Economic Impact of Radio '95

2. Economic impact assessment

2.1. Introduction

Two alternative approaches are used in this study for the measurement of the economic effects of radio using services: 1) the impact on UK GDP and employment and 2) the impact on consumer and producer surplus. In both cases estimates are from the perspective of the UK as a whole.

The two approaches are based on different assumptions and measure different things, and hence the results should not be summed. The GDP approach provides important insights on the benefits accruing to workers either directly or indirectly employed in radio using industries and to the shareholders of these industries. However, it does not take full account of the displacement caused by radio use on other activities and nor does it take account of the efficiency benefits radio use may generate for business.

The contribution of radio use to UK GDP (including exports) and employment is obtained for a given year by measuring:

• Direct GDP and employment: GDP and employment in the particular radio using industry (eg cellular telephony, private business radio) are estimated;
• Backward linkages: This is the GDP and employment generated in equipment manufacturers and other suppliers to radio users. These companies will themselves purchase inputs from other companies and so on. These indirect effects have been taken into account in our analysis;
• Forward linkages: This is the GDP and employment created in the production of consumer equipment, and in the distribution and retail sector. We have measured these GDP and employment impacts using the same methodology as for backward linkages;
• Displacement effects: In cases where a radio using service is a substitute for another service we have attempted to measure the amount of activity displaced. More generally, it can be argued that if resources are not employed in one part of the economy, movements in wage rates and interest rates will ensure that they are ultimately employed elsewhere. We have not attempted to measure such wider economic displacement, and so our estimates could be interpreted as giving an upper bound on the effects measured;
• Multiplier effects: These effects arise from the spending of incomes and profits in the radio using sector of the economy. They are estimated using an average income multiplier of 1.4.

The second approach measures the benefits accruing to consumers and producers. It provides a more satisfactory treatment of displacement and productivity impacts. However, there can be significant practical problems in measuring both consumer and producer surplus.

• Consumer surplus: This is the difference between what consumers would be willing to pay for a service and what they actually pay. To estimate the value of consumer surplus the relevant demand curve must be estimated. Where demand curve estimates were not available we estimated the efficiency benefits of using the existing radio based technology over the next best alternative. This approach overstates the true benefits because it does not take into account the impact of using the alternative technology on end user prices.
• Producer surplus: This is measured as profits in excess of a normal rate of return. Accurate measurement of producer surplus requires an assessment of business performance over a number of years. The estimates we have prepared do not formally take this into account.

For a more detailed discussion of the methodology and approach, the reader should refer to our previous report, The Economic Impact of the Use of Radio in the UK.

We were asked to estimate economic impacts for the following service areas:

• Aeronautical
• Amateur and Citizen’s Band
• Broadcasting
• Fixed services
• Maritime
• Private business radio
• Programme Making and Special Events
• Public Mobile Communications
• Radio Fixed Access
• Space Services
• Other services (i.e. low power devices, WBDT and HIPERLAN)
• Radio used by Government Departments, in particular Defence Applications

We have focused our efforts on those areas where the economic impacts seem likely to be significant. Data availability determines the approach(es) used in each case and, therefore, not all economic effects have been able to be quantified. Certain benefits of radio use are not amenable to quantification (e.g. amateur radio). These benefits are noted in the text.

The estimates will be more or less reliable depending on the extent to which we have had to rely on average or economy-wide rather than industry specific data. Two important areas where this has been the case are in the calculation of indirect GDP effects and employment effects. To estimate GDP effects we have often used input-output data which is now nearly seven years old and which applies to broad industrial sectors rather than the specific industry in question. To calculate employment effects we have often had to apply an average GDP to employment ratio. Because of the possibility that these factors may have introduced a bias in our estimates (either upward or downward), we have tended to be conservative in our assumptions. As far as possible, the estimates presented are annual values for 1995/96.

2.2. Aeronautical

2.2.1. Introduction

Aeronautical use of radio includes:

• air traffic control (communications from plane to ground and vice versa);
• radar - ground based and aircraft based;
• navigation beacons (distance and direction finding equipment);
• instrument landing systems;
• the Terrestrial Flight Telephone System (TFTS).

It should be noted that this section does not cover the use of aeronautical radio by the defence industry, which is discussed later in this chapter.

The previous study focused only on the communications activity undertaken by National Air Traffic Services (NATS), a joint operation between the Civil Aviation Authority (CAA) and the Ministry of Defence (MOD). For the present study, we have improved the estimates in the following ways:

• data: the availability of detailed financial information on the activities of NATS means that it is possible to calculate a more accurate GDP value;
• direct GDP: we include air traffic service providers other than NATS, for example Serco, Newcastle Airport and East Midlands Airport. There are about 70 airfields in the UK and NATS provides air traffic services to only 12 of them, including some of the largest, namely Heathrow, Gatwick and Manchester. In addition, NATS has a monopoly of on-route activity (UK civil airspace use). Based on our discussions with the aeronautical industry, we estimate that NATS accounts for the management of 70-80% of all air traffic activity. The direct GDP and employment impact of total UK air traffic service provision is estimated by factoring up the market share of NATS;
• indirect GDP: the purchase of other inputs by NATS and other service providers creates backward linkages with the rest of the UK economy. The value of the remaining inputs is total turnover less staff costs and depreciation. Taking an average import content for these and subsequent purchases one gets an estimate of the indirect GDP impact.

The CAA has highlighted two main issues that this methodology does not address. Firstly, the value of GDP associated with radio equipment manufacturers and, secondly, the benefits to the airline industry of radio use. We discuss these in turn.

The UK manufacture of airborne radio equipment is negligible relative to the total market size. Nearly all aircraft are equipped with radio equipment manufactured in the US. Our discussions with the RA and the CAA led us to believe that, on the other hand, there is some UK manufacture of ground equipment. Quantification of the value, and domestic content, of UK manufactured ground equipment has not been possible because of a lack of response to our request for information from equipment manufacturers.

The CAA suggested that we should examine the benefits of radio use in the airline industry. In particular, it was suggested that the whole airline industry is dependent on radio use and, therefore, the entire value added of the industry could be attributed to radio use. Although this argument is plausible, radio use is just one of a number of important inputs to airline industry. Whilst it is impossible to separate these benefits, we note that the total operating revenues earned by the major (i.e. not all) UK airlines in 1994 was £11.7 billion, generating profits of £476 million.

2.2.2. Results

Table 2.1 summarises the results.

Table 2.1

Aeronautical Radio Use

Summary of Annual Economic Contribution 1995/96

Source: NERA/Smith estimates

2.3. Amateur and Citizens’ Band Radio

2.3.1. Amateur

Amateur radio enables direct communications between hundreds of thousands of people all over the world. The ITU recognises the importance of amateur radio in its definition of the service - "A service of self-training in radio communication which encourages international friendship." Similarly, the RA recognises that "amateur radio is unique in the freedom it allows you to develop and experiment with radio communication equipment."

In the UK, there are approximately 60,000 licensed amateur radio enthusiasts. The primary use of amateur radio is as a hobby. There are a number of other uses of amateur radio that result in benefits for the UK economy.

• semi-professional. Participation in amateur radio enables the individuals concerned to learn about electronics and the world of communications. It may also assist in the development of other technological skills which could form the basis of a career in science, engineering or telecommunications;
• emergency use. Amateurs are able to offer their services to the first aid organisations and the police at public events and during disaster relief operations.

These benefits are, however, unquantifiable.

Our approach to estimating the economic impact of amateur radio use focuses on UK manufacture of equipment used by amateurs. Our discussions with the Radio Society of Great Britain (RSGB), the UK national body representing the interests of amateurs, and a major equipment sales company, revealed that there is little UK manufacture of amateur radio equipment relative to the total market. Industry sources estimate that imports (mainly from Japan) account for nearly 95% of all equipment sales.

Despite the significant imported content of equipment, it is a useful exercise to estimate the total value of the equipment market, as this provides an indication of the potential market for the UK manufacture of amateur radio equipment. The annual value of the amateur radio equipment market is calculated as follows:

Number of users in 1995 * average cost of equipment * (1/average age of equipment)

We assume that:

• (based on industry estimates) the average replacement cost of equipment lies between £1,000 - 2,500; and
• average age of equipment before it is replaced 10 - 15 years.

This implies the annual value of the amateur radio equipment market ranges from £4 - 15 million.

2.3.2. Citizens’ Band

In CB radio there are many users sharing a few channels on an uncontrolled basis. In 1995 there were an estimated 50,000 users. The situation with CB radio is similar to that for amateurs in that its use does not directly result in any directly measurable economic activity. Hence, our approach to estimating the economic impact of CB radio has focused on UK manufacture of CB equipment. Our discussions with the industry revealed that CB radio equipment is largely imported.

Again we have estimated the potential market for the UK manufacture of CB radio equipment. We assume that:

• (based on industry estimates) the average replacement cost of equipment varies between £100-200; and
• the average age of equipment before it is replaced is 10 - 15 years.

This gives an estimated annual value of the CB radio equipment market ranging from £0.35 - 0.65 million, i.e. the market is small.

2.4. Broadcasting

2.4.1. Introduction

Our assessment includes terrestrial television and radio, direct to home (DTH) satellite broadcasts, and Teletext.

Estimates of value added and employment for television and satellite broadcasters were obtained from their annual accounts. The previous study estimated the size of the UK commercial radio market. Subsequent economic impacts were calculated using this estimate. In contrast, we have now collected more reliable industry wide data on total industry turnover and total employment. This should translate into more reliable estimates of economic impact.

2.4.2. Broadcasters

2.4.2.1. Direct Effects

The direct effects include estimates of value added created by domestic programme production and transmission. Estimates of direct GDP and employment for broadcasting in 1995 are shown in Table 2.2. The corresponding value added and employment estimates for television in 1993 were £2,010m and 35,000, respectively. The 20-25% (nominal) growth in GDP figures reflects general growth in the TV broadcasting market and particularly high growth for BSkyB, Channel Four, Carlton Television, Teletext Holdings and Granada Television. Our estimates for value added from commercial radio in 1995 show little change from those in 1993 (£89.4m), whereas direct employment shows a considerable increase from 1993 (1,362). This is due to the availability of more reliable data for the industry.

Table 2.2

Direct Value Added and Employment Generated by Broadcasters in the UK, 1995

Source: NERA/Smith estimates

2.4.2.2. Indirect Effects

We estimated the value of intermediate inputs to television directly by taking total revenues (advertising, sponsorship revenues, licence fee and subscription revenues) and subtracting the sum of value added, the value of programme imports and the value of imports in the remaining inputs, using an average domestic content factor of 0.786. This gives an indirect GDP contribution of television of around £1700m. This is significantly higher than the 1993 estimate of £1200m, reflecting the rapid growth in total industry revenues (especially advertising and cable and satellite revenue) since 1993.

For radio we have assumed that direct imports are negligible. The value of intermediate inputs to radio is estimated by taking total revenues and subtracting value added, and then applying the average domestic content ratio to obtain indirect value added of about £140m. This is also significantly higher than our 1993 estimate of £90m, reflecting the rapid growth in total industry revenues since 1993.

Employment effects are estimated at about 69,100 assuming the economy-wide average value added per employee of £27,200. Our estimate of indirect employment from TV and radio broadcasters in 1993 was 51,560, i.e. 25% less than in 1995.

2.4.3. Set Manufacturers

UK television set production in 1995/96 is estimated to have been around 6 million sets, selling at an average trade price of £240 and an average retail price of £310. This implies an annual turnover of around £1.4bn for the set producers. In addition, satellite dishes are manufactured in the UK. Sales totalled around 0.8 million in 1995/96. At an approximate sales price of £100, this gives an additional £80m of turnover.

Of the 6 million television sets produced in the UK around 2.8 million were sold domestically, implying additional turnover in distribution and retailing of about £200m (2.8m x £70) and export revenues of around £770m.

To estimate value added in television and satellite dish production we have used the average value added to turnover ratio for the electronic consumer goods sector of 22%. This gives value added of £330m and 12,100 jobs. Likewise for the retail and distribution sector we apply the value added to turnover ratio for the retail distribution sector of 65%which results in value added and employment of £130m and 2,400, respectively.

To estimate the indirect effects we have applied the average intermediate goods to turnover ratio for each of the relevant sectors (46% for electronic consumer goods, 34% for retail distribution) and applied the average factor of 0.786 to take out the imported content. Indirect GDP and employment are estimated at £590m and 21,700.

2.4.4. Advertising

The value of production costs for television advertisements in 1995 was £461m and commission is estimated at about £396m. Applying the ratio of value added to turnover for the advertising sector of 63% to these estimates gives the value added and employment effects about £540m and 9,926.

Indirect effects are again calculated using the advertising industry turnover less value added and then removing the import content. Finally employment effects are calculated as for other sectors using input-output data for the UK economy. This results in indirect GDP and employment effects of approximately £250m and 9100.

2.4.5. Exports

Programme exports by television companies were worth £302m in 1995, as compared with imports of £400m. Of more significance are earnings from exports of television sets at around £770m. Export earnings are significantly higher than those reported in our 1993 estimates due to a combination of higher export volumes, which increased by 33%, and higher estimated trade prices.

2.4.6. Summary of Results

The results are summarised in Table 2.3. These show a 22% increase in (nominal) GDP and a 19% increase in employment associated with broadcasting between 1993 and 1995.

Table 2.3

GDP and Employment Impacts of Broadcasting 1995/96

GDP (£m) Employment

Source: NERA/Smith estimates

2.4.7. Consumer Surplus

To measure consumer surplus, we require estimates of consumers’ willingness to pay for television and radio services. To our knowledge there is no publicly available data for the willingness to pay for radio services. Our earlier 1995 report contained data on consumers’ willingness to pay for the existing four terrestrial broadcasters which was collected in two surveys undertaken in the mid to late 1980s.

We have recalculated the estimates based on 1996 prices. This is shown in Figure 2.1. The horizontal line on the figure represents the fixed costs households face if they are to receive terrestrial television services. These are the costs of the licence fee (the colour fee is assumed) of £86.50 plus the annual cost of television and aerial purchase, estimated generously to be £70/year on average. This is rounded to an annual cost of £155.

The data presented in the earlier studies are effectively stated preferences in the sense that consumer’s were asked a hypothetical "what would you be willing to pay" question. There is now evidence of household’s actual willingness to pay for television services as revealed by the take-up of and expenditure on pay-TV services. By 1996, a total of 5.1 million UK homes (21.7% of all TV households) subscribed to pay-TV; 3.6 million via direct-to-home DTH satellite and 1.5 million by cable. By calculating the average expenditure on television services by cable and television households, we are able to add two further data points to our earlier figure.

BSkyB reports that its total turnover from DTH subscribers amounted to £727.6 million for the financial year ended 1996. Assuming an average number of UK subscribers over the period of 3.3 million, implies an average spend per subscriber of £220 per annum on subscription charges. In addition, an up-front outlay of around £100 for equipment and installation is necessary to receive the service. Annualising equipment costs over five years and rounding, gives an average annual spend per DTH household of around £250. The Cable Communications Association (CCA) estimates that the average revenue per cable TV subscriber was £259 in 1996.

To put the cable and satellite data on a comparable basis to that for terrestrial television, it is necessary to express their penetration rates as a percentage of homes passed. For cable TV, the ITC estimates this figure to be 21.3%. For satellite, we have assumed that DTH transmissions are receivable by 75% of UK TVHH. This suggests an effective DTH penetration of 20.5% of "homes passed".

At first sight, the inclusion of the revealed willingness to pay as shown by the pay-TV experience would seem to suggest that the demand curves previously estimated are on the high side. However, expenditure on pay-TV is made given that terrestrial broadcasting is already in place and is effectively free at point of consumption. In contrast, we are trying to measure consumers’ willingness to pay for television services against the counterfactual of there being no television service. In this sense, the pay television data really represents a point on a separate demand curve, the demand for pay television. It measures the amount consumers are willing to pay for television over and above that provided on a free-to-air basis.

Extrapolating the B&H curve horizontally back to the vertical axis conservatively at the £456 level, we estimate the value of consumers surplus is in excess of £3.5 bn. This is a 17% increase over the 1993 estimate of £3bn.

2.5. Fixed services

2.5.1. Introduction

Fixed links provide part of the communications infrastructure of PTOs, PCN operators and those organisations with private communications networks. Radio rather than cabled links are used for reasons of cost, diversity and convenience.

In this section we examine the economic activity associated with the use, installation and maintenance of fixed links and the manufacture of fixed links equipment. In addition, efficiency benefits to users of being able to use fixed links rather than alternative communications services are estimated.

2.5.2. GDP and Employment Impacts

The estimates comprise two main elements, namely the GDP and employment associated with:

• fixed link equipment manufacture; and
• the installation and maintenance of fixed links.

2.5.2.1. Contribution by Equipment Manufacturers to UK GDP

Input/output data suggests that around 65% of the expenditure on telecommunications equipment is sourced from the UK. However, in the previous study we found that the percentage of fixed link equipment which is sourced from the UK is much less than 65%. In most cases the equipment comes from the US, Japan and Italy.

Some fixed link equipment is made in the UK, nevertheless this element is likely to be small. We have assumed that it amounts to only 10% of the total expenditure on fixed links equipment (which is estimated to be about £465m). Adjusting for the fact that some of the equipment produced in the UK will itself have an imported content, it is estimated that the total UK content of fixed link equipment is approximately £6.5 million per annum.

2.5.2.2. GDP Impact of Installation and Maintenance Costs

Fixed link installation costs are estimated to comprise approximately 20% of the capital cost of a fixed link. Installation costs of the equipment, like equipment costs, are annuitised assuming a 10% cost of capital and 10 year lifetime. This gives an annualised cost of £16 million.

There may be additional costs resulting from the purchase of sites and installation of structures on sites, although in many cases fixed links are installed on existing sites. The largest element of site costs is likely to be the purchase and installation of the tower. The UK content of site costs is estimated to be £2 million per annum.

It is commonly assumed that maintenance and related costs amount to around 10% of capital costs. Total equipment costs are estimated to be £465 million implying maintenance costs are around £46.5 million per year.

2.5.2.3. Employment Generated by Fixed Links

We examine separately the employment associated with equipment manufacture and employment generated through installation and maintenance expenditure. The employment associated with equipment manufacture is estimated to be about 100 jobs.

As in the previous study, we assume that the largest part of value added in installation and maintenance is likely to be wage related, although some capital equipment will be needed to install and maintain fixed links. Thus, an approximate estimate of employment is obtained by dividing the GDP contribution by an appropriate wage rate. We have used the average salary of BT's employees was approximately £27,000 in 1995/96, as BT is the most important single user of fixed links in the UK. Using the figure of £27,000 per employee:

• installation employment is about 720;
• maintenance employment is approximately 1,720.

2.5.2.4. Elimination of Double Counting

Some of the costs and value added impacts which have been considered above have been counted elsewhere. The most obvious case is PCN fixed links which are counted in our estimates of cellular GDP and employment. The resultant double counting can be eliminated by excluding PCN fixed link costs from our estimate of the value of fixed links.

The other instance where double counting could arise is in the estimates of GDP for the gas, electricity and water industries' PBR systems which include fixed links. As in our previous study we assumed that approximately 30-40% of PBR costs comprise fixed link expenditure. Given that the equipment cost per user is between £700-800 per year and there are 69,500 users, the value of PBR expenditure which is fixed link related (before removing imports) is at least £14.5 million per year and may be considerably higher. We, therefore, assume that £14.5m of utility PBR expenditure is double counted. The GDP associated with this expenditure is as follows:

The corresponding employment figures are 660 for PCN and 440 for utilities.

2.5.2.5. Summary of Results

Table 2.4 summarises our estimates of GDP and employment contribution for fixed links.

Table 2.4

GDP and Employment Impact of Fixed Link Usage in 1995

Source: NERA/Smith estimates

GDP and employment estimates for 1995 are lower than those estimated for the previous study (£80-100 million and 2,800-3,900 respectively) primarily because equipment costs for short-haul routes are estimated to have fallen from £50,000 to £40,000.

2.5.2.6. Efficiency Benefits

We have estimated the efficiency benefits associated with the use of fixed links as the additional costs users would have to pay in the absence of fixed links i.e. the additional costs of a cabled alternative.

The results, shown in Table 2.5, suggest that there are significant benefits from the use of radio. This is particularly so in the access networks of telecommunications operators. As new telecommunications operators are still developing their networks these benefits could grow significantly over time.

Table 2.5

Estimated Annual Efficiency Benefits from Fixed Link Usage 1995/96

Source: NERA/Smith estimates

2.6. Maritime

Maritime radio communications are used for a variety of purposes including:

• distress services, including dedicated Mayday channels;
• port operations, including mooring, berthing and marina services;
• radiodetermination service;
• maritime business radio on VHF; and
• maritime radio services such as VHF weather forecasts.

Ports operators use radio for communications between ships and ports, cargo and container handling, transport around the port area, tide gages, positioning, direction finding and radar. Although maritime activity is dependent on radio use, it is just one of a number of important inputs to the maritime industry. As a result, we have not attributed the total value added and employment from port operations to the use of radio.

The previous study focused only on the maritime communications activity undertaken by BT. In 1995/96, this had a turnover of £7m and 30 employees. Using the economy wide value added to turnover ratio, value added is estimated at £3 million (including staff costs).

Discussions with industry reveal that there is very little UK manufacture of maritime radio equipment. The UK maritime industry focuses on radar manufacture and "system building", which involves assembling different equipment for specific uses and users, and distribution. However, lack of data on the market size of radar manufacturers, distributors and system builders means that we can not accurately estimate the associated value added and employment. Nevertheless, we obtained financial information from three distributors and from this estimate that value added and employment are at least £11.5 million and 150, respectively.

In addition, it should be noted that there are other benefits of maritime radio activity, such as training, provided by amongst others, Wray Castle (who also issues maritime licences on behalf of the RA). Based on discussions with industry, we estimate that maritime training contributed £1.2 million to the UK GDP and employed about 40 people.

A summary of results is provided in Table 2.6.

Table 2.6

Summary of GDP and Employment from Maritime Radio Use, 1995/96

Source: NERA/Smith estimates

2.7. Private Business Radio

2.7.1. Introduction

The direct GDP impact of the use of PBR cannot be readily estimated because radio is just one of a number of important inputs to users’ activities. We focus, therefore, on the calculation of indirect GDP and employment, and the efficiency benefits of PBR.

2.7.2. Results

1.7.2.1. Indirect GDP and Employment Impact

The indirect contribution by PBR to UK GDP and employment is based on estimates of user equipment costs for the major user categories. We estimate that the GDP contribution of PBR radio equipment purchases is £116-179 million and £162-250 million inclusive of multiplier effects.

We estimate that the employment generated is between 3,650-5,650 before taking account of multiplier effects, assuming a value added to employment ratio of £27,200. Employment inclusive of the multiplier is estimated to be 5,100-7,900. Results are summarised in Table 2.7.

Table 2.7

Private Business Radio: Summary of Annual Economic Contribution - 1995/96

(figures in brackets are 1993 estimates)

Source: NERA/Smith estimates

These estimates are lower than those for 1993 for two reasons:

• the mix and number of PBR users has changed between 1993 and 1995, with an increasing proportion of lower value on-site/short range users; and
• estimates of the impact of PBR in the previous study included those for PAMR, whereas for this study the impact of PAMR is calculated separately. Our 1993 estimates of indirect GDP effects of PBR, excluding PAMR, ranged between £115-174 million i.e. were similar to those obtained above.

2.7.2.2. Efficiency Benefits

To measure efficiency benefits, we have estimated the difference between the costs to users of private mobile radio and the costs they would incur if they had to use another means of communications. Our estimates assume that cellular telephony is a reasonable alternative to private business radio. However, for those users where cellular does not provide the same functionality as PBR, we have attempted to estimate the additional cost in the absence of a mobile alternative.

Table 2.8

Annual Efficiency Benefits of Private Business Radio, 1995/96

(figures in brackets represent 1993 estimates)

Source: NERA/Smith estimates

Table 2.8 shows the benefits range from £500-1900m. These estimates are broadly similar to those obtained in the previous study. The lower bound estimates reflect the low cost cellular option (PCN) with relatively low calling rates and the upper bound reflects either the high cost cellular option (GSM) or the costs which would be incurred if no mobile alternative were available, whichever is higher. Generally, if the user did not have access to any radio communications, the "no mobile option", costs were higher than those of the cellular alternative, reflecting the importance of radio communications to the many industries using private business radio.

2.8. Programme Making and Special Events

2.8.1. Introduction

In the earlier study, the use of radio spectrum for services ancillary to broadcasting (SAB) and for service ancillary to programme making and special events (SAP) was discussed as a case study, but was not included in our calculation of the economic impacts. This time, however, we have explored the possibility of including its use in the economic impacts. It has not been possible to quantify more than a limited part of the benefits arising from the use of SAB/SAP. In many areas, it has proved impossible to disentangle the benefits directly arising from the use of radio from other more general effects. For example, many SAP applications are associated with significant economic activity (e.g. West End productions, concerts, sporting events) and generate substantial export earnings for the UK economy. However, clearly much of this economic activity would exist without radio.

The use of radio now plays an important role in the production of television programming. For some forms of content, for example many live events, it is arguable that without radio such programming could not be made or would be prohibitively expensive. For many other forms of content, the use of radio improves programme quality and enhances the general viewing experience.

The impact of this omission is, however, mitigated to some extent by the fact that some of these benefits while not directly measured are arguably indirectly captured in estimates for other sectors. For example, the improved quality of television programming is captured within our broadcasting calculations and more particularly in programme exports.

2.8.2. SAB and SAP equipment manufacture

The range of SAB/SAP equipment includes the following:

• radio microphones;
• talk-back equipment, providing narrow band communications channels;
• audio links, providing broadcast quality links from mobile units to fixed receivers;
• data links, to control (for example) remote cameras;
• video links, for electronic news gathering and outside broadcasts;
• mobile and radio cameras.

It has proven difficult to obtain reliable estimates of the value of the equipment manufacturing industry across these areas. In many cases, equipment is custom made to customers’ specifications. One industry estimate put annual UK radio microphone sales at £20 million and talk-back sales at between £5 -10 million. Much of this equipment is manufactured outside of the UK but modified by UK distributors for domestic use. For this reason, we have assumed that value-added from equipment manufacture is negligible. In any event, it is likely that some of the equipment manufacture is indirectly captured within our estimates for other sectors. For example, much of the talk-back and data link equipment is standard PBR kit. In order to avoid double counting, we have excluded these from our calculations for SAB/SAP.

Distribution and retailing employment associated with radio microphones and talk-back equipment is estimated at between 500 - 1000. In order to estimate the GDP impact we have applied the average economy wide value added per employee of £27,200. This implies a value-added associated with distribution and retailing of between £14 million and £27 million.

2.8.3. Results

The results are summarised in Table 2.9. Total value added (to the nearest £10m) is estimated at £20-40m, and employment between 700-1,400.

Table 2.9

Value Added and Employment Generated by SAB/SAP in the UK, 1995/96

Source: NERA/Smith estimate.

2.9. Public Mobile Communications

This section covers the economic impact of the following services:

• Public Access Mobile Radio (PAMR)
• Cellular Telephony
• Paging (wide-area and on-site paging)
• Mobile Data

2.9.1. Public Access Mobile Radio

2.9.1.1. Introduction

The direct GDP for PAMR is that from service provision. This is based on information on the activities of National Band 3.

The main benefits come from indirect effects of equipment purchase and the efficiency benefits of PAMR. The calculation of efficiency benefits from the use of PAMR is based on the cost of a cellular alternative.

2.9.1.2. Results

The results are summarised in Table 2.10.

Table 2.10

Public Access Mobile Radio Services - Summary of Annual Economic Impact 1995/96

(1993 estimates in brackets)

Source: NERA/Smith estimates

The 1995 estimates are considerably higher than those in 1993, primarily due to a doubling in the number of PAMR users between 1993 and 1995.

2.9.2. Cellular

2.9.2.1. Introduction

There are four operators providing a cellular telephony service in the UK. In 1995 there were approximately 5.4 million cellular subscribers, the vast majority of whom were subscribers to the Vodafone and Cellnet networks, although the number of subscribers using Mercury One-2-One and Orange is growing rapidly.

The data used in our estimates of GDP and employment impacts comes from annual reports of the cellular operators. In addition, value added and employment from service provision, retailing and handset production are directly estimated, based discussions with the industry.

2.9.2.2. GDP and Employment Impact

Our estimates of the GDP and employment impact given in Tables 2.11 and 2.12 show a growth of approximately 50% over 1993, before multiplier effects.

The 1995 estimates show that the GDP generated by the operators themselves only accounts for about one-fifth of the total GDP contribution, before multiplier effects. This is because the two PCN operators were in their start-up phase and expanding their networks and, therefore, making operating losses. However, their overall GDP contribution is substantial because of the investment expenditure they are incurring.

In addition, the current study directly estimates value added and employment from service provision and retailing, and handset production, based on discussions with the industry. As a result, the 1995/96 estimates are more reliable and reflect all activities associated with cellular telephony.

To estimate the displacement of fixed telephone use by cellular telephony we assumed:

• 10% of the calls of Vodafone and Cellnet are at the expense of those of fixed network operators;
• 20%of the calls of the PCN operators are at the expense of fixed network operators;
• the lost revenues to the fixed operators can be calculated as the number of subscribers on the relevant cellular systems multiplied by the percentage of lost calls multiplied by an assumed annual call bill for a residential fixed network customer of £200.

The degree of substitution is assumed to be considerably greater for PCN operators than for the GSM operator, because the latter have a greater proportion of business users whose use of the service is more time specific, and hence the fixed network provides a poorer substitute, than for domestic users.

Table 2.11

GDP Associated with Cellular Radio (£m)

Source: NERA/Smith estimates

Table 2.12

Employment Associated with Cellular Radio

Source: NERA/Smith estimates

2.9.2.3. Consumer surplus

To measure consumer surplus it is necessary to estimate a demand curve for cellular telephony. In the absence of published estimates of a demand curve we produced our own estimates using cross section data from 14 countries. We estimated a number of regression equations using a semi-logarithmic specification and the following explanatory variables:

• price;
• GDP per capita
• number of competitors;
• penetration rate;
• time since the start up year.

The equation we used was as follows:

Ln (Subscribers/Population) = 2.49 - 0.0072 (price/GDP per capita)

Using this demand curve we estimate that consumer surplus was about £7.8 billion in 1995. There is obviously a margin of error on this estimate and alternative specifications could result in estimates which are either significantly higher or lower.

The present specification assumes that there will always be some cellular subscribers no matter how high the price of cellular telephony. This is almost certainly unrealistic. If, as an alternative, it is assumed that there is a cut-off price above which there will be no subscribers then the estimate of consumer surplus will be reduced. To show the impact of a cut-off price we ran a sensitivity test under which it was assumed that the number of subscribers would be zero if the price of cellular telephony £6,000 a year. Consumer surplus in this scenario is around £7.3 billion. Alternatively, if we take account of the number of competitors in estimating the demand curve then consumer surplus rises to around £8.3 billion (assuming no cut-off point). For these reasons it is perhaps more appropriate to consider an approximate range for consumer surplus of about £7.3-8.3 billion.

This is an increase of 65-110% over the consumer surplus estimated for 1993. This increase in consumer surplus is not surprising given that the number of subscribers has increased by about 45% between 1993 and 1995, and prices have fallen by about 20% over the same period.

2.9.2.4. Producer Surplus

Both Vodafone and Cellnet currently achieve rates of return which are almost certainly in excess of their cost of capital. For example, in 1995/6 the return on net assets of the Vodafone group was 40%, and that for the Cellnet group was about 36%. Assuming a cost of capital of 20% Vodafone’s and Cellnet’s producer surplus could have been as high as £236 million and £126 million in 1995/96. However, it should be noted that a correct measure of producer surplus should reflect the performance of a business over a substantial segment of its lifetime. Conservatively, we have halved our estimates, which results in a producer surplus for Vodafone's of approximately £120 million in 1995/6 of about £60 million for Cellnet's.

2.9.2.5. Exports

There are two sources of export contribution:

• profits arising from the international activities of the operators; and
• sales of equipment overseas.

Vodafone is participating in a number of overseas cellular ventures. Profits from these ventures are shown in its Annual Report and Accounts 1995/96. These suggest that Vodafone lost approximately £20 million on such ventures. The UK employment associated with these ventures is likely to be small and we have not included it in our estimates. In addition, other operators may become involved in overseas ventures but we do not have information on the scale of any associated profits or losses.

2.9.3. Paging

2.9.3.1. Wide Area

There are currently four national paging operators in the UK - BT, Vodapage, PageOne Communications (formerly Mercury Paging), and Hutchison. In addition, there are three regional operators. By December 1995, there were a total of approximately 850,000 paging subscribers in the UK.

Our estimates of value added and employment are based on annual reports for PageOne and Hutchison, a brokers report for Vodapage and our own estimates for BT’s paging service.

Direct GDP and employment from paging operations in the UK are estimated at £64m and 1,800, respectively.

2.9.3.2. On-site

The direct GDP impact of the use of on-site paging cannot be readily estimated because paging is just one of a number of important inputs to users’ activities. We focus, therefore, on the calculation of indirect GDP and employment. Data limitations mean that our measure of GDP impacts is limited to that associated with the purchase of equipment by users.

Our estimates are based on information provided by the industry association for users of on-site paging, On-Site Communications Association (OSCA). Numbers of systems and pagers sold in 1995 and their typical value are given in Table 2.13.

Table 2.13

On-site Paging - System and Pager Sales 1995

Source: OSCA and industry estimates

Based on our discussions with the industry, we assume that running costs of on-site paging systems are negligible and there are no call charges.

Indirect GDP and employment effects from the manufacture of on-site pagers are estimated to be £1.3-£1.7 million and 40-50, respectively.

2.9.4. Mobile Data

This section provides estimates of the economic impacts arising from the operation of dedicated mobile data networks. The Department of Trade and Industry has awarded five licences to operate such services:

• Cognito;
• Hutchinson Mobile Data;
• Paknet;
• Ram Mobile Data;
• Securicor Datatrak.

The mobile data operators provide radio communications between mobile (typically a moving vehicle) or static locations and a central point using licensed radio frequencies. A wide range of computing and data communications applications are supported, including dispatch, service engineering and telemetry.

The highly competitive nature of the industry means that it has not been possible to compile consistent market data, with industry estimates varying markedly. All, however, agree that after a slow start, the industry is now growing rapidly with the number of users (terminals) being estimated to have more than doubled between 1994 and 1996.

2.9.4.1. Network Operator Revenues

Network operating revenues for 1995 are estimated to have been between £25 - £80 million. This implies a GDP impact of £9-30 million and an employment effect of 300-1,000.

2.9.4.2. Network Infrastructure and Consumer Equipment

It has not been possible to obtain consistent estimates of the value of network infrastructure and consumer premises equipment sales. We understand, however, that the level of UK content from such sales is small, suggesting that any GDP impacts are likely to be marginal.

2.10. Radio Fixed Access

2.10.1. Introduction

Three companies are licensed to provide telephony services using radio in the local loop, namely Ionica, Atlantic Telecommunications and Liberty Communications. None of these three companies had commenced operations for the financial year 1995/96. Ionica commenced operations in June 1996 and Atlantic in October 1996. Due to lack of financial data on investments during the financial year 1995/96 for Atlantic and Liberty, this section focuses on the investment activities of Ionica, for which data are available.

In 1995/96 Ionica had started to construct its network and Nortel had established a new factory to manufacture radio fixed access equipment.

Export revenues are likely to come from royalties on Nortel’s equipment sales, sale of software and systems support, and joint ventures. Our discussions with Ionica have led us to believe that Nortel’s exports of local loop technology are experiencing significant growth. Details were not , however, provided to us.

2.10.2. GDP and Employment Impact

Ionica commenced operations in June 1996 and has yet to publish any financial information. As a result, we are not able to estimate the direct GDP contribution of Ionica’s operations.

However, indirect GDP and employment effects of Ionica’s operations can be estimated from expenditure on network infrastructure in 1995/96 and the establishment of a new factory in Paignton by Nortel, supplier of Ionica’s residential subscriber system (RSS).

In 1995/96 Ionica invested £120m in network infrastructure and employed 480 people, while Nortel invested £40m in the new factory and employed 914 people. Value added and employment associated with these investments is estimated at £60m and 1,400 jobs.

It is also estimated that Ionica will contribute approximately £83 million to the UK GDP by the year 2001 and employ about 3,600 people. In addition, value added and employment associated with these investments is estimated at £135m and 5,200 jobs.

2.11. Space Services

2.11.1. Introduction

Satellite services provide a relatively low cost means of communications across long distances, often to a widely dispersed population. In particularly remote land locations or locations with poor communications infrastructure and at sea, they often provide the only means of reliable communications. Thus these communications can be extremely valuable to particular groups of users.

As in other sectors, the data available is rather patchy both for reasons of commercial confidentiality and because of the fragmented nature of the industry. Lack of suitable data meant we were not able to estimate consumer surplus or efficiency benefits.

The estimates given below exclude activity associated with direct broadcast satellites, as this is counted under broadcasting, but do include maritime, aeronautical and defence use of satellite communications.

2.11.2. GDP and Employment Impact

The direct, indirect and multiplier effects of activity associated with the use of satellite spectrum are summarised in Table 2.14. As can be seen the GDP effects are of the order of £1.2 billion with employment effects around 30,000. These figures represent an increase of 26% and 20% respectively on the estimates for 1993 given in previous study and reflect growth in both the equipment manufacturing and service provider markets.

Table 2.14

GDP and Employment Impacts of Space Services 1995/96

Source: NERA/Smith estimates.

2.12. Other services (i.e. low power devices, WBDT and HIPERLAN)

2.12.1. Low Power Radio Devices

Low power radio devices (LPRDs) operate over short ranges and at low power levels. They include personal alarms, telemetry and telecommand devices, radio microphones, radio LANS and anti-theft devices. Equipment is licence exempt. The Low Power Radio Association (LPRA) indicated that the UK is a market leader in the use of LPRD’s and that a large proportion of devices sold are manufactured in the UK (with imports at the low value end of the market).

Estimation of the market size and employment is made difficult by the presence of a very large number of products and manufacturers. In addition, LPRD’s are manufactured by large electronics companies which produce a large number of other products. As a result, we have based our estimates on a survey, carried out in 1994 by the LPRA, which estimated that the size of the market was £100m for 1993/94.

Assuming that the LPRD market grew at the rate of growth of nominal GDP, which was 5.8% between 1993 and 1994 and 4.8% between 1994 and 1995, the market size in 1995/96 is estimated to be about £110m. Industry sources estimate that market growth was faster than GDP growth and, therefore, our estimates should be treated as a lower bound.

Taking out the import content, we estimate that value added from LPRD manufactures is approximately £60m. Using the economy wide value added to employment ratio, employment is estimated at about 2,100.

2.12.2. WBDT and HIPERLANs

Wide Band Data Transmission (WBDT) services are relatively undeveloped. Users are thought be large corporations such as oil companies and nuclear power stations. Most of the equipment is made in the US. We were not able to find any hard data on the extent of UK licensing, R&D or manufacturing activity in this area.

It is our understanding that HIPERLANs are still the development stage and, therefore, there are no GDP and employment impacts.

2.13. Defence

Significant amounts of spectrum are reserved for defence purposes to be used in time of war and for peacetime manoeuvres. The military use radio spectrum for a wide variety of applications including:

• tactical and battlefields communications;
• location radar and surveillance;
• weapons control; and
• general barracks security, fire and police.

The MOD suggested that the whole defence industry is dependent on radio use and, therefore, the entire value added of the industry could be attributed to radio use. Although this argument is plausible, radio use is just one of a number of important inputs to the defence industry. Whilst it is impossible to separate these benefits, we note that that defence spending in 1995/96 was £21bn and it employed about 225,000 service personnel and 125,000 civilian personnel.

A partial measure of economic impacts can be obtained from estimates of defence expenditure on radiocommunications. We previously estimated that the defence forces spent around £150 million annually on radiocommunications equipment and services in 1993. Unfortunately, the MOD was unable to provide an estimate of its actual radiocommunications expenditure for 1995. From various pieces of anecdotal evidence, however, we now have reason to believe that the actual figure may be somewhat higher than £150 million per annum. Recent press articles, for example, have indicated that the Bowman contract to replace the British Army’s battlefield radio system could be worth as much as £2 billion. With the average expected life-span for such radio equipment is anywhere between 10 and 20 years and taking 15 as an average this implies an equivalent annual expenditure of over £130 million. In addition, the MOD has recently awarded a contract worth an estimated £1 billion over 10 years to BT for provision of the defence fixed telecommunications system (DFTS). This will deliver voice, data, LAN interconnect and other wide area networking services for the Navy, Army and Air Force.

The previous report also estimated that the defence forces employ 1,000-2,000 staff in activities related to radiocommunications. The MOD were unable to provide an estimate of comparable numbers for 1995, and we have simply assumed that the numbers remain unchanged. Applying the economy wide value-added per employee of £27,200 gives a direct value-added of £27 million - £54 million.

As a conservative estimate we have assumed that total radiocommunications expenditure for 1995 amounted to £250 million. This implies a value-added of around £130 million. We further estimate that a further 4,800 jobs could be associated with this expenditure.

The results are summarised in Table 2.15 below.

Table 2.15

Summary of GDP and Employment Effects for Defence 1995

Source: NERA/Smith estimates.

2.14. Summary

Our findings are summarised in Table 2.16. As can be seen both the GDP approach and the sum of consumer surplus (or efficiency benefits) plus producer surplus give by chance similar values of around £12-15bn.

Table 2.16

Summary of Annual Economic Effects 1995/96

Source: NERA/Smith estimates

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