The Communications Market 2005

1 Overview

Contents 1.1 Introduction.............................................................................. 7

1.2 Key communications themes................................................... 8 1.2.1 Digital communication grows as consumers convert from analogue.............8 1.2.2 Improved availability - rural communities getting connected .........................8 1.2.3 Proliferation of services broadcasters develop digital portfolios...............10 1.2.4 New and enhanced services - consumers take control ...............................11 1.2.5 Falling prices more for less.......................................................................14 1.2.6 Take-up broadband Britain arrives ...........................................................15 1.2.7 International regulatory developments ........................................................17

1.3 The communications consumer............................................. 19 1.3.1 Introduction..................................................................................................19 1.3.2 Consumption new services over new platforms .......................................19 1.3.3 Consumption digital households spend more money...............................20

1.4 Finance.................................................................................. 22 1.4.1 The balance of industry finance shifts .........................................................22 1.4.2 Growth in broadcasting and telecoms revenues .........................................22 1.4.3 Strong growth in TV advertising, but commercial radio advertsing revenues overtaken by internet advertising.................................................................23 1.4.4 Mobile growth continues as fixed revenues decline ....................................25 1.4.5 Television programming spend increases ...................................................26 1.4.6 The financial markets ..................................................................................26

1.5 Spectrum ............................................................................... 27 1.5.1 What is spectrum?.......................................................................................27 1.5.2 The importance of spectrum........................................................................27 1.5.3 Spectrum shortages ....................................................................................27 1.5.4 Why is it regulated? .....................................................................................29 1.5.5 New approaches to spectrum management................................................29 1.5.6 Current and future balance of spectrum use ...............................................30 1.5.7 Spectrum trading and liberalisation .............................................................30 1.5.8 Newly available spectrum............................................................................32 1.4.9 International comparison .............................................................................32

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1.1 Introduction This is the second in a series of annual Communications Market reports by Ofcom (the Office of Communications). The report highlights developments across the electronic communications sector in the UK, covering television, radio and telecommunications, for the calendar year 2004 and the start of 2005. It is supplemented by quarterly updates, in October, January and August each year, which provide the latest available data on each sector, including: industry size, structure and financing availability, penetration and use of products consumer attitudes and behaviour The Communications Market supports Ofcoms objective to provide best in class research to which stakeholders have regular access. It also provides the market context for Ofcoms reviews of Radio, Public Service Broadcasting and Telecoms. This report fulfils Ofcoms requirement to produce an annual factual and statistical report under Section 358 of The Communications Act 2003. The information set out in this report does not represent any proposal or conclusion by Ofcom in respect of the current or future definition of markets and/or the assessment of significant market power for the purposes of the Communications Act 2003, the Competition Act 1998 or other relevant legislation. Annual Communications Market reports are now published in hard copy and on the Ofcom website. Quarterly updates are available on the website only. Ofcom welcomes comments on the content and style of The Communications Market to help inform future publication. Comments and queries should be sent via e-mail to market.intelligence@ofcom.org.uk.

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1.2 Key communications themes

1.2.1 Digital communication grows as consumers convert from analogue 2004 was a year of growth across the digital communications sector, and one of slow decline for analogue services. Net household additions for broadband, mobile (2.5G and 3G), digital radio and digital television were all greater than in 2003, driving increased spend and usage. Both conversion from analogue in broadcasting and product upgrades in telecoms have proceeded at pace, driven by: improved availability proliferation of services new and enhanced consumer offerings falling prices In this section we analyse each of these drivers before looking at latest take-up figures.

1.2.2 Improved availability - rural communities getting connected Availability of many digital telecommunications services increased during 2004. For some time now, fixed line and 2G mobile services have been almost universally accessible, and penetration is approaching saturation. This has led to a search for new revenue streams, spearheaded through investment in both wired and wireless networks which enable enhanced services via increased bandwidth (Figure 1.1).

Figure 1.1: UK DAB, DTT and broadband availability DAB DTT Broadband

DTT composite coverage by all 6 multiplexes

DTT composite coverage by all 6 multiplexes

DAB coverage by at least one multiplex

DAB coverage by at least one multiplex

DSL

Cable modem

Fixed Wireless Access

Source: Ovum Note: Digital television and Broadband access via satellite is available across most of the UK Satellite remains the most widely available method of receiving digital television services, with coverage of almost all UK households apart from a few built-up and hillly areas, where line of site to the satellite is unavailable. Both BSkyBs satellite footprint and the reach of Digital Terrestrial Television (DTT) transmitters remained

8

more or less constant in 2004. DTT availability will remain close to 75% population coverage until the phased switchover to DTT (and shutdown of analogue transmission) allows for a power boost to the digital signal. It is envisaged first phase of the digital switchover will take place in 2008, with the whole country converted by 2012.

that the

or digital radio too, coverage is more extensive now than last year, with both Digital

n

io in

he majority of new broadband connections are supplied via asymmetric digital ork.

st

mers a

ore recently, BT announced further exchange upgrades which, combined with the

6% in

roadband internet connectivity, along with telephony and broadcast services, is also

able operators are joining broadband suppliers in seeking to unbundle local loops in

his

also

ll four of the main UK mobile operators have now joined 3UK in the 3G consumer market, typically offering download speeds of 384kbit/s. Although the footprint varies

FOne, operator of the national commercial DAB multiplex, and the BBC building new transmitters and new local multiplexes launching since last summer in Cambridge and Plymouth / Cornwall. Digital One is now available to over 86% of the populatioof Great Britain (it is not licensed to cover Northern Ireland) while the BBCs DAB services can be received by 85%. Local digital services are now licensed to cover 89% of the population, although coverage within these licensed areas is not complete. As both internet and digital television penetration grows, digital radshould become even more widely available, with the possibility of DAB chipsets mobile phones also due to become a reality within the next year via the BT / DigitalOne Livetime service. Tsubscriber line (ADSL) technology, predominantly over BTs copper wireline netwLike 3G, ADSL broadband availability is lowest in rural areas, so perhaps the most significant milestone for extending digital service accessibility in 2004 came in Auguwhen BT announced the scrapping of exchange distance limits, permitting consumers in more remote areas to receive a service. Until this point, custoliving more than 6km from a broadband enabled exchange were unable to receiveservice. Mremoval of distance limits, will make basic ADSL broadband even more widely available, reaching 99.6% of households by the end of summer 2005 (up from 9May 2005 and 90% a year earlier). Other solutions, including wireless, may still need to be deployed to make broadband available to the remaining half million or so UK citizens without access. Bavailable through the cable operators fibre-to-the-kerb networks. The overall level of cable network build-out has remained broadly similar over the past year, with 50.4% households passed in March 2005. However, both Telewest and ntl have invested in network upgrades, with an estimated 94.1% of their combined franchise areas now offering digital services. Telewest has announced plans to follow BSkyBs example and migrate the whole of its customer base to digital by the end of 2006. Corder both to in-fill franchise areas and to extend their services to new locations. This is a cheaper way for them to reach new customers than investing further in cable infrastructure. There were 28,000 unbundled lines in the UK at the end of 2004 trepresents only half of one per cent of all broadband-enabled lines. The UK remains some way behind France and Italy, both of whom had unbundled over 12% of broadband-enabled lines by the end of 2004. Use of unbundled local loops hasincreased the availability of the Homechoice TV over DSL service, which expects to have extended its availability to 2.4m homes in June this year, and has already moved beyond its original west London footprint. A

9

by company, an estimated 82% of UK households were able to receive 3G signals from at least one operator at the end of 2004 (up from 75% in 2003), as transmitter networks were extended to cover less densely populated areas (Figure 1.2). Each operator has committed to rolling out services further, to reach 80% by the end of 2008.

Figure 1.2: Availability of digital services as at April 2005 ales Scotland N Ireland

Fixed line calls 100 100% 100% 100% 100%

UK-wide 2005

Increase on 2004

England W

percentage points 0% %

Mobile 99% 0% 99% 99% 99% 99% 3G* 82% +5% n/a n/a n/a n/a Broadband* 96% +6% 97% 92% 92% 97% Cable +0.5% n/a n/a n/a n/a 47% Satellite TV 97% 0% n/a n/a n/a n/a Terrestrial TV*** 7 8

0% 3% 57% 2% 58% 75%

TV over DSL 5% 0% 6% 0% 0% 0% DAB Digital +4% 89% Radio*

89%** 73%** 92%** 100%**

able from at le perator late to local multiplex licensed population coverage rather than transmitter coverage

ll six multiplexes

s

f services broadcasters develop digital portfolios

,

(with any timeshifted +1 services in addition), yet applications to launch more channels

roadcasting on satellite and cable. atellite remains the platform with the greatest potential capacity, offering 352

ay

is service proliferation has emanated from the UKs major broadcasters. ach is developing a portfolio of channels in an attempt to head off the threat of

audience fragmentation posed by increasing multichannel take-up:

* services avail* Figures re

ast one o**** Figures relate to availability of signals from aData relates to households except radio which shows individuals.

xchanges slightly less than thiFigures for broadband are for households connected to enabled enumber are able to access the services. Source: Operators / Ofcom

1.2.3 Proliferation oConsumers now have unparalleled choice over the TV and radio they consume. Twenty years ago, television viewers had just four channels; but improvements in compression technologies mean all digital platforms now have increased capacityand operators are taking advantage of lower costs to launch new services. More than 370 channels were broadcasting in the UK at the end of May 2005mshow no signs of abating. Ofcom issued 156 new licences in 2004 alone, more thanin any previous year, with the entertainment, shopping, sport and adult genres accounting for over three quarters of the total. The majority of new licences were for services bStelevision channels (excluding timeshifted channels, regional versions of BBC ONE,BBC TWO and ITV1, interactive services and pay per view channels), availableeither for free or via subscription (up from 272 last year) and over 60 pay per view services. By contrast, digital cable provides between 100 and 136 channels (depending upon the operator), while DTT has 32 free channels, with a further 11 pservices. Some of thE

10

The newly consolidated ITV plc has developed a portfolio of digital channels withplans to launch more

Channel 4 has taken E4 free-to-view and has announced a range of new

the acquisition of a 51% stake in digital station Oneword

Five has said that it would like to develop a family of channels when the time is

he same is true in radio:

, Emap, SMG and Chrysalis have all developed a portfolio of stations on analogue and digital to help them reach wider audiences and preserve and grow

In MThe new group is the biggest player in radio (in terms of revenues, number of tations and listening hours) by some margin. It owns a large portfolio of local and

g a

st on analogue and on DAB digital radio, with more on satellite, igital terrestrial television and cable television. Of the 326 on analogue (the majority

or

ices (including the World Service) and 32 BC local or nations radio services. In addition to these, 88 digital radio services are

tl for vices are

ologies is continuing to drive the convergence of broadcast, telecommunications and internet services. Improvements

asing network also new

the itional sets. But they are also exercising greater

ontrol over their listening patterns, using non-linear programme delivery from on-demand and time shift services. In turn, some of these products promise new

services including More4 and its broadband documentary channel, as well as moving into radio with

the BBC has a longstanding suite of digital services, and is developing

broadband on-demand access for its programming

right.

T

GCap

market share This move towards station portfolios will be increased by consolidation in the sector.

ay 2005, the merger of Capital and GWR came into effect, to form GCap Media.

snational brands. In radio, the number of services is also increasing, with digital stations becomincore portfolio component of the major operators. In total 372 licensed radio stationsin the UK broadcadon FM frequencies), 275 are commercial services, broadcasting to a local, regional UK-wide audience. These will soon be joined by a new tier of community radio stations which are now being licensed. DAB offers 215 stations, of which 172 are commercial, broadcasting either to individual local areas, to several local areas or across the UK. These are supplemented by 11 BBC UK-wide servBavailable via satellite, up from 84 last year, while DTT offers 21 and on cable, nexample, delivers 40 stations. A large and rapidly changing number of seravailable to UK listeners over the internet.

1.2.4 New and enhanced services consumers take control The transition from analogue to digital techn

in digital compression, transmission and storage technologies are increcapacities and capabilities, allowing operators to offer not just more buttypes of service to consumers. Digital radio is proving to be one of the more innovative sectors in this respect. Listeners can access radio through many devices, from TV to mobile phones and internet, as well as via more tradc

11

revenue streams for operators, helping to offset the problems posed by channel proliferation. The BBC pioneered on-demand radio services and claims that 4.4 million hours oflisten again programming was accessed in February from its website. Howevecommercial radio has also entered the arena, with products such as GMGs jazzfm.com. A

r,

nd several manufacturers offer DAB receivers (Digital Radio ecorders) with pause, rewind and record functionality, which also help to deliver

ices with s

s r it, buy it burn it service. The Digital One / BT

ivetime service promises multimedia content (including video) delivered using DAB

as the iPod). This means listeners an access radio where and when they want. Virgin Radio has been offering

oncept site. ing to

dium.

ter in 2005). However, with growing competition for listeners time from 3G services

, and SkyB and the cable operators are increasingly turning to sophisticated added-value

o-on-

to ore around 80 hours

f video. Some Freeview boxes now also offer integrated PVRs, including some with ty

n-

Rgreater control to audiences. In addition, commercial groups now offer a host of enhanced interactive servwhich to entice the listener (and develop brand loyalty). These include EmapChannel Hopper, offering programme-related downloads and information for listeneron Freeview, and GWRs HeaLdata capacity, when it launches later this year. Another example of the flexibility and control offered by new radio services is podcasting, though which broadcasters publish digital recordings of radio programmes on the internet, which can then be downloaded onto PCs and transferred to portable digital music players (suchcpodcasts of its breakfast show since March 2005 and the BBC is trialling the cby making a small number of programmes available as Podcasts via its webCommercial radio stations are also experimenting with the technology, seekextend brand reach and increase advertising impacts. The success of the concept may well be determined by the ability to negotiate distribution rights for the me Although products such as the Reciva internet radio (which utilises WiFi and broadband connections) are coming onto the market, they are not common. DAB istherefore the only widely available digital platform currently offered in the UK that allows portable radio reception (although Digital Radio Mondiale services may launch laand podcasting, competition for portable reception time is likely to increase. Like radio, both free-to-view and pay television broadcasters are looking to alternative revenue streams to bolster income from traditional advertising, sponsorship and subscription sources. The five main channels have all launched a range of interactive and retail services to complement their broadcast offeringsBproducts personal video recorders (PVRs), high definition TV (HDTV), videdemand and PPV, interactive services to sustain their growth. Sky+ continues to be the UKs market leading PVR, with penetration more than doubling from 322,000 households in March 2004 to 770,000 (10% of its subscriber base) by the first quarter of 2005. With the hard drive cost/capacity ratio continuingfall, the latest version of Sky+ has a 160GB hard drive that can stotwin tuners (record one programme while watching another), series link capabili(automatically record all episodes after watching one) and large hard drives. While PVRs offer the convenience of time shifting linear programme schedules, many require the user to decide what they want to view before it is broadcast and configure the device to record accordingly (although intelligent devices like TiVo, which learn what the viewer likes and record it for them are available). True o

12

demand services have content pre-stored on servers which users can access

ld

mes from a vast online archive, and to atch them on their TV sets.

y onsumers who have purchased large, flat panel TV

isplays, by offering a High Definition TV (HDTV) service in 2005/06. The initial focus

d music

a 2G roduct). However, 2004 saw increasing interest in delivering digital broadcast

owth ver

download service which gave viewers access to archive aterial via their broadband connection, although no mainstream UK channel has yet

the UK)

evices. This had lead to an increased focus over the last twelve onths on digital rights management technologies (DRM) capable of ensuring that

taining igital

whenever they wish, using a high speed, high reliability digital network. These services could receive renewed impetus in 2004 with the re-launch of HomechoiceTV over DSL (with competitors expected to follow), but copyright issues must be overcome if network PVRs are to develop. Latest developments have seen the worlds of online search and television converging, as PVR operators and content providers enter talks with companies likeGoogle and Yahoo!. They plan to develop searchable content libraries which wouallow viewers to download films and programw At the same time the cable operators have pressed ahead with plans for on-demand television, with both ntl and Telewest currently running trials. And, like BSkyB, both cable companies have announced plans to meet the demand for better picture qualitfrom an increasing number of cdfor the new format is likely to be sports, movies and documentaries and its introduction will help meet the challenge of film distribution via new high definition DVD formats which are expected to emerge over the next couple of years. 3G networks also offer the additional capacity needed to deliver bandwidth-hungry multimedia services. While 3G allows users to download short video clips antracks to their handsets on demand, operators are still trying to encourage use of more basic multimedia applications, such as picture messaging (essentially pcontent to handheld devices; a mobile television trial being conducted by ntl and Nokia in Oxford uses DVB-H (DVB to the handheld) technology to broadcast TV, radio and data services. The growth in faster, always-on broadband internet connections is supporting grin a whole range of new of media and communications services, including Voice oIP (VoIP) and music and video downloading. The BBC recently conducted a successful trial of a videommade all of its content available via the internet. The introduction of standard broadband speeds of 1Mbit/s or more (and perhaps partly a result of increasing levels of legal action against individuals accused of copyright infringement in have led to burgeoning use of legitimate music download sites. According to BPI figures, 5.6 million tracks were downloaded in 2004, with 4.6 million more in the first quarter of 2005. However, the new services offered by digital technologies are presenting new challenges to content providers in terms of their ability to prevent near perfect, unauthorised digital copies from being freely distributed over the internet and via portable storage dmonly those who are authorised to access the content are able to do so, while rethe flexibility for them to transfer it between devices. The increasing amount of dcontent available is also making electronic programme guides and digital search engines an essential feature of many new content services.

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1.2.5 Falling prices more for less Improving technologies and increasing competition are delivering the dual consumer benefits of extended choice and lower prices. The biggest improvements have been

g of BTs copper local loop, improved in broadband, where increased unbundlintechnologies such as ADSL2+ and continued infrastructure investment by the cable operators have resulted in ever faster broadband speeds being offered for the same or cheaper prices. At the top end of the market, UK Online offers an 8Mbit/s service for 29.99/month in some areas, while BTs entry level product in May 2005 offered 1Mbit/s for just 17.99 per month, down from 24.99 for 512kbit/s 12 months earlier (Figure 1.3).

Figure 1.3: Average UK residential broadband subscription prices /month

27 26 26 25 2317

35 35 35 3530

20

32

41

50 50 50

0

20

40

60

Q4 2002 Q2 2003 Q4 2003 Q2 2004 Q4 2004 Q1 2005

512kbit/s

1Mbit/s

>1Mbit/s

Source: ECTA/OECD A wide range of pay TV packages is available to consumers, ranging from 7.99 per

digital terrestrial service, to 51 per month for hensive offering with Sky+. In addition, the cable and TV over

ir

to

AB sets. Future reductions in handset prices and and surpass

ay of transporting calls than traditional ircuit-switching. In order to benefit from the price savings of an all-IP voice call (i.e.

one that totally bypasses the PSTN), both the caller and the recipient need to be

month for Top Up TVs 10 channel kys most compreS

DSL providers offer a host of bundled triple play packages with telephony, internet and broadcast services. In general, pay TV prices increased in 2004 the top Sky tier rose 7.9% for example. However, all platforms offered consumers more for themoney last year with extra channels, faster connections and cheaper phone calls. Consumers also have a greater number of free services available to them. In additionto the increase in DAB and satellite radio services over the last year, viewers can eceive a large number of free channels, including all those provided by the BBC, r

ITV1, Channel 4 and Five on digital satellite. BSkyB offers a Freesat product whereby viewers can purchase set-top boxes with a free-to-view card through which to watch these services, although it has yet to launch a significant marketing push promote the concept. Hardware, too, is rapidly becoming cheaper. The arrival of new low-cost manufacturers, many from the Far East, is driving down retail prices for everything rom DTT receivers to Df

improvements in service coverage should enable 3G to fulfill its potential GSM as the dominant mobile technology. Although still in its infancy, Voice over IP (VoIP) is another technology which looks set to bring down prices. It allows voice calls to be made over data networks using nternet protocol (IP), a far more efficient wic

14

online at the same time, preferably at broadband speeds, with compatible software and equipment installed. This would mean that call costs are effectively covered by broadband access charges. The growth in always-on broadband connections coulwell be the key driver for VoIP rollout to the residential market.

1.2.6 Take-up broadband Britain arrives Take-up of most new technologies conforms broadly to an S-shaped curve, althoughthere is some variance in the slope of the S, and different grou

d

ps within the

population tend to adopt new technologies at different rates (Figure 1.4).

ed in to the early majority stage of

d a quarter f all households meaning broadband accounts now outstrip narrowband. It also

dividual in the UK. However, as some people have more than one mobile ousehold penetration stands at 85%. This sets operators seeking to

xtend consumer take-up the difficult task of trying to convince late adopters, or

2004 was the year in which broadband finally movthis curve, effectively becoming a mass market consumer proposition. Following growth of over 90% during the year, the number of residential broadband connections in the UK stood at 6.2 million at the end of December arounomeans that the UK now occupies a mid-table position in the table of broadband connections per 100 population, having lagged significantly behind the US, Japanand most other western European countries over the past few years.

Figure 1.4: Current position of major technologies on the technology adoptioncurve

Take-up %Take-up %

Source: Ofcom There were 61.2 million active mobile phone customers reported in the UK at the end of December 2005 (either pre-paid or on monthly contracts), more than one for every inconnection, helaggards, who are traditionally resistant to change, and who accept ideas only if they have become mainstream (or even tradition). Operators may instead choose to focus on the business sector.

100%

85%

50%

15%

Innovators EarlyAdopters

EarlyMajority

LateMajority

LateAdopters

GSM mobile(H/holds)

Broadband

DAB Radio

Digital TV

3G mobile

PVR& VOD

Personal digitalmusic players

WiFi homesWiFi hotspots

Time

100%

85%

50%

15%

Innovators EarlyAdopters

EarlyMajority

LateMajority

LateAdopters

GSM mobile(H/holds)

Broadband

DAB Radio

Digital TV

3G mobile

PVR& VOD

Personal digitalmusic players

WiFi homesWiFi hotspots

100%

85% GSM mobile(H/holds)

Broadband

DAB Radio

Digital TV

50%

15%

Personal digitalmusic players

WiFi homesWiFi hotspots

Innovators EarlyAdopters

EarlyMajority

LateMajority

LateAdopters

3G mobile

PVR& VOD

Time

15

Despite the mobile networks considerable financial investments in licence fees and new infrastructure over the past few years, 3G broadband mobile services have yto make a significant impact in

et the UK mobile market. At the end of 2004 there was a

tal of 2.5 million active 3G customers (all with 3UK other operators had not yet

P is immediately apparent free voice calls ithin an IP platform (e.g. between offices or to other companies with VoIP

UK

as risen to 61.9%). Freeview accounted for nearly 70% of this growth, with more f

iber ase remained more or less static at 3.3 million, although digital customers increased

t in 2004 with total umulative sales during the year almost trebling to 1.4 million, raising household

n nt they wish to use and more control over when and

here they use them. Increasing number of operators have stated an intention to

and e spread of WiFi hotspots will provide an alternative to 3G networks for accessing

tolaunched their consumer services) up from less than 250,000 a year earlier. 3G take-up was delayed by the later-than-expected product offerings from the major operators, and also by the poor choice, quality and availability of handsets. However, with recently intensified operator competition, improved devices and the launch of new services, consumer demand is expected to rise in 2005 the technology could yet prove to be adopted by the majority. 2004 also saw an increase in uptake of VoIP products, although this was principallyamong large businesses, rather than consumers. For larger businesses with multipleoffice locations, the main attraction of VoIwcapability). All large businesses have high-bandwidth permanent IP connections, enabling seamless VoIP connectivity with high quality of service. Recent large corporate VoIP conversions have included Marks & Spencer and Abbey National. Freeview continued to reshape the UKs TV landscape in 2004. Conversion from analogue to digital TV maintained momentum and at the end of 2004 59.4% of homes had digital, up from 50.2% in 2003 (Latest Q1 2005 numbers show that thishthan 3.25 million Freeview boxes and integrated digital TVs sold over the course o2004. As a result, the cumulative total for digital terrestrial households by the end ofthe first quarter of 2005 was over 5 million households. Although Freeview operatesprimarily as a free-to-view platform, its increasingly extensive and attractive line-upmust represent some competition for at least the basic packages of both cable and satellite. With Ofcom recommending that the phased process of digital switchover begins in 2008, digital TV needs to move swiftly into its late adopter stage. Pay television also prospered last year, with BSkyB achieving 369,000 net subscriber additions over the year (although growth rates were down), bringing its total subscriber base in the UK to almost 7.3 million homes. The total cable subscrbby 200,000 principally converters from their analogue services. With the offer of a wider range of stations, improved data services and an improvedand cheaper range of sets, increasing numbers of customers are migrating from analogue to digital radio. Sales of DAB sets received a major booscpenetration of DAB sets to 5%. The time-poor, cash-rich consumer is a market sector that is becoming increasingly targeted by digital operators. These people demand more convenient ways to gaiaccess to the services and contewoffer VoD services, PVR capable set top boxes and personal digital media players. With increased competition, the decreasing cost of digital storage devices and wide spread adoption of broadband, take-up of these services looks set to accelerate. Whilst the coming year will see the introduction of new and improved digital productsand services we are also likely to witness growth in innovative, low cost alternatives to existing services. VoIP will present challenges for existing telephony operators th

16

the internet outside the home and the office. HDTV will offer new competition to existing digital television services and could provide particular challenges for digital terrestrial television, the most capacity constrained of the platforms. These innovations promise to enhance consumer choice and value in the year ahead.

Figure 1.5: Availability and penetration of digital services Q1 2005

99.0 97.0 96.089.0

5.05.0

20.0

51.8

0.110.212.023.131.3

89.0

0

20

40

60

100

Mobil

e (2 /

2.5G

)

Satel

lite TV

Broa

dban

d

DAB d

igital

radio

3G M

obile

Digit

al ter

restria

l T

82.075.080

Source: Ofcom / operators / licensees Note: figures for radio are for individuals not households

1.2.7 International regulatory developments Over the past 18 months, the international regulatory agenda has been dominated by issues surrounding digital switchover, new digital services and spectrum

lators minds, and some have both issues have multinational

, nding satellite broadcasting it will become ever more important for

gulators from different countries to co-ordinate policy in order to ensure as far as

t

management. VoIP has also started to exercise regustarted to concentrate on mobile termination rates significance. As international boundaries around communications continue to become more blurred particularly with the increased impact of the internet and, to a lesser extentissues surrourepossible a seamless global market. Figure 1.6 lists the most important international regulatory developments of the pasyear.

V

Cable

TV

TV ov

er DS

L

UK

hous

ehol

ds,

Availability

Penetration

17

Figure 1.6: International regulatory developments Issue Country Body Regulatory action

Television

Broadcasting standards

US FCC Crackdown on broadcasting standards

Italy Italian Parliament

Confirmed intention to implement digital switchover by December 2006.

Digital switchover

Sweden Digital TV Kommissionen

Plans submitted to Swedish government indicating switchover should start next year and be completed by February 2008.

Spain The Spanish Parliament

Passed legislation to pave the way for digital switchover by 2010.

Radio

Netherlands House of representatives

Plans submitted for introduction of DAB commercial digital radio with calls for analogue to be switched off no later than 2019.

Digital broadcasting

Italy AGCOM New legislation published paving the way for more DAB stations and greater coverage.

Germany MABB Stopped issuing DAB licences on the grounds that outdated technology has been superseded.

France Consulting on digital radio.

Telecoms

Canada CRTC Enforced 911 emergency service provision by fixed VoIP service providers.

VoIP

US FCC Prohibited blocking of VoIP applications. Ireland Comreg Issues draft Direction to allow access to a new

number range for VoIP phone services. Netherlands A consultation on the planned policy for the use of

numbers for VoIP services. Norway NPTA Issued an outline on the regulation of VoIP. Spain CMT Finalised consultation on VoIP regulation and

proposed VoIP numbering and portability guidelines. Japan MIC Invited comments on draft report concerning

Measures for Preserving Important Communications such as emergency services.

Privatisation France French government

Initiated sale of 9.6% stake in France Telecom. Government retains stake of 41-43.5%.

Mobile termination

Australia ACCC Recommended mobile operators cut termination rates by over 40% by 2007.

Spectrum

Spectrum management

US US Secretary of Commerce

Launched review of current spectrum management policies.

Ireland Comreg Calls for opinion proposed approach to spectrum management for next 2005-2007.

Sweden PTS Call for comments on the present and future spectrum allocation table.

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1.3 The communications consumer

1.3.1 Introduction With an improved range of digital services on offer across telecoms and broadcasting, both use and household expenditure on communications services is rising. Viewing and listening figures for digital radio and television are both higher than in analogue only households. ARPU has risen as pay television subscribers migrating to digital have proved willing to pay for devices such as PVRs. And the manufacturers of the hardware used to receive digital services have come to expect increasingly short product replacement cycles particularly for mobile handsets.

1.3.2 Consumption new services over new platforms Consumers are increasingly changing the way in which they access communications services, and broadening the range of services they use. Digital TV viewers can now use devices like the red button to access enhanced or interactive content; 2.5G and 3G mobile users can send pictures and video respectively over their mobile phones; broadband internet users can now download their entire music libraries from the internet, then download music to portable audio devices, thus bypassing the need to buy and store CDs this trend will inevitably extend to video material as broadband speeds increase and compression technology evolves. Interactive and digital radio services are proving increasingly important to both consumers and broadcasters. In addition to the 4.4m hours of listening to the BBCs on-demand radio services in February, listening to digital only1 stations accounted for 8.3% of all commercial radio audiences by the end of 2004. Listening via non-traditional means is also rising. Radio via digital television continues to grow strongly, with RAJAR figures showing that nearly a third of all adults had at some time listened to radio using their television set by the end of 2004. However, although reach is higher through television, share is higher on DAB, possibly reflecting the impact of additional choice or perhaps the fact that keen listeners have tended to be early adopters of the technology. The number of adults who claimed ever to have listened to radio via the internet has risen to 16.3%, up from 15.1% in 2003. In addition to increased choice, through access to thousands of foreign stations (as well as the majority of the UK services), listening via the internet may demonstrate radios value as a secondary medium. For example radio can serve as a background whilst browsing the internet, something screen-based services struggle to offer. Listening via mobile phones is also increasing, although so far this has been via an analogue radio tuner included in the handset. Increasing channel budgets for the main television channels over the past six years have not halted the increasing fragmentation of the TV audience. This trend has been apparent for several years as digital take-up grows. Between 1994 and 2004, ITV1s share declined from 39.5% to 22.8%, and BBC ONEs from 32.4% to 24.7%. Meanwhile, the combined share of the digital channels has steadily increased from 6.6% in 1994 to 26.2% in 2004 in other words they now account for more viewing

1 Digital-only listening consists of listening to stations only available on digital platforms and listening to analogue stations that broadcast on digital platforms outside of their analogue listening area. It does not include listening to analogue stations on their

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share than either BBC ONE or ITV1. However, this overall trend conceals significant differences between cable, satellite and Freeview homes: the main five channels combined account for just over half of viewing in cable and satellite homes, compared to over 80% of viewing in Freeview homes. The main five channels still reach a wide cross-section of the audience: on average, all of them except Five were watched for at least fifteen minutes each week by more than half of all viewers. Nonetheless, some of the more traditional public service genres find it harder to secure a place in increasingly competitive schedules. In mobile telecoms, the four major networks continue to dominate, with new entrant 3UK only recently starting to make inroads. More interesting is the continued rise of MVNOs (mobile virtual network operators), who piggy-back on one or other of the UK networks to offer competing mobile services. Virgin Mobile, which operates over the T-Mobile network, is the most successful MVNO, with over 4 million active subscribers by March 2005. Tesco Mobile, which launched at the end of 2003 over the O2 network, had over 500,000 subscribers by December 2004.

Figure 1.7: Take-up of other household communications devices % of Households

85%85%87%87%82%

68%

45%27%

17%

5%

54%46%

39%65%

29%

2% 2%10%

18%

8%6%3%2%0%

20%

40%

60%

80%

100%

2000 2001 2002 2003 2004

Video recorder

DVD player

PC

PVR

MP3 player

Source: Ofcom - The Publics View 2003 Note: PC penetration was 64% as at February 2004 Other emerging technologies are vying for the time of consumers. As in 2003, DVD is currently the fastest growing new home technology, with 68% of adults claiming to own a DVD player at the end of 2004 (up from 5% in 2000). This contrasts with VCR ownership which is now static at 85% of households. Personal Video Recorders (PVRs) are the most recent and least established technology in the television marketplace but may have the greatest potential to change the way people consume TV in the long run. During 2004, penetration of these devices increased from 2% to 10% - driven almost entirely by BSkyBs aggressive roll-out of its Sky+ PVR service. Use of the internet and interactive services is also on the increase, and this is mirrored by the continued rise in PC ownership. By the end of 2004, there was at least one PC in 65% of UK households.

1.3.3 Consumption digital households spend more money The adoption of a range of new technologies and digital services across television and telephony (excluding some elements of installation, equipment and

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maintenance) caused a further rise in the impact of communications on household expenditure.

Figure 1.8: Average weekly household communications spend bn

6.54 5.88 5.97 5.84 5.69

3.38 4.09 4.9 5.816.57

0.41 1.281.26

1.593.64

4.114.69

5.09 5.38

1.5

0.550.54

0.530.49

0.48

3.4% 3.5%3.7%

3.9% 4.0%

0

5

10

15

20

2000 2001 2002 2003 20040.0%

1.0%

2.0%

3.0%

4.0%

% o

f tot

al e

xpen

ditu

re

Radio

TV

Internet andbroadbandMobile voiceand textFixed voice

Total comms

Source: Ofcom / operators / licensees / BBC Weekly household expenditure on television, radio and telephony rose from 14.45 to 19.78 between 2000 and 2004, and now accounts for 4.0% of total household expenditure, a rise of 0.1% since last year. Growth has been particularly strong in mobile telephony and internet and broadband television, which cost the average household 6.57 and 1.59 per week respectively. Average weekly household spend on television also increased, by 30p per week to 5.38.

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1.4 Finance

1.4.1 The balance of industry finance shifts If VoIP is adopted by the major incumbent service providers of both voice telephony and internet services, it could radically change the revenue and cost structure for these service providers particularly for the dominant residential voice carrier, BT. This is because VoIP cannot be charged on a traditional per minute basis, in the way that many voice calls are charged today. VoIP will mean that voice is carried as packets of data, and will be priced as such either on a monthly subscription basis (perhaps including usage caps), or, less likely, on a per capacity basis this second scenario is less likely since it would serve to highlight the fact that simple voice traffic over IP is far less bandwidth-hungry than most data transfer, particularly pictures and video. Aside from VoIP, the voice and internet market are moving towards a flat-rate charging structure in any case. Broadband internet access is almost exclusively charged on a flat monthly subscription basis, sometimes with usage caps; voice calls over both fixed and mobile networks are increasingly being offered as bundled packages that include line rental and a certain amount of calls per month. In radio and TV, the financing structure has changed less over the past year. TV funding continues to be dominated either by licence fees, advertising revenues, or pay TV subscriptions. One significant move was the introduction of Top Up TV over Freeview, giving subscribers access to a wider selection of channels than the basic Freeview package for a monthly subscription. In addition, Top Up TV is offering its Xtraview sample service for 1 per day, which may perhaps herald a move towards more on demand pricing of premium content. In radio, a small number of groups still dominate the UK industry; the BBC takes over half of all UK listening hours, while six groups (counting GWR and Capital separately) take over three quarters of the remaining listening hours. Again, licence fee and advertising are the dominant funding mechanisms.

1.4.2 Growth in broadcasting and telecoms revenues Revenues reported to Ofcom by operators in the UK communications sector amounted to 55.9bn in 2004, of which 8.6bn was from wholesale telecoms. Ofcom estimates that in 2004 end user spending on regulated communications services was 47.4bn (Figure 1.9), up 6% on 2003. These figures exclude some unreported revenues, notably from installation, maintenance and hardware.

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Figure 1.9: UK communications sector revenues bn

12.3 11.7 11.8 11.2 10.5

6.5 7.9 9.1 10.6 12.32.3 2.6 2.7

3.27 8.28.7 9.5

10.11.0 1.01.1 1.1

1.27.7

8.6 8.99.3 10.1

3.0

4.1%4.1%4.0%4.0%3.9%

0

10

20

30

40

50

60

2000 2001 2002 2003 20040%

1%

2%

3%

4%

5%

% o

f GD

P

TV

Radio

Other retailtelecomsInternet andbroadbandMobile voice anddataFixed calls andaccess% GDP

Source: Ofcom / licensees / operators / BBC The increase in communications spend was slightly faster than for the economy as a whole, although revenue as a proportion of GDP was stable at 4.1%. The bulk of the revenue figure (36.1bn) and the biggest annual rise (1.8bn) came from telecoms, although television had the fastest revenue growth (up 9% from 9.3bn in 2003 to 10.1bn). Total radio advertising and BBC radio spend increased by 4% to 1.2bn in 2004 (Figure 1.10).

1.4.3 Strong growth in TV advertising, but commercial radio advertising revenues overtaken by internet advertising The continued upturn in advertising was a key growth driver for the television industry, which generated revenues of over 10bn in 2004 (Figure 1.10). Nevertheless, subscriptions remained the largest single source of revenue for the television industry, ahead of advertising income. Subscriptions rose by 10% in 2004 to 3.6bn, while advertising revenues (NAR) were up 7% at 3.5bn. TV Subscription revenues overtook advertising revenues for the first time in 2003 and the gap between the two was unchanged in 2004.

Figure 1.10: TV revenues 2000 to 2004 bn

3.63.3

2.92.52.0

3.53.2

3.13.43.5

2.32.21.9

2.3

1.8

0.40.8 0.6 0.5 0.7

0

1

2

3

4

2000 2001 2002 2003 2004

Subscriptions

Net advertisingrevenue

Licence feeallocated to TV

Other

Source: Ofcom / licensees / BBC The share of the licence fee that Ofcom estimates can be allocated to the BBCs television services was unchanged at 2.3bn, accounting for 23% of total TV

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revenues. Other revenues (which include program sponsorship, sales from shopping channels, use of premium rate telephony and interactive services) showed the biggest annual increase of all TV revenue streams (up 40%) at around 750m. The majority of other TV revenues are made up of TV shopping, interactive services (which include premium rate telephony) and pay-per view. As Freeview grows it is changing the dynamics of the TV market. E4 became the first channel to move from a pay TV to a free-to-view model in May 2005, showing that future advertising revenues earned by a slot on digital terrestrial television could outweigh pay-TV subscription revenues from inclusion in a basic tier pay TV package. Competition for new Freeview slots is increasingly fierce, with ITV plc and Channel 4 reportedly paying more than 5 million for access to new slots for one year only in early 2005. ITV plc paid 134 million for SDN, one of the multiplex operators that provide capacity for Freeview, despite SDN only having revenues of 3.9 million in 2004. In 2004, total radio industry revenues (including BBC radio spend) were 1.2bn, an increase of 4% on 2003 (Figure 1.11). Ofcom estimates that there was an increase of 4% in the BBCs licence fee spend on radio to 0.61bn during 2004 (the basis of reporting in the BBCs Annual Report changed this year so a direct comparison is not possible). Growth in advertising revenues in the commercial sector was slightly slower at 3%, with revenues of 0.56bn in 2004 compared to 0.54bn in the previous year. The BBCs spend on radio accounts for 52% of the total size of the radio industry.

Figure 1.11: Growth of UK broadcasting advertising revenues bn

3.47 3.39 3.15 3.24 3.48

0.33 0.290.29 0.31

0.30 0.180.150.140.14 0.16

0

1

2

3

4

2000 2001 2002 2003 2004

Radio - localcommercial

Radio - nationalcommercial

TV

Source: Ofcom / licensees Growth in UK advertising continued in 2004 (figure 9). NAR reported by broadcasters rose 6.6% from 3.7bn to 4.0bn. The biggest growth came from local commercial radio which rose 7.6% to 175m but television also performed well, up 7.4% to 3.5bn. National commercial radio advertising revenues fell by 2.2% in 2004 to 299m (Figure 1.12).

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Figure 1.12: UK advertising spend by medium bn

4.6 4.1 4.3 4.5 4.7

4.7 4.5 4.3 4.2 4.4

2.0 2.2 2.42.5

0.8 0.8 0.8 0.91.0

2.5

0.6 0.5 0.5 0.60.60.60.40.20.2

0.20.2

0.20.20.20.1

0

5

10

15

2000 2001 2002 2003 2004

Cinema

Internet

Radio

Outdoor andtransportDirect mail

Press - display

TV

Source: The Advertising Association According to The Advertising Association total display advertising grew by 5.3% to 14.0bn in 2004. The internet was the fastest growing advertising medium last year with 46.3% revenue growth. The internet accounted for 4.3% of display advertising during the year, the same proportion as radio and in early 2005 internet advertising exceeded radio advertising for the first time as the increase in residential broadband connections extended reach. The internet accounts for a larger proportion of advertising spending in the UK than in most European countries, reflecting the dominance of the English language on the websites. (Note: there have been revisions to the Advertising Associations display advertising data since last year.)

1.4.4 Mobile growth continues as fixed revenues decline Total end-user spend on telecoms services increased by 5.2% in 2004 to 36.1bn. The biggest increase was in mobile telecoms where revenues increased by 1.7bn or 16% to 12.3bn. The largest drop was in the fixed calls and access market where revenues fell to 10.5bn from 11.2bn in 2003, a drop of 6.2%. In revenue terms mobile telephony was worth 17% more than the fixed market in 2004, whereas only as far back as 2002 the fixed market had been the larger of the two markets in terms of revenues. Internet revenues grew by just 6.8% to 3.2bn in 2004 despite the number of broadband customers almost doubling during the year. This growth came as competition between service providers led to significant broadband price falls coupled with increasing download speeds for end-users. Other retail telecoms, consisting of corporate data services, leased lines and mobile handset sales in tied shops rose 6.3% to 10.1bn.

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1.4.5 Television programming spend increases In total, the UKs TV broadcasters spent nearly 4.8 billion on programming in 2004, a little over half of which was spent on the five main channels. Programming spend on the five main channels increased in 2004 after having fallen in 2003 due to a drop in BBC ONEs spend. The fall in 2003 was the first since 1998 and despite the increased spend in 2004, terrestrial programming spend was below 2002 levels in real terms. The BBC spent over 230m on programming for its digital channels in 2004, 4% more than in 2003 although this spending is still dwarfed by its analogue spend the average cost per hour across the BBCs digital channels was 7K in 2004 compared to 100K an hour on BBC ONE.

1.4.6 The financial markets Shares in the UK telecoms sector have risen by about 10% over the last 12 months, slightly less than the 12% achieved by the broader FTSE index of 100 leading shares (Figure 1.13). Despite continuing worries over competition and price erosion, the larger telecoms companies such as BT, Vodafone and, following its recent recovery, C&W, have been able to announce increased dividends and share buy-backs. By comparison, the UK Media and Entertainment sector has performed poorly, achieving a rise over the year of only 2%. BSkyB shares have recovered steadily since their sharp fall in August 2004 following disappointing results, but remain considerably below their year ago level. ITV shares, after touching a low point in August last year before recovering, are virtually unchanged over the year. Radio company shares, despite the Capital-GWR merger, have been particularly weak in the last month or so, hit by growing worries over a deteriorating outlook for consumer spending, and therefore advertising revenues, and also fears that some companies may over-pay for future acquisitions.

Figure 1.13: Telecoms and media sector share index Index: Jan 2nd 2004=100

80

90

100

110

120

Jan-04

Feb-04

Mar-04

Apr-04

May-04

Jun-04

Jul-04

Aug-04

Sep-04

Oct-04

Nov-04

Dec-04

Jan-05

Feb-05

Mar-05

Apr-05

May-05

FTSE

Telco

Media

Source: www.yahoofinance.co.uk

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1.5 Spectrum

1.5.1 What is spectrum? Spectrum is all around us. It is the entire range of electromagnetic radiation ranging from the longest radio waves through visible light to x-rays and the shortest gamma waves. These waves have different frequencies and wavelengths but all travel at the same speed. Part of the spectrum includes the frequencies used for radiocommunications. The boundaries of the radio spectrum are usually considered to range from 9 kHz (9,000 cycles per second) to 3000 GHz (3,000 million cycles per second).

1.5.2 The importance of spectrum Radio spectrum is a finite resource estimated to contribute some 24bn to the UK economy each year (Figure 1.14), of which public mobile telecommunications and broadcasting contributed 40% and 36 % respectively. Spectrum is a vital input to electronic communication services and networks and central to making the UK a dynamic and competitive communications market. It is essential to the operational effectiveness of the emergency and other essential safety-of-life services and is used for much cultural, social and scientific activity.

Figure 1.14: The value of spectrum

Sector Value ( billion) Percentage 20.3 100 Of which

Total radio industry * Public Mobile 8.2 40 Broadcasting 7.4 36 Satellite Links 1.8 9 Fixed Links 1.6 8 Private Mobile Radio 1.1 5 Other ** 0.2 1 Source: Radiocommunications Agency estimates Note: *Totals may not agree due to rounding.

** other is defined to include amateur, citizens band, aviation, maritime and other equipment and services

1.5.3 Spectrum shortages Some parts of the spectrum are more valuable than others. Higher frequencies have greater information carrying capacity but travel less far and are vulnerable to scattering for example, by rainfall. Present technology cannot easily use spectrum above 60 GHz; the frequencies in greatest demand are those between about 100 MHz and 3 GHz, which are suitable for a variety of applications, including mobile. This range is generally considered to be prime spectrum, or the sweetspot (Figure 1.15). The following diagram shows the emergence of important new technologies in this spectrum. It is essential that companies can obtain access to spectrum, in order for new technology to be developed.

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Figure 1.15: Spectrum usage

Medium Wave Radio

Electric Waves

Radio Waves Infra-

VisibleLight

UltraViolet X-Rays

Gamma Rays

CosmicRays

30 3 30 300

Long Wave Radio

FM Radio

GSM

3G

Microwave Radio Links TV

VLF LF MF HF VHF UHF SHF EHF

Radio Spectrum

kHz MHz GHz 330 300 300

DECT WiFi Bluetooth TETRA

LMDS

Decreasing Range Increasing Bandwidth

Increasing Range Decreasing Bandwidth

3

Sweetspot

Source: Ofcom At the third GSM World congress (14 February 2005) it was reported that there were 13.5 million new 3G and GSM users worldwide in 2004. In the UK, demand for mobile communication services is likely to continue to increase as more fixed line calls move to mobile services. In addition to shortages in different parts of the spectrum, there is also a spectrum scarcity in more congested geographic areas of the spectrum. The following diagrams demonstrate the current use of the spectrum in bands below 1 GHz (readings taken on 27 to 28th July 2004). The yellow and red sections show high usage, blue indicates low usage. The diagrams show that demand is greater in an urban area such as Southwark than a rural area like Baldock (Figure 1.16).

Figure 1.16: Comparative spectrum usage in urban and rural areas

Source: Radiocommunications Agency

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1.5.4 Why is it regulated? Radio spectrum is used for a wide variety of purposes, from radio astronomy to television broadcasting, from cellular telephones to aeronautical and maritime navigation and from radar to garage-door openers. Different parts of the spectrum are designated for different purposes by National Regulatory Authorities. The UK Frequency Allocation Table shows the different purposes for which spectrum has been allocated by Ofcom in the UK. http://www.ofcom.org.uk/radiocomms/isu/ukpfa/?view=Search+form Spectrum has to be planned and managed in order to reduce the risk of interference between users, which can destroy the value of spectrum for communications, for example by interrupting signals or degrading the quality of the signal. Some allocations are determined by international agreements through organisations like the ITU, CEPT or the EU. International conventions also ensure that services such as mobile phones work across borders (roaming).

1.5.5 New approaches to spectrum management Ofcom enables access to spectrum through its powers under the Wireless Telegraphy Act (1904, 1949). It issues more than 250,000 licences in 30 different categories each year. The emergence of new technologies requires spectrum management to be flexible and able to react quickly to changes in the market. It is essential that the regulatory regime for spectrum is able to respond to changes in the demand for and use of spectrum in the UK. Under the Communications Act 2003, Ofcom has a primary statutory duty to ensure the optimal use of the radio spectrum in the interests of citizens and consumers. There are three main approaches to spectrum management. The general approach adopted world wide during the past 100 years has been for the spectrum manager to decide how best to allocate spectrum. Spectrum blocks are allocated to different purposes and assigned to different users. This approach was appropriate where much of the spectrum was used by government bodies such at the MoD, emergency services, aeronautical, maritime and broadcasting. Increased commercial use of the spectrum has increased demand in some areas and led to shortages. This has led to other approaches to spectrum management being investigated using market mechanisms to redistribute spectrum. Ofcoms vision for future spectrum management was set out in the Spectrum Framework Review, published in November 2004. Ofcom set out its plans to radically change the way that it manages spectrum with the aim of ensuring optimal spectrum use. It will do this by moving towards increased use of licence exemption and market mechanisms such as auctions, trading and liberalisation in this way. Ofcom believes that this will encourage efficiency by increasing the likelihood that spectrum will be held by those who can make best use of it, and by creating more freedom for spectrum to be used for more valuable applications. Ofcom intends to give the market as much freedom as possible to determine optimum use of the spectrum. It aims to reduce power restrictions and remove restrictions on technology and usage.

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1.5.6 Current and future balance of spectrum use Ofcom is obliged by the Communications Act to designate new allocations of spectrum as being licence exempt unless the nature of interference obliges it to assign individual licences. In the future, new technologies such as software defined radio, (which automatically selects and uses available spectrum), may make licence exemption a more significant part of Ofcoms approach to spectrum management, provided that these technologies can be shown not to cause interference to other spectrum users (Figure 1.17).

Figure 1.17: Spectrum usage

Command & control21.6%

Licence exempt6.9%

Market mechanis

ms71.5%

2010

Command & control95.7%

Licence exempt4.3%

2000

Source: Ofcom

Where licensing is necessary, there will be two key areas of implementation of change:

The transition to spectrum trading and liberalisation in relation to mobile services The release of newly available spectrum into the market over the next 2-3 years

1.5.7 Spectrum trading and liberalisation In order to allow market forces to decide on the best possible use of spectrum, auctions need to be combined with liberalisation and trading. This enables the market to decide on the most efficient use and user of the spectrum. Spectrum trading allows the holders of certain wireless telegraphy licences, granted by Ofcom under section 1 of the Wireless Telegraphy Act 1949, to transfer all or part of their rights and obligations under their licences to another party. Trading is entirely voluntary. Ofcom is not concerned with the underlying contractual arrangements which relate to the transfer of rights. Therefore, companies are free to structure these arrangements as they wish. The following table (Figure 1.18) is a summary of how Ofcom intends to implement trading over the next few years. For further info, see Ofcoms Spectrum Licensing Portal and trading information web pages:

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http://www.ofcom.org.uk/radiocomms/isu/ukpfa/intro

http://www.ofcom.org.uk/radiocomms/ifi/

Figure 1.18: Licences that have become tradable in 2004 and due to become tradable from 2005 2004

2005 2006 2007 Other

Analogue Public Access Mobile Radio

Wide area Private Business Radio

Emergency services

2G and 3G mobile

Mobile satellite

National paging

On-site PBR Programme Making & Special Events

Satellite shared with terrestrial services

Data networks Digital PAMR Aviation and maritime communication

Radio broadcasting

National and regional PBR

10 GHz FWA Radionavigation (Radar)

Television broadcasting

Common Base Stations

32 GHz

Fixed wireless access

40 GHz

Scanning telemetry

Fixed terrestrial links

Source: Ofcom

In 2004, roughly 1,057 licences became tradable, with a further 37,000 licences due in 2005 (totalling approximately 69% of all licences). Some licences contain a greater number of assignments than others. An assignment is the spectrum frequency or frequencies that are awarded to the licensee, some licences effectively contain sub licences by consisting of numerous assignments. There are 50,000 assignments which became tradable in 2004, with a further 80,000 licences to follow later in 2005.

Spectrum liberalisation allows greater freedom to decide how to use spectrum. Traditionally, wireless telegraphy licences have specified the use to which spectrum can be put and the means by which that spectrum can be exploited, including details of the services that can be offered and the wireless technology and its operating parameters. Spectrum liberalisation involves the reduction or removal of these restrictions.

Spectrum trading and liberalisation are distinct, though complementary, developments. Spectrum trading involves transfers of licence rights and obligations whereas liberalisation involves the reduction or removal of licence restrictions. It is possible to have trading without liberalisation and vice versa but liberalisation will be an additional reform that is expected to add significantly to the benefits from trading. In practical terms, spectrum trading and liberalisation should facilitate greater innovation, investment and competition in the supply of wireless services. Consumers should have access to new services more quickly, and pay less for the services they already buy.

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A recent report produced for the European Commission by Analysys Consulting estimates that the benefits to the European Union of spectrum trading and liberalisation could amount to as much as 9 billion per year (and about 1 billion per year for the UK).

1.5.8 Newly available spectrum Ofcom expects to release new spectrum on to the market in the next 2-3 years. Spectrum awards are likely to follow a competitive process, usually an auction, which is likely to be an efficient mechanism as spectrum is awarded to those who value it most highly. Ofcom intends to give the market more clarity about likely opportunities to obtain access to areas of spectrum through the gradual release of spectrum according to a detailed timetable of spectrum auctions. Ofcom will also provide information concerning accessibility to new and existing licences. The table below (Figure 1.19) summarises Ofcoms proposals for new awards in bands below 3 GHz.

Figure 1.19: Proposed new spectrum awards

Bands below 3 GHz 2005-2006 2006- 2007 2007-2008 1781-1785 MHz/1876-1880 MHz (GSM/DECT guard bands)

2290-2302 MHz 2010-2025 MHz 410-415 MHz/420-425 MHz, 872-876 MHz/917-921 MHz (Ex-Inquam bands)

2500-2690 MHz 1452 -1492 MHz (L Band) 1790-1798 MHz Source: Ofcom Ofcom also expects to make a number of awards in bands over 3 GHz during this period (possibly at 10 GHz, 28 GHz and 32 GHz), subject to external factors such as agreement with public service users.

1.5.9 International comparison Spectrum trading has been introduced in several other countries around the world, most notably in New Zealand, Australia and the USA. There is a net gain to the economy as a whole each time a licence is traded because the licence is worth more to the buyer than the seller. According to the Australian Communications Authority, Australia has seen an average annual turnover of 8% of all tradable licences. Where change of use is permitted it is likely that the net benefit will be higher in the UK than in Australia given the greater level of spectrum congestion. Consequently, the benefits that Ofcom anticipates will be significantly greater than the cost of introducing trading in these countries. Trading has already been introduced to a limited extent in some European countries, such as Norway, but is likely to be introduced more widely across Europe in the future.

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