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2. Recent major developments

2.1 Radio spearheads the move towards convergence

After many years of hype, communications convergence is becoming reality, although that reality, at least so far, is quite different from the predictions of a few years ago. When people talked of convergence in the 1990’s, they foresaw a world where the computer, telephone, television and radio became a single device in the home.

In practice, the number of devices has proliferated while content, sometimes re-versioned, is becoming available on a wide range of platforms and to some extent devices are becoming capable of receiving services from different platforms. Within the next few years the original vision may yet come to pass with the advent of the “home gateway” controlling access to services and play-out to a number of individual devices in the home. But for now diversity is the key.

Consumers can now use a broadband connection not only to access the internet but also to receive television and radio stations, buy and download songs, or call friends on the other side of the world. These services can also be made mobile using third generation (3G) technology.

Radio shows the way

Spearheading this move towards convergence is one of the most traditional media – radio. Radio services are now available and increasingly listened to via digital television, the internet and mobile telephones, as well as on the DAB digital radio platform itself. Radio stations are offering new opportunities for listeners to interact and download programmes or individual music tracks across different platforms and on DAB digital radio new multimedia and data services will soon be available.

While not a perfect substitute for the portability offered by traditional radio sets, the extra choice of radio services now available on devices other than traditional analogue radio sets means that listening via these other platforms is growing. Radio listening via digital television is growing particularly strongly. Rajar figures show that 28.8% of all adults have at some time listened to radio using their television set as at June 2004, almost half the number that have access to digital television.

Half of all UK analogue stations can be heard through websites and thousands of international stations are available. The number of adults who claimed ever to have listened to radio via the internet stood at 15.0% in June 2004. In addition to increased choice, listening via the internet is particularly effective at offering interaction with stations through their websites.

Listening to radio via a mobile phone is also increasing, with 15.4% of 15-24 year olds having done so at some point as at March 2004, although so far this has been via an analogue radio tuner included in the handset. In May 2004 digital radio and telecoms came closer when GWR and BT Wholesale announced a partnership to provide multimedia data - such as news, sports, traffic, stock market information or entertainment, possibly including video clips – to handheld devices like mobile phones and PDAs. The new venture will use Digital One’s broadcasting capacity, running alongside the eight national digital radio stations. The deal is another example of convergence providing the user with a single device able to access a whole range of services. These are the sorts of services that consumers, particularly in the younger age groups say they want (see Ofcom’s research “the Text Generation” on the Ofcom website).

Television over DSL is re-launched in London

TV over DSL (Digital Subscriber Line), has been available in the UK for over four years from Homechoice (in London) and Kingston Communications (in Hull). Homechoice has now stopped using BT’s Videostream product and recently launched a combined pay television, internet and Video-on-Demand (VoD) service over its own network using the unbundled local loop. This has significantly increased the availability of its service which can now be accessed by over 1.2 million homes in London and had 3,870 subscribers at the end of June 2004. The company claims that BT’s price reductions for local loop unbundling (LLU), which allows competitors access to BT’s local telephone exchanges, should enable it to expand its coverage further.

BT recently entered the TV over DSL market with its BT Rich Media product. Partnering with Realnetworks it offers a digital media platform which it claims will facilitate the publication and management of broadcast content. Wanadoo has also announced its intention to offer Video on Demand services to its broadband customers, with pay TV channels set to follow.

Further means of distributing television programmes are now technically possible. Although Hutchinson Whampoa offers delayed video coverage of FA Premier League goals via its 3G service, the UK has not yet had the widespread trials of television content to mobile phones such as those in Finland and Germany. While selected programmes can already be accessed over the internet, no mainstream UK channel has yet made all of its content available in this way, with rights issues remaining a key barrier.

Internet content is becoming mobile

Operators are developing internet content specially tailored for reception on a mobile phone. This is often branded and specific to the mobile operator and deals are being signed with various content providers such as Emap and ITN. Usage of these sorts of services is just starting to grow in the UK and is likely to expand further with the launch of 3G services from other operators.

Music downloads are a way of life for some

A survey recently commissioned by the British Phonographic Industry (BPI) found that of the estimated 8 million people in the UK who downloaded music approximately 92% were doing so illegally. However, following litigation warnings in the US and legal cases against users by the recording industry, the number of files on peer-to-peer networks is estimated to have decreased by approximately 20%.

At the same time, legal online music services are beginning to take hold in Europe - there are now nearly 30 legitimate download services available including iTunes, Napster, and MyCokeMusic. Figures from the Official UK Charts Company reveal that there were over 150,000 legal music downloads in January 2004, with MyCokeMusic claiming 50,000 in its launch week alone. In the first five months of 2004 there were more than half a million legal music downloads, meaning that a digital music format has outsold physical formats (vinyl, cassettes and DVD) for the first time.

Radio stations are getting in on the act too. In February 2004, for example, GWR announced the launch of its “hear it, buy it, burn it” service on its radio websites. Users can hear a song they like on the radio and use the station’s website to download it to their MP3 player. The latest generation of DAB digital radios (for example The Bug from Pure) allows listeners to download songs directly onto an SD (Secure Digital) card.

Mobile and fixed telephony begin to converge

In June BT announced plans to launch Bluephone later in 2004 (although this has now been put back to early 2005). This may go some way to facilitating the convergence of fixed and mobile networks and see BT becoming the UK’s first truly mobile virtual network operator (MVNO) with the capability to switch traffic.

When away from the home or office, a Bluephone works as an ordinary mobile phone. When in range of the user’s fixed terminal, a Bluetooth short range wireless link is made, so that calls can be made and received via a broadband (e.g. DSL) link. When a Bluetooth connection is made, the network is informed and ‘hands-over’ the call to the fixed line according to normal GSM protocols. Future versions may use other technologies such as WiFi or Ultra-Wide-Band (UWB) for the short range links.

This could help to eliminate problems with poor indoor coverage of GSM (Global Standard for Mobile telephony) in many buildings. Consumers would always be “best connected” whether at home, in the office or outdoors. There are also potential advantages for consumers in “singularity” in terms of handset, billing, numbering, voice-mail and address book. In addition, they should also benefit from lower tariffs available via fixed networks.

2.2 Progress towards a digital UK continues

The United Kingdom is going digital. Analogue radio, television and fixed line telephony have been almost universally available for some time – but over the past five years:

Digital platforms are available across most of the UK

There are three main ways to receive digital television – satellite, cable and digital terrestrial (DTT), with a fourth, TV over DSL at an early stage. The coverage of each platform varies, with digital satellite the most extensive. The terrestrial broadcasters’ aim is to build out DTT coverage to the vast majority of the country over the next few years, and the Secretary of State for Culture, Media and Sport announced in July 2004 that analogue television services are likely to be switched off by 2012.

Figure 1: Availability of services as at June 2004

 

Analogue

Digital

 

 

UK

England

Wales

Scotland

N Ireland

Fixed line calls ~       

100%

100%

100%

100%

100%

100%

Mobile

-

99%

99%

99%

99%

99%

3G*

-

75%

n/a

n/a

n/a

n/a


Broadband*

-

90%

92%

81%

81%

79%

Narrowband

100%

-

-

-

-

-

Cable TV

14%

37%

n/a

n/a

n/a

n/a

Satellite TV

-

97%

n/a

n/a

n/a

n/a

Terrestrial TV

99%

75%

73%

82%

57%

58%

TV over DSL

-

5%

6%

0%

0%

0%

Radio*   

98%

85%

88%**

92%**

74%**

100%**

* services available from at least one operator

** Figures relate to local multiplex licensed population coverage rather than transmitter coverage

~ Fixed line calls can be made digitally using ISDN lines or voice over internet protocol (VOIP) on broadband networks

Figures for broadband are for households connected to enabled exchanges - slightly less than this number are able to access the services.

Data relates to households except radio which shows individuals

Source: Operators / Ofcom

For DAB digital radio too, coverage is increasing – both Digital One, operator of the national commercial DAB multiplex, and the BBC are building new transmitters. Digital One now covers over 85% of the population of Britain (it is not licensed to cover Northern Ireland). BBC network radio broadcasts on DAB digital radio to

80% of the UK, although this is expected to rise to 85% by the end of 2004. Local digital services are now licensed in 46 areas of the UK, potentially covering 86% of the population – although, in reality, availability within many licence areas is less than 100%.

The spread of digital has been similarly extensive in the telecoms sector. The success of the mobile phone has brought about increased investment in transmitter networks and services now reach 99% of households. 3, the UK’s first 3G service from Hutchinson Whampoa, claims that 75% of households are able to receive its signals – other operators have recently launched 3G services and are currently extending their networks.

Narrowband internet access is available to anyone with a phone line, but 90% of households are now connected to a broadband-enabled exchange, allowing them to subscribe to higher speed, always-on services. However, BT estimates that 3% of these households are located too far from the enabled exchange to be able to receive a broadband service using current technology. This is a particular problem in rural areas. BT has stated that the percentage of households connected to a broadband-enabled exchange will rise to 99.6% by the end of 2005.

The number of services on digital platforms is growing

On television, the Sky digital platform offers the largest number of services, with 272 television channels (of which 11 are delayed re-broadcasts of the original channel - “+1” services) and a number of pay per view services. A high proportion of these channels are also available from the cable companies, while DTT offers 37 television channels.

BSkyB recently announced its intention to offer a “free-sat” service, which will provide viewers with an easy way to purchase equipment with which to watch the free-to-view satellite services, including all of the BBC’s services, ITV 1, Channel 4 and Five. Meanwhile in DTT, Top-Up TV launched a package of pay services at the end of March 2004 to complement the existing free-to-view services.

These developments mean that viewers will be able to decide between pay and free-to-view services on both DTT and satellite. Free-to-view services are included in the bundled packages of television and telephone services offered by the cable operators.

On DAB digital radio, there are 130 individual commercial services, broadcasting either to individual local areas, to several local areas or across the UK. Of these 32 are available only on digital, while a further 14 extend existing analogue services to new areas and 84 simulcast only to the same area as their analogue coverage. These are supplemented by 10 BBC UK-wide services and 35 BBC local or nations’ radio services. The Sky digital platform carries 85 radio services, while Freeview and the cable operators offer a smaller number of stations.

Consumer take-up continues to grow

Most digital services are available to most of the population, although take-up varies considerably by platform (figure 2). Mobile telephony (2 or 2.5G) has the highest level of take-up at 75% of households, compared to its technical coverage of 99%. Relative to their widespread availability, 3G services have the lowest take-up at 2.0 % of the population followed closely by DAB digital radio sets, which are in 2.5% of households (although to date only 3UK offers 3G handsets). As at the end of March 2004, 53% of UK households could receive digital television on at least one set in their home.

The rapid rise in Freeview purchases has been the principal reason for the growth in digital television take-up in recent months, with the addition of 2.3 million Freeview homes since the start of 2003, bringing the total to almost 3.5 million homes.

Over the same period BSkyB added a further 666,000 customers to its digital service to bring its total to almost 7 million homes, while the cable companies added 315,000 digital subscribers, principally converters from their analogue services, increasing their total subscriber base to 2.4 million.

Broadcasters are increasingly looking for ways to make digital television more attractive to viewers and so boost their market share and / or revenues. Interactive television and Personal Video Recorders (PVRs), such as Sky+, are already in the market and in June this year Sky announced its intention to launch High Definition Television (HDTV) services from 2006.

Most listening to digital radio currently takes place via digital television. However, after several years of what the industry saw as slow sales of sets, principally due to low availability and high prices, DAB digital radio set take-up by the public increased significantly during 2003 and 2004. Sales in the last quarter of 2003 were strong and exceeded those of analogue sets for the first time. With around 2.5% of households now estimated to own at least one DAB set (607,000 sets in total at the end of May 2004), penetration in the UK remains greater than in any other European country.

Figure 2: Availability and Penetration of digital services Q1 2004

 

Source: Ofcom / operators / licensees

Note: figures for radio are for individuals not households

 

All UK mobile operators now use digital signals to transmit voice calls. There were 54.7m active mobile phone customers reported in the UK at the end of March 2004 (either pre-paid or on monthly contracts) with an estimated 86% of UK households having at least one handset (note: some people have more than one subscription). Some consumers are now starting to substitute their fixed line calls for mobile calls, leading to a decline in the share of all telephone calls made from fixed lines - approximately 26% of all voice calls in the first quarter of 2004 were made using a mobile phone (figure 3).

Figure 3: Share of total fixed and mobile voice volumes

 

Source: Ofcom / operators

3G mobile networks leverage the ability of digital signals to provide more data at faster transfer rates. As at the end of June 2004, 3, the UK’s first 3G service, had an estimated 500,000 active users, up from 361,000 in March.

Whilst use of 2.5G services (offering, for example, photo messaging – i.e. more than simple voice and text messaging) has been growing for some time, 3G competition (offering full video calling and internet type content) is about to intensify. A ll UK mobile operators have now launched 3G data services with voice expected to follow.

In June 2004 53% of households had an internet connection, of which 4.45m (around a third) were broadband. This has brought UK broadband penetration to levels approaching those in France and Germany and, as UK monthly increases in subscriber numbers appear to be outstripping those in those two countries, the UK could move ahead in the near future. Overall, however, UK uptake remains some way behind that in the US, Japan, Korea and Sweden.

New technology will transform fixed telephone networks

One of the most potentially significant developments for the digitisation of the UK is the arrival of Voice over Internet Protocol (VoIP), which allows telephone calls to be made over networks designed for data, like the internet. It does this by converting analogue voice signals into digital signals suitable for transmission over the internet, which can then be converted back at the other end.

At its simplest, VoIP operates between personal computers, using speakers and a microphone or headset. Both users need to be online at the same time and running compatible software. VoIP can also work between normal analogue phones using an add-on device which converts the voice into a digital signal before transmission over the internet. This form of VoIP allows telephone numbers to be assigned to users and calls to be terminated onto the public service telephone network (PSTN). As call quality can be affected by bandwidth, most VoIP users employ broadband connections, so the technology is also known as Voice over Broadband (VoB).

Call costs for VoB are effectively covered by broadband access charges – so there is a zero marginal cost for voice calls made by users with always-on connections. If take-up of VoB becomes widespread this may lead to radical changes in the charging structure of the telecoms industry. However, there are significant technical issues to be overcome before VoIP performance becomes as reliable as the PSTN.

The potential for operational cost savings by telecoms operators means that VoIP technology is likely to be used for the replacement of existing PSTN core networks much faster than it becomes standard in the home or office. In June BT set out a timetable for upgrading its core UK networks to facilitate the next generation of multi-media communications services. The 21CN (21 st Century Network) programme is designed to migrate services from the existing UK PSTN to a multi-service IP network for both voice and data services.

2.3 Household usage of communications services increases

Consumption of TV, radio and telecoms grows

Over the past four years consumer usage of all forms of electronic communications has grown (figure 4). The average household is listening to more radio (an additional 2.3 hours a week), watching more television (up half an hour a week), spending more time making phone calls (14 minutes a week more), sending more texts (up nearly four times) and spending more time online (at least five times as much). (Note: some of these activities take place simultaneously.)

Figure 4: Weekly household communications consumption

  1999 2003
TV viewing 25.6 hours 26.1 hours
Radio listening (adults) 41.2 hours 43.5 hours
Telephone voice calls of which: fixed voice mobile voice 91 mins 82 mins 9 mins 108 mins 81 mins 27 mins
SMS texts 1 texts 15 texts
Dial-up internet usage 19 minutes 94 minutes
Broadband usage 0 Around 3 hours

Source: Ofcom, Rajar, BARB, operators

Note: these figures are an average for all households – for those households who actually use the services, the averages will obviously be higher

Other emerging technologies are also vying for consumers’ leisure time

Use of other emerging technologies and appliances is changing the landscape of home communications (figure 5). Most of the 53% of homes in the UK which had digital TV at the end of March 2004 receive these services via a digital set-top box but 3% of UK homes have integrated Digital Television sets (iDTVs) – negating the need for a separate set-top box.

Interactive television services - the - red button - have been used by 43% of digital viewers, with 21% claiming to use such services at least once a week.

DVD is currently the fastest growing new home technology with 45% of adults claiming to own a DVD player at the end of 2003, up from 5% in 2000. This contrasts with VCR ownership which is now static, if not actually falling.

Personal Video Recorders (PVRs) are the most recent and least established technology in the television marketplace but may have the greatest potential to change the way people consume TV in the long run. Currently BSkyB’s Sky + system is the principal PVR offering and the company claimed 322,000 subscriptions to its service at the end of March 2004.

Use of the internet and interactive services is also on the increase. Following a steady increase in PC ownership internet penetration reached 53% of homes in February 2004 and 47% of adults claim to use it daily.

Ownership of MP3 players (such as Apple’s iPod) initially increased slowly until the end of 2003 but the recent success of the iPod has almost certainly boosted sales in 2004. Although figures for the UK are not available, the company claimed to have sold 860,000 units internationally during the quarter ended June 26 2004.

Figure 5: Take-up of other household communications devices

Source: Ofcom - The Public’s View 2003

Note: PC penetration was 64% as at February 2004

2.4 Public service broadcasting continues to face challenges

The output of the main five television channels is increasingly under pressure to win audiences, as the television market fragments. The Communications Act 2003 set out what public service broadcasting is expected to deliver. Analysis of 2003 data confirms the picture described in phase one of Ofcom’s PSB review, which analysed data for the period 1998 to 2002 and found that broadcasting on the main terrestrial TV channels during the period had partially, but not fully, fulfilled the requirements of the Act.

In 2003, despite increases in some areas, many of the genres typically thought of as “public service broadcasting” are increasingly marginalised:

On the plus side, the number of hours of serious factual programming was stable, although still below its 2000 peak. News provision increased, although 2004 will see a decrease following ITV’s relocation of its late evening news bulletin to a permanent home at 22.30 on weekdays. This move has not so far brought it the 4m audience ITV was hoping for.

In total, the UK's broadcasters spent nearly £4.8 billion on programming in 2003, a little over half of it on the five main channels. For the first time since 1998, total programme spend on the five main channels fell in 2003, due to a £70m real-terms reduction in BBC ONE’s programme budget – although the budgets of other channels continued to rise. The BBC spent slightly more on its digital channels than in 2002, although its spending on its analogue output still dwarfs its digital spend (an average of £90,000 per hour on BBC ONE compared to just over £7,000 across all its digital channels).

Increasing channel budgets for the main channels over the past six years have not halted the increasing fragmentation of the TV audience. This trend has been apparent for several years as digital take-up grows. Between 1993 and 2003, ITV1’s share declined from 40% to 23.7%, and BBC ONE’s from 32.7% to 25.6%. Meanwhile, the share of the digital channels has steadily increased; combined, they now account for about the same amount of viewing as ITV1. However, this overall trend conceals significant differences between cable, satellite and Freeview homes: the main five channels combined account for just over half of viewing in cable and satellite homes, compared to over 80% of viewing in Freeview homes.

The main five channels still reach a wide cross-section of the audience: on average, all of them except Five were watched for at least fifteen minutes each week by more than half of all viewers. Nonetheless, some of the more traditional public service genres find it harder to secure a place in increasingly competitive schedules.

2.5 Increased competition in telecoms - consolidation in broadcasting

Competition in telecoms increases

In the telecommunications sector the story of 2003 and the first quarter of 2004 has predominantly been one of increasing competition rather than consolidation. Despite a few notable acquisitions, such as the purchase of Bulldog Communications by Cable & Wireless and Caudwell Group by Vodafone, falling prices and a proliferation of new players and hence services have accompanied structural changes to the market.

The last few months have seen the steepest decline in BT’s share of the fixed voice market for some time. By the end of June around 3.5 million BT subscribers had signed up for carrier-pre-selection (CPS) services with another call provider. BT’s market share of all fixed voice call volumes fell from 69% to 67% in the year to March, reflecting competition from cable and other direct access providers as well as from CPS providers.

BT announced in March this year that it was increasing the monthly cost of its standard telephony package. BT also announced a new wholesale calls product for those CPS operators that have invested in connecting to a local exchange, which will enable them to use BT directly for on-switch or inter-local exchange calls at substantially reduced costs.

Competition in the mobile sector remains strong. Despite some recent consolidation Virgin Mobile in particular continues to grow its subscriber base. Competition has also been further stimulated by the entrance of 3UK and the re-entrance of BT to the sector.

While the wholesale supply of broadband services is largely dominated by BT’s wholesale DSL products and cable modem services, competition at the service provider level is much stronger. The first part of 2004 has seen a large amount of price movement and strategic repositioning by all the major internet service providers.

The competition brought about by local loop unbundling (LLU) will be important in helping to deliver second-generation broadband services in the UK. In May 2004 BT announced a phased series of price cuts of up to 70% on its local loop products which should go some way towards encouraging network operators to extend their participation in this market.

Communications Act allows consolidation in broadcasting

Whilst in both digital radio and digital television advances in technology are facilitating the entry of new market participants, the Communications Act 2003 allowed for more consolidation to take place in broadcasting, and some mergers and acquisitions are already taking place, particularly in the television sector.

The Carlton and Granada merger, long awaited by the City, came to fruition in February 2004 with the formation of ITV plc. This brought together all English and Welsh ITV licences, with the aim of creating a force able to compete effectively with the BBC and BSkyB. The new entity plans to deliver savings of at least £100m (representing around 5% of its cost base), although this is at the expense of regional job losses. To prevent abuse of its dominant position in airtime sales the company agreed not to increase prices unless audiences also rise.

Many analysts expect further consolidation in the television industry over the next few years. In May 2004, ITV agreed a deal to acquire SMG’s 25% stake in GMTV (making it the majority shareholder) and there is speculation that SMG and Ulster TV may join them at some point in the future. Elsewhere, Channel 4 and Five have announced that they are looking at the possible benefits of merging and financial restructuring at ntl and Telewest could yet pave the way for consolidation in the cable sector.

The Communications Act 2003 also increased the scope for radio companies to merge provided that at least two radio operators (plus the BBC) broadcast in any given market. In addition, it allowed ownership of UK commercial radio stations by entities based outside of the European Union and by religious bodies.

Although there has been movement in the UK radio sector with thirty-five commercial radio licences changing hands since the beginning of 2004, the full-scale consolidation expected by industry analysts has yet to happen.

Meanwhile in the public sector, the role of the BBC is under review. The BBC operates under the terms of a Royal Charter, which comes to an end in 2006. The Department of Culture, Media and Sport (DCMS) is carrying out a review of the BBC to help inform Parliament’s determination of the BBC’s future size, shape and activities.

In addition to Charter Review, the DCMS is also carrying out separate reviews of the BBC’s new digital television services (led by Professor Patrick Barwise) and its new digital radio services (led by Tim Gardam) to ensure that they comply with approvals and to assess the impact they have on the market.

2.6 International regulatory developments

Over the past eighteen months, the international regulatory agenda has been dominated by issues surrounding the digitisation of broadcasting and telecoms. A number of countries have begun consultations on VOIP development and regulation while the active promotion of digital radio and television by the French, Korean and Norwegian regulators is taking place.

Figure 6: International regulatory developments

Issue

Country

Body

Regulatory action

Television

Media ownership

Italy

Italian Parliament

Approved a media reform law to relax limits on media ownership.

US

FCC and Third Circuit Court of Appeals

Rules on media ownership overturned by the appeals court. FCC banned from implementing the rules until they have redrafted them or offered a better justification for the media ownership limits that they proposed.

Digital switchover

Norway

Norwegian Parliament

Passed legislation setting 1 January 2008 for analogue broadcast switch off. Switch-over will take place on a region-by-region basis between 2006 and the end of 2007.

Radio

Digital broadcasting

France

French Parliament

The Paquet Telecoms Bill will look at DAB and is expected to create a clear regulatory framework in which digital broadcasting can evolve.

Korea

Ministry of Commerce, Industry and Energy

Announced support for a project to develop Digital Media Broadcasting (DMB) receiver technology.

Local broadcasting

US

FCC

Launched “Localism in Broadcasting” initiative in August 2003. ‘Localism Task Force’ to advise on legislative recommendations to Congress.

Telecoms

VoIP

Germany

RegTP

Launched public consultations on VoIP.

Canada

CRTC

Launched public consultations on VoIP.

US

Senate & FCC

Congressional proposal being considered to reduce the number of fees and regulations placed on VoIP services to allow the market to grow. Any action is unlikely to take place until 2005 but the bill’s sponsors hope that it will stimulate investment in VoIP.

Privatisation

Australia

Parliament’s lower house

Passed a bill for the privatisation of the incumbent operator, Telstra, paving the way for its discussion in the Senate.

Mobile termination charges

US

FCC

Pursuing their concerns on excessive foreign mobile termination charges by issuing a Notice of Inquiry and seeking the views of foreign regulators and Ministries.

2.7 The balance of industry finance shifts

Growth in broadcasting and telecoms

Revenue reported to Ofcom by operators in the UK communications sector amounted to £54.1bn in 2003; of this, £8.8bn was from wholesale telecoms. Ofcom estimates that in 2003, end user spending on regulated communications services was £45.3bn (figure 7), up 9.8% from 2002. (This excludes some unreported revenue, notably from installation, maintenance and hardware). The increase was faster than for the economy as a whole, with revenue as a proportion of GDP rising from 4.0% to 4.1%. The bulk of the revenue figure (£34.4bn) and the biggest annual rise (10.2%) came from telecoms, with television contributing £9.8bn (9.2%) and radio £1.1bn (up 4.9%) (figure 7).

Figure 7: UK communications sector revenues

Source: Ofcom / licensees / operators / BBC

TV subscription revenue overtakes TV advertising revenue

After three years of stagnation driven by poor advertising revenue performance, the TV sector returned to growth in 2003. And for the first time, TV subscription revenues overtook advertising to become the largest single source of revenues for the industry (figure 8). Subscription revenues rose by 11% in 2003 to stand at £3,295m, while advertising revenues (NAR) were up only 3% at £3,240m, roughly in line with inflation.

The share of the licence fee allocated by the BBC to its television services was up slightly at £2,298m, accounting for 23.4% of total TV revenues. “Other” revenues (including sponsorship, sales from shopping channels, use of premium rate telephony and interactive services) weighed in at almost £1bn, showing the biggest annual increase of all the revenue streams (up 51%). This could point, perhaps, to a structural change in the way programmes are funded.

Figure 8: TV revenues 1999 to 2003

Source: Ofcom / licensees / BBC

Note: This chart shows nominal prices – the equivalent chart in the Television section shows constant 2002 prices, in order to be consistent with phase one of the Public Service Broadcasting Review.

Recovery in the advertising market

UK broadcasting advertising started to show signs of recovery in 2003 (figure 9). NAR reported by broadcasters rose 3.5% from £3,584m to £3,708m. The biggest growth came from local commercial radio which rose 11.1% to £163m but national commercial radio also performed well, up 5.1% to £306m. Television remained more or less static in real terms at £3,240m but arrested the decline since 2000.

Figure 9: Growth of UK broadcasting advertising revenues


Source: Ofcom / licensees

The rise reflected improving industry sentiment; according to The Advertising Association total display advertising grew 2.3% to £13.1bn in 2003 with the two biggest advertisers, Proctor & Gamble and COI Communications, both showing double digit expenditure growth. Advertising agencies throughout Europe have also been optimistic in their outlook for the year – ZenithOptimedia forecasts total growth in the market of 3.2% in 2004.

The strong performance of radio means the medium now accounts for 4.5% of total display advertising, up from 4.3% for the previous two years. The total display advertising market remains dominated by TV, direct mail and the press (figure 10).

figure 10: UK advertising spend by medium

 

Source: The Advertising Association

Commercial radio revenues rose over the period 1994-2000 before falling back slightly during the advertising recession of 2000-2001. In 2003, total industry revenue was £1.1bn of which commercial radio accounted for £543m. Estimated spend on BBC radio rose slightly from £569m to £587m (using Ofcom estimates, as the basis of reporting in the BBC’s Annual Report changed this year).

Telecoms revenues up but the balance moves in favour of mobile and internet

In the telecoms sector total revenue in 2003 was up 10.2% to £34.3bn. This increase marked some dramatic changes within the total. Total fixed call and access revenues fell 3.6% to £11.1bn in stark contrast to mobile revenues which grew 16.3%% to £10.7bn. And although voice calls dominated total sector turnover, internet revenue grew 12.4% to £2.2bn as penetration increased and users switched to broadband. “Other retail telecoms”, consisting of corporate data services, leased lines and mobile handset sales in tied shops rose 21.8% to £10.3bn.

Financial impact of communications on consumers increases

The impact of television and telephony (excluding some elements of installation, equipment and maintenance) on consumers has grown steadily as penetration of digital services has increased and the range of offerings has expanded.

Figure 11: Average weekly household communications spend

 

 

Source: Ofcom / operators / licensees / BBC

Weekly household expenditure on television and telephony rose from £10.06 to £16.36 from 1999 to 2003, and now makes up 4.0% of total household expenditure. Growth has been particularly apparent in mobile telephony and television, (mirroring growth in industry revenue figures above).

The financial markets

UK telecoms shares have underperformed the FTSE since the beginning of 2004, reflecting concerns over profitability, given enhanced competition which has seen price reductions in most markets. The UK media sector initially outperformed the index, as investors were encouraged by consolidation news, but plummeted in August, weighed down by adverse reaction to BSkyB’s results (figure 12).

Figure 12: Telecoms and media sector share index

Index: Jan 2nd 2004=100

Source: www.yahoofinance.co.uk



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