earlier). Other solutions, including wireless, may still need to be deployed to make broadband available to the remaining half million or so UK citizens without access.

Broadband internet connectivity, along with telephony and broadcast services, is also available through the cable operators’ fibre-to-the-kerb networks. The overall level of cable network build-out has remained broadly similar over the past year, with 50.4% households passed in March 2005. However, both Telewest and ntl have invested in network upgrades, with an estimated 94.1% of their combined franchise areas now offering digital services. Telewest has announced plans to follow BSkyB’s example and migrate the whole of its customer base to digital by the end of 2006.

Cable operators are joining broadband suppliers in seeking to unbundle local loops in order both to in-fill franchise areas and to extend their services to new locations. This is a cheaper way for them to reach new customers than investing further in cable infrastructure. There were 28,000 unbundled lines in the UK at the end of 2004 – this represents only half of one per cent of all broadband-enabled lines. The UK remains some way behind France and Italy, both of whom had unbundled over 12% of broadband-enabled lines by the end of 2004. Use of unbundled local loops has also increased the availability of the Homechoice TV over DSL service, which expects to have extended its availability to 2.4m homes in June this year, and has already moved beyond its original west London footprint.

All four of the main UK mobile operators have now joined 3UK in the 3G consumer market, typically offering download speeds of 384kbit/s. Although the footprint varies by company, an estimated 82% of UK households were able to receive 3G signals from at least one operator at the end of 2004 (up from 75% in 2003), as transmitter networks were extended to cover less densely populated areas (Figure 1.2). Each operator has committed to rolling out services further, to reach 80% by the end of 2008.

Figure 1.2: Availability of digital services as at April 2005

	UK-wide 2005	Increase on 2004 Percentage Points	England	Wales	Scotland	N Ireland
Fixed line calls	100%	0%	100%	100%	100%	100%
Mobile	99%	0%	99%	99%	99%	99%
3G*	82%	+5%	n/a	n/a	n/a	n/a
Broadband*	96%	+6%	97%	92%	92%	97%
Cable	47%	+0.5%	n/a	n/a	n/a	n/a
Satellite TV	97%	0%	n/a	n/a	n/a	n/a
Terrestrial TV***	75%	0%	73%	57%	82%	58%
TV over DSL	5%	0%	6%	0%	0%	0%
DAB Digital Radio*	89%	+4%	89%**	73%**	92%**	100%**

 

* services available from at least one operator
** Figures relate to local multiplex licensed population coverage rather than transmitter coverage
*** Figures relate to availability of signals from all six multiplexes
Data relates to households except radio which shows individuals.
Figures for broadband are for households connected to enabled exchanges – slightly less than this number are able to access the services.
Source: Operators / Ofcom

1.2.3 Proliferation of services – broadcasters develop digital portfolios

Consumers now have unparalleled choice over the TV and radio they consume. Twenty years ago, television viewers had just four channels; but improvements in compression technologies mean all digital platforms now have increased capacity, and operators are taking advantage of lower costs to launch new services.

More than 370 channels were broadcasting in the UK at the end of May 2005 (with many timeshifted ‘+1’ services in addition), yet applications to launch more channels show no signs of abating. Ofcom issued 156 new licences in 2004 alone, more than in any previous year, with the entertainment, shopping, sport and adult genres accounting for over three quarters of the total.

The majority of new licences were for services broadcasting on satellite and cable. Satellite remains the platform with the greatest potential capacity, offering 352 television channels (excluding timeshifted channels, regional versions of BBC ONE, BBC TWO and ITV1, interactive services and pay per view channels), available either for free or via subscription (up from 272 last year) and over 60 pay per view services. By contrast, digital cable provides between 100 and 136 channels (depending upon the operator), while DTT has 32 free channels, with a further 11 pay services.

Some of this service proliferation has emanated from the UK’s major broadcasters. Each is developing a portfolio of channels in an attempt to head off the threat of audience fragmentation posed by increasing multichannel take-up:

• The newly consolidated ITV plc has developed a portfolio of digital channels with plans to launch more
• Channel 4 has taken E4 free-to-view and has announced a range of new services including More4 and its broadband documentary channel, as well as moving into radio with the acquisition of a 51% stake in digital station Oneword
• the BBC has a longstanding suite of digital services, and is developing broadband on-demand access for its programming
• Five has said that it would like to develop a family of channels when the time is right. ( Erratum: The original version of The Communications Market 2005 published on 13 July suggested that Five planned to introduce a lifestyle channel aimed at women, to be broadcast on Freeview. We would like to make clear that Five has not announced plans to introduce new channels, whether on Freeview or on other platforms, and has not announced what the content or target market of any new channels might be.)

The same is true in radio:

• GCap, Emap, SMG and Chrysalis have all developed a portfolio of stations on analogue and digital to help them reach wider audiences and preserve and grow market share

This move towards station portfolios will be increased by consolidation in the sector. In May 2005, the merger of Capital and GWR came into effect, to form GCap Media. The new group is the biggest player in radio (in terms of revenues, number of stations and listening hours) by some margin. It owns a large portfolio of local and national brands.

In radio, the number of services is also increasing, with digital stations becoming a core portfolio component of the major operators. In total 372 licensed radio stations in the UK broadcast on analogue and on DAB digital radio, with more on satellite, digital terrestrial television and cable television. Of the 326 on analogue (the majority on FM frequencies), 275 are commercial services, broadcasting to a local, regional or UK-wide audience. These will soon be joined by a new tier of community radio stations which are now being licensed.

DAB offers 215 stations, of which 172 are commercial, broadcasting either to individual local areas, to several local areas or across the UK. These are supplemented by 11 BBC UK-wide services (including the World Service) and 32 BBC local or nations’ radio services. In addition to these, 88 digital radio services are available via satellite, up from 84 last year, while DTT offers 21 and on cable, ntl for example, delivers 40 stations. A large and rapidly changing number of services are available to UK listeners over the internet.

1.2.4 New and enhanced services – consumers take control

The transition from analogue to digital technologies is continuing to drive the convergence of broadcast, telecommunications and internet services. Improvements in digital compression, transmission and storage technologies are increasing network capacities and capabilities, allowing operators to offer not just more but also new types of service to consumers.

Digital radio is proving to be one of the more innovative sectors in this respect. Listeners can access radio through many devices, from TV to mobile phones and the internet, as well as via more traditional sets. But they are also exercising greater control over their listening patterns, using non-linear programme delivery from on-demand and time shift services. In turn, some of these products promise new revenue streams for operators, helping to offset the problems posed by channel proliferation.

The BBC pioneered on-demand radio services and claims that 4.4 million hours of ‘listen again’ programming was accessed in February 2005 from its website. However, commercial radio has also entered the arena, with products such as GMG’s jazzfm.com. And several manufacturers offer DAB receivers (‘Digital Radio Recorders’) with ‘pause, rewind and record’ functionality, which also help to deliver greater control to audiences.

In addition, commercial groups now offer a host of enhanced interactive services with which to entice the listener (and develop brand loyalty). These include Emap’s Channel Hopper, offering programme-related downloads and information for listeners on Freeview, and GWR’s “Hear it, buy it burn it” service. The Digital One / BT Livetime service promises multimedia content (including video) delivered using DAB data capacity, when it launches later this year.

Another example of the flexibility and control offered by new radio services is ‘podcasting’, though which broadcasters publish digital recordings of radio programmes on the internet, which can then be downloaded onto PCs and transferred to portable digital music players (such as the iPod). This means listeners can access radio where and when they want. Virgin Radio has been offering podcasts of its breakfast show since March 2005 and the BBC is trialling the concept by making a small number of programmes available as Podcasts via its website. Commercial radio stations are also experimenting with the technology, seeking to extend brand reach and increase advertising impacts. The success of the concept may well be determined by the ability to negotiate distribution rights for the medium.

Although products such as the Reciva internet radio (which utilises WiFi and broadband connections) are coming onto the market, they are not common. DAB is therefore the only widely available digital platform currently offered in the UK that allows portable radio reception (although Digital Radio Mondiale services may launch later in 2005). However, with growing competition for listeners’ time from 3G services and podcasting, competition for portable reception time is likely to increase.

Like radio, both free-to-view and pay television broadcasters are looking to alternative revenue streams to bolster income from traditional advertising, sponsorship and subscription sources. The five main channels have all launched a range of interactive and retail services to complement their broadcast offerings, and BSkyB and the cable operators are increasingly turning to sophisticated added-value products – personal video recorders (PVRs), high definition TV (HDTV), video-on-demand and PPV, interactive services – to sustain their growth.

Sky+ continues to be the UK’s market leading PVR, with penetration more than doubling from 322,000 households in March 2004 to 770,000 (10% of its subscriber base) by the first quarter of 2005. With the hard drive cost/capacity ratio continuing to fall, the latest version of Sky+ has a 160GB hard drive that can store around 80 hours of video. Some Freeview boxes now also offer integrated PVRs, including some with twin tuners (record one programme while watching another), ‘series link’ capability (automatically record all episodes after watching one) and large hard drives.

While PVRs offer the convenience of ‘time shifting’ linear programme schedules, many require the user to decide what they want to view before it is broadcast and configure the device to record accordingly (although intelligent devices like TiVo, which learn what the viewer likes and record it for them are available). True ‘on-demand’ services have content pre-stored on servers which users can access whenever they wish, using a high speed, high reliability digital network. These services could receive renewed impetus in 2004 with the re-launch of Homechoice TV over DSL (with competitors expected to follow), but copyright issues must be overcome if network PVRs are to develop.

Latest developments have seen the worlds of online search and television converging, as PVR operators and content providers enter talks with companies like Google and Yahoo!. They plan to develop searchable content libraries which would allow viewers to download films and programmes from a vast online archive, and to watch them on their TV sets.

At the same time the cable operators have pressed ahead with plans for on-demand television, with both ntl and Telewest currently running trials. And, like BSkyB, both cable companies have announced plans to meet the demand for better picture quality from an increasing number of consumers who have purchased large, flat panel TV displays, by offering a High Definition TV (HDTV) service in 2005/06. The initial focus for the new format is likely to be sports, movies and documentaries and its introduction will help meet the challenge of film distribution via new high definition DVD formats which are expected to emerge over the next couple of years.

3G networks also offer the additional capacity needed to deliver bandwidth-hungry multimedia services. While 3G allows users to download short video clips and music tracks to their handsets on demand, operators are still trying to encourage use of more basic multimedia applications, such as picture messaging (essentially a 2G product). However, 2004 saw increasing interest in delivering digital broadcast content to handheld devices; a mobile television trial being conducted by ntl and Nokia in Oxford uses DVB-H (DVB to the handheld) technology to broadcast TV, radio and data services.

The growth in faster, always-on broadband internet connections is supporting growth in a whole range of new media and communications services, including Voice over IP (VoIP) and music and video downloading. The BBC recently conducted a successful trial of a video download service which gave viewers access to archive material via their broadband connection, although no mainstream UK channel has yet made all of its content available via the internet. The introduction of standard broadband speeds of 1Mbit/s or more (and perhaps partly a result of increasing levels of legal action against individuals accused of copyright infringement in the UK) have led to burgeoning use of legitimate music download sites. According to BPI figures, 5.6 million tracks were downloaded in 2004, with 4.6 million more in the first quarter of 2005.

However, the new services offered by digital technologies are presenting new challenges to content providers in terms of their ability to prevent near perfect, unauthorised digital copies from being freely distributed over the internet and via portable storage devices. This had lead to an increased focus over the last twelve months on digital rights management technologies (DRM) capable of ensuring that only those who are authorised to access the content are able to do so, while retaining the flexibility for them to transfer it between devices. The increasing amount of digital content available is also making electronic programme guides and digital search engines an essential feature of many new content services.

1.2.5 Falling prices – more for less

Improving technologies and increasing competition are delivering the dual consumer benefits of extended choice and lower prices. The biggest improvements have been in broadband, where increased unbundling of BT’s copper local loop, improved technologies such as ADSL2+ and continued infrastructure investment by the cable operators have resulted in ever faster broadband speeds being offered for the same or cheaper prices. At the top end of the market, UK Online offers an 8Mbit/s service for £29.99/month in some areas, while BT’s entry level product in May 2005 offered 1Mbit/s for just £17.99 per month, down from £24.99 for 512kbit/s 12 months earlier (Figure 1.3).

Figure 1.3: Average UK residential broadband subscription prices

£/month

Source: ECTA/OECD

A wide range of pay TV packages is available to consumers, ranging from £7.99 per month for Top Up TV’s 10 channel digital terrestrial service, to £51 per month for Sky’s most comprehensive offering with Sky+. In addition, the cable and TV over DSL providers offer a host of bundled ‘triple play’ packages – with telephony, internet and broadcast services. In general, pay TV prices increased in 2004 – the top Sky tier rose 7.9% for example. However, all platforms offered consumers more for their money last year – with extra channels, faster connections and cheaper phone calls.

Consumers also have a greater number of free services available to them. In addition to the increase in DAB and satellite radio services over the last year, viewers can receive a large number of free channels, including all those provided by the BBC, ITV1, Channel 4 and Five on digital satellite. BSkyB offers a ‘Freesat’ product whereby viewers can purchase set-top boxes with a free-to-view card through which to watch these services, although it has yet to launch a significant marketing push to promote the concept.

Hardware, too, is rapidly becoming cheaper. The arrival of new low-cost manufacturers, many from the Far East, is driving down retail prices for everything from DTT receivers to DAB sets. Future reductions in handset prices and improvements in service coverage should enable 3G to fulfill its potential and surpass GSM as the dominant mobile technology.

Although still in its infancy, Voice over IP (VoIP) is another technology which looks set to bring down prices. It allows voice calls to be made over data networks using internet protocol (IP), a far more efficient way of transporting calls than traditional circuit-switching. In order to benefit from the price savings of an all-IP voice call (i.e. one that totally bypasses the PSTN), both the caller and the recipient need to be online at the same time, preferably at broadband speeds, with compatible software and equipment installed. This would mean that call costs are effectively covered by broadband access charges. The growth in always-on broadband connections could well be the key driver for VoIP rollout to the residential market.

1.2.6 Take-up – broadband Britain arrives

Take-up of most new technologies conforms broadly to an S-shaped curve, although there is some variance in the slope of the ‘S’, and different groups within the population tend to adopt new technologies at different rates (Figure 1.4).

2004 was the year in which broadband finally moved in to the ‘early majority’ stage of this curve, effectively becoming a mass market consumer proposition. Following growth of over 90% during the year, the number of residential broadband connections in the UK stood at 6.2 million at the end of December – around a quarter of all households – and, as of May 2005, broadband accounts now outstrip narrowband. It also means that the UK now occupies a “mid-table” position in the table of broadband connections per 100 population, having lagged significantly behind the US, Japan and most other western European countries over the past few years.

Figure 1.4: Current position of major technologies on the technology adoption curve

Source: Ofcom

There were 61.2 million active mobile phone customers reported in the UK at the end of December 2005 (either pre-paid or on monthly contracts), more than one for every individual in the UK. However, as some people have more than one mobile connection, household penetration stands at 85%. This sets operators seeking to extend consumer take-up the difficult task of trying to convince ‘late adopters’, or ‘laggards’, who are traditionally resistant to change, and who accept ideas only if they have become mainstream (or even ‘tradition’). Operators may instead choose to focus on the business sector.

Despite the mobile networks’ considerable financial investments in licence fees and new infrastructure over the past few years, 3G broadband mobile services have yet to make a significant impact in the UK mobile market. At the end of 2004 there was a total of 2.5 million active 3G customers (all with 3UK – other operators had not yet launched their consumer services) up from less than 250,000 a year earlier. 3G take-up was delayed by the later-than-expected product offerings from the major operators, and also by the poor choice, quality and availability of handsets. However, with recently intensified operator competition, improved devices and the launch of new services, consumer demand is expected to rise in 2005 – the technology could yet prove to be adopted by the majority.

2004 also saw an increase in uptake of VoIP products, although this was principally among large businesses, rather than consumers. For larger businesses with multiple office locations, the main attraction of VoIP is immediately apparent – free voice calls within an IP platform (e.g. between offices or to other companies with VoIP capability). All large businesses have high-bandwidth permanent IP connections, enabling seamless VoIP connectivity with high quality of service. Recent large corporate VoIP conversions have included Marks & Spencer and Abbey National.

Freeview continued to reshape the UK’s TV landscape in 2004. Conversion from analogue to digital TV maintained momentum and at the end of 2004 59.4% of UK homes had digital, up from 50.2% in 2003 (Latest Q1 2005 numbers show that this has risen to 61.9%). Freeview accounted for nearly 70% of this growth, with more than 3.25 million Freeview boxes and integrated digital TVs sold over the course of 2004. As a result, the cumulative total for digital terrestrial households by the end of the first quarter of 2005 was over 5 million households. Although Freeview operates primarily as a free-to-view platform, its increasingly extensive and attractive line-up must represent some competition for at least the basic packages of both cable and satellite. With Ofcom recommending that the phased process of digital switchover begins in 2008, digital TV needs to move swiftly into its ‘late adopter’ stage.

Pay television also prospered last year, with BSkyB achieving 369,000 net subscriber additions over the year (although growth rates were down), bringing its total subscriber base in the UK to almost 7.3 million homes. The total cable subscriber base remained more or less static at 3.3 million, although digital customers increased by 200,000 – principally converters from their analogue services.

With the offer of a wider range of stations, improved data services and an improved and cheaper range of sets, increasing numbers of customers are migrating from analogue to digital radio. Sales of DAB sets received a major boost in 2004 with total cumulative sales during the year almost trebling to 1.4 million, raising household penetration of DAB sets to 5%.

The time-poor, cash-rich consumer is a market sector that is becoming increasingly targeted by digital operators. These people demand more convenient ways to gain access to the services and content they wish to use and more control over when and where they use them. Increasing number of operators have stated an intention to offer VoD services, PVR capable set top boxes and personal digital media players. With increased competition, the decreasing cost of digital storage devices and wide spread adoption of broadband, take-up of these services looks set to accelerate.

Whilst the coming year will see the introduction of new and improved digital products and services we are also likely to witness growth in innovative, low cost alternatives to existing services. VoIP will present challenges for existing telephony operators and the spread of WiFi hotspots will provide an alternative to 3G networks for accessing the internet outside the home and the office. HDTV will offer new competition to existing digital television services and could provide particular challenges for digital terrestrial television, the most capacity constrained of the platforms. These innovations promise to enhance consumer choice and value in the year ahead.

Figure 1.5: Availability and penetration of digital services Q1 2005

Source: Ofcom / operators / licensees
Note: figures for radio are for individuals not households

1.2.7 International regulatory developments

Over the past 18 months, the international regulatory agenda has been dominated by issues surrounding digital switchover, new digital services and spectrum management. VoIP has also started to exercise regulators’ minds, and some have started to concentrate on mobile termination rates – both issues have multinational significance.

As international boundaries around communications continue to become more blurred – particularly with the increased impact of the internet and, to a lesser extent, issues surrounding satellite broadcasting – it will become ever more important for regulators from different countries to co-ordinate policy in order to ensure as far as possible a seamless global market.

Figure 1.6 lists the most important international regulatory developments of the past year.

Figure 1.6: International regulatory developments

Issue	Country	Body	Regulatory action
Television
Broadcasting standards	US	FCC	Crackdown on broadcasting standards
Digital switchover	Italy	Italian Parliament	Confirmed intention to implement digital switchover by December 2006.
	Sweden	Digital TV Kommissionen	Plans submitted to Swedish government indicating switchover should start next year and be completed by February 2008.
	Spain	The Spanish Parliament	Passed legislation to pave the way for digital switchover by 2010.
Radio
Digital broadcasting	Netherlands	House of representatives	Plans submitted for introduction of DAB commercial digital radio with calls for analogue to be switched off no later than 2019.
	Italy	AGCOM	New legislation published paving the way for more DAB stations and greater coverage.
	Germany	MABB	Stopped issuing DAB licences on the grounds that ‘outdated’ technology has been superseded.
	France		Consulting on digital radio.
Telecoms
VoIP	Canada	CRTC	Enforced 911 emergency service provision by fixed VoIP service providers.
	US	FCC	Prohibited blocking of VoIP applications.
	Ireland	Comreg	Issues draft Direction to allow access to a new number range for VoIP phone services.
	Netherlands		A consultation on the planned policy for the use of numbers for VoIP services.
	Norway	NPTA	Issued an outline on the regulation of VoIP.
	Spain	CMT	Finalised consultation on VoIP regulation and proposed VoIP numbering and portability guidelines.
	Japan	MIC	Invited comments on draft report concerning Measures for Preserving Important Communications such as emergency services.
Privatisation	France	French government	Initiated sale of 9.6% stake in France Telecom. Government retains stake of 41-43.5%.
Mobile termination	Australia	ACCC	Recommended mobile operators cut termination rates by over 40% by 2007.
Spectrum
Spectrum management	US	US Secretary of Commerce	Launched review of current spectrum management policies.
	Ireland	Comreg	Calls for opinion proposed approach to spectrum management for next 2005-2007.
	Sweden	PTS	Call for comments on the present and future spectrum allocation table.

• Overview - The Communications Consumer
• Overview - Finance
• Overview - Spectrum

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