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August 2005 Quarterly Update

1: Key facts

Radio

Local commercial radio listening fall to a new low share of 33.9% in Q1 2005 (although there was a rise in Q2 2005)
Emap’s acquisition of SRH would mean the creation of the second largest commercial radio group in the UK by number of stations and would bolster Emap’s position as second largest group by listening hours
The number of community radio licences awarded has quadrupled from five to 20

Telecoms

Total retail telecoms revenues in the 12 months to March 2005 were £36.6 billion, 5% higher than over the previous 12 month period
Mobile spend in Q1 2005, at £3.3 billion, is some 17% higher than the same quarter in 2004
BT Fusion, which launched a commercial trial in June 2005, is the first demonstration of fixed-mobile convergence
Over 35% of UK fixed lines are now connected to non-BT service providers

Television

Freeview now reaches over 5 million households
30% of all TV viewing is to multichannel services
Shopping, interactive services and pay-per-view accounted for a fifth of digital channels’ revenues in 2004
Direct consumer spending now accounts for over 60% of all TV industry revenues, with advertising accounting for less than 40%

2: Introduction

This is the third in a series of quarterly supplements to Ofcom’s annual Communications Market reports, the latest of which was published in July 2005. This update covers the first calendar quarter of 2005 (January-March).

The Communications Market supports Ofcom’s objective to provide best-in-class research to which stakeholders have regular access. It aims to give a comprehensive picture of the radio, telecommunications and television sectors, with a round-up of recent developments and the latest available data on:

Industry size, structure and financing;
Availability, penetration and use of products and services; and
Consumer attitudes and behaviour.

In addition, we take a closer look at some emerging themes in each sector:

Focus on BBC radio;
Mobile content; and
The multichannel market

Note that 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 for the purposes of the Communications Act 2003, the Competition Act 1998 or other relevant legislation.

Ofcom welcomes comment on the content and style of the Communications Market to help inform future publications. Suggestions and queries should be sent to: market.intelligence@ofcom.org.uk.

3: Executive summary

3.1: Radio

Consolidation continues to reshape the UK radio industry. Emap’s proposed takeover of Scottish Radio Holdings would create the second largest radio company in the UK by the number of licences owned (Emap is already has the second largest share of radio listening). Following the creation of GCap and the acquisition of The Wireless Group by UTV, a number of operational changes are starting to emerge from the new organisations.

Community radio has received a boost in recent months with the 15 new licences bringing the total number awarded to 20. In addition, three more commercial radio licences were awarded in Manchester Norwich and Ballymena.

Q1 2005 saw local commercial radio see its share of radio listening fall to its lowest level although Q2 figures showed an improvement.

3.2: Telecoms

Broadband continues to be the lead story in the telecoms sector. By June 2005, there were a record 8.1 million broadband connections in the UK. The growth in broadband connections has driven the uptake of products and services that are either unique to broadband, or that provide a far more satisfying user experience at faster broadband speeds. BT’s competitor DSL ISPs have been rapidly gaining market share over the past two years, to a point where they now comprise 47% of all broadband connections, and the cable companies have a combined 28% market share of broadband.

BT’s Fusion fixed-mobile product is expected to be only the first step in the convergence of fixed and mobile platforms. A number of key enabling factors will facilitate development of fixed-mobile convergence, notably:

the emergence of handsets with multiple transmission protocols (GSM/WCDMA/Wi-Fi/WiMax)
the growth of voice over IP (VoIP) offerings over fixed broadband and Wi-Fi platforms
a move towards all-IP transmission of voice and data over mobile networks

Revenues in the mobile sector continue to power ahead; mobile spend in Q1 2005, at £3.3 billion, is some 17% higher than the same quarter in 2004, and now constitutes over a third of all telecoms revenues. In contrast, revenues from fixed calls and access continue to fall, chiefly as a result of price competition.

3.3: Television

Structural change in the TV sector is ongoing, with the transition to digital continuing to have wide and diverse impacts:

BSkyB announced record profits, and restated its commitment to launch high-definition and enhanced PVR services in 2006. BSkyB expects revenues from its SkyBet service to exceed its advertising revenues in 2006
RTL’s agreement with UBM to let the former take complete control of Five is expected to allow Five to compete more aggressively with growing digital competition. RTL’s strategy is to develop and strengthen its families of channels in each market, and there was speculation that if the deal goes through it would seek to launch more channels in the UK or acquire other channels as they become available;
Telewest purchased the outstanding shares of sit-up Ltd that it did not already own, valuing sit-up at £194 million;
ITV’s proposed deal to acquire SDN, one of the digital terrestrial multiplex operators was under review by the Office of Fair Trading; and
Advertising revenues earned by multichannels exceeded Channel 4’s for the first time in the second quarter of 2005

The BBC’s 2004-05 Annual Report also focused on the governors’ assessment of the BBC’s performance in an increasingly competitive digital market. The governors praised BBC ONE’s revitalised Saturday night schedule, and recognised the BBC’s digital channels’ success in increasing their audience. However they also acknowledged a number of audience concerns about quality, set a goal to reduce the level of repeats in BBC ONE and BBC TWO’s peak-time schedules, and suggested that BBC THREE’s news output should be overhauled.

Advertising spend grew in the first quarter of 2005, according to the Advertising Association, with Internet advertising the fastest growing medium. Overall growth in TV advertising in the UK is expected to be a little over 2% in 2005. However, one widely reported study from Zenith Optimedia suggested that the long-term future of TV advertising was uncertain; it predicted that TV’s share of the global advertising market would fall this year, and that this might mark the start of a long-term decline.

No doubt partly in response to these concerns, many channels have developed alternative sources of revenue, including premium rate telephony services, interactive services and advertising, pay-per-view and TV shopping. In total these new and alternative revenue sources generated £235 million for digital channels in 2004, excluding channels operated by vertically integrated broadcasters, who do not report channel revenues separately.

The digital multichannels continue to take an increasing share of viewing, with 30% of all viewing to multichannels in June 2005. ITV1’s share fell to just 20%. Its peak-time share also declined in the second quarter, to reach 25.4% in June 2005 – just half a percentage point greater than BBC ONE and 2.6 percentage points greater than the combined multichannels. However, the decline in ITV1’s share has been partly offset by the strong performance of ITV2 and ITV3, with the result that the total share for all ITV channels was fairly stable over the first five months of 2005 at around 22%.

26/09/05 - Corrigendum for August Communications Market Quarterly:

Page 24: Text alteration to reflect data in Figure 15
Page 29: Figure 19 updated
Page 39: Text alteration to reflect data in Figure 28
Page 40: Figure 29 updated
Page 42: Figure 32 updated
Page 43: Figure 34 updated
Page 48: Figure 43 updated
Page 50: Text alteration to reflect data in Figure 47
Page 64: Text alteration to reflect data in Figure 59

Quarterly Update August 2005 [pdf]
Full Print Version
The Communications Market – Telecommunications Appendices [pdf]
Appendix 1 - Fixed telecoms market data tables
Appendix 2 - Mobile telecoms market data tables