Renewal of the Independent National Radio licences

Ofcom has reviewed the financial terms for the licences whose licensees applied for a review. We reviewed each licence separately, based on financial and other evidence from the licensees and other sources. Our review indicated that Classic FM and Absolute Radio continue and will likely continue to generate profits for the incumbent licence holders, although the profits derived from analogue transmission will continue reduce over time as analogue listening as a proportion of total listening falls.

A new entrant, however, would incur significant entry costs before it was able to generate analogue profits similar to the incumbent. These entry costs would include, for example, launch marketing costs, other start-up costs (such as dry running costs and capital expenditure) and reductions in revenue in the early years (compared to those generated by the current licence-holders) as audiences take time to build up.

Our review has concluded that for a hypothetical new entrant these entry costs would outweigh the potential profits available from broadcasting nationally on analogue in the fiveyear duration of the renewed licence.

Therefore, our conclusion for each of the licences under review was that, on the basis described in the August Statement, a hypothetical new entrant would not be prepared to make financial payments in return for the right to broadcast nationally on analogue for the period under consideration. As a result, the incumbent licence holders could retain their licences in a hypothetical auction for a nominal amount. Consequently, we have decided to keep the financial terms at nominal amount of £10,000 per annum for each of Classic FM and Absolute Radio (with a nil PQR). This is what we consider a reasonable view of the approach the incumbent licensees would take to making nominal bids, looking at nominal cash bids made by bidders and those set by Ofcom in (real and hypothetical) auctions for television licences.

The UK’s three national analogue (FM and AM) commercial radio licences (currently held by Classic FM, Talksport and Absolute Radio) are all due to expire in 2018. Under the Broadcasting Act 1990 (as amended), all three licences qualify for a further five-year renewal. This means that each licensee can apply to extend their licence, rather than having to re-apply for their licence in an open competition.

The licences were originally awarded by an auction process, and the licensees are required to make annual financial payments to the Treasury. These financial payments consist of a cash bid amount, and a specified proportion of the revenue obtained by the licensee. This latter payment is known as the percentage of qualifying revenue, or PQR.

As the licence renewal process means there is no actual auction of the licences (and therefore no cash bids), Ofcom is required to set new financial terms for each licence. These financial terms consist of an amount which, in our opinion, would have been the cash bid of the licence holder if the licence had been auctioned for the renewal period, together with a PQR.

In May, we consulted on the timetable and methodology we propose to follow in order to set these financial terms. We received three responses to the consultation. This statement sets out Ofcom’s methodology having carefully considered the responses received.

We propose that the methodology previously used by Ofcom in 2010 for setting the financial terms of the three licences remains broadly appropriate, taking account of developments and making certain modifications in response to the consultation, as set out in this document.

Following applications for renewal from the three licence holders we will determine financial terms using the methodology set out in this statement. These determinations will be published on our website.