Reviews of the financial terms for the Channel 3 and Channel 5 licences

  • Start: 15 October 2009
  • Status: Closed
  • End: 10 December 2009

1.1 In July 2009, the Secretary of State for Culture, Media and Sport brought into effect The Communications Act 2003 (Commencement No. 4) Order 2009 . One of the effects of this order was that the holders of Channel 3 and Channel 5 licences may apply for a review of the financial terms attached to their digital replacement licences.

1.2 The earliest date from which revised terms could apply is 1 January 2010. In order for this to happen, licensees needed to apply for a review before the end of 2009. Nine licensees applied to Ofcom for a review of their terms before that date and therefore Ofcom must now undertake a review of the terms covering the period of the licence running from 1 January 2010 until expiry at the end of 2014.

1.3 For each licence in respect of which an application has been made, the legislation requires Ofcom to determine two different types of payment. The first is a percentage of the licensee's qualifying revenue and the second is a fixed annual cash payment. To assess the amount that is appropriate for the annual cash payment, Ofcom is required to determine the amount which, in its opinion, would have been the cash bid of the licence holder were the licence being granted afresh in a competitive auction process.

1.4 In October, we issued a consultation on the approach that we should take to the reviews. The last time such reviews were undertaken was in 2005 and in the consultation we set out that overall we considered the approach taken then remains appropriate, subject to a small number of adjustments. We received four responses to the consultation, all of which were confidential. This statement sets out Ofcom's methodology having considered the responses received and gives more detail of the expected timetable for completion of the reviews.

1.5 Our objectives for these reviews are to determine a fair and reasonable value for each licence which is in accordance with the statutory requirements and to set new financial terms according to a fair and objective process. To the extent possible, the process should also allow us to set terms that are reasonable within the context of the current market environment and that will continue to be reasonable for the period of the licence. This means that we need to take into account changes in the market and regulatory environment that will impact the financial terms for each licence.

1.6 The key elements of the methodology are as follows:

  • The methodology acknowledges that an incumbent licence holder's bid for a licence in a competitive auction process would be the minimum amount necessary to win the auction. This amount might be different from the full value of the licence to the incumbent themselves. For this reason, the valuation of each licence is based on the value of the rights and obligations to a new entrant, since it is this valuation that would determine the amount that the incumbent would have to bid in order to retain the licence at auction.
  • Where rights and obligations are replicable in the market, then our methodology assumes that the new entrant will incorporate market values in determining the value of the licence. Where this is not possible, then a more detailed modelling approach will be used to estimate the new entrant's valuation for the right or obligation.
  • A new entrant would also face entry costs associated with taking up the licence which the incumbent would not incur, and these are also factored in to the new entrant's valuation.
  • Each licence is assumed to be offered separately in the auction. This means that the new entrant would not assume the same operating efficiencies that are obtained by the current ownership structure and joint operating of multiple licences.
  • Together, these items are captured in a discounted cash flow analysis which, in turn, will inform Ofcom's decision as to the PQR and the amount which, in Ofcom's opinion, would have been the cash bid of the incumbent in an auction.

1.7 This statement also sets out the proposed timetable for review. The valuation exercise requires a considerable volume of data submissions from licence holders to inform Ofcom's decision. Ofcom is working with licensees in order to develop the format and timing for data submissions which are expected to be provided to Ofcom in final form in May.

1.8 Once these submissions have been received, Ofcom will review them and seek further evidence as is necessary in order to arrive at what we consider to be a fair and reasonable determination of financial terms for the remaining period of the licence. We expect to make our determination of the revised terms no later than September 2010 although, if it is possible to do so, we will seek to conclude the review sooner. Once the licensees have received the notification setting out the revised terms, they have a period of 30 days during which they can accept or reject the revised terms.

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