Economic Impact of Radio '95

3. Digital Terrestrial broadcasting

This chapter considers the prospects for digital terrestrial television (DTT) and digital audio broadcasting (DAB) in the UK over the next ten years. In order to deal with the problems of uncertainty inherent in projecting market developments over such a time period, we present scenarios which describe likely upper and lower bounds to consumer take-up. The economic consequences of these projections for the UK economy are then considered in terms of impacts on domestic and export equipment sales and on the programme production market. For the case of DTT, we also explore the impact of an announcement of analogue closure.

3.1. Digital Terrestrial Television (DTT)

3.1.1. Introduction

The UK is the first country to announce the launch of DTT. If events run to plan, then by the end of 1998 a total of six digital multiplexes could be operating. Together these multiplexes will offer 30 or more programme services plus a range of additional data and interactive applications. DTT is not the only means of delivering digital television to the home and UK cable and satellite television operators have also announced plans to offer digital services (DST and DCT respectively), possibly before terrestrial services are launched. So while our focus is primarily on DTT we also consider the prospects for DST and DCT since, for reasons which are developed further below, their fortunes (at least initially) are inextricably linked.

3.1.2. DTT

The packaging of programme services and the marketing of DTT to the home is to be coordinated by so-called multiplex operators. Given currently planned compression ratios, each multiplex will be capable of broadcasting around five programme signals using the same amount of spectrum as previously required for a single analogue service. Continuing advances in technology could further increase this compression ratio and hence expand the future number of services. In addition, DTT offers the potential for the development of data and interactive services with a return path via a modem connection to the PSTN. A maximum of 10% of multiplex capacity may be used for such additional services.

Under government plans, a total of six multiplexes are to be made available initially (see Figure 3.1). This number is constrained by the availability of broadcast spectrum and the need to fit digital services around existing (UK and overseas) analogue transmissions. The coverage of each multiplex varies, with current figures ranging from around 90 per cent of the UK population for the largest three multiplexes down to 70 per cent for the smallest.

Two and a half of the six multiplexes have been reserved for the existing terrestrial broadcasters, while the remainder are to be licensed by the Independent Television Commission (ITC) via a tender process. The BBC has been allocated a whole multiplex, while ITV, Channel 4 and Teletext are to share another one. In exchange for this guaranteed capacity, the existing broadcasters will be required to simulcast their analogue services in digital. They will be free to use the remaining multiplex capacity to develop additional programme services. Of the four multiplexes to be licensed by the ITC one, multiplex A, will also carry the Channel 5 and S4C simulcast services, plus a certain amount of Gaelic programming in peak hours in Scotland, while multiplexes B, C and D are fully available for the development of new programme services.

Each application in respect of the four advertised multiplexes is to be assessed by the ITC according to criteria set out in the Broadcasting Act 1996. These are:

the coverage area proposed;

the speed of service roll-out;

the applicants’ ability to establish and maintain the service;

the appeal of the programme services to a variety of tastes and interests;

the applicants’ plans for promoting or assisting the acquisition of decoders by viewers; and

applicants’ plans to ensure fair and effective competition in their dealings with providers of programmes and additional services.

The deadline for applications to operate multiplex services was 31 January 1997. The ITC plans to award licences by Spring 1997, with the expectation that services will begin within 12 months of the award date.

The ITC has received applications from three groups in respect of the four advertised multiplex licenses. S4C Digital Networks Limited (a wholly owned subsidiary of S4C, the Welsh public broadcaster) was the sole bidder for Multiplex A. British Digital Broadcasting (BDB) a consortia of the ITV companies Carlton and Granada and the satellite operator BSkyB, and Digital Television Network (DTN), set up by the cable operator International CableTel each submitted bids for Multiplexes B, C and D. Both bidders have indicated that they would like to win all three multiplexes, but they have also applied for each individually. The ITC also received an application from Digital 3 and 4 Ltd, representing ITV and Channel 4, in respect of the multiplex on which they have guaranteed places.

From the various applications it is clear that:

all the major UK broadcasters have expressed an interest in launching DTT services. This will provide DTT with a strong base of established and familiar brands from which to market the new services;

DTT content will include the simulcasting of all existing channels plus a range of offerings new to terrestrial television, including premium film and sports channels. This may prove significant in terms of the initial consumer take-up of DTT since premium film and sports are widely recognised as the main drivers of pay-TV subscriptions.

3.1.3. Digital Cable and Satellite Television

Digital technology may also be used to transmit television signals over cable and satellite networks. Unlike terrestrial television, these media are not constrained by the need to fit around existing analogue transmissions and this means that many more programme services - upwards of 200 - are possible. Some of this extra capacity will be used to provide additional subscription and advertising financed programming, while much more will be used to show new pay per view (PPV) services.

Commercial plans for DST and DCT are currently being finalised. The satellite operator BSkyB has announced that it will launch a digital satellite package in late 1997. Its proposed service will include up to 100 channels of pay-per-view films, sports, music and theatre events as well as conventional subscription channels. The three largest UK cable operators Telewest Communications, Bell Cablemedia and Nynex CableComms have also recently announced plans for the launch of digital cable services by the end of 1997. It is widely expected that the other UK cable operators will follow suit.

3.1.4. Comparing The Delivery Platforms

Spectrum constraints mean that DTT will offer a more limited range of programming than either DST or DCT. Audience research suggests, however, that only certain types of programming and in particular premium films and sporting events attract large pay-TV audiences. In this sense, the impact of any capacity constraint on DTT may be mitigated since it is the quality of programming rather than simply the extent of programme choice which is important in attracting viewers.

DTT’s capacity constraint may be more significant in terms of the development of new pay-per-view and additional interactive services. These represent important new revenue sources for the television sector. For example, the turnover of the UK video rental and sell-through sectors, the natural target markets for proposed video on demand (VOD) and near video on demand (NVOD) services, exceeded £1.2 billion in 1995. The revenue potential of new interactive services is less certain, but if current projections of the growth in the Internet are realised they could be substantial. The opportunity for DTT to offer such services is limited because of capacity constraints. Unlike cable and satellite, therefore, DTT may find itself largely excluded from an important and growing source of revenue.

In order to receive digital TV, consumers will initially need to purchase a set-top box (STB). This will convert digital signals into analogue form so that they can be displayed on existing television sets. Estimates of the likely costs of STBs vary, and in part depend on the degree of functionality that is to be built into the box. It is clear, however, that DTT STBs will initially be more expensive than either cable or satellite boxes. This is in part because of the extra complexity of the chip sets required for the decoding of terrestrial signals. It is also because cable and satellite systems will be able to realise economies of scale in production much more quickly than DTT, as a result of actual and proposed digital launches around the world. In contrast, only a few countries have yet to announce plans for DTT and the UK is by far the most advanced of these.

Industry estimates suggest that cable and satellite STBs will initially cost around £400 to produce, with DTT boxes costing perhaps an extra £50-£100. It is widely expected that the retail price will be subsidised by operators, with the subsidy recovered from higher ongoing charges. BSkyB, for example, has announced a target price of £200 for a DST box, while the BDB consortium has suggested that its DTT box will be available for around £300.

DTT does offer the advantage that it can (generally) be received via existing aerials. In this sense, the terrestrial box is of a simple "plug and play" variety. This also means that DTT signals can be received via set-top aerials, an important consideration in today’s environment of multi-set households and given the absence of in-home local area networks.

Over the longer-term, digital television receivers are likely to emerge with the technology necessary to decode DTT signals built into the set. Dixons, the major high street electrical retailer, has suggested that integrated receivers are likely to retail initially at a £200 premium to analogue sets. Other industry estimates suggest the premium could be much higher, perhaps of the order of £350.

For reasons given below, we expect the market for STBs to be limited to those households who place a high value on multichannel television reception. For these households, the choice between delivery platforms will depend on the range and quality of programming and additional services offered, and the relative costs of adoption of the different systems. While interest in multichannel TV be expected to grow over time, it is likely to remain restricted to a minority of households. For many, the main driver of digital take-up will be the TV set replacement cycle. The ability to receive DTT signals on digital receivers using existing aerials provides DTT with an important advantage over cable and satellite systems. As the price premium for digital sets declines, we expect a growing number of set replacement sales to be of digital rather than analogue sets. By this means, households will effectively convert to digital reception by default even if they mainly continue to view the existing terrestrial networks.

3.1.5. Existing Digital TV Services

One pointer towards the possible success or otherwise of digital television in the UK comes from a consideration of the experience of digital TV launches overseas. A number of digital satellite bouquets have already been launched to mixed success around the world (Table 3.1). By far the largest market is the United States, where digital TV services have been available since 1994. By December 1996, the two largest operators DirecTV and Primestar had around 3.7 million subscribers between them. These subscribers include both households which were previously not passed by cable networks and dissatisfied former cable subscribers.

Table 3.1

Digital Satellite Television, Selected Examples

Source: NERA estimates compiled from DBS Digest, New Media Markets and Screen Digest.

Elsewhere, digital satellite services have to date met with mixed success. In France, the Canal + digital service claims to have signed up 160,000 subscribers since its launch in April 1996. In contrast the German DF1 service has gained only 20,000 subscribers, hampered in part by the strength of existing terrestrial television offerings.

3.1.6. Historical analogies

A further indication of the likely take-up of DTT comes from the analysis of historical analogies. The last major change in television transmission standards was the change from monochrome to colour, with the first colour broadcasts beginning in 1967. It is difficult to assess the relative improvement to the consumer of the transition from monochrome to colour against that offered by a move from analogue to digital. Moreover, the retro-compatibility of colour broadcasts with 625-line monochrome sets provides a further difference to the comparison. Analysis of the colour television experience does, however, provide some useful insights into the issues and problems involved in replacing an existing generation of television receivers with a new generation of more expensive ones.

An account of historical events and full discussion of the issues surrounding the transition to colour can be found in Appendix 2. Among the insights gained from the analysis of the colour television experience, the following are of particular relevance to the planned transition from analogue to digital television:

the displacement of monochrome households as measured by the number of monochrome only licences in force was a gradual rather than a sudden process. Even in 1987, some twenty years after the introduction of colour TV, 2.4 million monochrome licences (representing around 23% of all television households in the UK) remained force;

the displacement of monochrome sets as measured by the number of sets in use took even longer than the transition of households. In 1987, 8.5 million monochrome sets remained in use, equivalent to a set penetration rate of 44% of television households.

This suggests that the transition from analogue to digital could take a very long time indeed.

3.1.7. Projecting DTT Take-up

3.1.7.1. Introduction

This section describes our approach to the development of projections of DTT take-up in the UK over the next 10 years. Table 3.2 presents an overview of our methodology.

Table 3.2

Overview of Approach to Modelling Take-up of DTT

The starting point for our analysis is to consider separately the market for STBs and digital receivers. The likely rate of take-up of digital services, and DTT’s share of each market is then projected as follows:

Target market. The first stage is to identify the various market segments most likely to purchase the different forms of DTT hardware. For STBs, this is considered to be households willing to pay for television services. For digital receivers, the target market is households making replacement receiver purchases;

Adoption decision. In each case, purchasers will face a range of adoption decisions. For STBs, the choice is between a cable, satellite or terrestrial box or possibly some combination of these. For receivers, the choice is between an analogue or a digital one;

Key drivers. The final stage is to identify the key drivers of the adoption choices. For STBs, this includes the ability to receive the service, the distinction between cable, satellite and terrestrial programme (and additional service) offerings and the relative costs of adoption across the different delivery platforms. For digital receivers, the key factors are the set replacement cycle, the price premium of digital sets over analogue, the extent of DTT coverage and the number of years to analogue closure.

Sensitivity tests were then carried out on each of the key drivers, and scenarios developed to describe the upper and lower bounds to the likely take-up of DTT over the next ten years.

The above stages are described in more detail below, while the scenarios are outlined in section 3.1.8.

3.1.7.2. STBs

The earliest available and least expensive means of receiving DTT will be the STB. Two variants are likely to be available, a cable/satellite STB with integrated (or add-on) DTT capability and a DTT only STB.

1) Target market

We consider the key driver of digital TV to be the proliferation of new programme services. The most likely purchasers of digital STBs will therefore be those households who place a high value on the reception of multichannel TV services. The additional interactive applications enabled by the transition to digital will be highly valued by a small number of consumers and may attract new subscribers at the margins, but are unlikely in themselves to be a major driver of digital TV (at least initially). For viewers who place a high value on such applications, cheaper and more effective alternatives, such as the Internet and World Wide Web are likely to prevail.

The natural "target market" for digital STB purchase is existing cable and satellite subscribers, as this group has already indicated a willingness to pay for multichannel television reception. Pay TV penetration in the UK currently stands at around 22% of TV households. Many in this group may upgrade to digital cable and satellite services, attracted by the range and diversity of programming and additional services likely to be offered.

The increased programme choice and interactive capabilities of digital TV should also mean that the proportion of the population willing to pay for TV (and related) services will increase over time (a trend accentuated by a general increase in personal disposable incomes). In order to project this increase, we have pursued two approaches: bottom-up, focusing on hardware penetration rates; and top-down analysing total consumer expenditures on pay-TV and related services. Reconciling these two approaches, we project that the penetration of pay TV, and hence the potential market size for STBs, could reach 40% of television households (TVHH) by 2007 and that industry revenues could total in excess of £ 2.5 billion.

2) Adoption Choices

Digital STB purchasers will face the choice of selecting a cable, satellite or terrestrial platform or some combination of these.

3) Key Drivers

The choice between delivery platforms will be influenced by a range of factors including:

the geographic coverage;

the distinction between programme (and additional service) offerings; and

the relative costs of adoption including hardware and ongoing service charges.

For a number of households currently unable to receive either cable or satellite transmissions, DTT will represent the first means of receiving of multichannel TV. Other things being equal, we expect the take-up of pay-TV services across these households to reach a level comparable to that achieved in cable and satellite households.

For existing analogue cable and satellite subscribers, the natural upgrade path would appear to be a switch to DCT or DST. The transition of its existing customer base may, however, prove to be a complex marketing exercise for the cable and satellite industry. On the positive side, subscribers have already indicated a willingness to pay for television services. On the negative side, they have invested in analogue hardware and must now be persuaded to trade-up to digital services.

In this context, satellite may face a particularly difficult task since most subscribers have purchased their own hardware. BSkyB’s proposed digital services will use a new orbital slot located at 28 degrees east, while existing dishes are pointed towards 19 degrees east. So in addition to new STBs, digital satellite subscribers will also need to modify or replace existing dishes. Migration strategies used by BSkyB may include STB subsidies and rental schemes designed to lower the initial cost of conversion together with the gradual withdrawal of analogue services acting as the stick to encourage the upgrading to digital.

For cable, the direct upfront costs to consumers of the transition to digital will be lower as the STB is rented from the cable company. Such costs are, however, likely to be recovered from the consumer over the longer-term through higher ongoing charges. The take-up of cable TV is also increasingly being driven by promotion of a combined cable telephony/TV package. This provides the cable companies with a strong marketing proposition and greater pricing flexibility, with the incremental charge for the basic TV service being kept to a minimum. This may place cable at a comparative cost advantage to satellite and terrestrial offerings.

DCT and DST subscribers will also have the option to receive DTT, either through a multi-platform STB, or via a plug-in gateway device. In addition, a proportion of existing cable and satellite households, who perhaps do not require the full range and diversity of services offered over digital cable and satellite, may elect to take only DTT services.

Finally, the transition to digital will attract new subscribers to pay TV - either because of the increased number of services offered and/or because of a general rise in consumer incomes over time. Competition for these new subscribers is likely to be intense across the different delivery platforms with adoption choices influenced by a range of factors including geographic coverage, different programme (and additional service) offerings and the relative costs of adopting the different systems.

3.1.7.3. DTT Receivers

For many and perhaps the majority of households, multichannel pay-TV services will remain of little interest regardless of the digital developments. For this group, the main driver of digital TV take-up will be the set replacement cycle.

1) Target Market

Data from the industry trade association BREMA shows that 3.66 million TV sets were sold in the UK in 1995. With main sets being replaced on average every eight years, this suggests that around 2.93 million of these were purchases of new main sets, with the remaining 0.73 million being for secondary sets.

BREMA’s sales data shows a shift away from small-screen and portable set sales toward large-screen sales, particularly at the high-feature end of the market. This may prove significant, since digital sets will initially retail at a significant (estimated variously at between £200-£350) premium to analogue. With the current average retail price of a large screen colour TV (the likely initial target market for digital sets) standing at around £425, this implies a starting retail price for digital receivers of between £625 and £775.

2) Adoption choices

Once digital receivers become available, purchasers of new receivers will face the choice of either buying another analogue set, or upgrading to a digital one.

3) Key drivers

Since digital sets will initially sell at a significant premium to analogue, early digital sales will largely be as replacements for the main "living room" set. As the digital premium falls over time, then not only will most main set replacement sales be digital but so too will secondary set sales. Key drivers of digital take-up will include:

the set replacement cycle, with main sets currently replaced on average every eight years;

the price premium of digital receivers over analogue equivalent;

the coverage area for DTT;

the years to analogue closure.

3.1.8. Scenarios

The rate of growth of DTT penetration is determined by the complex interaction of a large number of factors. In order to provide a bound on the range of possible outcomes, we have developed two contrasting scenarios. Scenario 1 presents a lower-bound on the rate of take-up if DTT is to become a viable commercial proposition. Scenario 2 presents a possible upper-bound on take-up of DTT under the current policy framework. In a third scenario, we consider how an announcement of an analogue closure date might accelerate DTT take-up beyond the levels reached in scenario 2.

In each case, the take-up of DTT is modelled separately for the STB and digital receiver markets. STBs are assumed to be available from 1998. STB purchasers are assumed to comprise:

households willing to pay for multichannel TV but currently unable to receive cable and satellite signals. In both scenarios we assume that the take-up of DTT across such households over time approaches that achieved in the market as a whole;

a small number of existing analogue cable and satellite subscribers who elect either to adopt additional DTT capabilities when upgrading to DCT or DST or to convert to DTT. We assume that this number amounts to 5% of analogue convertees in scenario 1 and 10% in scenario 2;.

new pay TV subscribers. We assume that one third of such purchasers elect for a DTT box in scenario 1 and 50% in scenario 2.

In each scenario, there remains a significant proportion of the population that does not purchase any type of STB. For this group, the main driver of DTT take-up is the set replacement cycle. Digital receivers are assumed to become available from 2000. In each case we assume (conservatively) that the average time between set replacements remains at the current level of eight years. The difference between the two scenarios lies in the growth in the number of digital sales relative to total receiver sales. The ratio of digital to total receiver sales assumed for each scenario is shown in Figure 3.5.

Source: NERA/Smith estimates.

Table 3.3, below, presents the projected take-up of DTT across the different hardware markets for the two scenarios over the ten year period 1998 - 2007. The figures refer to the number of households that have adopted at least one means of DTT reception. In each case only the first means of adoption is recorded (so, for example, sales of DTT receivers to households with an existing DTT capable STB are excluded). We project that by 2007 DTT penetration will reach 25% of TVHH under scenario 1, and 45% of TVHH under scenario 2.

Table 3.3

Projected DTT Take-Up 1998 - 2007

Number of Households (000s)

Source: NERA/Smith estimates.

Figure 3.6 shows the penetration of DTT as a percentage of all television households (TVHH). For reference, the earlier colour TV experience is also shown in Figure 3.6, assuming colour receivers were available from 2000.

3.1.9. Analogue Closure

The 1996 Broadcasting Act notes that the issue of analogue closure is to be reviewed after DTT penetration reaches 50% or five years after its introduction, whichever is the sooner. On the basis of our projections, we calculate that the number of analogue households remaining ten years after the introduction of DTT is likely to be considerable: 13.9 million in scenario 1 and 10 million in scenario 2. With the numbers so high, an early shut down of analogue transmissions would appear unlikely.

However, the RA asked us to consider the impact of an announcement of an early analogue closure date on the take-up of DTT. Accordingly, in scenario 3 we consider the case in which an announcement to end analogue transmissions in 2008 is made in 2003.

We assume that the main impact of the announcement of the start of analogue closure is the shortening of the set replacement cycle from the current average of eight years to five. Under this scenario, 68% of households have at least one means of DTT reception by the end of 2007. Figure 3.7 contrasts projected DTT penetration as a percentage of total households under the three scenarios.

Source: NERA/Smith analysis.

3.1.10. Economic Impacts

The economic consequences of digital TV in terms of the impact on UK economic activity will comprise:

investment in transmission infrastructure. The advent of DTT will require new investment in the existing terrestrial transmission network in order to upgrade to digital capabilities.

domestic equipment sales. This will comprise STB and receiver sales. Digital equipment will be more complex than analogue equivalent and so could potentially generate more value added;

new export opportunities. The issue here is the extent to which the UK taking a lead in development of DTT will promote new export markets for digital set-top boxes (STBs) and in the longer term of integrated digital TV receivers. The UK is currently a net exporter of TV sets, will DTT create a greater export opportunity?

programme sales. The UK is also traditionally strong in programme production. What new opportunities will the digital broadcasting environment offer content providers?

Initial starting prices for digital equipment, and their premium over analogue equivalents are shown in Table 3.4. We assume that the price of the relevant analogue equivalent remains constant in real terms over the next ten years, reflecting the relative maturity of the market. In each case, the digital premium is assumed to halve within two years reflecting the realisation of significant production economies of scale. Thereafter the digital premium is assumed to decline at a rate corresponding to that experienced following the introduction of colour television.

Table 3.4:

Digital Hardware Retail Pricing Assumptions (£)

¹ Excludes cost of any lock-in subscription that may be required.

² No direct analogue equivalent, typical cable/satellite STB taken as point of comparison.

³ Average price of large-screen colour television taken to reflect the fact that early digital receiver sales are likely to be at high-end of the market and most will be widescreen sets.

Source: NERA/Smith estimates.

3.1.10.1. Investment in Transmission Infrastructure

The advent of DTT will require new investment in order to upgrade the terrestrial transmission network to digital operation. The incremental costs will include the installation of new antennas and of new transmitters, and the strengthening of existing masts etc. Estimates of the cost of network roll-out vary and in part depend upon the level of coverage achieved. The investment cost profile in terms of homes passed is highly non-linear, as a few large transmitters located in or near major conurbations can reach a significant proportion of the population. The ITC, for example, estimates that the 12 largest transmission sites would provide multiplex A with a coverage figure of approximately 66% of the UK population. Extending coverage beyond this point, sees the investment cost per household begin to rise as an increasing number of smaller transmitters and relay stations are required to cover smaller towns and dispersed rural populations.

Based on various industry estimates, we expect the scale of capital investment required to build-out a transmission network for the six multiplexes (with multiplexes A to D reaching the minimum coverage requirements laid down by the ITC) to be around £300 million. Applying the average economy wide domestic content and value-added to turnover ratios suggests a total GDP impact from investment in transmission infrastructure of £153 million.

3.1.10.2. Domestic Set Production for UK Market

Under the assumptions given in Table 3.4, the total cumulative value of retail market sales of DTT STB and receiver equipment over the next ten years is expected to reach £3.5 billion in scenario 1, £6.9 billion in scenario 2 and £8.7 billion in scenario 3; all figures are in constant 1996 prices.

Assuming an average industry retail mark-up of 55% and an import penetration rate of 36% implies a cummulative turnover to the UK STB and TV receiver production industry of £1.4 billion and £2.9 billion, £3.6 billion in scenarios 1, 2 and 3 respectively, from UK domestic sales.

To estimate value added in DTT receiver and STB production, we have used the average value-added to turnover ratio for the consumer electronics industry of 22%. Likewise for the retail and distribution sector, we apply the value added to turnover ratio for the retail distribution sector of 65%. This implies a direct value-added of £829 million, £1.65 billion and £2.06 billion for scenarios 1, 2 and 3 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. Adding in multiplier effects gives an indirect value-added of £670 million for scenario 1, £1.3 billion for scenario 2, and £1.7 billion for scenario 3.

Thus we estimate total cumulative GDP impacts from domestic sales of DTT receivers and STBs over the next ten years of £1.5 billion for scenario 1, £3.0 billion for scenario 2 and £3.8 billion for scenario 3. A summary of the cumulative GDP impacts is provided in Table 3.5 below.

Table 3.5

Estimated Cumulative GDP Impacts for Domestic DTT STB and Receiver Production

1998 - 2007, £ bn (1996 prices)

Source: NERA/Smith estimates.

Employment effects have been estimated assuming the current economy-wide average value added per employee of £ 28,720. Estimated annual employment effects for the three scenarios are shown in Figure 3.8 below.

Source: NERA/Smith estimates.

3.1.10.3. Exports

The UK is currently a net exporter of colour sets. BREMA estimates that in 1995 the UK exported 3.44m sets out of a total production volume of 5.8m. Estimation of the economic impact from DTT STB and receiver exports is difficult, since much will depend upon the timing of overseas DTT launches and upon the take-up of services in those markets. For simplicity, we have assumed that the current ratio of exports to total UK production remains constant over the period 1998 - 2007. The economic impact from UK exports of DTT receivers and STBs over the next ten years is then as shown in the Table 3.6. We do not expect scenario 2 to be different to scenario 3 since a shutdown of analogue television in the UK is unlikely to affect exports.

Table 3.6

Estimated Cumulative GDP Impacts from UK Exports of DTT Receivers and STB,

1998 - 2007, £ bn. (1996 prices)

Source: NERA/Smith estimates.

3.1.10.4. Programme Production

The introduction of digital terrestrial broadcasting will also act as a stimulus to the UK programme production industry. Although there will be repackaged content from broadcasters’ existing programme archives, such content alone is unlikely to make DTT an attractive consumer proposition. Thus it is likely that new originally commissioned material (and first-run film and live sporting events) will be a necessary pre-requisite for widespread public acceptance of the new medium.

Estimating the likely increase in UK television production as a direct result of DTT is difficult. Even if we assume (conservatively) that this implies 10% additional production, this could imply another £ 600 million in GDP impact.

3.1.10.5. Displacement Effects

The economic impacts outlined above have been calculated without taking into account any displacement of analogue TV sales. As a lower-bound estimate, we might assume that all domestic digital TV sales displace analogue sales that might otherwise have been made. In such a case, the incremental economic impact of digital is equal to the extra value-added created by the more complex digital equipment. The issue of exports is less clear and for simplicity we have assumed that digital exports do not displace analogue ones.

Table 3.7 provides estimates of the incremental economic impact from domestic DTT receiver and STB sales, assuming 100% displacement of analogue sales. Comparison with the estimates given in Table 3.5 shows that the GDP impacts are significantly reduced (by 73%, 75% and 76% in scenarios 1, 2 and 3 respectively) if we assume 100% displacement of domestic analogue sales.

Table 3.7

Estimated Cumulative GDP Impacts from 100% Analogue Displacement: Domestic DTT Receiver and STB Production, 1998 - 2007, £bn. (1996 prices)

Source: NERA/Smith analysis.

3.1.10.6. Summary

The estimated economic impacts of each scenario in terms of GDP associated with the investment in transmission infrastructure and the manufacture and sale of STBs and television receivers are shown in Table 3.8. As can be seen, once the displacement of analogue TV set production and retailing are taken into account, the effects are small when compared with the existing annual GDP impact of broadcasting. The introduction of digital television may also generate new digital VCR and related equipment sales, though these are not estimated here and suggest that our figures should be treated as lower bounds to total equipment sales.

Potentially of more significance than equipment sales will be the additional stimulus to programme production, although at this stage it is difficult to assess the potential size of this effect. Even if we assume (conservatively) that this implies 10% additional production this could imply a another £ 600 million per year in GDP impact (in 1996 prices).

Table 3.8

Cumulative GDP Impacts of DTT

£bn, 1996 prices

Source: NERA/Smith analysis.

3.2. Digital Audio Broadcasting (DAB)

3.2.1. Introduction

The process of digitalisation is also coming to the world of radio with the advent of digital audio broadcasting (DAB). The BBC has been undertaking trial DAB transmissions since September 1995 covering the Greater London area with five transmitters, which has given coverage of 20% of the UK population. By March 1998 it is planned that a further 22 transmitters will be on line, covering major cities and roads and extending coverage to around 60% of the population.

The Radio Authority has to date licensed a number of trial multiplexes for the provision of commercial radio DAB services. It expects to offer a national digital radio multiplex in late 1997 and a regional service multiplex licence in 1998. The net result is that DAB services may be rolled out over a longer period of time than DTT.

In many respects, DAB raises many of the same issues as DTT. It provides a significant improvement in reception quality over analogue services, enables the provision of a greater number of radio services and presents the opportunity for the development of new data services. Like DTT, early DAB equipment will be sold at a significant premium to existing analogue equipment.

There are, however, some important differences between DAB and DTT. In particular, unlike television, radio is for the most part a low value product with a much longer life cycle. For this reason, the transition to digital is likely to take much longer in the case of radio than for television. As is explained further below, the initial market for DAB is likely to be restricted to in-car radios and, possibly, high-end audio systems. We present two scenarios of the possible take-up of DAB in these markets and consider the impact of these developments for the UK economy.

3.2.2. The Benefits of DAB

DAB offers a number of advantages over existing analogue radio broadcasting. These include:

improved reception quality. DAB reception quality is described as being virtually indistinguishable from that of compact discs. The reception is effectively free from interference. The improvement is most apparent when compared to medium and long wave radio services, and to the reception of FM signals when mobile. The proposed use of single frequency networks (SFN) provides for a further benefit to mobile reception, since it overcomes the problem of having to retune the car radio during long journeys.

increased provision of radio services. DAB provides for more efficient use of radio frequencies. The proposed licensing of a national multiplex service, for example, will allow the development of 6-8 new stereo radio services.

additional services capability. DAB provides for the transmission of data along with radio programmes. This data capability might be used to transmit programme related information, for example, song title and composer details or to offer the facility to place an order to purchase the track, buy a concert ticket etc. It might also be used for non-programme related services, for example, traffic information or for paging services.

3.2.3. DAB Reception Equipment

Although the roll-out of DAB services in the UK is now underway, DAB equipment is not yet readily available and does not currently represent a credible consumer proposition. DAB sets are available for purchase but are very large and expensive. Grundig, for example, sells an in-car DAB receiver for around £2,500. This contrasts with an average retail price for analogue in-car radio receivers of between £199 and £249.

The price premium of digital sets is widely expected to decline over time as single chip sets are developed and as production economies of scale are realised. A new wave of in-car DAB receivers are to be launched at the Berlin trade fair later this year with prices expected to be around £450 - £500. At this level, DAB receivers start to become price competitive with existing top-of-the-range car radios.

The currently high costs of providing DAB capabilities within receivers means that the initial target market for DAB will be the in-car radio market. The existing market comprises two segments. Most new cars sold in the UK now come with a radio (and more typically a radio cassette player) fitted as standard; this market is known as the OE (or original equipment) market. Car radios are also purchased directly by consumers, the after sales market, either as an upgrade or replacement for OE equipment or for cars not originally fitted with a radio.

Table 3.9 provides estimates of 1996 UK sales volumes and average prices for car radios.

Table 3.9

The UK Car Radio Market 1996

Source: Industry estimates.

The existing car radio market may be further broken down by sales at different price points. Based on discussions with manufacturers, we estimate that sales in the £400 + price range - the initial target market for DAB - accounts for around 5% of OE sales and between 12-15% of the after sales market.

3.2.4. Projections

For cost and reception reasons we expect car radio to emerge as the initial market for DAB. There may also be a limited market for DAB at the top-end of the audio systems market, though we note that the difference in quality between a static FM signal received via an external aerial and DAB is rather less marked than for mobile reception.

We consider two scenarios, each conditioned by the speed of decline of the digital price premium. To some extent, the process proves self-reinforcing since higher volume sales enable greater production economies to be realised and so drive the price of sets down much faster. As the price of receivers declines, so DAB will gain an increasing share of sales at each price point.

The assumptions used in each scenario are outlined in Table 3.10.

Table 3.10

Scenarios for DAB Car Receiver Prices

Source: NERA/Smith analysis.

The projected sales volumes for DAB car radio receivers for each of the two scenarios over the next ten years is presented in Figure 3.9. In each case we project that DAB will account for nearly all new sales at the top-end of the car radio market by 2007. In scenario 2, DAB receivers also account for over half the sales in the mid-price range and are starting to penetrate the budget end of the market. In scenario 1, the progress of DAB into the lower price segments is rather less marked. We do not make projections for the purchase of mobile digital radio sets, as the UK does not have any manufacturing capability in this area.

Source: NERA/Smith estimates.

3.2.5. Economic Impacts

The roll-out of DAB services will first require capital investment in the transmission infrastructure. As with DTT, estimating the likely level of investment required is difficult since much will depend on the level of coverage required and the nature of the network configuration, including the extent to which it is possible to reuse the existing analogue infrastructure. The BBC is spending £10 million in the first phase of its DAB roll-out encompassing 27 transmitters to cover 60% of the population. As with DTT, investment costs beyond this point are non-linear as an increasing number of small transmitters and relay stations are required to cover small towns and remote areas. To this figure must be added the costs of the national commercial DAB multiplex plus that various regional and local multiplexes which may be established.

On the basis of discussions with industry, we estimate the total capital investment requirements for the two national multiplexes to be £35-45 million. This implies a total GDP impact of £20 million.

The development of DAB will also create value added in radio equipment manufacture, distribution and retailing. At present, the UK has only a limited amount of radio equipment manufacturing capacity. Most small and portable radio production now takes place in low wage economies in the Far East and elsewhere. The UK radio manufacturing capability is limited to car radio, with an estimated market share of between 15-25% with most sales to the higher priced segment of the market.

We estimate that the total retail value of DAB sales could amount to £380m - £740m over the next ten years. Taking an average retail mark-up of 30% implies a total turnover of £292m - £570m. If the UK share of this market remains at between 15% - 25%, then this implies an estimated turnover from DAB receiver production over the next ten years of £44m - £143m. Taking the average value-added to turnover ratio for the consumer electronic industry of 22% implies a value-added from UK receiver production of £9.7m - £31.5m.

Likewise for the retailing and distribution sector, we apply the value-added to turnover ratio for the retail distribution sector of 65% implying a value-added of £8.6m - £27.6m.

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. Adding in the multiplier effects gives an estimated indirect value-added of £4.9m - £11.4m for receiver production and £3.2m - £10.3m for retailing and distribution.

A summary of the economic impacts is provided in Table 3.11.

The effect of the displacement of analogue sales could be considerable. As such, the above estimates are best considered as an upper-bound of the impacts, with the incremental value added of DAB over analogue likely to be only 20% or so of the gross impact.

Table 3.11

Summary of Cumulative GDP Impacts for DAB, 1998 - 2007, £m 1996 prices

Source: NERA/Smith analysis.

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