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Economic Impact of Radio '95 |
Appendix 3 . Projecting pay tv take-up: the top-down and bottom-up approaches
In order to project the likely take-up of pay TV over time, we have pursued two approaches: bottom-up, focusing on hardware penetration rates; and top-down analysing consumer expenditure patterns on pay TV and related services.
Bottom-up
Pay-TV penetration in the UK currently stands at around 22% of television households (TVHH). One means of thinking about how this figure might move over time is to compare UK take-up of pay-TV services with that achieved overseas.
The United States is generally regarded as the most developed television market in the world. It perhaps represents the most significant indicator for the future development of pay-TV services in the UK. The headline figure for multichannel TV take-up in the United States currently stands at around 67% of television households; with a cable TV penetration rate of about 64% and the remainder comprising direct-to-home (DTH) satellite subscribers. A simple comparison of these headline figures with the UK is, however misleading, as there important differences between the two markets.
First, the 64% cable TV penetration figure refers to the basic cable service; this comprises retransmitted broadcast signals, advertiser-supported general and special interest programming, and public, educational and government channels. A traditional function of cable TV in the US is as a means of improving reception of local television broadcast signals and this is a major factor underlying the very high rate of basic cable take-up. With the coverage of the terrestrial television transmitter network over 99% of the population, this so-called "antenna service" has not emerged as an important factor in UK cable and satellite take-up.
Perhaps a more appropriate comparison is to focus on the penetration of premium services (offered in the US on a per channel subscription basis). On this basis the UK and US rates appear much closer. AC Nielsen estimates that in 1995 27.1 million US cable homes (28.4% of total TVHH) subscribed to at least one premium service. Adding to this figure the 5.9 million DTH subscribers, and assuming that most or all of these subscribe to at least one premium or pay-per-view service, gives a premium services penetration rate of around 35% of total US TVHH.
The comparable take-up of premium services in the UK in 1996 is around 18.7% of TVHH. This would suggest that the analogue UK pay-TV market lies some way below its maximum potential. Moreover, the added functionality of the switch to digital might be expected to extent the take-up of premium services still further.
A second difference lies in the availability of cable TV in the United States compared to the UK. The US marketplace is characterised by almost universal availability of cable with over 96% of the 96.5 million US television households passed by cable. In contrast, the comparable figure for the UK is just 30%.
Simply extrapolating the current projected build rate for cable TV networks in the UK and assuming that the take-up of cable (as a proportion of homes passed) and of satellite remains at 1996 levels, implies a cable and satellite penetration rate of around 30% by 2007. Note that this figure is likely to include an element of double counting since amongst satellite subscribers will be households in areas currently uncabled but which will be cabled in the future. Some of these subscribers might otherwise have opted for cable services. On the other hand, keeping take-up rates constant takes no account of any stimulus due to the additional functionality of digital services and the general increase in personal disposable incomes.
On the basis of the bottom-up analysis, a potential UK pay-TV penetration rate of between 35-40% of TVHH is not an unrealistic expectation.
Pay-TV subscriptions in the UK for 1996 reached £1 billion and represent the fastest growing source of television revenues (see Figure A3.1). Digital TV can be expected to capture a growing share of these revenues over time.
Source: NERA/Smith estimates based on Screen Digest data.
Moreover, digital TV offers greater functionality which may attract new revenue streams from adjoining markets: for example, video-on-demand (VOD) and near video-on-demand (NVOD) services might be seen as direct substitutes for video rental and possibly video sell-through. More generally, digital TV competes with other forms of audio-visual (AV) product for the consumer pound. Figure A3.2 shows the growth in consumer AV expenditures over the period 1990 -1995.
Projecting forward likely expenditures on pay TV services over time involves a number of stages:
- the general rate of economic growth which, other things being equal, can be expected to increase leisure (including AV) expenditures; and
- any anticipated change in the importance of the AV sector relative to other leisure good sectors which might lead to a greater proportion of incomes being spent on AV product. The introduction of new technologies and applications such as the advent of digital TV might, for example, lead to such a shift as AV products become more highly valued by consumers.
- any evidence of a potential shift in the relative positions of the different segments over time;
- the timing and impact of new technologies and new application introductions;
- the degree of substitution between market segments.
In order to control for the many possible outcomes, we constructed a small number of scenarios which best describe likely market developments over the projection period, for each user segment.
On the basis of this analysis, we project that pay TV expenditures (including subscription and pay TV revenues but excluding new narrowband and internet type interactive services) could be in excess of £ 2.5 billion in 2005. If we assume (conservatively) that average pay TV expenditures per household remain constant in real-terms, then this implies a projected penetration level for pay TV services of around 40% by 2005.
Figure A3.2:
UK Consumer AV Expenditures 1990 - 1995
Source: NERA/Smith analysis based on Screen Digest data.
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