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

07 February 2014

Introduction

The Channel 3 and Channel 5 licences are due to expire on 31 December 2014. Under the provisions of the Communications Act 2003 (the "Act") the holders of these licences may apply to renew their licences for a further period of ten years to 31 December 2024. Each of the current licence holders has applied for a renewal of their licences.

Ofcom has decided to renew the Channel 3 and Channel 5 licences. Ofcom must therefore determine the financial terms on which the licences are to be renewed. The determination must comprise two different types of payment. The first is a fixed annual cash payment and the second is a percentage of the licensee's qualifying revenue ("PQR") .

To assess the amount of 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 (under section 15 of the Broadcasting Act 1990 (the "1990 Act")). This means that in relation to the cash bid element, Ofcom is required to reproduce the effects of a hypothetical auction of the licences. The Act does not set out a process which Ofcom must follow to determine the PQR or the relative sizes of the PQR payments and cash bid. The Act gives Ofcom a level of discretion that it does not have in respect of the cash bid and it may determine different percentages for different accounting periods, or determine a nil percentage.

How financial terms are set

Ofcom set out the methodology it would use to determine financial terms for each licence in the statement entitled Methodology for determining the financial terms for the Channel 3 and Channel 5 licences published on 23 July 2013 ('the July 2013 Statement')1. The methodology reflects the requirement under section 217(2) of the Act to determine part of the financial terms based on an assessment of the amount each incumbent would have bid were their licence being granted afresh in a competitive auction.

As set out in the July 2013 Statement, the amount the incumbent would bid in a competitive auction would be the minimum required to beat the second-highest bidder, and as such would not necessarily represent the maximum amount the incumbent 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. It is this value to a new entrant that would determine the amount that the incumbent would have to bid in order to retain the licence in a hypothetical auction.

The July 2013 Statement considered a number of additional costs that a new entrant might associate with holding a Channel 3 or 5 licence.2 The principal obligation giving rise to additional costs is the requirement to deliver PSB (Public Service Broadcasting) programming. The PSB programming obligations attached to the Channel 3 and 5 licences can be summarised as follows3:

 Channel 3Channel 5
Regional news (in and outside peak) 
Other regional content 
National and international news (in and outside peak)
Originations (in and outside peak)
Current affairs (in and outside peak)
Independent production
Production outside London

The July 2013 Statement also considered a number of benefits that a new entrant might associate with holding a Channel 3 or 5 licence.4 Historically the most valuable benefit associated with the licence was the ability to broadcast on analogue. Since digital switchover completed in 2012 however, this is no longer the case. The main remaining benefits associated with holding the licences include reserved capacity on DTT (Digital Terrestrial Television) and the right to 'appropriate prominence' on electronic programme guides (EPGs).

Outcomes of previous reviews of financial terms

The financial terms were reviewed by Ofcom in 20055 and 20106. The outcome of these reviews is set out in Table 2.

Table 2: Financial terms determined for each Channel 3 and Channel 5 licence

  Prior to 2005 2005 review (2005-2009) 2010 review (2010-2014)
  PQR Cash bid (in 2004) PQR Cash bid (in 2005) PQR Cash bid (in 2010)
Channel 3 regional licences            
Anglia (East of England)17% £3,631k 10% £180k 0% £10k
Border (Borders) 2% £79k 0% £10k Did not apply
London (London Weekday) 20% £17,849k 26% £1,120k 0% £10k
Central (East, West and South Midlands) 17% £7,994k 11% £900k 0% £10k
Channel (Channel Islands) 0% £1k Did not apply Did not apply
Grampian (North of Scotland)6% £111k 6% £60k Did not apply
Granada (North West England and Isle of Man) 15% £4,278k 9% £240k 0% £10k
HTV (Wales and West) 7% £2,323k 0% £10k Did not apply
LWT (London Weekend) 17% £5,176k 21% £720k 0% £10k
Meridian (South of England) 23% £12,897k 14% £320k 0% £10k
Scottish (Central Scotland) 11% £1,800k 0% £10k Did not apply
Tyne Tees (North East England) 16% £2,239k 0% £10k Did not apply
UTV (Northern Ireland) 5% £611k 5% £120k 0% £10k
Westcountry (West England) 13% £1,289k 0% £10k Did not apply
Yorkshire (Yorkshire and Lincolnshire) 22% £8,524k 3% £240k 0% £10k
             
Channel 3 breakfast licence 23% £4,523k 30% £230k Did not apply
            
Channel 5 8% £4,318k 8% £680k 0% £10k

Note: Where a licence did not apply for a review, its existing terms continued to apply. The cash bid increases by RPI each year. The PQR in these periods applied to revenues attributable to broadcasting on analogue only.

The 2005 review led to a reduction in the financial terms associated with each licence (other than Channel which did not apply for a review). This was driven by the reduction in the value of the right to broadcast on analogue as the penetration of digital television increased and by changes that Ofcom had made to licensees' PSB obligations.7 The 2005 review noted that as digital switchover approached completion, the benefit associated with broadcasting on analogue would reduce and as a result it was possible that the value of the rights associated with the licence would be offset in full by the costs of the obligations associated with the licence such that a new entrant might be unwilling to pay more than a nominal sum for the licence.8 For some licences we set nominal terms of £10,000, recognising that a hypothetical new entrant would not be prepared to make financial payments as well as deliver PSB programming in return for the rights attached to the licences.

By the time of the 2010 review, analogue viewing had reduced further as digital switchover neared completion, and we concluded that a hypothetical new entrant would not be prepared to make financial payments as well as deliver PSB programming in return for the rights attached to any of the licences that had applied for a review. As a result, we considered that the incumbent licence holders could retain their licences in a hypothetical auction for a nominal amount of £10,000 per annum for each licence (the same nominal amount as was set for some licences in the 2005 review).

The outcome of these reviews is therefore that most licences are currently making nominal financial payments.

Determination of financial terms for the renewed licence period

Ofcom has determined the financial terms for each licence that has applied for licence renewal. Our conclusion is that, on the basis of the methodology described in the July 2013 Statement, 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. As a result the incumbent licence holders could retain their licences in a hypothetical auction for a nominal amount. Consequently, we have decided to set the financial terms at a nominal amount of £10,000 per annum for each licence. This amount is consistent with previous Ofcom determinations and the 1992 Channel 3 auctions where some licensees retained their licences by posting nominal bids.

Table 3: Determination of financial terms for the renewed licence period

 Current terms New terms
 PQRCash bid PQRCash bid
Channel 3 regional licences     
Anglia (East of England) 0% £10k  0% £10k
Border (Borders) 0% £10k  0% £10k
London (London weekday) 0% £10k  0% £10k
Central (East, West and South Midlands) 0% £10k  0% £10k
Channel (Channel Islands) 0% £1k  0% £10k
Grampian (North of Scotland)6%£60k 0% £10k
Granada (North West of England and Isle of Man) 0% £10k  0% £10k
HTV (Wales) 0% £10k  0% £10k
LWT (London Weekend) 0% £10k  0% £10k
Meridian (South of England) 0% £10k  0% £10k
Scottish (Central Scotland) 0% £10k  0% £10k
Tyne Tees (North East England) 0% £10k  0% £10k
UTV (Northern Ireland) 0% £10k  0% £10k
Westcountry (South West England) 0% £10k  0% £10k
Yorkshire (Yorkshire and Lincolnshire) 0% £10k  0% £10k
      
Channel 3 breakfast licence30% £230k  0% £10k
      
Channel 50% £10k  0% £10k

Next steps

Licensees need to accept the financial terms determined by Ofcom in order for the licence renewal to take effect. We will update our website with details of which licensees accepted and rejected the financial terms.

If licensees accept the financial terms,9 and Ofcom is 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 until 31 December 2024.

 

Footnotes

1 http://stakeholders.ofcom.org.uk/binaries/consultations/c3-c5-finance/statement/statement.pdf

2 July 2013 Statement, paragraphs 3.65 to 3.89 and 3.112 to 3.122.

3 More detailed information on the obligations attached to each licence can be found in the licensing section of Ofcom's website http://licensing.ofcom.org.uk/tv-broadcast-licences/current-licensees/

4 July 2013 Statement, paragraphs 3.37 to 3.64.

5 http://stakeholders.ofcom.org.uk/consultations/channel3_consultation/

6 http://stakeholders.ofcom.org.uk/consultations/review_c3_c5_licences/

7 2005 Determination, paragraph 3.4. http://stakeholders.ofcom.org.uk/binaries/consultations/channel3_consultation/statement/ch3ch5fin.pdf

8 2005 Determination, paragraph 3.19

9 In the case of Channel 3 licences, Ofcom has also determined the area for which the licence will be renewed. Channel 3 licensees must also accept the area determination.