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

The Channel 3 and Channel 5 licences are due to expire on 31 December 2024. The current Channel 3 licence holders are ITV and STV. Paramount Group holds the Channel 5 licence. Each of the current licence holders has applied for a renewal of their licences and we have decided to renew them for a further ten years.

Background

Statute sets out that Ofcom must determine the financial terms for licence renewal, which must comprise two different types of payment. The first is a percentage of the licensee’s qualifying revenue (“PQR”) and the second is an annual cash bid which increases by inflation each year.

We must determine the financial terms by reference to the amount that, in our opinion, the current licence holder would have bid to win the licence(s) in a competitive tender. This means that we are required to reproduce the effects of a hypothetical auction of the licences. See our methodology (PDF, 693.8 KB) for more detail on our approach for setting the financial terms.

As set out in the methodology, in principle, the amount the current licence holder would bid in a competitive auction would be the minimum required to beat the second-highest bidder (a new entrant). This means the level of bid would not necessarily represent the maximum amount the current licence holder would be willing to pay.

We said that the value of each licence to a hypothetical new entrant would be based on the costs and benefits that arise as a direct consequence of holding the licence, such as the additional costs of PSB programming obligations and the value of the right to EPG prominence. It is this value to a new entrant that would determine the amount that the current licence holder would bid to retain the licence in a hypothetical auction.

The valuation also takes account of market uncertainties that may affect the amount a new entrant would be willing to bid. In our methodology we said these could include future trends in linear viewing and television advertising revenue and any future benefits associated with the Media Bill, in particular prominence on connected TVs, the nature and timing of which is currently uncertain. Please see the roadmap to Media Bill implementation (PDF, 1.2 MB), published on 26 February, for more information.

Determination of financial terms

We have determined the financial terms for each Channel 3 and Channel 5 licence, taking account of submissions from the current licensees representing their views of what valuation a new entrant would place on each licence under our methodology.

Our conclusion is that a hypothetical new entrant would not be prepared to make financial payments as well as incur costs associated with PSB programming and other licence obligations in return for the benefits directly associated with the licences. Our view is that, from the perspective of a hypothetical new entrant, any reasonable estimate of the value of potential benefits from prominence on connected TVs would not change this conclusion.

As a result, we consider that the current licence holders could retain their licences in a hypothetical auction for a nominal cash bid.

Our decision

We have decided to set the financial terms for each Channel 3 and Channel 5 licence at a nominal cash bid amount of £1,000 per annum with a 0% PQR. The cash bid amount increases by inflation each year.

Next steps

Applicants have until 22 March 2024 to accept or reject the financial terms. We will update our website after this date with details of which licensees accepted and rejected the terms.

If licensees accept the financial terms, and we are not required or permitted to refuse renewal of the licences under the Act, their licences will be renewed on these terms for a period of ten years from 1 January 2025 to 31 December 2034.