Renewal of the Independent National Radio licences - Methodology for review of financial terms

05 October 2010

Executive summary

1.1 The Digital Economy Act 2010 ("the 2010 Act") includes provisions which allow for a national analogue ("INR") licence to be renewed for a period of not more than seven years, beginning with the date of renewal. These new statutory provisions represent a second opportunity for the three INR licensees to apply for licence renewal, and thus avoid having to apply for a new licence in an auction. All three licences were previously renewed in 1999/2000 (for an eight-year period).

1.2 Licence renewal is a statutory incentive for the holder of an analogue licence to provide a digital service. Specifically, an INR licence is eligible to be renewed only if its holder is providing a digital simulcast service (which all three INR licensees do on the national DAB radio multiplex, so they are eligible to apply for a renewal).

1.3 As part of the process of INR licence renewal, Ofcom is required to set new financial terms for each licence. These so-called 'additional payments' consist of an amount which, in our opinion, would have been the cash bid of the licence holder were the licence being auctioned for the (further) renewal period rather than renewed (the "Cash Bid"), and a percentage of qualifying revenue ("PQR").

1.4 In July, we issued a consultation on the approach that we should take to the reviews of financial terms. The last time such reviews were undertaken was in 2006 and in the consultation we set out that overall we considered that the approach taken then remains appropriate subject to a small number of adjustments. We received three responses to the consultation, which the respondents said were confidential. This statement sets out Ofcom's methodology having considered the responses received and gives details of the renewal timetable for all three licences.

1.5 We have decided to apply the same methodology for setting the additional payments for each licence which we used in 2006 when the financial terms of each licence were last set, taking account of developments and making modifications as set out in this document. Now, as in 2006, our overriding objective is to adopt a methodology which enables us to determine financial terms that are fair and reasonable within the context of the current market environment, in line with our powers and duties.

1.6 We have decided that the overall valuation methodology, to help us set a Cash Bid and PQR for each licence, will involve valuing each licence as a whole in order to determine the amount of the second-highest bid in a hypothetical auction. We have decided to apply a discount rate of 12.8% to the valuations.

1.7 A particular uncertainty related to the valuation of these licences is the potential duration of the renewed licence periods in practice we have decided that for each of the two AM INR licences, the appropriate period for valuation purposes is the period from their 'relevant date' to the end of 2015, and for the FM licence, the appropriate period is from the anticipated date of renewal of the licence to the end of 2015.