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(Fifth Edition) Laid before Parliament 16 December 2004

Introduction

Statutory requirements

1.1 Under the terms of the 1990 Act, Ofcom is required to draw up, and from time to time review, a statement setting out the principles to be followed in ascertaining the ‘qualifying revenue’ of certain of its licensees for the purposes of any provision of Part I or Part II of the 1990 Act.

1.2 The 1996 Act extends this requirement to ‘multiplex revenue’. Specifically, Ofcom must draw up a statement setting out the principles to be followed in ascertaining the multiplex revenue in relation to a licence holder for the purposes of section 14 of the 1996 Act, and the share of multiplex revenue attributable to a person in relation to any multiplex service for the purposes of any provision of Part I of 1996 Act.

1.3 The Third Edition of the Statement of Principles was a combined statement to meet both these statutory requirements and the Fourth Edition simplified the administrative procedures for the collection of additional payments from licensees and removed procedures in respect of the Channel 4 Support Scheme, which ceased in 1998. The Fifth Edition clarifies the interpretation of Qualifying Revenue, as defined in the 1990 Act, as it applies to the Digital Replacement Licences, sets out more clearly relevant administrative arrangements and makes various consequential amendments following enactment of the Communications Act.

1.4 The Statement, and any revision of it, has to be drawn up after consultation with the Secretary of State for Culture, Media and Sport and the Treasury. It must then be published, with a copy being laid by the Secretary of State before each House of Parliament.

Definitions of ‘Qualifying Revenue’ and ‘Multiplex Revenue’

1.5 The 1990 Act provides that certain financial processes and payments should be based on qualifying revenue. The 1996 Act makes similar provisions in respect of multiplex revenue.

1.6 The statutory provisions contained in the 1990 Act and the 1996 Act are, in some cases, drawn in broad terms. References to the principal definitions used in the Acts can be found at Annex A. The following is a brief summary of these definitions, provided for convenience only, and should not be regarded as a substitute for the definitions in the Acts. Where terms are used whose definitions are summarised in this statement, they are shown in italic type. Unless the context requires otherwise, “licensee” in this part means a regional Channel 3 or national Channel 3, Channel 4, Channel 5, additional services, television licensable content service, restricted television service, television multiplex service, digital television programme service and digital television additional service licensee, as the case may be.

1.7 Because qualifying revenue is defined by reference to the ‘licensed service’, it is relevant to consider which services are covered by the licences in order to assess qualifying revenue.

1.8 Section 215 of the Communications Act requires Ofcom to offer to replace the current analogue broadcasting licences for Channel 3 and Channel 5 with digital broadcasting licences (‘digital replacement licences’) to take effect from 29 December 2004. A digital replacement licence is, primarily, a licence to provide a service on a digital terrestrial multiplex with an added requirement to simulcast the service in analogue, as Ofcom considers appropriate.

1.9 Section 214(2) of the Communications Act 2003 sets out that the digital licence must (a) be a licence to provide the licensed service with a view to it being broadcast in digital form; and (b) contain such condition (if any) requiring the provider of the service to ensure that the whole or a part of the service is also provided for broadcasting in analogue form as Ofcom consider appropriate.

1.10 Therefore, the service provided on both analogue and digital terrestrial will constitute the licensed service and revenues from provision of the service on both platforms will comprise qualifying revenue. Revenue from the provision of a service on cable and satellite will continue to fall outside the definition of qualifying revenue.

Qualifying Revenue

1.11 The following provides a brief summary of qualifying revenue, as defined by the Acts. Channel 3, Channel 4 and Channel 5, Television Licensable Content Service, and Restricted Television Services Licences

1.12 For Channel 3, Channel 4 and Channel 5, Television Licensable Content Service and Restricted Television Services Licences, qualifying revenue means all payments, received or to be received, by the licensee, as well as by any connected person :

1. in consideration of the inclusion in the licensed service in that period of advertisements or other programmes;
2. in respect of charges made by him in that period for the reception of programmes included in the licensed service;
3. in connection with the inclusion of any advertisement or other programme in the licensed service in order to meet any additional payments, other than the cash bid;
4. by way of any financial benefit (whether direct or indirect) from payments made by any person, by way of sponsorship, for the purpose of defraying or contributing towards the costs incurred or to be incurred in connection with any programme included in the licensed service.

Public Teletext

1.13 For Public Teletext, qualifying revenue consists of the aggregate of all amounts received or to be received by the licensee or any person connected to him:

1. in consideration of the inclusion in the licensed service in that period of advertisements or other items; and
2. all amounts received or to be received by the licensee, or any person connected to him, in respect of the provision of the service from anyone authorised by the licensee to provide the licensed service, in whole or in part or from any person connected to someone so authorised.

Television Licensable Content Service

1.14 Qualifying revenue for Television Licensable Content Service licensees includes income derived from the broadcasting of the service in the United Kingdom and overseas. Where qualifying revenue is earned in one or more foreign currencies and is not accounted for in sterling in the licensee's audited accounts, the revenue will be converted into sterling at the average of the spot rates on the opening and closing dates of the accounting period as published in the Financial Times for those dates. Where the Financial Times is not published on one or both of those dates, Ofcom will use the spot rate published in the next available Financial Times. Where Ofcom is required to estimate qualifying revenue for the purposes of imposing a financial penalty and where it is necessary to express qualifying revenue in sterling, the appropriate exchange rate will be the one published in the Financial Times on the date on which Ofcom decides to impose the penalty.

Additional Services

1.15 Qualifying revenue for Additional Services means all amounts received or to be received which refer to the right to use, or to authorise any other person to use, the spare capacity allocated under the licence.

Multiplex Revenue

1.16 The 1996 Act sets out definitions for multiplex revenue, which concern both Multiplex Licensees and third parties providing services carried on the multiplex (for example, programme providers). The following summarises the definitions in the 1996 Act.

1.17 For Multiplex Licence Holders, multiplex revenue includes all payments or other financial benefit received, or to be received by him or any person connected to him, in consideration of the inclusion in the services carried on the multiplex of advertisements or other programmes, or from charges for the reception of programmes included in those services. It also includes all payments received by the television multiplex licensee, or any connected person, in respect of the broadcasting of any qualifying service by means of the television multiplex licence or payments made to enable the television multiplex licence holder to meet its additional payments.

1.18 If a programme provider or additional services provider derives any financial benefit (whether direct or indirect) from payments made by any person, other than the television multiplex licence holder, by way of sponsorship for the purpose of defraying or contributing towards the cost of programmes, the amount of financial benefit shall constitute multiplex revenue

1.19 All payments referred to in paragraphs 1.17 and 1.18 above will comprise multiplex revenue if received by:

1. the television multiplex licensee, or any person connected with him, from a person other than a programme or additional services provider;
2. any programme provider, or any person connected with him, from a person other than the television multiplex licence holder, an additional services provider or another programme provider;
3. any additional services provider, or any person connected with him, from a person other than the television multiplex licence holder, a programme provider or another additional services provider.

Use of Qualifying Revenue and Multiplex Revenue by Ofcom

1.20 As noted above, this statement sets out the principles to be followed in ascertaining qualifying revenue and multiplex revenue for the purposes of any provision of Part I or Part II of the 1990 Act (in the case of qualifying revenue), and for sections 14 and 56, and Part I or Part II of the 1996 Act (in the case of multiplex revenue). These purposes include the setting of certain payments by licensees to the Treasury (‘additional payments’), as well as in the enforcement of licences by means of financial penalties. These are described briefly below.

Additional payments

Qualifying Revenue

1.21 Qualifying revenue is used when determining payments made by licensees to the Treasury, both when licences are awarded by competitive tender, and thereafter where the licence holders apply for a review of their financial terms.

1.22 The 1990 Act requires that certain kinds of licences be awarded by Ofcom after a process of competitive tender. These include licences for Channels 3 and 5, the Public Teletext licence and additional services licences. These licensees are required to make additional payments, to be collected by Ofcom, consisting of amounts expressed as percentages of qualifying revenue and a cash bid. The cash bid is a fixed sum, adjusted annually in line with movements in the Retail Prices Index, and is unrelated to qualifying revenue. The percentage of qualifying revenue (PQR) applicable to a licence is determined by Ofcom and is included in the advertisement for the licence.

1.23 Section 225 of the Communications Act allows for Channel 3, Channel 5 and Public Teletext licensees to apply for reviews of their financial terms for payments to the Treasury. Under section 227 of the Communications Act, following an application for a review, Ofcom must determine the fixed annual cash amount to be paid for the licence and PQR payable for each year of the licence period.

Multiplex Revenue

1.24 The 1996 Act requires that licences to provide a multiplex service are awarded after a competitive process. The ITC invited applications for the granting of multiplex licences, with a zero percentage of multiplex revenue payable by the licensee set for the initial period. No cash bid has to be made by the licensee.

Financial Penalities

1.25 Financial penalties may be imposed by Ofcom, where a licensee fails to comply with a condition of the licence or any direction issued by Ofcom. If a penalty is imposed before the first accounting period has ended, Ofcom is required to estimate qualifying or multiplex revenue for that accounting period. The level of financial penalty can vary, guidance on which is set out in Section 4.

• Qualifying Revenue and Multiplex Revenue [pdf]
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