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Section 5

Projections for digital adoption

	Basis of the estimates
	Projections of future take-up under base case
	Other scenarios
	Secondary sets
	Conclusions

5.1 Consumers have rapidly adopted digital TV since 1998 without a specific Government commitment to switch-off the analogue signal. In this section, Ofcom presents the results from its forward projections of market-led adoption of digital TV to estimate when penetration rates would reach near-universal levels. The model disaggregates between the different platforms for digital TV and is calibrated by current consumer attitudes towards digital TV. Projections for central, high and low scenarios are set out below, all of which assume that there are no new policy interventions and few important market developments.

5.2 Any model which makes long-term projections about a rapidly changing product such as digital TV is certain to prove incorrect. Few foresaw the popularity of mobile phones in the early 1990s, for example. Ofcom has prepared these projections in order to give an indication of likely future takeup based on the information available in early 2004. The figures can be nothing more than that. They are, however, useful in aiding the policy-making process by informing the likely degree of success for market-led switchover.

Basis of the estimates

5.3 The model used to develop take-up projections incorporates research evidence on consumers' attitudes to different digital platforms and to digital TV in general:

• Attitudes to digital TV. Consumer research conducted for Department of Trade and Industry(DTI) ^(-13-) has indicated that one in five households would be unwilling to adopt digital TV. The reasons for their reluctance are discussed further in the next section and are assumed to remain constant over the next few years.
• Purchasing intentions by platform. Ofcom's projections also take into account a further finding from the consumer research that most of those with firm intentions to acquire digital TV said that they intended to get Freeview rather than a pay TV service.
• Coverage levels. Another constraint on the overall levels of digital take-up is the restricted availability of DTT coverage. One in four households will not be able to receive DTT signals until after switchover occurs. Some of those wishing to obtain DTT but unable to receive it will opt for cable or satellite; but it is assumed that most will stick with analogue TV because they are attracted by free-to-view digital TV rather than pay TV.

5.4 The model also incorporates industry forecasts for the various digital platforms over the next few years. In particular, the central projection is based on the following assumptions:

• BSkyB reaches its subscriber target of eight million at the end of 2005 with growth continuing thereafter.
• Cable operators gradually convert all their TV customers to digital and gain new subscribers by offering digital TV alongside broadband internet access.
• The current free-to-view smartcard scheme for satellite is not reintroduced and free-to-view satellite is not actively promoted.
• The price differential between IDTV and DTT set-top boxes falls over time, but remains significant.
• A wide range of IDTV models is introduced but analogue models remain the main products on offer in high-street shops.
• The lowest price of DTT set-top boxes drops to around £30 (GBP) leading it to become an impulse buy for some consumers.
• DTT set-top boxes become more widely available in supermarkets.
• A pay TV DTT option is taken up by no more than half a million subscribers with the vast majority of these being existing Freeview customers.

Projections of future take-up under base case

5.5 Chart 5.1 sets out a central projection for digital take-up in coming years. Under the base case it is estimated that 78 per cent of households would have digital TV by the end of 2010. Each of the current digital TV platforms would continue to grow. In the case of cable companies, take-up growth is augmented by the complete conversion of their analogue networks to digital by 2010.

Chart 5.1: Estimated take-up of digital TV by platform at the end of each year

5.6 Digital terrestrial TV is likely to be responsible for most of the future rise in digital TV take-up because:

• Consumer research and the slowing growth of pay TV suggests that the majority of households likely to convert to digital in the coming years are likely to want a free-to-air service rather than a pay TV service.
• Prices of DTT receivers, both set-top boxes and IDTVs, are likely to continue to fall.
• The increase in the numbers of Freeview viewers is likely to lead to an improvement in the output of the current channels and to the possible launch of new free-to-air channels.
• Word-of-mouth is likely to increase take-up further.

5.7 The projections indicate that the number of homes with DTT receivers will increase from three million currently to 6.7 million by the end of 2010, with a growing proportion of these accounted for by IDTVs rather than set-top boxes. Though fast, the growth in DTT households is limited by the lack of DTT coverage for over a quarter of the population. By the end of 2010, digital adoption is projected to be almost 18 percentage points higher in DTT-covered areas relative to areas without an adequate DTT signal. In DTT-covered areas, we project that 83 per cent of households would have digital TV by the end of 2010.

5.8 Other digital TV platforms are also likely to continue to expand but at a slower rate than DTT. As described in section 3, the growth rates of both cable and satellite have slowed in recent years.

5.9 Continued growth in pay TV subscribers is to be expected, not least because the cable and satellite platforms have an important advantage over DTT in that they have far greater capacity available and premium content. Whereas only around 30 channels will be available on digital terrestrial TV until switchover, digital cable and satellite networks can offer hundreds of channels. As well as extra channels this capacity will be used to offer innovative services which many consumers will find appealing, including more interactive services and video-on-demand services. Bundling broadband internet access along with digital TV and voice telephony is also likely to benefit the cable operators.

5.10 The projections indicate that by the end of the 2010 BSkyB will have close to 8.7 million subscribers in the UK, significantly more than the current figure of around 6.9 million. The number of free-to-view satellite homes is also expected to grow to over one million from 211,000 currently, although given the absence of a free-to-view smartcard scheme, virtually all of these will be lapsed Sky subscribers. We assume that BSkyB will not undertake another swap of decryption cards in the relevant time frame. The cable companies will also continue to increase their subscriber numbers, and the combined subscriber figure of all the cable operators will rise from 3.3 million now to almost 3.7 million by the end of 2010.

5.11 Over the next few years, an acceleration of new broadband connections (digital subscriber line or DSL) into people's homes is likely to stimulate a rapid increase in video services delivered over telephone lines. It is even possible DSL will begin to become an important alternative platform for digital broadcasting in addition to digital cable, digital satellite and digital terrestrial. But it currently appears unlikely that these new services will play a significant role in the move towards digital switchover for two reasons: first, at least initially, it is envisaged that video services over telephone lines will be premium rate video-on-demand rather than TV broadcasting; and second, TV services over broadband connections are expected to be predominantly in areas of high population density where cable and digital terrestrial services are already available.

Other scenarios

5.12 We also attempted to test the sensitivity of our projections to alternative high and low take-up assumptions.

5.13 The high-case scenario assumes the following:

• BSkyB successfully launches a low-cost pay TV offering which attracts subscribers who would otherwise remain with analogue TV.
• A successfully marketed free-to-air satellite option increases digital TV uptake in areas which cannot currently receive digital terrestrial TV.
• Additional subscribers are attracted to cable TV. Cable operators convert their networks to digital by 2008.
• The price of IDTVs falls considerably and they become the main offering in high-street shops, leading them to be bought by consumers who would not adopt digital TV otherwise.
• There are improvements in the free-to-air channel line-up.
• The price of Freeview receivers drops to around £20 (GBP) leading it to become an impulse purchase for the majority of households.
• The attitude of those consumers strongly resistant to digital TV softens over time as a result of compelling content, falling costs and favourable experiences of friends/family etc.

5.14 The low-case scenario assumes the following:

• BSkyB concentrates on raising revenue per subscriber rather than on increasing the number of its subscribers.
• A free digital satellite platform ceases to be offered and all those who stop subscribing to pay TV give up digital TV entirely.
• Conversion to digital is not a priority for cable companies and complete conversion to digital is not achieved until 2012.
• IDTV prices remain high, deterring purchases.
• Freeview prices drop to around £40 (GBP) but the majority of households do not regard it as a spontaneous purchase.
• Consumers are not convinced that digital TV content is compelling, and the attitude of those resistant to the propositions on offer hardens over time.

5.15 The results of the high-case and low-case projections for overall digital take-up are shown alongside the central projection in Chart 5.2, which shows that by 2012, we expect the take-up of digital TV to lie between 70 and 90 per cent of households.

Chart 5.2: Projected overall take-up of digital TV at year end

Source: Ofcom Projections

Secondary sets

5.16 Ofcom has also sought to consider the likely rate of conversion for all TV sets, not just the primary TV in any household. While over half of households have converted to digital for at least one TV set, we estimate that only approximately 26 per cent of all TV sets in the UK are converted to digital reception ^(-14-).

5.17 Secondary sets are much less likely to have been converted to digital: only about 3.5 per cent of non primary sets had been converted by the end of 2003. Freeview accounted for over half of these TVs because its low price was more attractive than pay TV platforms which usually charge a monthly subscription of at least £10 (GBP) per month for a second set-top box.

5.18 Digital conversion of all television sets will be slower than digital adoption among households for two reasons: first, many households will not upgrade second or third sets as quickly as their primary sets; and second, the number of TV sets sold with analogue tuners continues to outstrip the number of digital receivers.

5.19 Nevertheless, the fall in the price of DTT receivers is likely to lead to an increase in the conversion of non-primary sets, and together with the continued increase in digital take-up for primary sets the penetration levels for all TV sets is likely to rise from 26 per cent of total sets at the end of 2003 to 41 per cent by 2010. This reflects a penetration level of 3.5 per cent of non-primary sets in 2003 rising to 17 per cent in 2010.

5.20 As Chart 5.3 shows, Ofcom's estimate of the outstanding number of TVs to be converted to digital remains relatively constant between 2003 and 2012 if there is no announcement of a definite timetable for switchover. The outstanding number of unconverted TVs is high throughout. It is projected to fall at first while the take-up of digital TV on primary sets is growing quickly, but begins to rise towards the end of the decade as the purchase of new TVs without associated digital converters again exceeds the conversion of secondary sets to digital. The projections for second sets are particularly sensitive to trends in the price of digital converters, so the numbers of outstanding unconverted TV sets in chart 5.3 would be subject to a larger margin of error than the projections for digital adoption by households.

Chart 5.3. Outstanding number of TV sets which would need digital conversion

Conclusions

5.21 Digital television is growing fast, but even on the optimistic assumptions of the high-case scenario, digital take-up in 2010 is still less than 90 per cent. Ofcom considers that the finding that market-led digital take-up will be significantly less than 100 per cent is robust for a number of important reasons. Firstly, research on consumer attitudes indicates that a relatively small but stable set of consumers are unwilling to adopt digital TV voluntarily. Secondly, significant numbers of consumers currently without digital TV are not willing to subscribe to pay TV. The alternatives for these households are limited, not least because a quarter of all households will be unable to receive digital terrestrial TV unless and until switchover happens. The combined effect of these factors is to produce an upper ceiling on market-led take-up of around 85 per cent of households.

5.22 The number of TVs which need to be converted is likely to remain relatively constant at over 35 million for the whole of the next decade. This presents a real challenge for switchover, but the conclusion should not be that switchover is impossible. So long as digital penetration is high and those sets are converted to digital when the analogue signal begins to be switched off, people will be able to continue using them. The high number of sets to be converted around the switchover date in any region nevertheless puts the recent success of digital TV in some perspective and highlights the challenge of implementing switchover successfully.

5.23 The natural limits to digital penetration of households and the high number of outstanding analogue sets implies that a strategy of waiting for consumers to gradually adopt digital TV at their own pace faces serious obstacles. Before outlining an alternative strategy we examine the specific challenges to be overcome in more detail.

Footnotes

13:- Attitudes to digital swichover, March 2004 http://www.digitaltelevision.gov.uk/pdf_documents/publications/AttitudestoSwitchover_300304.pdf

14:- The figure is based on operators' estimates of digital take-up and the June 2003 Barb Establishment Survey, which found that each household has on average two regularly used TVs.

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