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Overview - The year in communications

1.3 The year in communications

1.3.1 Introduction

During 2005, the UK communications market played an increasingly important part in consumers’ daily lives. Take-up of new digital services proceeded at pace – driven by increased availability, greater choice, innovative consumer offerings and falling prices. We examine each of these factors in turn in this section.

1.3.2 Availability: 3G and LLU extend reach of communications services

2005 was a year where sections of the telecommunications industry continued to push aggressively to maximise their potential customer base. Although many platforms (2G mobile, fixed-line, satellite TV) had already reached near-universal availability, during 2005 and early 2006 there were increases in the availability of 3G, broadband and unbundled local exchanges (LLU) (Figure 1.1).

Figure 1.1 Availability of digital communications services

Figure 1.1: Availability of digital communications services

Source: Ofcom / operators / licensees

Note: For a more detailed explanation of availability figures please refer to Ofcom’s Communications Market: Nations and Regions report, published in April 2006.

At the end of 2005, second generation mobile services were available from at least one operator to a 75% geographic coverage level in 96.9% of postal districts, and 82.4% of postal districts were similarly covered by all four operators (Figure 1.2). When mapped onto population density in those areas, our analysis shows that 99.9% of the UK population live in postal districts with 75% geographic coverage by at least one 2G mobile operator.

90.5% of postal districts had a minimum 25% geographic 3G coverage offered by at least one mobile operator, while 46.2% received services from four or five operators (our criteria for coverage require operators to be able to provide downlink bandwidth levels of at least 128kbit/s – one of a number of possible thresholds for advanced data and video services. The postcode coverage threshold is lower than for 2G services owing to both technological considerations and to reflect the newness of 3G services).

1.2 Geographic coverage of mobile services by postal district

Figure 1.2: Geographic coverage of mobile services by postal district

Source: Ofcom / operators, Q3 – Q4 2005.

According to BT, by Q1 2006 99.9% of UK premises were connected to a DSL-enabled exchange. However, some premises within these exchange areas are not suitable for delivery of broadband services, or only broadband at lower speeds, owing to local technicalities such as distance from the exchange or poor quality of networks.

Local loop unbundling (LLU) entails physically disconnecting BT’s local lines from its network and connecting them to other operators’ networks, enabling them to provide their own services to customers. The number of unbundled lines started to rise steeply in late-2005 and early-2006, following wholesale price reductions from BT and the introduction of a price-capping regime by Ofcom. In December 2005 there were 210,000 unbundled lines, but by June 2006 a further 370,000 lines had been added, taking the total to 580,000.

Following the closure of Kingston Interactive Television ( KIT) in February 2006, which had been available to 105,000 homes in the Hull area of East Yorkshire, TV over DSL (delivered over an unbundled exchange) was available to approximately 2.4m homes in the London area by May 2006. These services were provided by Homechoice, which has stated that it plans to work with alternative providers of unbundled services to extend its coverage area throughout 2006 and 2007.

The UK’s newly merged main cable operator ntl:Telewest also provides broadband connectivity. Its broadband service is delivered via fibre-optic and coaxial cable (rather than BT’s copper wire local network), and delivers speeds of up to 10 Mbit/s. Digital cable’s availability to 45% of UK homes has remained unchanged over the last year (Figure 1.3) and ntl:Telewest has stated its intention to extend its reach via local loop unbundling of BT lines, rather than by building new cable.

Figure 1.3 Availability of digital cable and digital terrestrial television, DTT

Cable coverage DTT coverage

Figure 1.3 Cable coverage

DTT coverage

Figure 1.3 DTI coverage

Satellite remained the digital television platform offering the widest coverage in 2005. Although the footprint covers the whole of the UK, actual availability to households can be limited due to factors such as obstruction to the line of sight to the satellite, local topography and planning restrictions. According to BSkyB, 98% of households in the UK and Ireland can get the Sky digital satellite service.

Digital Terrestrial Television (DTT) coverage also remained constant during the year, with 73% of UK households able to receive services from all six multiplexes (Figure 1.3). The Highlands and Islands of Scotland and upland areas of England and Wales still had significant reception problems by the end of 2005. Also, in Northern Ireland there were only three transmitters as of December 2005, limiting coverage to the region.

Availability of DAB (Digital Audio Broadcasting) digital radio remained static in 2005, with 89% of the UK population covered by at least one – and in most cases all three – of the multiplexes operated by Digital One, the BBC and local commercial broadcasters (Figure 1.4) (In addition digital radio services are available to digital TV and internet homes).

Figure 1.4: DAB digital radio coverage 2006

Figure 1.4: DAB digital radio coverage 2006

Source: Ofcom

Note: Coverage areas are indicative only

1.3.3 New services over existing platforms

During 2005 and early 2006, a number of factors – including technology developments, accessibility to multiple delivery platforms at low cost, and innovative business models – all helped consumers to listen to, view, interact with, use and store information in new ways, and to get more from their communications services. The number of broadcast digital TV channels and radio stations increased again; operators launched TV services to mobile devices; the amount and variety of audio and video content available via the internet continued to rise and the number of households with personal video recorders (PVRs, capable of recording television on a hard disc drive) grew rapidly during the year.

New television and radio services

Reduced costs and ample capacity through the use of digital technology have made it easier for broadcasters to target a more narrowly defined audience with niche channels.

In 2001, three years after digital television launched on satellite, BSkyB offered 198 non-terrestrial channels on its Sky service and these channels commanded approximately 39% of multichannel viewing. The remaining 61% share was to the main terrestrial channels, BBC 1 through to five, and their associated digital spin-offs.

The following four years witnessed rapid growth in the number of channels, with the launch of a further six terrestrial spin-offs (excluding the relaunches of BBC Choice and BBC Knowledge) and a net addition of 138 non-terrestrial channels (Figures 1.5 and 1.6). This increase in channel choice was a key driver of consumer take-up of multichannel television, which doubled between 2001 and 2005 to over 18 million households.

Figure 1.5: Spin-off channel launches from the five main channels

Figure 1.5: Spin-off channel launches from the five main channels

* Launched originally as subscription services

Source: Ofcom

Figure 1.6: Channel availability

Figure 1.6: Channel availability

Source: Ofcom / BARB

However, in some ways, the five mainstream channels taken together with their spin-offs have benefited more than new operators from the growth in multichannel television; viewing share of their spin-off channels rose from 3% to 9% in multichannel homes between 2001 and 2005, more than offsetting the 1.2 percentage point drop in share of the parent channels. The share of ‘non-terrestrial’ new channels meanwhile fell from 39% to 34% in multichannel homes, as audiences grew but fragmented (Figure 1.7).

Figure 1.7: Multichannel share of viewing in multichannel homes, 2001 – 2005

9.1m Total multichannel homes 18.1m

Figure 1.7: Multichannel share of viewing in multichannel homes, 2001 – 2005

Source: Ofcom / BARB

The radio sector, too, has also been able to offer greater availability and choice through digital distribution. Many stations have embraced television, the internet and DAB , as a means of increasing their coverage (Figure 1.8)

Figure 1.8: Radio stations launching on the national DAB multiplex

Figure 1.8: Radio stations launching on the national DAB multiplex

Source: Ofcom

However, as with television, the existing national groups have often been the key beneficiaries of wider availability. Share of listening to national stations increased from 49% in 2001 to 55% in 2005. Although the number of local radio stations increased by 37 to 366 during this period, their share of listening declined by 5.7 percentage points.

Clearly listening share is affected by factors other than just increased availability. However, a look at the strategies of the BBC , Virgin and Emap illustrates how some of the larger radio groups have taken advantage of the digital opportunity:

New telecoms services

In the telecoms sector a number of services either came to market or evolved significantly during 2005 and early 2006. Among these was residential voice over IP (VoIP), which moved from being a niche product towards becoming a much broader consumer offering. This evolution was driven by a number of factors, including greater overall consumer awareness of VoIP, and new devices which simplify the user experience. In May 2006, for example, Vonage introduced a VoIP handset which plugs straight into an ADSL-enabled wall socket, rather than requiring the user to switch on their PC; and in June 2006 BT launched its new Home Hub, which allows users to plug any handset straight into a phone socket on the hub itself.

Other developments in telecoms services included a continued rise in the volume and breadth of mobile content – from new ring tones to user-generated video channels. Similarly, in broadband, new content is continually being added – with notable growth in ‘intelligent’ websites such as last.fm, a music download site that interrogates users’ PC music libraries and suggests further music they might like.

1.3.4 New Services over new platforms

TV over broadband

The continued rapid uptake of broadband to the home has provided a significant addressable base to which rights holders can distribute their content. This has benefited not just the major broadcasters, for whom the internet offers a new way to reach new (and existing) customers, but also small rights holders and even individuals, who can now distribute their programming. During 2005 and early 2006 significant barriers were overcome and internet distribution now seems to be a key strand in the growth strategies of many broadcasters.

New service launches and trials at the beginning of the year were designed to optimise this internet viewing experience; BSkyB’s ‘Sky by Broadband’ service and the BBC’s integrated Media Player (iMP) trial both exploited peer to peer (P2P) file sharing technology to overcome the limitation of a 500kbit/s internet connection and deliver reliable, high quality video by exploiting ‘free storage’ in the form of the consumer’s computer hard disk drives ( HDD) to store the content before viewing.

During the course of the year broadband technologies and speeds continued to improve, with up to 2Mbit/s broadband connections becoming increasingly common and up to 8Mbit/s available in some areas. These developments, along with improvements in video compression technologies, have resulted in a growing number of operators offering video services which are streamed in real time, without the need for local storage on the viewer’s computer.

Details of some of the key services currently available include:

Although these organisations use software to manage and protect their digital rights, the continued threat of piracy and illegal downloads remains an issue for many content owners. In an Ofcom survey, 83% of internet users were aware that there are illegal ways to access films, music and computer software on the internet but 33% of these believed illegal downloads should be legal (Figure 1.9). Interestingly, this figure jumps to 50% when looking at the younger 16-24 age demographic.

1.9 Attitudes to downloads that are currently classified ‘illegal’

Percentage of internet users aware that there are illegal ways to access content

Figure 1.9: Attitudes to downloads that are currently classified ‘illegal’

Source: Ofcom research, summer 2005

TV to mobile devices

In addition to broadband distribution, most of the UK’s mobile network operators have introduced TV services to mobile devices over the last year. Development has occurred on two fronts; higher speed mobile data connections provided by 3G networks have allowed streamed television and downloaded video clips to be delivered to mobile handsets, while trials seeking to bring the efficiency of broadcast networks to deliver television services to mobile phones have also taken place.

The first generation of television services on mobile phones are delivered using 3G technology on traditional ‘one-to-one’ mobile data connections (known as ‘narrowcasting’ as opposed to ‘broadcasting’ or ‘one-to-many’). Consequently, if two customers watch the same broadcast content at the same time, they each use capacity on the 3G network. Although most network operators now offer such services, adoption is relatively low and so this inefficiency of transmission is not a major concern. However, as take-up increases, alternative technologies may need to be deployed to address this scalability issue.

BT Movio and Virgin Mobile have recently completed trials in London of a broadcast technology that allows television services to be broadcast via the DAB digital radio network. Using this DAB-IP technology, users with compatible mobile handsets are able to receive both digital radio and digital television services and, as it is a broadcast technology, there is no limit on how many users can receive the service at any particular time. The trial offered radio alongside a limited range of television channels and resulted in consumption of around one hour of television per week alongside 95 minutes of radio.

While DAB-IP is an evolution of the standards developed for digital radio, an alternative technology called DVB-H (Digital Video Broadcasting - Handheld) is a derivation of the technology behind digital TV. In conjunction with Nokia and broadcast network operator Arqiva, O2 conducted a trial in Oxford in 2005 using a DVB-H network, which revealed that viewers watched on average just over three hours of mobile TV per week.

1.3.5 New ways of watching and listening

PVRs

By March 2006, there were over 1.4 million subscribers to BSkyB’s Sky+ personal video recorder (PVR) service, with 0.8 million net additions since December 2005 alone. At the heart of these devices is a hard disk drive ( HDD) which allows digital TV programmes to be stored, randomly accessed and replayed with no reduction in picture quality. The capacity of the standard Sky+ set top box has increased from 40 to 160 gigabytes, while retail prices have fallen.

The reducing price of HDD storage is leading to the inclusion of PVR functionality in an increasing number of consumer devices. Key PVR offerings which have come or are coming to market include:

Having an accessible base of HDD-enabled set top boxes may provide platform operators with an opportunity to introduce new services in which broadcast programmes, advertising and other content can be ‘pushed’ onto the disk and then made available to the consumer on demand, or potentially, in the case of advertising, based on user behaviour and preferences.

Video and audio on the go

The advent of the MP3 system for compressing digital audio, along with the iPod device and iTunes download service from Apple, were both important in reinventing the idea of music on the go. However, there is evidence of a similar trend emerging in video, TV and radio content.

Portable TV sets have been available for many years; indeed Seiko produced one integrated into a wristwatch in 1982 and cheap mass market hand portable units were available by the end of the 1980s, but take-up has been limited. However, with the growth of digital technology there are now many devices which allow the viewing of stored digital video on the move, in addition to broadcast mobile television. Examples include:

Radio too is addressing customers’ desires to control their listening and viewing habits. The BBC Radio Player – which offers on-demand ‘listen again’ services – had a record month in March 2006, with more than 20 million hours of online listening and 12 million on-demand requests. In April 2006, ‘The Archers’ was the most demanded programme with over 650,000 requests.

While ‘listen again’ programmes are only available for seven days after broadcast, and are streamed through an internet connection, MP3 downloads can be kept indefinitely; podcasting is simply an automated form of MP3 downloading. Although there is no definitive list of the most downloaded podcasts, iTunes reported that the most downloaded shows via its application were:

High-definition TV

As the cost of digital storage reduces, and the speed and capacity of digital networks continue to improve, the data requirements for digital TV are set to increase further with the introduction of more channels and the advent of high definition TV ( HDTV).

HDTV services typically require 4-6 times the amount of data to carry video information as standard definition services. Using current compression technologies, such as MPEG2, this would significantly increase the amount of storage and network capacity required. The commercial deployment of the latest compression technologies, such as MPEG4, over the last year, promises to reduce these requirements significantly, reducing the costs associated with delivering these services to consumers.

BSkyB and Telewest both currently offer commercial HDTV services in the UK, and a trial of HDTV over the digital terrestrial platform is underway in the London area. The Sky service costs £299 for an HD set top box (which also has the PVR functionality of the Sky+ service), and an additional £10 monthly subscription for a selection of content from Sky One, Sky’s sport and movie channels, together with HD versions of National Geographic, Artsworld, Discovery and a BBC HD channel. Telewest’s service has no upfront cost, but for an additional £10 or £15 a month (depending on the TV package to which they subscribe) customers get an HD-enabled PVR. The Telewest service currently has two channels – BBC HD and ITV HD.

1.3.6 Competition and technology help to deliver lower prices

During 2005 and the first half of 2006, increased competition in the communications sector, coupled with advances in technology, have benefited the customer in terms of greater availability of services, more choice from a broader product offering, and, in many cases, lower real prices.

Prices in the pay-TV sector remained broadly flat over the year, although the cost of new products and services such as high-definition TV and PVRs was passed on to subscribing customers. However, the price of telecoms services fell again; our analysis suggests that spend on a selection of these services, based on 2005 average household consumption levels, fell by 6.2% in real terms between 2004 and 2005, and was over 15% lower than in 2001 (Figure 1.10). For example, in 2001 it would have cost the average household £31.32 to use mobile voice and text services at 2005 levels, compared to £30.45 for the same usage levels in 2005. This reflects the fact that the fall in prices over this period has more than offset the increase in the number of mobile subscribers per household.

Figure 1.10: Real cost of average household telecoms consumption

£ per month, 2005 prices

Figure 1.10: Real cost of average household telecoms consumption

Source: Ofcom / operators

Note: Assumes consumption is at 2005 levels across all years. Includes VAT; excludes NTS voice calls.

Although there have been real falls in the price of fixed voice services and mobile calls and text, the biggest drop since 2001 has come in broadband, where improved technology has allowed operators to offer ever-higher speeds without concurrent price increases. Retail offers are continually changing, but a subscription to an entry-level service typically cost less than £10 per month by May 2006. This compares with a 1-1.5Mbit/s connection costing between £30 and £35 per month in December 2004 (Figure 1.11).

Figure 1.11: Average UK residential broadband subscription prices

Figure 1.11: Average UK residential broadband subscription prices

Source: Ofcom

Note: Prices are an average of the top four UK ISPs, and are for stand-alone broadband subscriptions. Most operators no longer market a 512kbit/s product.

In addition, bundling of services to the customer has become a key part of operators’ strategies to reduce broadband prices. The biggest surprise in the competitive pricing model was probably Carphone Warehouse’s (CPW) ‘free broadband offer’, introduced in March 2006 and designed both to grow its broadband base and also to entice its TalkTalk fixed-line subscribers to a bundled broadband product. Orange responded to CPW’s price drop in May 2006, offering ‘free broadband’ to customers who also took out an 18-month mobile contract at £30 per month or more.

1.3.7 Take-up: digital TV penetration grows, broadband now mass-market

The mobile and broadband sectors were the key drivers of growth in the UK telecoms industry in 2005, while digital terrestrial television and DAB take-up also grew strongly. Figure 1.12 shows penetration of key communications services and devices as at Q1 2006, plotted on the technology adoption ‘S’ curve.

Figure 1.12: Adoption curve for communications services and devices, Q1 2006

Figure 1.12: Adoption curve for communications services and devices, Q1 2006

Source: Ofcom

Note: Penetration of DAB radio, 3G mobile and VoIP are based on individuals; other technologies are based on households

Total mobile subscriptions grew by 5.8m in 2005 to 65.5m. This figure represents over 100% of the UK population, reflecting the increasing number of users with multiple subscriptions and increased business use. Household penetration of mobile phones (i.e. homes with at least one mobile subscription) was approximately 90% as of Q1 2006 – a near-saturation figure – compared with 71% in 2000. By comparison, fixed line penetration was 90%, having declined from 94% since 2000.

3G mobile adoption also increased markedly during 2005, growing 66% to 4.8 million subscriptions (8% of the population), reflecting a significant marketing push from the main mobile operators. 3UK retained the greatest market share at 77% of subscriptions, with Vodafone at 15%, and the remainder split between Orange , O2 and T-Mobile.

By May 2006, there were more than 11 million broadband connections to homes and smaller businesses in the UK. We estimate that DSL broadband (at a minimum of 512kbit/s) is now available to over 95% of homes and businesses in the UK, in addition to the 45% of UK homes passed by cable broadband (which can currently deliver broadband internet at up to 10Mbit/s).

Penetration of digital TV reached 73% in the first quarter of this year, or 18.3 million households. Digital terrestrial was the main driver, with over 7 million homes now using Freeview on their primary TV set – outnumbering the number of analogue-only households for the first time. Digital switchover is due to commence in 2008 beginning with the Border region, at which point take-up can be expected to accelerate.

It is interesting to see how much more quickly consumers are adopting digital technology than analogue. Figure 1.13 shows that it took over 40 years for analogue television sets to penetrate 73% of households. However, for digital television the same position has been reached in just eight years (although many digital homes still have unconverted sets) (Figure 1.13).

Figure 1.13: TV penetration - all TV households and digital TV households

Percentage of households

Figure 1.13: TV penetration - all TV households and digital TV households

Source: Ofcom, BARB

Ownership of audiovisual devices has also grown strongly over the past year. Ofcom research suggests that household penetration of portable music players increased from 18% in December 2005 to 35% by March 2006, driven by growth in MP3 players; ownership is skewed towards males and 15-24 year olds (Figure 1.14).

And in addition to the 2.5 television sets per household, there has been strong growth in the number of computers that allow owners to watch TV or video. This has been accompanied by increased take-up of devices which affect the way programmes are watched; DVD player ownership is stabilising at around 70% of households, but now that penetration of PVRs has reached around 8% (and 29% of households own recordable DVD devices) we may start to see some substitution of the VCR , or at least see it being moved to second and third TV sets.

Take-up of other household audiovisual devices

Percentage of households

Figure 1.14: Take-up of other household audiovisual devices

Source: Ofcom research / estimates

A comparison of availability and penetration of the major digital communications services reinforces the fact that, while take-up always lags availability, the mobile, broadband and DTT service providers have been particularly successful at reaching their addressable market in a comparatively short space of time (Figure 1.15).

Figure 1.15: Availability and penetration of digital services

Figure 1.15: Availability and penetration of digital services

Source: Ofcom / operators / licensees, end 2005.

Note: Figures for radio and 3G are for individuals not households



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