execsum

Economic Impact of Radio '95

Executive Summary

Introduction (Chapter 1)

1	This study by National Economic Research Associates (NERA) and Smith System Engineering (Smith) for the Radiocommunications Agency (RA) updates and extends an earlier study carried out by NERA and Smith on "The Economic Impact of the Use of Radio in the UK". The terms of reference for the study ask for four main strands of work to be conducted:
	Assessment of the impact of radio technology on the UK economy, in terms of the impact on GDP, consumer and producer surplus, employment and exports; Assessment of the potential impact of digital terrestrial broadcasting (TV and radio) in terms of GDP and employment creation over the next 5 to 10 years; Five case studies assessing market development and efficiency issues for private business radio and public paging; the impact of migration and congestion in the 1.5GHz and 7.5GHz fixed link bands respectively; and the impact of the location of a mobile satellite operator in the UK; Estimating the UK's position in a world ranking of international broadcasting, aeronautical communications, international satellite activity, cellular telephony and radio in the local loop services.
2	An important feature of the current study (as compared with the previous one) has been the much wider consultation with industry, in order to collect data and discuss our analysis. Ultimately the quality of many of the estimates we have produced depends on the extent to which industry has been prepared to give us the relevant information. We have benefited from discussions with 65 organisations which are listed in Appendix 1. We would like to thank all those who helped us in our work.
Economic Impacts (Chapter 2)
3	We were asked to assess the economic impact on the UK, measured in terms of GDP and employment impact and, where feasible, consumer and producer surplus, of the use of radio to provide the following services:
	Aeronautical Amateur and Citizens' 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 HIPERLANS) Defence
4	A summary of the results of the economic impact assessment is given in Table 1. Due to lack of data, it was not possible to quantify effects for amateurs, CB radio and WBDT and HIPERLANS. Only partial quantification of effects was possible for programme making and special events, defence, maritime and aeronautical services. Hence our work provides a conservative estimate of the GDP and employment contribution of radio using services. Nevertheless, the estimated total value of £13bn amounts to around 2% of UK GDP for 1995.
5	The total GDP impact of around £13bn is around 25% higher in real terms, than the estimated value for 1993 of £10bn. This implies an average real annual growth in the estimated GDP impact radio services of 11.5%. Perhaps not surprisingly, the GDP associated with radio based services is growing faster than the economy as a whole, which grew at around 3% p.a. (in real terms) between 1993 and 1995. The employment associated with radio based services is estimated to have grown by around 35% between 1993 and 1995.
6	In many respects the measures of efficiency benefits and producer and consumer surplus, which amount to £12-15 bn, provide a more accurate picture of the benefits of radio using services. This is because they reflect the benefits radio services generate for business, in terms of improved efficiency and profits, and for consumers, in terms of increased convenience and enjoyment. However, these estimates are subject to a high degree of uncertainty.
7	The notable changes in the service specific findings are as follows:
	there has been strong growth between 1993 and 1995 in the GDP (23% p.a. in nominal terms or 20% per annum in real terms) and employment (35% p.a.) associated with cellular services, mainly reflecting the rapid growth (45% p.a.) in numbers of subscribers. The rapid growth in the cellular market has conferred significant additional consumer benefits (up more than 60%), although there has been somewhat less growth in producer benefits (up 20%). This is because tariffs have fallen at the same time as demand has been growing. The GDP and employment associated with broadcasting grew by around 20-25% between 1993 and 1995, reflecting strong growth in advertising revenues and in the profitability of BSkyB's satellite services. The estimated GDP impacts for fixed services have fallen primarily because of falling equipment prices. The estimated GDP and employment impacts for PBR, have fallen by 10-15% between 1993 and 1995. This is mainly because of recent changes in the mix of users, with a growing proportion comprising (lower expenditure) on-site or short range rather than wide area users. Also the 1993 estimates included PAMR, where as these are counted as part of public mobile communications in this report. When the PAMR figures are excluded, there is virtually no change in the GDP estimates for PBR. The estimated (nominal) GDP and employment impacts for space services have increased by 26% and 20% respectively since 1993.

Table 1

Summary of Annual Economic Effects 1995/96

	GDP (£m)	Employment (000)
Aeronautical	730-800	18-20
Broadcasting	8,600	256
Fixed Links	60	2
Maritime	20	0.3
PBR	160-250	5-8
Programme making and special events	20-40	1
Public Mobile Communications	1,850	78
Radio Fixed Access	60	2
Space services	1,200	30
Other services	60	2
Defence	220-260	8-10
Total	~13,000	~410

Efficiency Benefits:
PBR	500-1,900
PAMR	20-80
Fixed Links	100-400
Space	positive
	620-2,400

	Consumer Surplus (£m)	Producer Surplus (£m)

Cellular	7,300-8,300	180
Broadcasting	3,500	400

Total	11-12,000	600

Source: NERA/Smith estimates

Digital Broadcasting (Chapter 3)
8	The prospects for digital terrestrial television (DTT) and digital audio broadcasting (DAB) over the next 10 years are assessed using a scenario analysis. On the basis of these scenarios, we estimate the possible impact on the UK economy of the introduction of these services. There is still considerable uncertainty about the likely content, price and take-up of these services and hence there is inevitably a wide margin of error around our estimates. We do not attempt to quantify the benefits from the spectrum that will eventually be released as a result of the closure of analogue services.
Digital Terrestrial Television
9	DTT multiplex operators offering 30 or more programme services plus a range of data and interactive applications are expected to be operating before the end of 1998. Cable and satellite operators have also announced plans to launch digital services, possibly before DTT is launched. The starting point for our projections of DTT take-up over the next 10 years is to segment the market into different user types. Those users placing a high value on the reception of multichannel television services are assumed to be potential purchasers of digital set-top boxes (STBs). For the remainder of households, it is assumed that the decision to switch to digital television will be taken as part of the normal set replacement cycle.
10	We then project the adoption of STBs or digital receivers, firstly, by identifying the proportion of the population likely to purchase this equipment; secondly, by projecting how this target population of consumers might grow and; thirdly, by projecting take-up from within the target population. We consider that the key drivers of the take-up of DTT are the availability of an attractive programme offering and the cost of DTT equipment relative to that of analogue equipment.
11	We developed two contrasting scenarios - low and high adoption of DTT - which can be thought of as setting rough bounds on possible outcomes. The key assumptions are outlined in section 3.1.8. The projected take-up of DTT, in terms of percentage of TV households able to receive the service is shown in Figure 1.

Source: NERA/Smith estimates.

12	Under Scenario 1, DTT penetration is projected to be around 25% of all households by the end of 2007, where as it is projected to be close to 45% under Scenario 2. In both cases, the growth in penetration is principally caused by the purchase of digital sets as the new main household TV sets (from the year 2000 on), even though we assume conservatively that the current eight year set replacement cycle is not affected by the introduction of DTT.
13	We were also asked by the RA to examine the possible impact of an announcement in 2003 that analogue TV will be closed down by the end of 2007. This announcement is assumed to shorten the set replacement cycle, especially as the end date draws closer. From 2003 onwards, we assume that most replacement TV set purchases (for main and secondary sets) are of digital receivers, such that by 2007 68% of TV households have at least one means of receiving DTT.
14	The estimated economic impacts of each scenario in terms of GDP and employment associated with the manufacture and sale of STBs and television receivers are shown in Table 3. 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 (see Table 1). However, 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 another £600m/year in GDP impact (in 1995/96 prices).

Table 3

Cumulative GDP Impacts of DTT

£bn, 1996 prices

	Scenario 1	Scenario 2	Scenario 3

Domestic Sales	1.5	3.0	2.1
Plus Exports	1.3	2.5	2.5

Total	2.8	5.5	4.6
Less Displacement	2.4	4.8	3.7

Net Impact	0.4	0.7	0.9

Source: NERA/Smith analysis

Digital Audio Broadcasting

15	DAB services have been broadcast by the BBC on a trial basis since 1995, and the BBC plans to extend the service to reach 60% of the population by March 1998. The Radio Authority expects to license national and regional digital radio multiplex operators in 1998. The major impediment to the development of the digital radio market at present is the high cost and large size of receivers. However, receiver prices and sizes are expect to fall rapidly over the next two years. Nevertheless, it is expected that the initial market for digital radios will be for in-car use and possibly for top-end audio systems.
16	We considered two scenarios for take-up of DAB equipment, each conditioned by the speed of decline of the digital price premium. The projected cumulative sales of digital in-car radios are as shown in Figure 2. In each case we project that DAB will account for nearly all new sales at the top-end of the radio car market by 2007. In Scenario 1, there are fewer sales in the low price segments than in Scenario 2. We have not projected portable digital radio sales, as the UK does not manufacture these radios.
17	The impact of the introduction of DAB on the UK economy will be relatively small as there is little manufacture of car radios in the UK. The results in terms of GDP impact are as shown in Table 4. The effect of the displacement of analogue sales could be considerable, with the incremental value of DAB over analogue likely to be only 20% or so of gross impacts.

Table 4

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

	Gross Impact	Impact Less Displacement Effects
Direct:
production	10 - 32	2 - 6
retailing	9 - 28	2 - 6

Indirect (including multiplier):
production	5 - 11	1 - 2
retailing	3 - 10	1 - 2

Total	26 - 81	5 - 16

Source: NERA/Smith analysis.

Case Studies (Chapter 4)

18	The PBR case study assessed the positioning of PBR in the overall communications market, the efficiency of PBR relative to other services and possible alternatives to current PBR management techniques.
19	Concerning the positioning of PBR, the main alternative services facing PBR users are public services, namely cellular telephony, mobile data and PAMR. PBR’s attraction for local area users is its low cost compared to other types of communications and for wide area users it is the ability to tailor the network to their coverage requirements. The relative disadvantages of public services, in terms of higher cost, poorer coverage, and lack of control, group calls, fast call set up and various despatch facilities will decline in future making public services more attractive, particularly to wide area users.
20	There is already some evidence that wide area users are increasingly finding that cellular and PAMR services can meet their requirements. For example, organisations which have moved from PBR to shared services include various local authorities, a few utilities, a number of haulage and delivery companies, some roadside assistance organisations and various emergency services. The number of wide area PBR users is estimated (by the RA) to have declined between 1994 and 1995. However, the data require further validation and are incomplete (they exclude national users). We suggest that as a matter of priority the RA should collect data on numbers of mobiles for all user categories.
21	There has been rapid growth in local area/short range PBR use and this is expected to continue as greater use is made of these new applications by business and possibly in future for leisure use (if licence conditions are modified to permit consumer use).
22	While it is too early to say with certainty that the total number of wide area PBR users is in permanent decline, on the basis of our market analysis we have made the tentative predictions about migration shown in Table 5.

Table 5

Possible Future Migration

User type	Typical current system	Trends
Large organisation	PBR	Towards PAMR and cellular
Small users/wide area roaming	PBR and PAMR	Towards PAMR and cellular
Small users/local area roaming	PBR	Remaining with current provision
Short range users	PBR (Short range radio)	Remaining with current provision

Source: NERA/Smith analysis

The efficiency of PBR relative to other services was evaluated using the measures listed in Table 6. A definition of each of these measures is given in section 4.1.3. None of the measures is particularly suitable for making an uncontentious comparison between different mobile services, however data transmitted per MHz per day appears to be the most appropriate. As can be seen in Table 6 the results differ considerably, depending on the measure used.

Table 6

Comparison of Different Efficiency Measures

Measures	Paging	PBR	PAMR	GSM	PCN
Bandwidth*	25kHz	12.5kHz	12.5kHz	25kHz	25kHz
Subs/MHz	500,000	17,000	5,000	69,000	13,000
Traffic/MHz/day (Mbits)	110	16,000	24,000	61,100	29,700
Re-use*	25kHz	150kHz	150kHz	225kHz	225kHz

* For these measures the smaller the value the greater the efficiency of the service.

Source: NERA/Smith analysis

24	A number of alternative management techniques for PBR were considered, including private or user management, making databases publicly accessible, use of stricter transmitter power controls, introduction of more efficient technologies and provision of varying grades of service. It was not possible within the scope of this study to assess any of these options in detail. We did not find hard evidence on the benefits that these measures might offer in terms of improved spectrum use. However, on the basis of a priori reasoning and comments made to us by industry, the options of private spectrum management organisations and making databases publicly accessible might offer benefits and could therefore be worthy of further investigation.
25	The paging case study considered the position of paging in the mobile communications market. The number of paging users is currently growing strongly as a result of the introduction of new calling party pays tariffs. This growth is expected to continue despite the apparent threat from GSM. Key advantages of paging include its relatively extensive coverage, small terminal size, long battery life and unobtrusiveness. The use of paging facilities will soon undergo a significant change as digital technology is adopted. This will open up new possibilities such as provision of traffic information. Paging is expected to retain its niche position and extend penetration in the future, but not to the high penetration levels experienced in the US or Pacific-Rim countries.
26	The 1.5GHz case study examined the effect on users of this fixed link band as a consequence of the requirement to migrate links from this band. The links are used for narrow band communications often in rural locations. Few viable alternatives appear to exist other than deploying fixed links in the 1.4GHz frequency band. The cost of this migration to the users is estimated to be around £30m.
27	The 7.5GHz case study considered the cost of the congestion experienced in this fixed link band. The band is used, for example, by the BBC, NTL, the utilities, radio fixed access operators and PCN operators. Most users noted that they had not been able to site some links, particularly in urban areas, because of lack of available spectrum, but few were able to quantify the effects. For some users, cable or use of higher frequency bands provides an economic alternative. It appears that established users of the band are not particularly affected by congestion but new telecommunications operators (and existing users who require more spectrum) could face additional start-up costs. Based on limited information provided by users, we estimate that congestion in this band will cost the users in excess of £31m due to the higher costs of the alternatives.
28	The location of the international satellite operator Inmarsat in the UK was found to contribute at least £36m per year to UK GDP. There are a number of indirect benefits to the UK economy in the form of additional UK-based manufacturing and service industries. One example is the location of ICO Global Communications in the UK, which itself contributes to the UK economy. We have been unable to ascertain the value of this particular contribution.
International Comparisons (Chapter 5)
29	Five international comparisons were conducted to estimate the UK’s world ranking in key spectrum using activities. The results were: in international broadcasting the UK is ranked third (compared to fourth in the previous study); in aeronautical communications the UK is ranked second, as in the previous study; in satellite communications the UK is ranked second, as in the previous study; in mobile communications the UK is ranked third, compared to second in the previous study; in radio in the local loop there was difficulty in obtaining accurate information, but on the basis of the number of licensed operators the UK appears to be ranked second.

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