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1.1 Introduction and summary

1.1.1 Introduction

This is Ofcom’s third International Communications Market Report. It aims to provide a statistically-driven international comparative context for the UK communications sector.

The report provides an overview of the communications industries in a range of countries:

• It draws comparisons between the UK and six large comparator countries – France, Germany, Italy, the US, Canada and Japan.
• Where possible, we have included data from another five countries – Poland, Spain, the Netherlands, Sweden and the Republic of Ireland.
• We have also repeated last year’s analysis of communications markets in Brazil, Russia, India and China. Because their economies are at a different stage of development to the other 12 comparator countries, and because full datasets are harder to come by, we have set out these four countries in a separate chapter at the end of the report.

1.1.2 Data and methodologies

Data in this report cover the 2007 calendar year. We show trends using a five-year historical time series where possible.

All currency conversions use the average market exchange rate during 2007, as provided by the IMF. We have opted to convert data from every year at this fixed rate, so that currency fluctuations do not obscure market trends. The exception to this methodology is in the international price benchmarking analysis (Section 1.X), where we have used purchasing power parity adjusted exchange rates. All figures are nominal unless otherwise stated.

The document draws on a combination of desk research and discussions with industry bodies, operators, regulators and commentators. The data were gathered with the support of consultancy firm IDATE, which has attempted to verify sources and provide market estimates where data are incomplete. Telecoms pricing consultancy Teligen built a bespoke model to enable our analysis of comparative international pricing and populated it with specifically-sourced tariff data. Comparisons between data in this report and its predecessors will not always be possible, owing to changes in definitions over time, in the method of collecting data and due to the availability of new data sources. Similarly, some UK data published in this report may not be directly comparable with data published in other Ofcom reports, such as the UK Communications Market Report.

Thanks are due to Screen Digest, Informa, PriceWaterhouseCoopers, EuroBarometer, the European Audiovisual Observatory, the World Advertising Research Centre, Execution Research, Médiamétrie/Eurodata and the Canadian regulator CRTC for the permissions they have given us to use their data.

We endeavour to ensure that data in this report are comprehensive and the most accurate currently available. However, with a document so wide in scope, and with reliance on third parties for some data, there will always be omissions and occasional inaccuracies. Comments and feedback on this report are welcomed at market.intelligence@ofcom.org.uk.

The information set out in this report does not represent any proposal or conclusion by Ofcom in respect of the current or future definition of markets and/or the assessment of licence applications or significant market power or dominant market position for the purposes of the Communications Act 2003, the Competition Act 1998 or other relevant legislation.

1.1.3 Report structure

This report is divided into seven chapters:

• The Overview (this section) (page 19) provides a report summary. It then goes on to examine:
• how the UK communications industry compares with the main comparator countries in this report;
• the UK communications consumer, in an international context; and
• the regulatory landscape within which communications service providers operate.
• Comparative international pricing (page 53) compares the typical prices people pay across our main comparator countries, for a range of different ‘baskets’ of communications services.
• Converging communications markets (page 87) examines recent market trends, industry characteristics and consumer behaviour across a range of converged devices and services.
• The television (page 137), telecommunications (page 183) and radio (page 243) sections each describe a range of recent market developments, analyse the industry (typically focusing on revenue trends), and conclude with a consideration of consumer behaviour.
• Emerging markets (page 265) considers the communications markets of Brazil, Russia, India and China.

The remainder of this section summarises each chapter’s main findings.

1.1.4 Overview (page 9)

1.1.4.1 The UK industry in context (page 23)

Communications market revenue reached £876bn in 2007 – the UK accounted for 4.4% (£39bn) as the fourth largest market behind the US, Japan & Germany

• Global communications market revenue totalled £876bn in 2007, up 6.1% year-on-year.
• Revenue is concentrated among a comparatively small number of developed nations. The seven main comparator countries in this report (the UK, France, Germany, Italy, the US, Canada and Japan) accounted for £440bn (50%) of the total. Telecoms remained the largest of the three sectors, making up 68% (£300bn) of the total, followed by TV (28% or £122bn) and radio (4% or £18bn).
• The UK communications sector accounted for 4.4% (£39bn) of the worldwide total, ranking fourth in the world (after the US, Japan and Germany). Per head of population, the UK generated £636 in 2007, second only to the US with £698. The UK figure was up by a quarter in five years, second only to Italy (30%) and Canada (27%).
• The UK’s television industry (at £10.4bn) was the third largest among the bigger comparator countries in this study (after the US and Japan), while the telecoms (£26.9bn) and radio (£1.3bn) industries both ranked fourth, after the US, Japan and Germany.

1.1.4.2 UK advertisers spend a greater proportion of their budget on the internet than any other nation – 19% of all display advertising in 2007

• TV and radio’s share of advertising spend varies by country. TV spend alone accounts for the majority of total spend in Italy; when combined with radio, the same is true of Poland and Spain. In the UK, spend on television and radio combined accounted for just under one third of all display advertising in 2007.
• With the exception of the Republic of Ireland and France, TV advertising’s share of spend either remained stable or fell during 2007. In the UK, it fell by 0.9 percentage points in 2007, the second largest reduction behind Canada (-1.1 percentage points)
• UK advertisers allocate a greater proportion of their budgets to the internet than in any other country - 19% in 2007. Advertisers in Sweden ranked second with 17%, followed by the US with 13%. The most significant shift in advertising spend during 2007 was into UK internet-based advertising; its share of total spend rose by 4 percentage points.
• During 2008 equity valuations for some communications market operators fell, as did market indices. While generalisations are difficult to make, when these reductions are corrected for overall market movements, some telecommunications stocks appear to have outperformed the market, while some television channel businesses appear to have performed less well.

1.1.4.3 The UK consumer in context (page 31)

The UK leads the main comparator countries in digital television and DVR take-up and ranks second in mobile penetration

• Take-up of digital technologies has risen year-on-year across all the larger comparator countries in this study.
• Homes in the UK were the most likely to have a main television set connected to a digital decoder in 2007, with an estimated 86% connected by the end of the year (up 9 percentage points). Homes in the US ranked second, with 70% (up 9 percentage points) followed by the French with 66% (up 13 percentage points – the fastest growing main comparator country in 2007).
• The UK ranked second, behind Italy, for the number of live mobile connections per 100 of population (121 and 154 respectively). UK take-up rose by 6 percentage points year-on-year, behind Italy (16 percentage points), Germany (14) and the US (7); the UK’s lead over Germany on this measure narrowed to 3 percentage points (from 11) during 2007.
• Residential and small/medium sized enterprise (SME) broadband take-up in the UK totalled 60 connections per 100 households in 2007, up by 10 percentage points on the year. It ranked third behind the US (61%, up 12 percentage points year-on-year) and Canada (66%, up 6 percentage points).
• More people in the UK own and use a DVR (30%) than in any other of the larger comparator countries. Twenty-one per cent of Italians make the same claim, alongside 20% of people in the US and Canada. DVRs were less popular in Germany (11%) and Japan (13%).
• Consumers’ use of different communications devices varies by gender. In many countries women were significantly more likely than men to use a fixed line phone on a weekly basis. Men were more likely than women to claim weekly use of a games console or portable music player.
• Recent research into the resilience of telecommunications expenditure in the UK, France, Germany and Italy suggests that consumers may be less inclined to trim their mobile, fixed line and broadband spend than other areas of discretionary spend.

1.1.4.4 The regulatory landscape (page 41)

National regulatory authorities – proliferation connected to market liberalisation

• The tendency towards liberalising communication markets has increased the number of national regulatory authorities from 12 to 148 worldwide over 20 years.
• Convergence has prompted institutional reform in a number of countries, with many regulators around the world, including Australia, Canada, Italy, Finland, the UK, the US, and most recently, South Korea, now being responsible for pan-communications sector regulation. There is also increased regulatory cooperation with the development of cross-country networks

Regulatory developments centred on promoting competition and protecting consumers

• Negotiations on a revised European regulatory framework for electronic communications networks continued during 2008. There has been broad support for proposals which strengthen consumer protection, but other issues, such as the introduction of a veto power for the European Commission or a European Agency, have proved controversial.
• In telecommunications markets, the regulatory issues currently under consideration across some of the comparator countries include the regulatory approach to next generation access networks, functional separation (whereby certain network elements of the incumbent operator are placed in a separate business unit to allow competing service providers to access essential network infrastructure on non-discriminatory terms), and consumer protection (e.g. international roaming and mobile call termination rates).
• Audio-visual regulation is also undergoing significant changes. In Europe, the AVMS Directive will shape the future of commercially-funded PSB, potentially opening up new revenue. Across the world, NRAs are examining how converging markets and new media technologies will influence the future direction of public service broadcasting, and dealing with the challenges created by the rise in online content distribution.

1.1.5 Comparative international pricing (page 53)

• Our comparative international pricing takes account of the growing tendency of consumers to take a bundle of communications services from a single provider. It also accounts for the equipment costs that consumers can incur in signing up to new communications services.
• We consider five different baskets of communications services in this analysis.
• Basket 1 is representative of a low-use household with basic needs (‘free’ TV and a fixed telephone line).
• Basket 2 builds on these basic needs with a broadband connection.
• Basket 3 represents a mobile ‘power user’, using mobile for voice and broadband, and taking entry-level pay-TV.
• Basket 4 combines a fixed line with several mobile handsets, a fixed broadband connection and entry-level pay-TV.
• Basket 5 represents the highest-spending type of household, with low use of fixed telephony, two mobile handsets, fixed-line broadband and premium-level pay-TV.
• The analysis considers single service offers, weighted by the comparative market shares of the leading providers of fixed voice, mobile voice, broadband and television. Further analysis also examines the ‘best bundled offer’ available to satisfy the needs of each consumption basket; the summary, set out here, should be read in conjunction with that fuller analysis.
• Benchmarking the fixed voice services available, using the weighted average comparison, reveals that that the UK is more expensive for the lowest-use basket than France, Germany and Italy, owing to high line rental charges. The UK offers the cheapest fixed-line service in the fourth basket, while in France and Germany the equivalent fixed-line service is considerably more expensive.
• In mobile, using the same weighting methodology, services are cheaper in the UK in every basket except the low-usage one, where the Italian offer is cheapest. In general, the UK and Italian tariffs are lower than those in the other comparator countries.
• With fixed-line broadband, consumers in the UK and France benefit from the cheapest weighted average tariffs. But comparisons require caution, since single-service offers are not easy to come by in each country.
• Like-for-like comparisons in television are difficult, owing to the different types of channels and content available from country to country. ‘Free’ TV is most expensive in Germany and the UK, where licence fees are high; conversely, there is no licence fee in the US or Spain. Basic pay-TV is cheapest in Italy, Germany and the UK. For premium-level content, prices in the US are highest, followed by those in the UK and Spain.

1.1.6 Converging communications markets (page 87)

1.1.6.1 Consumers are taking advantage of mobile-enabled services in increasing numbers

• Mobile broadband has grown in popularity across several comparator countries during 2007, driven by broadband-capable HSPA availability of more than 70% across Europe and increasing take-up of datacards and ‘dongles’. In the UK HSDPA covers 87% of the population.
• The growth of mobile broadband connectivity has created a thriving market for music downloads to mobile phones. It accounts for over half of all digital music revenue per head in France and Italy, and 90% of the total in Japan; in the UK the figure stands at just under 30%.
• Mobile social networking has also taken off in the UK and the US, with application developers adapting interfaces to suit mobile screens – 0.8m UK and over 4 million US mobile subscribers now access social networking sites on their phones.
• But mobile TV has had a mixed year, with commercial deployments in the Netherlands and the US counterbalanced by the closure of a planned German service based on DVB-H. There is no broadcast-based mobile TV service in the UK (though subscriber-based streamed services are available).

1.1.6.2 Growing broadband take-up has encouraged UK and US broadcasters to launch free-to-view content aggregators that are proving increasingly popular

• The BBC, Channel 4, ITV, Five and Sky in the UK and News Corporation/NBC in the US (through Hulu) have each launched sites offering access to their television shows.
• Concurrently, individuals’ consumption of free-to-air online TV shows has grown rapidly across several comparator countries - in the UK by 69% since 2006.
• Some of these services are free-to-view and advertiser funded. But others have adopted a pay-per-view model and typically charge a fee. Online TV and video content revenue per head in 2007 stood at £1.70 in the US, £0.98 in the UK and £0.55 in Canada. The UK experienced the highest growth since last year at 182%.

1.1.6.3 Total broadband connections increased by 21 % across our comparator countries in 2007

• The growing popularity of TV and film-based content delivered over the web has been facilitated by growing take-up of fixed-line broadband. At the end of 2007, there was almost one fixed broadband connection for every four people in our comparator countries, and growth in the use of mobile broadband services is increasing.
• Access to broadband not only drives up the average time spent online, but also shifts the pattern of services that consumers typically use when online. Internet use was highest in the US, where the average internet user spent over 15 hours a week online in August 2007.
• Games and video dominate Google search terms – the fastest-rising search terms are exclusively concerned with user-generated content sites like ‘Facebook’ and ‘Dailymotion’.
• With the rising popularity of social networking sites, our research suggests that people are increasingly using social networking sites to stay in touch with other people, rather than using email or instant messenger services. At least half of all UK and Canadian adults use the internet for social networking.

1.1.7 Television (page 137)

1.1.7.1 Digital television take-up is rising rapidly across our comparator countries as digital switchover dates approach…

• Analogue terrestrial television is disappearing across Europe; take-up fell by 13 percentage points (pp) in France, 11pp in Spain, 9pp in the UK and 8pp in Italy during 2007. In the UK, France, Spain and Italy, digital terrestrial television was the preferred platform choice when switching over to digital.
• Digital television take-up on main sets was greatest at the end of 2007 in the UK (86% of households, up 9 percentage points(pp)), followed by the US (70%, up 9pp), France (66% up 13pp) and Japan (65% up 8pp). Analogue terrestrial TV transmission have already ceased in the Netherlands and Sweden – they will soon disappear in the US when nationwide switchover occurs in February 2009.

1.1.7.2 …yet pay television services continue to attract subscribers – despite the emergence of newer subscription-free digital television services…

• Pay-TV take-up rose during 2007 across the comparator countries, although the rate of consumer adoption varied significantly, from 0.1% of households in the Netherlands to 10% in Poland.
• The majority of households in the Netherlands, Sweden, the US, Canada and, to a slightly lesser extent, Ireland and Germany, took pay-TV in 2007. For the first time, in 2007, the majority of people in Poland took a pay TV service (and French households crossed the same threshold in 2006). UK pay-TV take-up stood at 47% in 2007, up by 2 percentage points.

1.1.7.3 … with revenues boosted by the growing popularity of ‘add-ons’ such as high-definition television and digital video recorders

• Across ten of our comparator countries in 2007, there was an installed base of 28 million digital video recorders (DVRs), up by 52% year-on-year. The US, the UK and France accounted for 96% of that total – 73% in the US, 13% in the UK and 10% in France. Among European countries, DVR take-up is highest in the UK.
• An estimated 9 million subscribers in 2007 paid for high-definition (HD) services across the UK, France, Germany, Italy, the US and Canada. Subscribers in the US and Canada accounted for 87% (7.9 million) of the total; UK subscribers make up the majority of the 1.2m HD subscribers in Europe.

1.1.7.4 The growing popularity of subscription services meant that advertising share of total industry revenue fell below 50% for the first time in 2007

• Global television industry revenue reached an estimated £166bn in 2007, up by 6% on 2006 and by nearly one-third since 2003. Advertising was the largest component of the total, at £81bn, although for the first time it didn’t account for the majority of total television revenue.
• The Italian TV industry expanded by an average of 9.4% p.a. in the five years to 2007; the Canadian market grew by an average of 6% over the same period and the US market by 5.9%. The UK industry grew by 4.8% over the same period.

1.1.8 Telecommunications (page 183)

1.1.8.1 More mobile connections than fixed lines in every comparator country in 2007

• The number of mobile connections overtook fixed lines in Canada for the first time in 2007. This meant that there there were more mobile connections than fixed lines in all of the comparator countries by the end of 2007. People in Poland and Italy had the highest proportion of mobile telephony connections at the end of 2007, at 80% and 78% respectively, while in the UK the figure was 69% (up by 2 percentage points since 2006).
• Despite the growing sophistication of handsets and the services supported by mobile network operators, SMS (text messaging) had remarkable growth in many countries in 2007, with SMS use growing by 142% in the US and 137% in Canada, and 90% in Poland. In the UK the volume of SMS messages grew by 36%.
• As a result of growing take-up of mobile services, total mobile revenues were higher than those from fixed voice and broadband combined in all the comparator countries covered. Mobile revenue averaged 54% of the total revenues in the report and ranged from 42% in Sweden to 63% in Poland. Mobile revenue share was highest in Poland at 63%, and lowest in Sweden at 42%, while in the UK the figure was 56%.

1.1.8.2 Fixed-line penetration falling, broadband growth slowing

• Over the five years to 2007 the total number of fixed lines in the nations covered by the report fell by 2% to 428 million, although installed lines did increase in Germany and the Republic of Ireland. Fixed lines fell by 1% in the UK, to 34 million.
• But in most countries the majority of voice calls still originate on fixed lines – but only just. Among the nations where separate outgoing call volumes data were available, an average of 54% of voice calls originated on fixed-line networks in 2007, down from 72% in 2002. The UK figure fell from 76% to 60% over the same period.
• The pressures on fixed operators in voice markets were echoed in the broadband market during 2007, with narrowband migration beginning to near completion, and competition emerging among mobile broadband providers.
• Broadband connection growth averaged 37% a year across the comparator countries between 2002 and 2007; it was highest in the Republic of Ireland (166%) and lowest in Canada (19%), while in the UK it was 63%.
• Growth in broadband take-up is slowing among our comparator countries; across our comparator countires the total number of broadband connections grew by 21% in 2007, down from 24% a year earlier. In the UK, growth slowed to 20% compared to 31% in 2006.
• Although broadband revenues were the fasting-growing element of telecoms revenue in 2007 (growing by an average of 36% a year in the previous five years) broadband contributed only 11% of telecoms revenue in the same year.

1.1.9 Radio (page 243)

1.1.9.1 Radio listening – feeling the effects of growing broadband penetration

• Radio listening in 2007 was highest in Poland and the Republic of Ireland, at around 30 hours per head per week. Among the North American and Western European countries the average is nearer 20 hours per head per week. In Spain and Japan this falls to less than 15 hours per head per week spent listening to radio.
• But converging distribution networks and devices are reshaping how consumers choose to listen to content that has traditionally only been available through a broadcast-based network.
• More than a third (37%) of French people claim to use their internet connection to access live radio services. In Italy, the UK, and Germany around a third of internet users claim to listen online, with a quarter of internet users in the US and Canada. But in Japan, just 17% of internet users listen to live radio online – probably reflecting generally lower levels of radio listening there.
• Online distribution also allows people to listen to audio service on demand rather than live. More than a third in Italy, Canada, the US, and in the UK claim to download audio (e.g. music tracks and podcasts), although this activity is less popular in Germany, with just under one in five making the same claim.
• While the internet offers a new distribution channel for radio services, it can also be a substitute service for some. Of the seven large comparator countries surveyed, on average almost one in four people (23%) said they were listening to less radio, whilst around 13% said they were listening to more radio, since getting access to the internet at home. Within the nations, a third of people in Japan and France said they listened to less radio, while one in five in Italy claimed to listen to more.

1.1.9.2 Radio operators in the seven main comparator countries generated £19bn

• The seven main countries included in this study account for around £19bn, or 79%, of world radio revenues. Total world radio revenues reached £23.6bn in 2007, up by £0.3bn on last year. The US accounted for 45% (£10.6bn) of the total; the UK generated a further 5% (£1.3bn).
• Some radio markets experienced a fall in advertising revenue in 2007.The US (-5.1%), France (-2.1%) and Japan (-3.8%) all lost revenue.

1.1.10 Emerging markets (page 265)

• BRIC countries accounted for 42% of the world’s population and had a combined telecoms, TV and radio industry revenue of over £120bn in 2007, just 14% of global revenue. Telecoms revenue grew by an average of 48% across the BRIC countries between 2004 and 2007, driven largely by mobile services, which made up over half (£53bn) of the telecoms revenue generated in the four countries in 2007.

1.1.10.1 Mobile penetration in Russia exceeded that of the UK for the first time in 2007, and Chinese operators activated more than 88 million new mobile connections

• BRIC countries added over 216 million new mobile subscriptions in 2007, a 17% increase on the additions made in 2006. The largest ever reported annual increase in new mobile connections in a country occurred in China in 2007 (88.2 million), while there were a further 84 million new connections in India.
• Take-up of mobile services has been rapid in the BRIC countries - outpacing rising fixed-line take-up. Mobile adoption grew most rapidly in Russia, with penetration growing from 12% in 2002 to 123% in 2007; it now exceeds UK mobile take-up (121%).

1.1.10.2 Fixed-line broadband take-up remains low, with mobile devices offering more extensive broadband reach among BRIC nations

• Fixed-line broadband take-up among BRIC countries is low, averaging three connections for every 100 people, compared to 26 in the UK. In India only three people in every 1000 had a fixed broadband subscription at the end of 2007 – up from 2 in every 1000 in 2006.
• The mobile platform has shown greater success in extending the reach of broadband among BRIC countries – an estimated 60 million people own an internet-enabled mobile.

1.1.10.3 Television and radio services mainly distributed over analogue platforms; adoption rising quickly

• The growth in China’s TV market illustrates the capacity of the Chinese communications market to develop. In the four years to 2007 it grew by 20 million households, compared to just 0.6m in the UK.
• Since 2002 television revenue across the BRIC countries has grown at an average annualised rate of 19%, compared to 5% in the UK. Despite being the smallest country (£2.4bn revenue), Russia’s TV industry grew fastest (up by nearly one-third since 2005), driven by rising income levels and the growing take-up of pay-TV services.
• The Russian radio market is the largest among the BRIC nations, at just over £300m in 2007 (compared to £1.3bn in the UK), overtaking China, with revenues of just under £300m, during the year. India was the fastest-growing radio market from 2003 to 2007, expanding by an average of 52% per annum, albeit from a smaller base.

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