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Interim Report February 2006

Key facts

Radio

Cumulative sales of DAB digital radio sets passed 2 million at the end of Q3 2005, with industry bodies suggesting that heavy Christmas sales had boosted that total to 2.7 million by the end of the year
Commercial radio’s share of listening continued to lag behind the BBC in Q3 2005 (537 million hours of listening, vs. the BBC’s 611 million), with preliminary Q4 figures suggesting that this trend continued to the end of the year
The number of community radio licences awarded by Ofcom tripled over 2005 to 62, and further awards in 2006 have brought the total to 84
A survey by RAJAR showed that the share of all listening via digital platforms increased to 10.5% over August/September 2005, from 5.9% over the same period a year earlier
Almost one in five 15 to 24 year old respondents to Ofcom's tracker survey said they are likely to buy a DAB digital radio in the next six months – the highest of any age group
Satisfaction with UK radio is high; according to Ofcom’s latest consumer survey, 86% were satisfied with radio choice and 93% were satisfied with content

Telecoms

Based on data supplied to Ofcom by operators, retail revenues from all telecoms services in the 12 months to 30 September 2005 were £37.2 billion – over 6% higher than in the previous year
In the year to 30 September 2005, fixed-line revenues fell to £10.3 billion – down by 9% compared with the previous 12 months – while revenues from mobile communications grew by 16% to £13.6 billion
By the end of September 2005, Ofcom’s data showed that 57% of the country’s 15.5 million internet connections were over broadband, and latest figures show that by December 2005 there were almost 9.8 million broadband connections across the UK
The number of local loop unbundled (LLU) lines grew from fewer than 50,000 in Q1 2005 to over 200,000 by the end of the year, and according to the Office of the Telecommunications Adjudicator this total had increased to 250,000 by February 2006
At the end of September 2005, Ofcom’s research showed that there were 62.5 million mobile subscriptions – a figure that is higher than the total UK population. Further consumer research by Ofcom showed that around 80% of UK adults (some 40 million) use mobile services, suggesting that a significant number of people now have two or more mobile subscriptions
Mobile virtual network operators (MVNOs), which offer retail mobile services by leasing network capacity from operators, now account for over 5.5 million subscriptions in the UK

Television

By the end of September 2005, 66% of UK households (16.5 million) had digital television
Over the six months to 30 September 2005, the number of Freeview-only households grew by 14% (716,000 new households), to a total of 5.8 million homes
Over the same period, pay-TV digital satellite households increased by 123,000 (2% growth, to a total of 7.5 million), free-to-view satellite households grew by 100,000, and digital cable households grew by 101,000
The reach of multichannel TV grew to 60.1% in December 2005 (with audience share growing to 30.8%). In contrast, year-on-year reach of the terrestrial channels continued to fall, with ITV1 experiencing the greatest single-channel decline (from 78.7% to 74.8%) during 2005
The BBC continued to take the biggest broadcaster share in multichannel homes, with a 30.8% share for all BBC channels in December 2005, compared with 22.6% for the ITV channels and 9.8% for all Sky channels
By the end of Q2 2005, satellite channels exceeded Channel 4 in revenues from advertising – satellite net advertising revenues for Q3 2005, at £177 million, stood second behind only ITV (£373 million)

Introduction

This report is one of a series of regular updates to Ofcom’s annual Communications Market reports, the latest of which was published in August 2005. This issue mainly covers data from Q2 and Q3 2005, with market development updates covering the period from June 2005 to February 2006.

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:

Radio sector finance;
Mobile Virtual Network operators (MVNOs); and
The cable sector.

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.

Executive summary

3.1: Radio

The radio industry underwent a period of internal consolidation over the second half of 2005, following a period of widespread merger and acquisition (M&A) activity. A number of the larger radio groups including GCap and Chrysalis announced strategic changes. Some of these, for example GCap’s decision to divest a number of stations, are likely to lead to further M&A activity. However, a number of new initiatives will alter the way that the companies do business (for example the Virgin radio station launches and GCap’s change in advertising policy). The effect of these internal changes on the industry as a whole will become clearer over time.

New ways of consuming radio – particularly digital radio – continue to become more popular. A survey by RAJAR showed that the share of radio listening via digital platforms increased to 10.5% in August and September 2005, up from 5.9% a year earlier. Organisations are responding to this change in listening habits: recent months have seen both radio operators and other companies (usually print media) launch podcasts (radio programmes for downloading either to a PC or a portable music player), while new products such as the Sky Gnome are being introduced to make digital radio listening easier over multiple platforms.

In October 2005, Ofcom published ‘Phase 2 of Radio – Preparing for the Future’, its review of radio in the UK, and in December 2005, Ofcom published a statement on the allocation of spectrum in VHF Band III, Sub-band 3. These two documents laid out a number of decisions on the future of analogue and digital radio. They also set out Ofcom’s overall strategic framework for radio and its public purposes, and localness guidelines. Ofcom has also continued to issue commercial and community radio licences – community radio has received a particular boost, with the number of community licences awarded tripling in the second half of 2005.

Despite difficult market conditions, revenue per listener and revenue per listener hour in commercial radio both rose slightly over the past five years (by 5% and 8% respectively). Over the same period, the revenue split between stations of different styles has changed significantly, with chart-led mainstream stations’ share of revenue falling from 55% of all commercial revenue in Q3 2000 to 42% in Q3 2005. Perhaps surprisingly, the stations that have the highest revenue per listener tend to be those that cover smaller populations. London stations have the lowest average revenue per listener, despite the fact that these stations tend to generate the highest total revenues.

3.2: Telecoms

The second half of 2005 saw a number of major mergers and acquisitions in the telecoms industry. In January 2006 Spain’s Telefonica acquired mobile network operator O2, in a deal worth around £17.7 billion; in October 2005, cable operators Ntl and Telewest announced an agreed merger; also in October 2005, BSkyB announced a recommended bid for LLU (local loop unbundling) operator Easynet for £211 million; and in August 2005, Cable & Wireless issued an agreed bid of £780 million for corporate telecoms operator Energis. The Ntl/Telewest and BSkyB/Easynet transactions are particularly noteworthy, since both are seen as important precursors of widescale deployment of TV over broadband.

In a further piece of potential corporate activity, in January 2006 Ntl announced a revised bid for mobile operator Virgin Mobile. If the deal goes through, the combined group, which would probably operate under the Virgin brand name, would be the UK's first company to offer quadruple-play services spanning cable TV, fixed-line telephones, mobile and internet.

The second half of 2005 also saw the introduction of live streaming TV over 3G by most of the UK’s network operators, and a number of trials of TV to mobile devices using technologies other than 3G. In September 2005, mobile operator O2 began a trial of mobile TV in the Oxford area using DVB-H technology, in conjunction with TV broadcaster Arqiva, and in mid 2005, BT and Virgin Mobile teamed up to trial the BT Movio mobile TV service, using existing DAB technology and network. The next 12 months are likely to see some important industry decisions being made over standards adoption, with a key consideration being the availability of appropriate electromagnetic spectrum.

BT’s new local access business unit, Openreach, came into being on 11 January 2006; its creation was a key outcome of BT’s acceptance of undertakings in lieu of a reference under the Enterprise Act. In addition, Ofcom confirmed in December that after two years of development the Wholesale Line Rental (WLR) product offered by BT now meets a series of agreed criteria, subject to certain further improvements committed to by BT. Ofcom has therefore relaxed price controls on BT’s retail services, and has also set charge ceilings which result in a cut in certain WLR charges.

Retail revenues from telecoms services in the 12 months to September 2005 were £37.2 billion – £2.2bn more than year to September 2004. Mobile revenues accounted for £13.6 billion of this total, a 16% rise year-on-year, while revenues from fixed telecoms fell by 9% over the same period. By December 2005 there were almost 9.8 million broadband connections to UK homes and businesses, with the number of broadband connections comprising 57% of all internet connections in September 2005.

3.3: Television

The media mergers and acquisitions outlined above also had a major impact on the TV sector. Ntl’s bid for Virgin Mobile and BSkyB’s acquisition of Easynet mark major strategic moves to enable operators to offer customers a range of television, broadband and fixed-line telephony services, known as ‘triple-play’ – or ‘quad-play’ with the inclusion of mobile services. The long awaited Ntl/Telewest merger is intended to build significant scale in the cable sector creating a combined entity with over 5 million subscribers.

The trend in convergence continued across the broadcasting sector: BT announced that its broadband-delivered IPTV service will be launched in late 2006; AOL has gone live with its video service, Hi-Q; and the terrestrial broadcasters have launched broadband TV services. Most notably, the BBC has stated that it intends to make ‘Catch Up’ programming (recently-aired shows) and its archives available online, and ITV launched its broadband ‘ITV Local’ service in two south coast cities.

By the end of Q3 2005, digital television penetration reached 66% of households (16.5 million) across the UK, according to Ofcom estimates. Over the six months to 30 September 2005, over one million new households gained access to digital TV programming, of which the Freeview platform accounted for 716,000 (equating to 14% growth in the total number of Freeview-only households to a new total of 5.8 million). Over the same period, pay-TV digital satellite households increased by 123,000 (2% growth, to a total of 7.5 million), free-to-view satellite households grew by 100,000 to 545,000, and digital cable households grew by 101,000 to 2.6 million.

ITV and Channel 4 each took a 20% stake in Freeview in October, and Five acquired an undisclosed stake in Top Up TV in November. In addition, ITV and the BBC announced a joint plan in September to launch a free digital satellite service in the first half of 2006 which will be largely aimed at the 27% of UK households who are currently unable to receive subscription-free digital services through Freeview.

The BBC published its case for a new licence fee settlement in October. In order to deliver the future vision set out in the Government’s March 2005 Green Paper, the BBC said that it would need to spend an additional £5.5 billion over the first seven years of the next Charter period, from 2007/08 to 2013/14, necessitating an increase in the licence fee, from RPI plus 1.5% currently to RPI plus 2.3% per year. The BBC said that the new money would be spent on producing high-quality locally-relevant content, and on new digital services and infrastructure.

Television advertising revenues peaked in late 2004 at £926m and then declined in each quarter during 2005, reaching £789m in Q3. Satellite channels were the only channels to show growth during this period, but in Q3 they too began to decline and ended the year at £177m.

This growth is underpinned by a long-term trend that has seen multichannel reach grow to 60.1% in December 2005 and audience share grow to 30.8%. In contrast, year-on-year reach of the terrestrial channels continued to fall. ITV1 experienced the greatest drop, with reach in December 2005 dropping to 74.8% compared to 78.7% in December 2004.

The full document is available below

The Communications Market - Interim Report February 2006 [pdf]
Full Print Version
Telecommunications Market Data Tables Q3 2005 [pdf]