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Section 1

Executive summary and main findings

	Ofcom's 30 main findings and recommendations
	Snapshot of digital TV in early 2004

1.1 Ofcom has been asked by the Secretary of State for Culture, Media and Sport to report on progress towards digital switchover over the next decade; to set out our views on potential uses for released spectrum; to list the main challenges that could prevent full switchover; and to analyse the policy options which could be implemented to achieve switchover.

1.2 The growth of digital TV has been one of the UK's most significant commercial and technical achievements of recent times. Since its launch in 1998, digital TV has grown faster than almost any other electronic household good or service, and the UK is recognised as the global leader in digital TV adoption. Driven by successful marketing of platforms, millions of consumers have subscribed to digital satellite and digital cable services or have bought Freeview set-top boxes and digital TVs. In the past year, the pace of growth has accelerated, leaving a minority of households with access to only four or five TV channels.

1.3 In September 1999, the Government first announced its ambition to switch off the analogue TV signal and move to digital TV. It said that digital switchover could start as early as 2006 and be completed by 2010.

1.4 Digital switchover has the potential to transform TV broadcasting, not least to create a more effective and well-functioning broadcasting market; it could open new avenues for the creative talents of the broadcasting industry; and it would provide the scope for new and exciting opportunities in broadcasting and in new communications technologies by freeing up a large amount of potentially valuable radio spectrum. The benefits are widely spread, however with some accruing to consumers, some accruing to Government and some to broadcasting companies.

1.5 Specifically, switchover would benefit the UK because:

Digital terrestrial broadcasting would represent a big efficiency gain in spectrum use over analogue, thereby releasing spectrum for potential use by additional broadcasting services or many new communications services.
It would improve the functioning of the UK broadcasting market; the lack of access to spectrum would no longer be a significant entry barrier for new terrestrial TV channels.
Almost all households would be able to receive digital signals through their aerials compared with only around three-quarters today, providing many more than five free-to-air TV channels, interactive services and new pay TV options on all TV sets.
Early switchover would cement the UK's leading position in digital TV services.

1.6 The Government's detailed cost-benefit analysis calculates net benefits to the UK in the region of £1.5bn (GBP) to £2bn (GBP). The price of these benefits would be the costs of transition. Around switchover, a substantial number of households would need to convert their primary TV to be compatible with digital signals and many more households would need to convert secondary TVs and video recorders if they wished to continue using them.

1.7 Some disruption would be inevitable: a small proportion of existing roof-top aerials and many more existing portable aerials would be unlikely to be able to receive an acceptable digital terrestrial signal, even after switchover. However, TV screens would not go blank overnight because it is possible to switch off the analogue channels sequentially. At the start of switchover, there could be a period when one or two analogue channels were switched off and the digital signal was boosted to full strength. During this transition, consumers would be able to install new equipment without losing all their analogue TV services. This switchover method caused minimal disruption in Berlin when it successfully switched off its last analogue signal in August 2003.

1.8 With the potential for disruption in mind, the Government set two conditions for switchover in 1999: first, that all households who can currently get the main public service broadcasting channels (BBC1, BBC2, ITV and Channel 4) in analogue form can receive them on digital systems; and second, that digital TV would be affordable for the vast majority of households. The Government defined the indicator of affordability as "95 per cent of households having access to digital equipment before switchover is completed".

1.9 For all the recent success of digital TV, Ofcom's projections suggest that market-led digital adoption is unlikely to reach 95 per cent by the end of 2010 under the current commercial and policy environment. The central projection, based on current consumer attitudes and platform prospects, estimates that only 78 per cent of households will have digital TV by the end of 2010.

1.10 Ofcom's central projection reflects the limitations on the digital terrestrial signal's power before switchover. Until the power levels can be boosted at switchover, only about three-quarters of households will be able to receive digital TV through their aerials. Ofcom's central projection has a 2010 digital penetration rate almost 18 percentage points higher in Digital Terrestrial Television (DTT) covered areas than in non-DTT covered areas. In addition to the coverage problem, without significant developments in the pay TV market, including the build-out of digital cable networks, pay TV penetration rates are unlikely to rise above 50 per cent of households. These two constraints suggest that it is unrealistic to expect the current rapid growth of digital adoption to continue. Ofcom's projection suggests that penetration rates are unlikely to rise above 85 per cent without a decision to implement switchover.

1.11 But in circumstances where a clear date for switchover were to be announced and action was taken to implement the switchover timetable, projections for the take-up of digital TV are likely to be significantly higher than 85 per cent, making switchover much more likely to be achieved successfully.

1.12 Ofcom believes digital switchover is desirable, practical and achievable. In return for the transitional cost of digital TV equipment, possibly retailing for as little as £30 (GBP) to £40 (GBP) each ^(-1-), the UK will be able to secure the benefits of digital TV and released spectrum for the nation.

1.13 It is time for all interested parties - Government, Ofcom, the broadcasters, manufacturers and retailers - to change gear. Everyone involved should move from planning to implementation. One element in implementation is to recognise that the process of switchover will have to start before digital adoption has reached 95 per cent of households. But a more important hurdle to jump is one of co-ordination: the beneficiaries of switchover are spread widely and are more diffuse than those likely to bear the transitional costs. It is this co-ordination problem among Government, Ofcom, broadcasters, manufacturers, retailers and consumers that needs to be solved if switchover is to be successful.

1.14 Specific obstacles to market-led digital adoption are:

Consumer take-up.
At present, some consumers do not value digital TV. Attitudes are likely to change (mobile phones were considered to have limited appeal in the early 1990s), but consumer attitude surveys show that in 2003 some households (5 per cent) said that they would be willing to live without TV rather than convert their sets to digital. Some more (15 per cent) perceive little value in the greater choice digital TV offers. Only a minority currently support the policy of full switchover. In addition, consumers are considerably less interested in converting secondary TVs than their primary TV set. In the absence of further initiatives, there may be as many as 35 million TVs that will remain analogue-only at the end of 2010.
Broadcaster incentives and obligations.
The public service broadcasters will need to have a clear and unambiguous commercial incentive to drive switchover. Commercial analogue broadcasters would benefit from the elimination of expensive transmission of both analogue and digital signals and new opportunities to expand channels and services. But digital TV would also increase competition, reducing audiences and advertising revenues. The BBC has a different, but equally difficult trade-off. Switchover would reduce the BBC's transmission costs and extend coverage of its digital services to all households, but any net loss of viewers could reduce public support for the licence fee.
Free-to-view digital TV.
Free-to-view digital terrestrial TV will be an important feature of the TV market for the foreseeable future, but its coverage will be far from universal before the signal can be boosted during switchover. Only about three-quarters of households are currently covered. Free-to-view satellite is not burdened by the coverage problems, but viewers cannot currently receive all the public service broadcasters on the satellite platform without a charge.
Timing issues.
The timing of switchover has not yet been decided. Government and broadcasters are currently working on the timetable, but manufacturers, consumers, broadcasters and transmission companies will be less willing to invest in equipment necessary for switchover.
Implementation of switchover.
The current loose confederation of interests in the digital TV action plan has been effective in delivering the pre-conditions for a Government decision on switchover. But as we move from planning to implementation, co-ordination and active management will be required to complete the process effectively.
International agreements.
Many of the wider benefits of switchover would come only if spectrum can be reused after the analogue signal is switched off. Ofcom will represent the UK at important forthcoming radiocommunications conferences which will determine how the released spectrum may be used. These international issues do not represent a specific obstacle to market-led take-up, but the rationale for switchover is strongest if efficient and flexible use of the spectrum can be secured.

1.15 To accelerate progress, the policies Ofcom suggests to overcome the obstacles to market-led switchover are:

Greater certainty over switchover timing.
It is likely that digital switchover would be implemented through a rolling programme of regional switchovers, taking about four years to complete between the first and last region.

The benefits of an early announcement of a precise timetable are: certainty for consumers in their purchasing decisions; certainty for broadcasters, transmission companies, manufacturers and retailers in investment decisions; and certainty for Ofcom in implementing the regulatory framework for digital public service broadcasting licences, the review of public service broadcasting, spectrum pricing and spectrum trading.

But an early announcement would also have risks. The most serious is the possibility of reinforcing negative consumer attitudes towards switchover before it becomes seen as a technological certainty.
Use the regulatory framework to help drive switchover.
Ofcom is the appropriate body to manage the regulatory framework in order to provide some broadcasters and transmission companies with commercial incentives to promote switchover. We will work with them to secure the wider benefits of greater TV choice and spectrum efficiency for the UK.

Ofcom intends to consider including any appropriate switchover-related obligations in the framing of the new digital public service broadcasting licences before the end of 2004 to ensure the nationwide roll out of digital TV. We will also consider the ways in which spectrum pricing could sharpen broadcasters' incentives for digital switchover and whether the financial impact of switchover should be reflected in future renewals of commercial broadcasters' financial terms.

Ofcom recommends that as part of the BBC's Royal Charter review, the Government adds specific obligations to the BBC's current general obligations to promote digital TV. They should include obligations on rolling out digital transmission, providing public information, continuing to provide its TV channels on the free-to-view satellite platform, and providing on-air marketing of digital TV on a platform-neutral basis.
Improve access to free-to-view digital TV.
Until switchover, free-to-view digital satellite could play an important role in increasing take-up among those who do not want pay TV. In non-DTT areas, it is the only option. But free-to-view access to all the public service broadcasters is currently not possible on digital satellite.

Ofcom will consider whether regulatory intervention is needed to secure a viable free-to-view satellite proposition before switchover. The cost of any action would fall primarily on public service broadcasters. Depending on the coverage of the digital terrestrial signal after switchover, further measures may need to be considered to ensure universal coverage of the public service broadcasters on the satellite platform.
Provide information and advice for consumers.
The BBC has been successful in marketing its digital channels over the past 18 months. But consumers will require considerably more support and information for switchover to be a success.

Well before the switchover date in their region, a wider promotion drive should include not just on-air advertising, but also direct marketing, help-lines, clear product labelling, and possibly in-home support. Clear consumer information will be crucial in helping consumers to convert secondary sets to digital around the date for switchover in each region.

Ofcom's Consumer Panel will be looking at the lessons that can be learnt from previous regulatory decisions to ensure that the consumer dimension of switchover is given due prominence in Ofcom's work.
A move from planning into implementation.
Though it has been successful to date, the existing confederation of interested parties might find it difficult to align interests in favour of switchover.

Ofcom recommends the establishment of a body to lead switchover and to be responsible for its implementation. Termed 'SwitchCo' for simplicity, the organisation should have a simple and clear objective to achieve switchover by a specified date. Its central role would be to co-ordinate the various parties in their areas of responsibility, rather than attempting to perform the roles best done by others.

Ofcom recommends that it should be sufficiently independent to avoid any conflicts of interest and ensure neutrality in the promotion of the different digital platforms. Secure and adequate funding should be provided.
Address affordability issues.
The previous policy proposals would increase the rate and extent of digital adoption. But the transitional cost of conversion may remain a significant barrier for some households and risks excluding them from TV after switchover. If switchover occurred this year, the transitional burden would fall disproportionately on the 30 per cent of households with the lowest incomes, but that burden is likely to diminish over time as the cost of converters falls and digital penetration rises.

By the time of switchover, a residual affordability problem is all that is likely to remain for the conversion of households' primary sets to digital TV. There will be a wider problem of secondary TV sets, but the cost of conversion would represent less than 0.2 per cent of annual expenditure for the vast majority of households.

At the time of switchover, any financial support scheme should seek to avoid the risk that households would delay purchasing the relevant conversion equipment by offering any financial incentives to all households in designated groups rather than just digital non-adopters.
Seeking permission to use cleared spectrum to the greatest benefit.
The UK's stance in forthcoming international radiocommunications conferences is to seek the greatest flexibility in the use of the cleared spectrum after switchover for the many other UK demands on its use, thereby maximising the benefits of switchover.

Preparation of the UK's negotiating position ahead of the conferences should be focused on seeking to secure full clearance for its switchover plans and seeking full and flexible use of the TV band after switchover.

Snapshot of digital TV in early 2004 **^(-i-)**
Technology	Equipment	Availability	Brand	Take-up (m)	Proportion of households
Satellite	Externally mounted satellite receiver and a set-top box.	97%	Pay: Sky digital	6.9m	28.0%
Satellite	Externally mounted satellite receiver and a set-top box.	97%	Free-to-view: not branded	0.2m	0.9%
Cable	Cable connection from network to the home and a set-top box	51%	Pay: ntl, Telewest^(-ii-)	2.3m	9.1%
Cable	Cable connection from network to the home and a set-top box	51%	Free-to-view: not available	-	-
Terrestrial	Conventional TV aerial and either a set-top box or a TV with a built-in digital tuner	73%^(-iii-)	Pay: Top Up TV	Launched Spring 2004	-
Terrestrial		73%^(-iii-)	Free-to-view:Freeview	3.0m	12.2%
					50.2 Total Penetration

Source: Ofcom

Ofcom's 30 main findings and recommendations

In subsequent sections, we detail the progress of digital TV, the obstacles to switchover and the detailed policy recommendations. The 30 main findings and recommendations in this report are listed below. The recommendations are highlighted in bold.

Timing issues

1. Ofcom recommends a gradual region-by-region switchover process. One or two analogue TV channels should be switched off first so that the digital signal can be boosted. TV screens would not go blank overnight and DTT availability would be increased to near-universal levels.

2. Without a firm timetable for switchover, broadcasters and transmission companies will not be able to decide if and when the obsolete analogue equipment should be replaced. Ofcom recommends that switchover is not delayed substantially so that it would fall beyond the lifespan of existing analogue transmission equipment.

3. The most serious risk of an early announcement is the possibility of cementing negative consumer attitudes towards switchover before it becomes seen as a technological certainty.

4. The benefits of an early announcement of a precise timetable are: certainty for consumers in their purchasing decisions; certainty for broadcasters, transmission companies, manufacturers and retailers in investment decisions; and certainty for Ofcom in implementing the regulatory framework for digital public service broadcasting licences, the review of public service broadcasting, spectrum pricing and spectrum trading.

5. An announcement of a timetable would significantly extend digital penetration in the UK and would help allow digital switchover to be achieved between 2007 and the end of 2010. Consumer research indicates that many current analogue households are prepared to purchase digital TV receivers provided they know that digital switchover is imminent. With the majority of households already having access to digital television, the foundations for an announcement of a timetable have already been laid.

Regulatory framework

6. Ofcom has a significant role to play in managing the regulatory framework to encourage digital TV adoption and removing some of the obstacles confronting switchover.

7. Although broadcasters should not necessarily manage the process of implementing switchover themselves, it is reasonable to expect them to make a fair contribution, particularly by extending digital terrestrial coverage and availability nationwide, and by ensuring viewers are properly informed about switchover and its implications for them. Ofcom will seek commitments from broadcasters and may consider including appropriate and necessary additional obligations for nationwide digital TV rollout in the new digital public service broadcasting licences, due to be issued by the end of 2004.

8. A market review of the broadcasting transmission market is underway. Ofcom has powers to ensure effective competition in this market and we will seek to ensure that an agreement to extend DTT transmission networks does not result in broadcasters being charged excessive prices.

9. Ofcom will consider imposing spectrum pricing to sharpen incentives to promote switchover. Channel 3 licensees and Five already pay for their licences to broadcast, which include an implicit charge for spectrum. Ofcom will ensure that licensees do not pay twice for the same spectrum. If spectrum pricing is introduced, charges could apply for the first time to the BBC, Channel 4 and S4C in 2006.

10. Some of the new and potential obligations could raise costs for commercial broadcasters. Ofcom would consider taking account of additional burdens on these companies where appropriate.

11. Ofcom recommends that as part of the BBC's Royal Charter review, the Government adds specific obligations to the BBC's current general obligations to promote digital TV. They should include obligations on rolling out digital transmission nationwide, providing public information, continuing to provide its channels on the free-to-view satellite platform, and providing on-air marketing of digital TV on a platform-neutral basis.

Free-to-view digital TV

12. Even if all consumers wanted to convert to digital, some would face a serious hurdle because coverage constraints currently limit digital terrestrial television.

13. Until switchover, free-to-view digital satellite could play an important role in increasing take-up among those who do not want pay TV. In non-DTT areas, it is the only option. But free-to-view access to all the public service broadcasters is currently not possible on digital satellite. Ofcom will consider whether regulatory intervention is needed to secure a viable free-to-view satellite proposition before switchover. The cost of any action would fall primarily on public service broadcasters.

14. Depending on the coverage of the digital terrestrial signal after switchover, further measures may need to be considered to ensure that all households can receive the public service broadcasts on the satellite platform, including using the must-provide provisions of the Communications Act. Ofcom has the potential power to oblige certain named broadcasters to provide the means to receive public service broadcasting services when households cannot otherwise receive them to an acceptable technical standard. It could mean that these named broadcasters might be obliged to supply the necessary satellite decryption card to households which lost analogue reception and were not able to receive an adequate DTT signal after switchover.

15. The Government should continue its efforts to remove the coverage barriers which hinder other digital platforms and slow progress towards switchover, for example, planning restrictions which prevent the erection of satellite dishes on certain buildings.

Consumer information and advice

16. Switchover will simply not be possible unless consumers are persuaded of its benefits. Although half of households have digital TV, the other half are unlikely to go digital as quickly or as readily.

17. Well before switchover, a mass national advertising campaign should explain to all households that switchover is coming and should attempt to build public support for the objective. A new consumer labelling scheme should also be introduced to warn consumers that unconverted analogue equipment will not function past a set date. This needs to be implemented with the support of manufacturers and retailers. The funding requirements of consumer information and advice will be significant.

18. Around the switchover date in their region, consumers will require further information and support. The promotion drive should not just include on-air advertising, but also direct marketing, help-lines, clear product labelling and possibly in-home support. A regional communications campaign in the immediate run-up to analogue switch-off will need to be developed with specially tailored advice for households who are unable to receive digital terrestrial signals until switchover starts.

19. After switchover is completed, continuing support will also need to be offered to consumers who remain hesitant or confused about the conversion to digital.

A move from planning to implementation

20. The Digital TV Action Plan has been effective in delivering the pre-conditions for a Government decision on switchover. It is much less suited to the role of an implementation vehicle. Active management will be required to complete switchover effectively.

21. Once agreement has been secured with the many interested parties about the move to implementation, Ofcom recommends the establishment of a body, termed 'SwitchCo' for simplicity, to be responsible for its delivery by a specified date.

22. SwitchCo should highlight the benefits of switchover, provide public information, provide support at switchover, ensure clear labelling, liaise with other interested parties, report on progress made by them, attempt to maximise the number of digital options available, and ensure platform neutrality in the promotion of digital TV.

23. Many interested parties - the Government, the broadcasters, Ofcom, manufacturers and retailers - will continue to have important roles to play in delivering switchover. They must agree to SwitchCo's role and remit, and would be part of its governance arrangements. However, neither the Government, nor the BBC, nor a consortium of broadcasters, nor Ofcom should run SwitchCo because their interests are diverse. Instead, SwitchCo should have sufficient independence so it can represent the national interest effectively, ensure platform neutrality and avoid conflicts of interest.

24. The Government, in collaboration with broadcasters and Ofcom, should ensure SwitchCo is an adequately resourced body, which can gain the confidence of all parties. SwitchCo will require funding for running costs, marketing expenditure and consumer support around switchover. Funding could come from a number of potential sources including direct public expenditure, forgone future public receipts from broadcasting activities, an element of the TV licence fee, or private finance funded by foregone future spectrum revenues. Since the economy as a whole is the main beneficiary of switchover, the funding mechanism should not put a disproportionate burden on any interested party.

Affordability

25. Even if digital adoption rates are very high, the transitional cost of conversion to digital may remain a significant barrier for some households and risks leaving a few households excluded from TV after switchover. The penetration of digital TV currently rises with household income, so the transitional costs of switchover would currently predominantly fall on the poor.

26. These transitional costs need not be a great barrier to switchover: the cost of a basic converter box in 2004 is already less than half the cost of the annual licence fee; the relative burden is likely to diminish over time as the cost of converters falls; and digital penetration is likely to rise significantly before switchover.

27. By the time of switchover, a residual affordability problem is all that is likely to remain for the initial conversion of households' primary sets to digital TV. A wider number of households will need to convert secondary sets and video recorders. Any financial support would reduce consumer resistance to switchover, although decisions on financial support need not be taken immediately, since the design of any appropriate financial support would depend on the nature of the transitional costs at the time of switchover.

28. At a later date, the Government should consider the costs and benefits of offering limited financial assistance to particular groups, similar to the free licence fee scheme for over 75s. To avoid the danger that some households might wait until the last minute in the hope of receiving financial support, any scheme should be available to all households in a designated group rather than just the remaining analogue households.

International issues

29. Switchover's rationale is strongest if flexible use of the spectrum can be secured. The UK's strategy for the TV spectrum should be to seek to ensure full protection of the UK's digital television switchover plan. It should also seek to protect future UK use of the released spectrum and any viable additional interleaved spectrum after switchover.

30. In the 2004 and 2006 Regional Radiocommunications Conferences, the UK will seek to protect its digital broadcasting plans and keep options open for any cleared spectrum made available after switchover. In the 2007 and 2010 World Radiocommunications Conferences, the UK will seek to gain the maximum flexibility of use for the TV band for broadcasting and other uses.

Footnotes

i:- Digital TV delivered through broadband not included as the numbers involved are currently too small

ii:- Plus some others, for example in the Isle of Wight

iii:- A higher figure - 80 per cent - can receive at least some channels

1.- Ofcom projection

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