Methodology for determining the financial terms for the Channel 3 and Channel 5 licences

Published: 21 February 2013
Consultation closes: 2 May 2013
Status: Closed (statement published)

Executive summary

1.1 The Channel 3 and Channel 5 broadcast licences are due to expire on 31 December 2014. Under the provisions of the Communications Act 2003 (the “Act”), the licensees may apply to renew their licence(s) for a further period of 10 years. In line with section 229 of the Act, Ofcom submitted a report to the Secretary of State for Culture, Media and Sport on matters which are relevant to Channel 3 and Channel 5 licence renewal. This was published in May 2012.

1.2 On 21 November 2012, the Secretary of State advised that she did not intend to block the renewal. Ofcom is therefore continuing with the renewal process of Channel 3 and Channel 5 broadcast licences for a period of 10 years, commencing on the expiry of the existing term, from 1 January 2015.

1.3 In order to obtain a licence renewal, the holders of Channel 3 and Channel 5 licences must submit an application to Ofcom within the period set out in the Act. If Ofcom decides to renew their licences it must 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 percentage of the licensee’s qualifying revenue (“PQR”) and the second is a fixed annual cash payment. 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”)).

1.4 On 21 February 2013 Ofcom published a consultation (“the consultation”) that set out its proposed approach to determining the financial terms for the Channel 3 and Channel 5 licences should the licences be renewed.  Ofcom received six responses to the consultation from ITV plc, STV Group plc, UTV Media plc, Channel 5, the Commercial Broadcasters Associated (COBA) and Everything Everywhere (EE).

1.5 Ofcom’s objective is to determine a fair and reasonable value for each licence (in accordance with the statutory requirements) and to set new financial terms according to a fair and objective process. Subject to a small number of changes, which we set out in this statement, the overall methodology we have adopted to determine financial terms is consistent with that set out in the consultation. The process will allow Ofcom 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 renewed licences. This means that we will take into account reasonably foreseeable changes in the market and regulatory environment that will impact the financial terms for each licence.

1.6 Ofcom will seek data and information from licensees (“submissions”) that will allow Ofcom to determine financial terms in line with the methodology set out in this document. These submissions will include licensees’ views of the value a new entrant would place on the licences in the context of a hypothetical auction. Once these submissions have been received, Ofcom will review them and, where necessary, seek further evidence in order to arrive at what we consider to be a fair and reasonable determination of financial terms for the renewed licence period. We expect to determine financial terms in November 2013, subject to submissions being received from the licensees.

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