The International Communications Market 2008

Research Document Publication date: 20 November 2008

Файл загружен с http://www.ifap.ru The International Communications Market 2008

Foreword

This is Ofcom’s third report on developments in international communications markets. Putting the UK market into an international context is becoming increasingly important, as communications service provision globalises and as technological innovation breaks down traditional national market boundaries.

This report sets out the availability, take-up and use of communications services among seven main comparator countries (the UK, France, Germany, Italy, the US, Canada and Japan). Where data are available, we have included a further five European countries (Poland, Spain, the Netherlands, Sweden and the Republic of Ireland). We also consider separately the development of communications markets in the large emerging economies of Brazil, Russia, India and China.

This year, we have put yet more emphasis on the importance of convergence by setting out a number of converging market themes. These demonstrate that as content and services are distributed to consumers over a variety of digital networks, and to many different devices, consumer behaviour towards communications services is changing – for example, their concurrent use of different media such as the internet and television. We have also included more time-series data this year on how, across our larger comparator countries, consumer attitudes towards communications services are evolving.

We are publishing this report to help fulfil our commitment to continually research markets, to inform our policy thinking and to fulfil the commitment we made in our 2008/09 annual plan. It complements the other research that has been published by Ofcom in 2008, and forms part of the Communications Market trilogy – together with The UK Communications Market (published in August 2008) and The Communications Market: Nations and Regions (May 2008).

The reference period of this report is the five years to the end of 2007. Consequently, our analysis does not fully take account of changing economic conditions over the past twelve months. Where appropriate, and possible, we have set our data against this background (for example in our UK context sections), but a full analysis of the impact of the current economic climate on the international communications market will need to await the next report.

This report does not draw policy conclusions. Instead it will, we hope, put the UK market into an international context, acting as a useful reference source for stakeholders and as a support to our policy development.

Ed Richards Chief Executive

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Key points: Convergence

 There is nearly one broadband connection for every four people across the countries in this report. With 26 connections per 100 people, the UK is third among our comparator countries, behind the Netherlands (35%) and Sweden (31%). Average growth in connections between 2004 and 2007 was highest in the UK, France, Germany, the Netherlands, Sweden and Ireland, at 5% per year.

 In the US, internet users in the US spend the most time online – 15 hours online each week; those in Spain spend the least amount of time online, at just 7.5 hours per week. UK users rank second behind the US, at nearly 14 hours per week. Internet use per user has risen the fastest in the UK over the last four years, at an average annual rate of 30%.

 The internet’s share of advertising spend is highest in the UK (19%) and Sweden (17%). The US, Canada and Japan are the only other countries where the internet makes up more than 10% of total advertising expenditure.

 Concurrent media use, or stacking, is now common across our comparator countries. Between 70% (Italy) and 83% (Japan) of consumers across our comparator countries claim to access the internet while watching TV. In the UK the figure is 74%.

 Viewing of TV shows over the web is growing rapidly. US consumers download the most streams per head (26), with UK consumers next (8). Growth in the volume of downloads reached 131% in France during 2007, and 69% in the UK.

 Broadcast TV viewing levels seem to be least affected by the internet in the US. In the US, broadcast-based TV viewing appears more resilient to internet access than anywhere else - the net percentage of US people viewing less broadcast-based TV since having internet access is 7%, whereas in all the other countries in our survey the figure was between 15% and 21%; in the UK it was 15%.

 Mobile broadband availability using HSDPA technology now exceeds 70% in many European countries, prompting operators to develop residential mobile broadband services, enabled by plug-in ‘dongles' for laptops. HSDPA availability is highest in the UK (87%).

 Digital recorded music sales grew by over 20% year-on-year in all our comparator countries except France and Italy. Mobile music downloads now account for over half of all recorded digital music revenue in France, Italy and Japan. In Japan, mobile accounts for over 90% of all digital music revenue, compared to 29% for the UK.

 Mobile social networking is beginning to grow in popularity – 0.8 million mobile subscribers in the UK and 4 million in the US access social networking sites using their phones, thanks to improving handset capabilities, faster network speeds and bespoke SNS mobile applications.

 Broadcast mobile television has had a mixed year. Italy is the biggest market in Europe with nearly 1 million DVB-H subscribers, though there have been service closures elsewhere

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Key points: Television

 The rate of migration to digital TV in 2007 resulted in the UK having the highest proportion (86%) of main sets connected to digital, (up from 77% in 2006), followed by the US (70%, up by nine pp on 2006), France (66%, up 13 pp) and Japan (65% up eight pp). In the Netherlands and Sweden analogue terrestrial TV has already been switched off.

 Pay-TV take-up grew in 2007 across all comparator countries, reaching 47% of households in the UK (up 2 percentage points on 2006). Pay-TV take-up was highest in the Netherlands at 99% of main sets (up 0.1 percentage points year-on-year) and lowest in Italy (22%, up 3 percentage points).

 An estimated 9 million subscribers paid for HD services across the UK, France, Germany, Italy, the US and Canada during 2007. Subscribers in the US and Canada accounted for 87%, or 7.9 million of the total, with the UK responsible for over half of the remaining 1.2 million HD households.

 In the ten of our comparator countries where data were available, an estimated 28million pay-TV households had a digital video recorder (DVR) in 2007, up by 52% year-on-year. Three countries accounted for 96% of the total: the US (73%), the UK (13%) and France (10%). A greater proportion of people in the UK have access to a DVR than in any other comparator country (30%).

 Global television industry revenue reached an estimated £166bn in 2007 (of which £10.4bn was from the UK), up by 6% year-on-year. Advertising was the largest component, at £81bn, although for the first time, it didn’t account for the majority of all television industry revenue Owing to strong growth in subscription revenue

 Revenue per head was highest in the US, at £221 (up £8 year-on-year); it was lowest in Poland at £42 (up £6); in the UK it stood at £172 (up £7 during 2007).

 Subscriptions drove revenue increases in many countries including the US, Poland, Canada and Japan, while growing advertising spend on television was also a driver in the Republic of Ireland, Sweden, The Netherlands and Spain. In the UK, subscriptions accounted for 41% of revenue per head, against 34% from advertising and 25% from public funding.

 Television’s share of advertising spend fell in most countries profiled. The TV markets in Canada and the UK experienced the largest share reductions, of 1.1 and 0.9 percentage points respectively.

 The average audience share of European PSB channels across this study fell by 2 percentage points in 2007, to 38%. This compares to a drop of 2 percentage points by the UK PSBs; which commanded an average share of 39%.

 Viewers in the UK watched 3.6 hours of television a day, slightly more than the average of 3.4 hours across the other European countries forming part of this report, but nearly an hour less a day than viewers in the US (4.5 hours).

 Viewers in Japan (25%) and the UK (39%) were less likely to have concerns about television content than viewers in France (54%), Germany (53%), the US (47%), Italy (46%) and Canada (43%).

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Key points: Telecoms

 Telecoms service revenues grew in all of our key comparator countries during 2007 except Germany. The highest growth was in the UK and Canada, up by 5%, driven mainly by increased mobile use and broadband take-up.

 In all of the countries covered by the report, total mobile revenues in 2007 were higher than fixed-line voice and broadband combined.

 Broadband was the fastest-growing sector in terms of connections and revenues, although growth is slowing in most countries, including the UK, where service revenues increased by 14% in 2007, compared to 20% a year previously

 In general, reductions in fixed-line call volumes in most countries have been offset by large increases in mobile call volumes, which grew by at least 20% in the UK, Germany, Italy, Poland, Sweden and the Republic of Ireland during 2007.

 There was remarkable growth in text messaging in many countries during 2007, despite handset and network developments which enable more sophisticated types of communications such as instant messaging. Text messaging volumes increased by 36% in the UK, 90% in Poland and over 100% in the US and Canada.

 However, mobile operators have seen diminishing returns, as increases in call volumes have not been matched by corresponding increases in retail revenue. A 21% increase in mobile call volumes in the UK during 2007 delivered a 7% increase in mobile voice volumes, while in Germany falls in pricing meant that despite call volumes increasing by 20%, mobile voice revenues fell by 5%.

 Despite falling fixed call volumes, in most countries the majority of voice minutes originated on fixed-line phones, while in some countries (UK and Spain) penetration of fixed lines actually increased.

 Japan is far ahead of the rest of our comparator countries in offering next- generation access broadband networks, with fibre-to-the-building available to 85% of the population by the end of 2007. There was also large variation in Europe in 2007, with over 5% of households in Germany, Italy, Sweden and the Netherlands having access to high-speed broadband, compared to less than 1% in the UK, Spain and Ireland, although rapid deployment is planned in most countries.

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Key points: Radio

 In the seven main comparator countries surveyed, a third of the total population, on average, claimed to listen to radio online. It was highest in France, with 37% claiming to access radio via the internet, followed by people in Germany (34%) and the UK (33%). People in Japan were less likely to listen to radio over the internet (17%).

 Audio downloads (e.g. music tracks and podcasts) had been tried by over a third of internet users in Canada (40%), Italy (39%), the US (36%) and the UK (35%) and just under a third of people in Japan (31%). It was less prevalent in Germany, where just one in five (18%) claimed they had downloaded audio.

 In the UK 20% of people claimed to be listening to less radio since getting access to the internet, but 16% said they were listening more. In the seven countries surveyed, on average almost one in four people (23%) said they were listening to less radio, and 13% listening to more since having the internet at home.

 People in Poland and the Republic of Ireland listened to the most radio per head in 2007, at 4.8 and 4.2 hours per day respectively. Listening in Spain and Japan was lowest among our comparator countries at 1.8 and 2.2 hours per day respectively; while UK listening ranked fifth, at 2.9 hours per person per day.

 Global radio revenue totalled £23.6bn in 2007, up £0.3bn on 2006. This was an increase of 1.4% year-on-year, but was below the four-year annualised trend rate of 3.8%. Revenues from advertising were down by 1.1%, but public funding was up by 2.3% and subscription revenues up by 41%.

 The radio industries of the seven large comparator countries accounted for 80% of total world radio revenues. The US radio market is still by far the largest, with annual revenue of nearly £11bn in 2007, 45% of the global total, and equating to £35 per head of population. The UK was the fourth largest market of the seven, with £1.3bn, (£21 per head), equivalent to around 5% of world radio revenue.

 Radio’s share of display advertising spend varies by country. It was highest in Canada and the US, where radio accounted for 12.6% and 10.7% of the total respectively. By comparison, UK radio advertising takes a 3.3% share of display advertising.

 Subscription-based satellite radio take-up in North America continued to rise, with subscriptions approaching 20m in 2008. The two main satellite providers in the US, XM and Sirius, were given the go-ahead to merge by the FCC in July 2008. Satellite radio services are planned to launch in Italy in 2009 with other European countries set to follow.

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Contents

1 Overview 9 1.1 Introduction and summary 11 1.2 The UK communications industry in context 23 1.3 The UK communications consumer in context 31 1.4 The regulatory landscape 41 2 Comparative International Pricing 53 2.1 Comparative international pricing 55 3 Convergence 87 3.1 Convergence market developments 89 3.2 Content and aggregation 99 3.3 Distribution and networks 111 3.4 Consumption 117 4 Television 137 4.1 Television market developments 139 4.2 The television industry 153 4.3 The television viewer 171 5 Telecoms 183 5.1 Telecoms market developments 185 5.2 The telecoms industry 207 5.3 The telecoms user 227 6 Radio 243 6.1 Radio market developments 245 6.2 The radio industry 255 6.3 The radio listener 261 7 Emerging Markets 265 7.1 Emerging markets: Brazil, Russia, India and China 267 8 Country Profiles 285 9 Appendices, Glossary and Table of Figures 301

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The International Communications Market 2008

The International Communications Market 2008

1 1 Overview

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Contents

1.1 Introduction and summary 11 1.1.1 Introduction 11 1.1.2 Data and methodologies 11 1.1.3 Report structure 12 1.1.4 Overview (page 7) 12 1.1.5 Comparative international pricing (page 47) 14 1.1.6 Converging communications markets (page 81) 15 1.1.7 Television (page 131) 17 1.1.8 Telecommunications (page 177) 18 1.1.9 Radio (page 239) 18 1.1.10 Emerging markets (page 264) 19 1.2 The UK communications industry in context 23 1.2.1 Summary 23 1.2.2 Communications sector revenues 24 1.3 The UK communications consumer in context 31 1.3.1 Summary 31 1.3.2 Take-up of communications services 31 1.3.3 Consumers’ spend on communications services 37 1.4 The regulatory landscape 41 1.4.1 The relationship between market developments and the regulatory landscape 41 1.4.2 In Europe there is a common regulatory framework for telecommunications operators 44 1.4.3 Regulatory developments in telecommunications markets 45 1.4.4 Developments in content regulation 48

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1.1 Introduction and summary

1.1.1 Introduction This is Ofcom’s third International Communications Market Report. It aims to provide a statistically-driven international comparative context for the UK communications sector.

The report provides an overview of the communications industries in a range of countries:

 It draws comparisons between the UK and six large comparator countries – France, Germany, Italy, the US, Canada and Japan.

 Where possible, we have included data from another five countries – Poland, Spain, the Netherlands, Sweden and the Republic of Ireland.

 We have also repeated last year’s analysis of communications markets in Brazil, Russia, India and China. Because their economies are at a different stage of development to the other 12 comparator countries, and because full datasets are harder to come by, we have set out these four countries in a separate chapter at the end of the report.

1.1.2 Data and methodologies Data in this report cover the 2007 calendar year. We show trends using a five-year historical time series where possible.

All currency conversions use the average market exchange rate during 2007, as provided by the IMF. We have opted to convert data from every year at this fixed rate, so that currency fluctuations do not obscure market trends. The exception to this methodology is in the international price benchmarking analysis (Section 1.X), where we have used purchasing power parity adjusted exchange rates. All figures are nominal unless otherwise stated.

The document draws on a combination of desk research and discussions with industry bodies, operators, regulators and commentators. The data were gathered with the support of consultancy firm IDATE, which has attempted to verify sources and provide market estimates where data are incomplete. Telecoms pricing consultancy Teligen built a bespoke model to enable our analysis of comparative international pricing and populated it with specifically-sourced tariff data. Comparisons between data in this report and its predecessors will not always be possible, owing to changes in definitions over time, in the method of collecting data and due to the availability of new data sources. Similarly, some UK data published in this report may not be directly comparable with data published in other Ofcom reports, such as the UK Communications Market Report.

Thanks are due to Screen Digest, Informa, PriceWaterhouseCoopers, EuroBarometer, the European Audiovisual Observatory, the World Advertising Research Centre, Execution Research, Médiamétrie/Eurodata and the Canadian regulator CRTC for the permissions they have given us to use their data.

We endeavour to ensure that data in this report are comprehensive and the most accurate currently available. However, with a document so wide in scope, and with reliance on third parties for some data, there will always be omissions and occasional inaccuracies. Comments and feedback on this report are welcomed at [email protected].

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

11 The International Communications Market 2008 licence applications or significant market power or dominant market position for the purposes of the Communications Act 2003, the Competition Act 1998 or other relevant legislation.

1.1.3 Report structure This report is divided into seven chapters:

 The Overview (this section) (page 19) provides a report summary. It then goes on to examine:

o how the UK communications industry compares with the main comparator countries in this report;

o the UK communications consumer, in an international context; and

o the regulatory landscape within which communications service providers operate.

 Comparative international pricing (page 53) compares the typical prices people pay across our main comparator countries, for a range of different ‘baskets’ of communications services.

 Converging communications markets (page 87) examines recent market trends, industry characteristics and consumer behaviour across a range of converged devices and services.

 The television (page 137), telecommunications (page 183) and radio (page 243) sections each describe a range of recent market developments, analyse the industry (typically focusing on revenue trends), and conclude with a consideration of consumer behaviour.

 Emerging markets (page 265) considers the communications markets of Brazil, Russia, India and China.

The remainder of this section summarises each chapter’s main findings.

1.1.4 Overview (page 9) 1.1.4.1 The UK industry in context (page 23)

Communications market revenue reached £876bn in 2007 – the UK accounted for 4.4% (£39bn) as the fourth largest market behind the US, Japan & Germany

 Global communications market revenue totalled £876bn in 2007, up 6.1% year-on- year.

 Revenue is concentrated among a comparatively small number of developed nations. The seven main comparator countries in this report (the UK, France, Germany, Italy, the US, Canada and Japan) accounted for £440bn (50%) of the total. Telecoms remained the largest of the three sectors, making up 68% (£300bn) of the total, followed by TV (28% or £122bn) and radio (4% or £18bn).

 The UK communications sector accounted for 4.4% (£39bn) of the worldwide total, ranking fourth in the world (after the US, Japan and Germany). Per head of population, the UK generated £636 in 2007, second only to the US with £698. The UK figure was up by a quarter in five years, second only to Italy (30%) and Canada (27%).

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 The UK’s television industry (at £10.4bn) was the third largest among the bigger comparator countries in this study (after the US and Japan), while the telecoms (£26.9bn) and radio (£1.3bn) industries both ranked fourth, after the US, Japan and Germany.

1.1.4.2 UK advertisers spend a greater proportion of their budget on the internet than any other nation – 19% of all display advertising in 2007

 TV and radio’s share of advertising spend varies by country. TV spend alone accounts for the majority of total spend in Italy; when combined with radio, the same is true of Poland and Spain. In the UK, spend on television and radio combined accounted for just under one third of all display advertising in 2007.

 With the exception of the Republic of Ireland and France, TV advertising’s share of spend either remained stable or fell during 2007. In the UK, it fell by 0.9 percentage points in 2007, the second largest reduction behind Canada (-1.1 percentage points)

 UK advertisers allocate a greater proportion of their budgets to the internet than in any other country - 19% in 2007. Advertisers in Sweden ranked second with 17%, followed by the US with 13%. The most significant shift in advertising spend during 2007 was into UK internet-based advertising; its share of total spend rose by 4 percentage points.

 During 2008 equity valuations for some communications market operators fell, as did market indices. While generalisations are difficult to make, when these reductions are corrected for overall market movements, some telecommunications stocks appear to have outperformed the market, while some television channel businesses appear to have performed less well.

1.1.4.3 The UK consumer in context (page 31)

The UK leads the main comparator countries in digital television and DVR take-up and ranks second in mobile penetration

 Take-up of digital technologies has risen year-on-year across all the larger comparator countries in this study.

 Homes in the UK were the most likely to have a main television set connected to a digital decoder in 2007, with an estimated 86% connected by the end of the year (up 9 percentage points). Homes in the US ranked second, with 70% (up 9 percentage points) followed by the French with 66% (up 13 percentage points – the fastest growing main comparator country in 2007).

 The UK ranked second, behind Italy, for the number of live mobile connections per 100 of population (121 and 154 respectively). UK take-up rose by 6 percentage points year-on-year, behind Italy (16 percentage points), Germany (14) and the US (7); the UK’s lead over Germany on this measure narrowed to 3 percentage points (from 11) during 2007.

 Residential and small/medium sized enterprise (SME) broadband take-up in the UK totalled 60 connections per 100 households in 2007, up by 10 percentage points on the year. It ranked third behind the US (61%, up 12 percentage points year-on-year) and Canada (66%, up 6 percentage points).

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 More people in the UK own and use a DVR (30%) than in any other of the larger comparator countries. Twenty-one per cent of Italians make the same claim, alongside 20% of people in the US and Canada. DVRs were less popular in Germany (11%) and Japan (13%).

 Consumers’ use of different communications devices varies by gender. In many countries women were significantly more likely than men to use a fixed line phone on a weekly basis. Men were more likely than women to claim weekly use of a games console or portable music player.

 Recent research into the resilience of telecommunications expenditure in the UK, France, Germany and Italy suggests that consumers may be less inclined to trim their mobile, fixed line and broadband spend than other areas of discretionary spend.

1.1.4.4 The regulatory landscape (page 41)

National regulatory authorities – proliferation connected to market liberalisation

 The tendency towards liberalising communication markets has increased the number of national regulatory authorities from 12 to 148 worldwide over 20 years.

 Convergence has prompted institutional reform in a number of countries, with many regulators around the world, including Australia, Canada, Italy, Finland, the UK, the US, and most recently, South Korea, now being responsible for pan-communications sector regulation. There is also increased regulatory cooperation with the development of cross-country networks

Regulatory developments centred on promoting competition and protecting consumers

 Negotiations on a revised European regulatory framework for electronic communications networks continued during 2008. There has been broad support for proposals which strengthen consumer protection, but other issues, such as the introduction of a veto power for the European Commission or a European Agency, have proved controversial.

 In telecommunications markets, the regulatory issues currently under consideration across some of the comparator countries include the regulatory approach to next generation access networks, functional separation (whereby certain network elements of the incumbent operator are placed in a separate business unit to allow competing service providers to access essential network infrastructure on non- discriminatory terms), and consumer protection (e.g. international roaming and mobile call termination rates).

 Audio-visual regulation is also undergoing significant changes. In Europe, the AVMS Directive will shape the future of commercially-funded PSB, potentially opening up new revenue. Across the world, NRAs are examining how converging markets and new media technologies will influence the future direction of public service broadcasting, and dealing with the challenges created by the rise in online content distribution.

1.1.5 Comparative international pricing (page 53)  Our comparative international pricing takes account of the growing tendency of consumers to take a bundle of communications services from a single provider. It

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also accounts for the equipment costs that consumers can incur in signing up to new communications services.

 We consider five different baskets of communications services in this analysis.

o Basket 1 is representative of a low-use household with basic needs (‘free’ TV and a fixed telephone line).

o Basket 2 builds on these basic needs with a broadband connection.

o Basket 3 represents a mobile ‘power user’, using mobile for voice and broadband, and taking entry-level pay-TV.

o Basket 4 combines a fixed line with several mobile handsets, a fixed broadband connection and entry-level pay-TV.

o Basket 5 represents the highest-spending type of household, with low use of fixed telephony, two mobile handsets, fixed-line broadband and premium-level pay-TV.

 The analysis considers single service offers, weighted by the comparative market shares of the leading providers of fixed voice, mobile voice, broadband and television. Further analysis also examines the ‘best bundled offer’ available to satisfy the needs of each consumption basket; the summary, set out here, should be read in conjunction with that fuller analysis.

 Benchmarking the fixed voice services available, using the weighted average comparison, reveals that that the UK is more expensive for the lowest-use basket than France, Germany and Italy, owing to high line rental charges. The UK offers the cheapest fixed-line service in the fourth basket, while in France and Germany the equivalent fixed-line service is considerably more expensive.

 In mobile, using the same weighting methodology, services are cheaper in the UK in every basket except the low-usage one, where the Italian offer is cheapest. In general, the UK and Italian tariffs are lower than those in the other comparator countries.

 With fixed-line broadband, consumers in the UK and France benefit from the cheapest weighted average tariffs. But comparisons require caution, since single- service offers are not easy to come by in each country.

 Like-for-like comparisons in television are difficult, owing to the different types of channels and content available from country to country. ‘Free’ TV is most expensive in Germany and the UK, where licence fees are high; conversely, there is no licence fee in the US or Spain. Basic pay-TV is cheapest in Italy, Germany and the UK. For premium-level content, prices in the US are highest, followed by those in the UK and Spain.

1.1.6 Converging communications markets (page 87) 1.1.6.1 Consumers are taking advantage of mobile-enabled services in increasing numbers

 Mobile broadband has grown in popularity across several comparator countries during 2007, driven by broadband-capable HSPA availability of more than 70%

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across Europe and increasing take-up of datacards and ‘dongles’. In the UK HSDPA covers 87% of the population.

 The growth of mobile broadband connectivity has created a thriving market for music downloads to mobile phones. It accounts for over half of all digital music revenue per head in France and Italy, and 90% of the total in Japan; in the UK the figure stands at just under 30%.

 Mobile social networking has also taken off in the UK and the US, with application developers adapting interfaces to suit mobile screens – 0.8m UK and over 4 million US mobile subscribers now access social networking sites on their phones.

 But mobile TV has had a mixed year, with commercial deployments in the Netherlands and the US counterbalanced by the closure of a planned German service based on DVB-H. There is no broadcast-based mobile TV service in the UK (though subscriber-based streamed services are available).

1.1.6.2 Growing broadband take-up has encouraged UK and US broadcasters to launch free-to-view content aggregators that are proving increasingly popular

 The BBC, Channel 4, ITV, Five and Sky in the UK and News Corporation/NBC in the US (through Hulu) have each launched sites offering access to their television shows.

 Concurrently, individuals’ consumption of free-to-air online TV shows has grown rapidly across several comparator countries - in the UK by 69% since 2006.

 Some of these services are free-to-view and advertiser funded. But others have adopted a pay-per-view model and typically charge a fee. Online TV and video content revenue per head in 2007 stood at £1.70 in the US, £0.98 in the UK and £0.55 in Canada. The UK experienced the highest growth since last year at 182%.

1.1.6.3 Total broadband connections increased by 21 % across our comparator countries in 2007

 The growing popularity of TV and film-based content delivered over the web has been facilitated by growing take-up of fixed-line broadband. At the end of 2007, there was almost one fixed broadband connection for every four people in our comparator countries, and growth in the use of mobile broadband services is increasing.

 Access to broadband not only drives up the average time spent online, but also shifts the pattern of services that consumers typically use when online. Internet use was highest in the US, where the average internet user spent over 15 hours a week online in August 2007.

 Games and video dominate Google search terms – the fastest-rising search terms are exclusively concerned with user-generated content sites like ‘Facebook’ and ‘Dailymotion’.

 With the rising popularity of social networking sites, our research suggests that people are increasingly using social networking sites to stay in touch with other people, rather than using email or instant messenger services. At least half of all UK and Canadian adults use the internet for social networking.

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1.1.7 Television (page 137) 1.1.7.1 Digital television take-up is rising rapidly across our comparator countries as digital switchover dates approach…

 Analogue terrestrial television is disappearing across Europe; take-up fell by 13 percentage points (pp) in France, 11pp in Spain, 9pp in the UK and 8pp in Italy during 2007. In the UK, France, Spain and Italy, digital terrestrial television was the preferred platform choice when switching over to digital.

 Digital television take-up on main sets was greatest at the end of 2007 in the UK (86% of households, up 9 percentage points(pp)), followed by the US (70%, up 9pp), France (66% up 13pp) and Japan (65% up 8pp). Analogue terrestrial TV transmission have already ceased in the Netherlands and Sweden – they will soon disappear in the US when nationwide switchover occurs in February 2009.

1.1.7.2 …yet pay television services continue to attract subscribers – despite the emergence of newer subscription-free digital television services…

 Pay-TV take-up rose during 2007 across the comparator countries, although the rate of consumer adoption varied significantly, from 0.1% of households in the Netherlands to 10% in Poland.

 The majority of households in the Netherlands, Sweden, the US, Canada and, to a slightly lesser extent, Ireland and Germany, took pay-TV in 2007. For the first time, in 2007, the majority of people in Poland took a pay TV service (and French households crossed the same threshold in 2006). UK pay-TV take-up stood at 47% in 2007, up by 2 percentage points.

1.1.7.3 … with revenues boosted by the growing popularity of ‘add-ons’ such as high- definition television and digital video recorders

 Across ten of our comparator countries in 2007, there was an installed base of 28 million digital video recorders (DVRs), up by 52% year-on-year. The US, the UK and France accounted for 96% of that total – 73% in the US, 13% in the UK and 10% in France. Among European countries, DVR take-up is highest in the UK.

 An estimated 9 million subscribers in 2007 paid for high-definition (HD) services across the UK, France, Germany, Italy, the US and Canada. Subscribers in the US and Canada accounted for 87% (7.9 million) of the total; UK subscribers make up the majority of the 1.2m HD subscribers in Europe.

1.1.7.4 The growing popularity of subscription services meant that advertising share of total industry revenue fell below 50% for the first time in 2007

 Global television industry revenue reached an estimated £166bn in 2007, up by 6% on 2006 and by nearly one-third since 2003. Advertising was the largest component of the total, at £81bn, although for the first time it didn’t account for the majority of total television revenue.

 The Italian TV industry expanded by an average of 9.4% p.a. in the five years to 2007; the Canadian market grew by an average of 6% over the same period and the US market by 5.9%. The UK industry grew by 4.8% over the same period.

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1.1.8 Telecommunications (page 183) 1.1.8.1 More mobile connections than fixed lines in every comparator country in 2007

 The number of mobile connections overtook fixed lines in Canada for the first time in 2007. This meant that there there were more mobile connections than fixed lines in all of the comparator countries by the end of 2007. People in Poland and Italy had the highest proportion of mobile telephony connections at the end of 2007, at 80% and 78% respectively, while in the UK the figure was 69% (up by 2 percentage points since 2006).

 Despite the growing sophistication of handsets and the services supported by mobile network operators, SMS (text messaging) had remarkable growth in many countries in 2007, with SMS use growing by 142% in the US and 137% in Canada, and 90% in Poland. In the UK the volume of SMS messages grew by 36%.

 As a result of growing take-up of mobile services, total mobile revenues were higher than those from fixed voice and broadband combined in all the comparator countries covered. Mobile revenue averaged 54% of the total revenues in the report and ranged from 42% in Sweden to 63% in Poland. Mobile revenue share was highest in Poland at 63%, and lowest in Sweden at 42%, while in the UK the figure was 56%.

1.1.8.2 Fixed-line penetration falling, broadband growth slowing

 Over the five years to 2007 the total number of fixed lines in the nations covered by the report fell by 2% to 428 million, although installed lines did increase in Germany and the Republic of Ireland. Fixed lines fell by 1% in the UK, to 34 million.

 But in most countries the majority of voice calls still originate on fixed lines – but only just. Among the nations where separate outgoing call volumes data were available, an average of 54% of voice calls originated on fixed-line networks in 2007, down from 72% in 2002. The UK figure fell from 76% to 60% over the same period.

 The pressures on fixed operators in voice markets were echoed in the broadband market during 2007, with narrowband migration beginning to near completion, and competition emerging among mobile broadband providers.

 Broadband connection growth averaged 37% a year across the comparator countries between 2002 and 2007; it was highest in the Republic of Ireland (166%) and lowest in Canada (19%), while in the UK it was 63%.

 Growth in broadband take-up is slowing among our comparator countries; across our comparator countires the total number of broadband connections grew by 21% in 2007, down from 24% a year earlier. In the UK, growth slowed to 20% compared to 31% in 2006.

 Although broadband revenues were the fasting-growing element of telecoms revenue in 2007 (growing by an average of 36% a year in the previous five years) broadband contributed only 11% of telecoms revenue in the same year.

1.1.9 Radio (page 243) 1.1.9.1 Radio listening – feeling the effects of growing broadband penetration

 Radio listening in 2007 was highest in Poland and the Republic of Ireland, at around 30 hours per head per week. Among the North American and Western European

18 The International Communications Market 2008

countries the average is nearer 20 hours per head per week. In Spain and Japan this falls to less than 15 hours per head per week spent listening to radio.

 But converging distribution networks and devices are reshaping how consumers choose to listen to content that has traditionally only been available through a broadcast-based network.

 More than a third (37%) of French people claim to use their internet connection to access live radio services. In Italy, the UK, and Germany around a third of internet users claim to listen online, with a quarter of internet users in the US and Canada. But in Japan, just 17% of internet users listen to live radio online – probably reflecting generally lower levels of radio listening there.

 Online distribution also allows people to listen to audio service on demand rather than live. More than a third in Italy, Canada, the US, and in the UK claim to download audio (e.g. music tracks and podcasts), although this activity is less popular in Germany, with just under one in five making the same claim.

 While the internet offers a new distribution channel for radio services, it can also be a substitute service for some. Of the seven large comparator countries surveyed, on average almost one in four people (23%) said they were listening to less radio, whilst around 13% said they were listening to more radio, since getting access to the internet at home. Within the nations, a third of people in Japan and France said they listened to less radio, while one in five in Italy claimed to listen to more.

1.1.9.2 Radio operators in the seven main comparator countries generated £19bn

 The seven main countries included in this study account for around £19bn, or 79%, of world radio revenues. Total world radio revenues reached £23.6bn in 2007, up by £0.3bn on last year. The US accounted for 45% (£10.6bn) of the total; the UK generated a further 5% (£1.3bn).

 Some radio markets experienced a fall in advertising revenue in 2007.The US (- 5.1%), France (-2.1%) and Japan (-3.8%) all lost revenue.

1.1.10 Emerging markets (page 265)  BRIC countries accounted for 42% of the world’s population and had a combined telecoms, TV and radio industry revenue of over £120bn in 2007, just 14% of global revenue. Telecoms revenue grew by an average of 48% across the BRIC countries between 2004 and 2007, driven largely by mobile services, which made up over half (£53bn) of the telecoms revenue generated in the four countries in 2007.

1.1.10.1 Mobile penetration in Russia exceeded that of the UK for the first time in 2007, and Chinese operators activated more than 88 million new mobile connections

 BRIC countries added over 216 million new mobile subscriptions in 2007, a 17% increase on the additions made in 2006. The largest ever reported annual increase in new mobile connections in a country occurred in China in 2007 (88.2 million), while there were a further 84 million new connections in India.

 Take-up of mobile services has been rapid in the BRIC countries - outpacing rising fixed-line take-up. Mobile adoption grew most rapidly in Russia, with penetration growing from 12% in 2002 to 123% in 2007; it now exceeds UK mobile take-up (121%).

19 The International Communications Market 2008

1.1.10.2 Fixed-line broadband take-up remains low, with mobile devices offering more extensive broadband reach among BRIC nations

 Fixed-line broadband take-up among BRIC countries is low, averaging three connections for every 100 people, compared to 26 in the UK. In India only three people in every 1000 had a fixed broadband subscription at the end of 2007 – up from 2 in every 1000 in 2006.

 The mobile platform has shown greater success in extending the reach of broadband among BRIC countries – an estimated 60 million people own an internet-enabled mobile.

1.1.10.3 Television and radio services mainly distributed over analogue platforms; adoption rising quickly

 The growth in China’s TV market illustrates the capacity of the Chinese communications market to develop. In the four years to 2007 it grew by 20 million households, compared to just 0.6m in the UK.

 Since 2002 television revenue across the BRIC countries has grown at an average annualised rate of 19%, compared to 5% in the UK. Despite being the smallest country (£2.4bn revenue), Russia’s TV industry grew fastest (up by nearly one-third since 2005), driven by rising income levels and the growing take-up of pay-TV services.

 The Russian radio market is the largest among the BRIC nations, at just over £300m in 2007 (compared to £1.3bn in the UK), overtaking China, with revenues of just under £300m, during the year. India was the fastest-growing radio market from 2003 to 2007, expanding by an average of 52% per annum, albeit from a smaller base.

20

The International Communications Market 2008

22 The International Communications Market 2008

1.2 The UK communications industry in context

1.2.1 Summary This section puts the UK communications industry into an international context, by comparing the revenue characteristics of its telecommunications, television and radio sectors with those of the main comparator countries in this report (France, Germany, Italy, the US, Canada and Japan). The key findings are:

 Global communications market revenue totalled an estimated £876bn in 2007, up 6.1% since 2006. The UK industry ranks fourth in the world (behind the US, Japan and Germany) and accounts for 4.4% (£39bn) of the total.

 Revenue generated by the seven main comparator countries in this report amounted to £440bn in 2007, up by 3.5% since 2006. Telecommunications accounted for 68% (£300bn, up by 3.4%) of this total, with TV making up a further 28% (£122bn, 4.4%) and radio the remaining 4% (£19bn, -0.1%).

 The UK’s telecoms sector generated £27bn in revenue during 2007, up by 5.8% on the year – the second fastest-growing telecoms sector after Canada among our main comparator countries. The UK’s TV industry added a further £10bn (up by 4.3%) while radio contributed £1.3bn (up by 2.5% - the fastest-growing in 2007 after Canada and Italy).

 Since 2002, the Italian TV sector grew fastest across sectors and across our main comparator countries, expanding at an average yearly rate of 9.4%; the Canadian TV market grew by 6.0% p.a. and the US by 5.9% p.a.; the UK ranked fourth with 4.8%. In the telecoms sector, the Canadian market grew fastest (6.2% p.a.) followed by the UK (5.1% p.a.). The Canadian radio sector was also the fastest growing, at 4.9% p.a., followed by Italy (4.4% p.a.); the UK radio market rose by 1.8% over the same period.

 Per head of population, UK revenue stood at £636 in 2007, up 5% on the year, behind the US with £698 (which grew by 3.7% over the same period). Over the last five years, UK revenue per head has risen by 25% – above the average of all our main comparator countries (18%); third, behind Canada (29%) and Italy (30%).

 Television and radio’s share of total advertising spend varies significantly across our comparator countries. TV advertising spend accounts for a majority of all spend in Italy, and, when combined with radio, the same is true of Poland and Spain. With the exceptions of the Republic of Ireland and France, TV’s share of total advertising spend either remained flat, or fell, during 2007. In the UK, television and radio advertising spend accounted for 30% of all spend in 2007, down by one percentage point year-on-year.

 UK advertisers were the most likely to invest their advertising budgets online during 2007 - the internet took a 19% share of all advertising spend. Sweden ranked second with 17%, followed by the US with 13%. Growth in the internet’s share of spend was also highest in the UK, rising by 4 percentage points since 2006.

 The reference period for this report runs until the end of 2007. Since then, markets have faced economic uncertainty and financial market instability. Communications

23 The International Communications Market 2008

market equity price trends over the past twelve months show that some telecommunications stocks have outperformed their relevant market index; not all television channel businesses have fared so well.

1.2.2 Communications sector revenues 1.2.2.1 UK communications revenue ranks 4th in the world with 4.4% of the global total

In 2007, the revenue generated by companies participating in the telecommunications, television and radio sectors reached £876bn, up by 6.1% on the year and by up 5.6% p.a. on average over the last five years.

Telecommunications industries accounted for 78% (£687bn) of the total, down from 79% in 2002, having grown by 6.2% over the last 12 months, ahead of the five year average growth rate of 5.2%. Television accounted for a further 19% (£166bn), up by 6.2% during 2007, having risen by 7.3% since 2003. Radio accounted for the remaining 3% (£24bn) and experienced the lowest growth rate of the three industries in 2007 at just 1.4%, below the average annual growth of 3.6% since 2002.

The UK’s communications sector accounted for 4.4% (£39bn) of global revenue in 2007, proportionally higher than its share of population, which stood at around 1.0%. It ranked fourth by revenue, behind the US, which generated 24.0% of the total (£210bn), while accounting for 4.6% of the world population. Japan generated 8.0% (£70bn) with just 1.9% of the global population, while Germany accounted for a further 4.8% (£42bn) – while making up just 1.2% of the world’s population (Figure 1.1).

Figure 1.1 Global communications revenue Revenue (£bn)

Growth 1yr 5yr

900 £876bn 6.1% 5.6% £826bn £24bn 800 £777bn £23bn £733bn £22bn £166bn 1.4% 3.6% Radio £706bn £156bn £663bn £22bn 700 £21bn £146bn £20bn £125bn £138bn 600 £117bn

500 6.2% 7.3% Television 400 £646bn £687bn 300 £574bn £608bn £526bn £560bn 200 6.2% 5.2% Telecoms 100

0 2002 2003 2004 2005 2006 2007 Source: Ofcom calculations based on Ofcom (UK), IDATE (telecommunications) with the remaining data taken from PWC Global Entertainment and Media Outlook 2008 - 2012 Notes: Data calculations and interpretation are solely Ofcom's responsibility. Ofcom has used an exchange rate of $2.001 to the pound, representing the OECD average for 2007.

24 The International Communications Market 2008

1.2.2.2 The UK TV market ranks third by revenue; telecoms and radio ranked fourth

Telecommunications revenue in the seven largest comparator countries totalled £300bn in 2007, accounting for 50% of the global total. It rose by 3.4% over the year, tracking the five year average growth rate. The US accounted for 44%, or £133bn, of the telecoms industry total, with Japan contributing a further 17% (£50bn) and Germany making up a further 10% (£30bn), just ahead of the UK with 9% (£27bn).

Television industry revenue was concentrated among a smaller number of countries than telecoms income. The three largest accounted for 78% of total television revenue (against 71% for telecoms) with the US contributing 55% (£67bn), Japan contributing a further 15% (£18bn) and the UK 8% (£10bn). TV industry revenue among the seven main comparator countries expanded by 4.4% in 2007, ahead of both telecoms and radio.

Radio industry revenue was as concentrated as television, with the US accounting for 57% of the £18.7bn total in 2007 (driven by a large free-to-listen sector, coupled with a satellite subscription service) and Germany generating a further 12% (£2.3bn) – with public funding making a substantial contribution. Japan added a further £1.7bn (9%), ahead of the UK radio industry, ranked fourth with £1.3bn (Figure 1.2).

Figure 1.2 Communications revenue, by sector, among larger countries: 2007

TOTAL Total in 2007 £300m £122m £19m £440bn Year on year growth 3.4% 4.4% -0.1% 3.5% 5 year CAGR 3.4% 5.1% 2.5% 3.8% Growth 100% YOY 5yr CAGR £1.7bn £50.4bn £17.7bn JAP £70bn 1.2% 1.3 £0.8bn £4.4bn 80% £14.2bn CAN £19bn 6.0% 6.1

USA £210bn 4.6 4.5 60% £10.6bn £133.0bn £66.6bn ITA £28bn 2.6 5.5

40% GER £42bn -0.8 1.8 £20.5bn £0.9bn £6.3bn £30.4bn FRA £32bn 4.3 4.5 20% £9.3bn £2.3bn £24.4bn £7.0bn £1.1bn UK £39bn 5.3 4.9 £26.9bn £10.4bn £1.3bn 0% Telecoms TV Radio

Source: Ofcom calculations based on Ofcom (UK), IDATE (telecommunications and TV) with the radio data taken from PWC Global Entertainment and Media Outlook 2008 - 2012 Notes: Data calculations and interpretation are solely Ofcom's responsibility. Ofcom has used an exchange rate of $2.001 to the pound, representing the OECD average for 2007.

1.2.2.3 Italian television revenues grew fastest between 2002 and 2007; Canada’s three sectors all exhibited strong growth over the period

Over a five-year time horizon, television revenue in Italy grew fastest, averaging 9.4% per annum, driven by expanding subscriber revenue from pay-TV services such as Sky Italia and Fastweb. Television industries in the UK, France, the US and Canada all achieved five- year average growth rates of between 4.4% and 6.2%. The Japanese and German television industries grew more slowly over the same time period; in Japan revenue expanded at an average annual rate of 3.1%, while in Germany the challenge of persuading households to

25 The International Communications Market 2008 migrate from a basic set of low-cost free-to-view channels was manifest, with revenue growing by just 1.9% over the last five years.

In the telecommunications sector revenues in the five years to 2007 grew fastest in Canada, expanding by an average of 6.2% per year, followed by the UK (5.1%) and France (4.6%). In common with their TV industries, the German and Japanese telecoms industries experienced the smallest average annualised rates of growth, at 1.8% and 0.8% per annum respectively.

Growth among radio industries was more subdued. It averaged 2.5% over the last five years, rising as high as 4.9% in Canada and 4.4% in Italy. But among the remaining larger comparator countries, revenues grew by 1.6% - 2.5%, with the UK’s radio sector expanding by 1.8% over the period (Figure 1.3).

Figure 1.3 Five year average growth rates across communications industries Communications sector growth rates (% per.annum.)

10 9.4%

8 Telecoms 6.2% 6.0% 6 5.9% 5.1% 5.1% 4.9% 4.8% 4.6% 4.5% 4.4% 4.4% TV 4 4.0% 3.4% 3.1% 2.5% 2.5% 2.4% 1.9% 1.9% 1.8% 1.8%

2 1.6% Radio 0.8%

0 UK FRA GER ITA USA CAN JAP TOTAL 5 year communications 4.9% 5.1% 1.8% 5.5% 4.5% 6.1% 1.3% 3.8% sector CAGR Source: IDATE for telecommunications/TV and PWC Global Entertainment and Media Outlook 2008 – 2012 for radio Notes: Data calculations and interpretation are solely Ofcom's responsibility.

1.2.2.4 UK communications revenue per head totalled £636 in 2007 - second to the US (£698)

Accounting for differences in population size reveals that the UK generated £636 of communications industry revenue per head of population in 2007, just behind the US with £698; Canada followed with £592 and Japan with £548. The UK’s ranking relative to other countries is explained both by the strength of its telecommunications and television industry revenues, and by the presence of a substantial element of public funding; but its radio industry generated per-capita revenue broadly in line with the average among the larger countries in this study (although below that of the US, Germany and Canada) (Figure 1.4).

26 The International Communications Market 2008

Figure 1.4 Communications revenue, by sector, per head: 2007

Growth since 2002 Total 25% 21% 10% 30% 19% 29% 7% 18% Telecoms 26% 21% 9% 24% 16% 29% 4% 15% TV 25% 21% 10% 56% 27% 28% 16% 25% Radio 8% 7% 13% 24% 8% 22% 8% 10%

800 £698 700 £636 £35 £21 £592 £606 600 £26 £548 £26 Radio £221 £172 £509 £510 £13 500 £17 £28 £477 £135 £168 £15 £139 £109 £113 400 £109 TV 300

£443 £442 £432 200 £395 £413 £382 £369 £353 Telecoms 100

Communications sector revenue per head 0 UK FRA GER ITA USA CAN JPN Average Source: Ofcom calculations based on Ofcom (UK), IDATE (telecommunication and TVs) with radio data taken from PWC Global Entertainment and Media Outlook 2008 - 2012 Notes: Data calculations and interpretation are solely Ofcom's responsibility. Ofcom has used an exchange rate of $2.001 to the pound, representing the OECD average for 2007.Growth rates in bold denote that it ranks first or second in that sector.

1.2.2.5 UK internet share of total advertising spend highest among comparator countries

Advertising forms an important funding stream in both the television and radio industries, although its importance to both media varies substantially across our comparator countries. In the UK, television and radio combined accounted for nearly one-third of all advertising expenditure in 2007, 90% of which was taken by television and the remainder by radio. But elsewhere, broadcasters commanded a higher share of total spend. In three instances – Italy, Poland and Spain - they accounted for a majority of all advertising spend in 2007. In the US, Canada and Japan, they received between 40% and 50% of total spend, while in the remaining countries (France, Germany, the Netherlands, Sweden and the Republic of Ireland) they accounted for between a fifth and two fifths of all spend.

Internet advertising expenditure also accounts for a growing proportion of total spend. In the UK, it commanded nearly one in every five pounds of advertising expenditure in 2007 – the highest proportion among the comparator countries. 17% of Swedish advertising spend was dedicated to the internet in the same year, followed by US advertisers with 13% (Figure 1.5).

27 The International Communications Market 2008

Figure 1.5 Proportion of advertising spend allocated to TV, radio and internet Proportion of total advertising spend (%) 70

60 3% 4% Internet 5% 13% 6% 8% 50 10% 10% 9% 5% 11% 3% 40 19% 13% 7% Radio 4% 9% 1% 30 17% 3% 4% 9% 52% 48% 7% 43% 3% 20 38% 41% 32% 31% 27% TV 26% 24% 10 22% 20%

0 UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRL Source: World Advertising Trends 2008, published by World Advertising Research Center

1.2.2.6 The internet’s share of advertising spend grew fastest in the UK and Sweden during 2007

Since 2006, advertisers have allocated an increasing proportion of advertising spend to the internet. This reallocation took place fastest in the UK and Sweden, where the internet’s share of total spend rose by 4.4 and 3.5 percentage points respectively. In the US, the internet’s share of total spend rose by 2.7 percentage points, while it rose by around 2.4 and 2.2 percentage points in Canada and the Netherlands respectively. Among the remaining comparator countries, spend on internet advertising rose by 2 percentage points or less over the year.

Broadcasting’s share of advertiser spend fell in most countries - with the exceptions of the Republic of Ireland and France, where TV’s share rose by 1.8 and 0.4 percentage points respectively (Figure 1.6).

28 The International Communications Market 2008

Figure 1.6 Change in market shares of advertising segments, 2006 - 2007 Change in share of total advertising spend (percentage points) 5

4

3 Internet 0.5 4.4 2 2.7 1.0 3.5 0.4 Outdoor 2.4 2.0 0.2 0.3 2.2 1 1.1 1.8 1.8 Cinema 1.1 0.8 0.2 1.0 0.4 0 0.2 0.3 0.3 0.3 Radio -0.4 -0.5 -0.8 -0.6 -0.9 -1.2 -0.8 -0.3 -1.7 -1.4 -1 -2.1 -0.1 -0.4 -1.9 TV -2.5 -1.1 -2.6 -0.4 GER ITA -0.4 -0.2 -0.7 -0.2 -2 -0.5 Magazines FRA -1.1 -0.1 ESP -0.2 -0.5 -0.5 NED -1.2 -0.5 JPN -0.7 -3 -0.1 Newspapers -0.2 CAN POL -0.4 IRL -0.9 US -4 SWE -0.1 -0.1 UK -5

Source: World Advertising Trends 2008, published by World Advertising Research Center

1.2.2.7 The communications market in 2008

The reference period for this report runs to the end of 2007. During 2008, concerns arising from reduced liquidity in the world’s financial markets, coupled with growing concerns about the possibility of a recession, have affected the value of communications sector equities.

But the impact has not been felt equally across all sectors. While generalisations are difficult to make, some but not all telecoms stocks outperformed their respective country indices (Figure 1.7).

Figure 1.7 Telecommunications equity price trends versus market indices

Source: Ofcom calculations based on Yahoo! Finance data.

29 The International Communications Market 2008

By contrast, some of those businesses which manage television channels have fared less well. In making comparisons between individual equities and market indices, it must be borne in mind that the equity itself may form part of the index and therefore, comparisons between the two should be made with caution and regarded as indicative only (Figure 1.8).

Figure 1.8 Media equity price trends versus market indices

1.8

1.6

ProSiebenSat1 versus 1.4 DAX

1.2 BSkyB versus FTSE 100

1.0 Mediast versus MIB

0.8 ITV versus FTSE100

0.6 TF1 versus CAC

0.4 DirecTV versus Nasdaq

0.2

0.0 05/11/2007Nov 07 05/02/2008Feb 08 05/05/2008May 08 05/08/2008Aug 08 Nov 08

Source: Ofcom calculations based on Yahoo! Finance data.

30 The International Communications Market 2008

1.3 The UK communications consumer in context

1.3.1 Summary This section compares the consumption characteristics of consumers across the main comparator nations in this report. Its main findings are that:

 By the end of 2007, TV households in the UK were the most likely to have connected a digital decoder to their main set, with 86%1 of sets converted (up 9 percentage points since 2006). Homes in the US ranked second (70%, up 9 pp) with France third (66%, up 13 pp) – overtaking Japan, where conversions reached 65% of households in 2007.

 The UK ranked second for mobile phone connections, behind Italy (121 and 154 connections respectively per 100 population); Germany ranked third with 118 connections per 100. Take-up in Italy rose by 16pp and in Germany by 14pp, compared to 6ppin the UK. As a result, the gap between take-up in the UK and Germany narrowed from 11 connections per 100 in 2006 to just 3 in 2007.

 There were 60 residential/SME broadband connections in the UK for every 100 households in 2007; the UK ranked third behind Canada with 66 connections per 100 and the US with 61. Growth was highest in the US and Germany, with an additional 12 broadband connections per 100 households; the UK ranked second with France with 10 additional connections per 100.

 Ofcom research suggests that more people in the UK own and use a DVR (30%) than in any other of the large comparator countries; 21% of Italians make the same claim, as do 20% of people in the US and Canada. DVRs are least popular in Germany (11%) and Japan (13%).

 Our research also suggests that take-up of games consoles rose substantially in 2007, with significant increases in the UK, Germany, Italy and the US; this resulted in a majority of people for the first time having access to a console in the UK, Italy and the US.

 Women were more likely than men in the UK, France, Canada and Japan to claim that they used a fixed-line phone ‘weekly’. But there was no difference between men and women’s claims of ‘weekly use’ of mobiles except in Japan (where women were more likely to claim ‘weekly’ use). Men were more likely than women to say they used console/computer games on a weekly basis in the UK, Italy, the US, Canada and Japan.

1.3.2 Take-up of communications services 1.3.2.1 UK ranks second for mobile penetration and first for DTV take-up

The UK is one of three countries in 2007 where, on average, each consumer had more than one active mobile connection. In Italy there were 154 live connections for every 100 people, 121 in the UK and 118 in Germany. This may be explained by the greater tendency of

1 For the latest digital television take-up figures for the UK, please see http://www.ofcom.org.uk/research/tv/reports/dtv/

31 The International Communications Market 2008 consumers in these countries to take pre-pay mobiles. In France, the US and Japan, there were fewer active connections – between eight and nine for every ten consumers – while Canadians were the least likely to own a mobile (six in ten). Take-up grew across all of the larger comparator countries in 2007, with the largest increases among consumers in Germany and Italy, and substantial rises in the UK, France and the US.

Take-up of fixed-line services told a different story in 2007. It fell in all of the larger comparator countries except the UK, where it remained largely static. Connections fell furthest in France (by 5 percentage points) and in the US and Japan (by 3 percentage points) (Figure 1.9).

Figure 1.9 Take-up of fixed and mobile connections, 2006 - 2007

Fixed line: general pattern of reduction Mobile: growing take-up among all the penetration across the larger comparator larger comparator countries. Substantial countries (pink shading represents growth in Italy and Germany since 2006 reduction since 2006) 160 154 Reduction since 2006 16 2007 growth 2007 2006 121 118 120 6 14

87 85 79 6 7 80 4 -1 -1 139 62 115 4 -5 -4 -3 104 40 81 78 74 Take-up per 100 people 66 55 63 57 45 44 53 47

0 UK FRA GER ITA USA CAN JPN UK FRA GER ITA USA CAN JPN

Fixed line penetration (per 100 people) Mobile penetration (per 100 people) Source: Ofcom calculations based on IDATE data Notes: Figures may not exactly sum to the totals, owing to rounding errors

Eighty-six per cent of UK households had digital television (DTV) at the end of 2007 – more than in any of the other large comparator countries. Households in the US ranked second, with seven in ten taking a digital television service, while over six in ten households in Japan and France had converted to digital by the end of 2007. Levels of DTV take-up are probably influenced by the different digital switchover (DSO) dates that policy-makers have set. The US will be the first large country in this study to switch fully to digital TV when its analogue terrestrial transmissions cease nationwide in February 2009. Take-up grew fastest in France, with an additional 13% of households migrating to a digital platform during 2007; 9% of households migrated in the UK, Italy and the US.

There was less difference in residential/SME broadband take-up among the larger comparator countries, ranging from 41% in Italy to 66% in the Canada. The US ranked second with take-up of 61%, followed by the UK with 60% and France with 58%. Growth in take-up was highest in the US and Germany, with a further 12 connections per 100 households during 2007; the UK and France ranked second on growth, with an additional 10 per 100 households (Figure 1.10).

32 The International Communications Market 2008

Figure 1.10 Take-up of DTV and broadband (includes residential take-up and SMEs), 2006 - 2007

DTV: general pattern of growing take-up with Broadband: substantial growth across all digital switchover having commenced in some the large comparator countries. Year-on- countries (e.g. UK) and full switchover year growth highest in the USA and deadlines approaching in others (e.g. US) Germany. 90 86 2007 growth 9 80 2006 70 70 66 65 66 9 60 61 8 58 6 57 60 13 56 54 10 10 50 12 5 50 9 7 12 41 40 77 32 5 30 5 61 57 60 53 52 47 47 50 48 49 Household take-up (%) 20 38 36 27 10

0 UK FRA GER ITA USA CAN JPN UK FRA GER ITA USA CAN JPN

DTV take-up (% homes) Residentia/SME broadband take-up (% homes) Source: Ofcom calculations based on IDATE data Note: The broadband penetration figure includes residential and connections to SMEs. The figures will therefore over-state residential take-up and should not be compared to DTV take-up nor to UK residential broadband penetration figures published elsewhere.

Patterns of technology adoption in 2007 show that as markets saturate, year-on-year rates of adoption tend to fall. Figure 1.11 illustrates that 3G handset take-up rose significantly over 2007 while overall levels of take-up remain comparatively low. By contrast, rates of broadband adoption were typically lower in 2007, while levels of adoption were higher. Finally mobile, as a well-established technology in all the larger countries in this study, benefited from high levels of take-up in 2007, but lower annual increases in take-up (Figure 1.11).

33 The International Communications Market 2008

Figure 1.11 Technology take-up versus year-on-year increases in adoption

120 110 3G in USA Some evidence that saturating levels of 100 technology penetration are connected 90 with reductions in year-on-year take-up. 80 3G in FRA, JPN, GER, ITA 70 60 50 40 30 BB in GER, USA, FRA, UK, ITA, CAN, JPN 20 Mobile in GER, ITA, UK 10

0 Mobile in USA, FRA, JPN, CAN Year-on-year growth (per 100 population) 0 20 40 60 80 100 120 140 160

Take-up per 100 population Source: Ofcom calculations based on IDATE data Note: The broadband penetration figure includes residential and connections to SMEs. The figures will therefore overstate residential take-up and should not be compared to DTV take-up nor to UK residential broadband penetration figures.

1.3.2.2 People more likely to own and use a DVR in the UK than in the US, France, Germany, Italy, the US and Japan

Along with digital television and broadband, take-up of a range of additional digital devices is also high, and rising, among our larger comparator countries. According to our consumer research, DVD player ownership exceeded eight in ten individuals in the UK, France, Italy, the US and Canada. But take-up was lower in Germany and Japan, at 73% and 72% respectively. Year-on-year, DVD player take-up fell by 3 percentage points while it rose by 8 percentage points in Japan.

Portable music devices were most popular in Italy, with three quarters of individuals owning one, possibly explained by high levels of mobile take-up, since many handsets now include an integrated music player. A majority of individuals in all of the larger comparator countries claimed to own a portable music device. This represented a threshold moment for consumers in the US and Japan where, for the first time, the majority claimed to own and use a portable music device during 2007, following a rise in take-up over the year of 11 and 6 percentage points respectively.

Games consoles were owned by the majority of individuals in the UK, France, Italy, the US and Japan, where take-up ranged between 51 and 57%. For the first time in 2007, a majority of respondents claimed ownership of a games consoles in the UK, Italy and the UK thanks to increases in penetration of 6, 5 and 11 percentage points respectively.

Just under one-third of people with access to the internet in the UK claimed to own a DVR in 2007, higher than any of the other large comparator nations – possibly fuelled by the wide availability of these devices across digital television platforms (e.g. Sky+ on pay-satellite, V+ on cable and Freeview+ on DTT). Take-up stood at 21% in Italy, 20% in the US and Canada, and 17% in France; it was substantially lower in Japan (13%) and Germany (11%) (Figure 1.12).

34 The International Communications Market 2008

Figure 1.12 Device ownership and use among internet users, 2006 - 2007 Proportion of individuals (%) Year-on-year changes (note red boxes denote statistically significant movements)

-2 -3 0 -3 +1 -1 +8 4 4 4 2 11 4 6 6 4 65112 0 3 3 0 -3 0 3 0 100% UK FRA GER ITA US CAN JPN 90% 86% 84% 84% 84%

80% 80% 75% 73% 72% 70% 63% 60% 59%

60% 57% 57% 55% 52% 51% 51% 51% 50% 50% 49%

40% 40%

30% 30% 21% 20% 20%

20% 17% 13% 11% 10% UK UK UK UK UK UK GERGER ITA ITA US US CAN CAN JPN JPN GERGER ITAITA US US CANCAN JPNJPN FRA FRA GERGER ITA ITA US US CAN CAN JPN JPN UK UK FRA FRA FRAFRA GERGER ITA ITA US US CAN CAN JPN JPN 0% FRA FRA DVD player Portable digital music Games console DVR Source: Ofcom’s Understanding International Communications Behaviour research, October 2008 Question: “Which of the following devices do you own and personally use? Select all that apply” Base: All adults aged 18+ using the internet (UK=1001, France=1000, Germany=1002, Italy=1003, USA=1010. Canada = 1000, Japan = 1003). Note: As the questions were answered online these results may not reflect the attitudes of a representative sample of the whole population.

1.3.2.3 Women more likely to use fixed lines on a weekly basis; men more likely to play console/PC games on a weekly basis

Our online consumer research highlights some statistically significant differences between men and women about which communications technologies they claim to use frequently. Women are more likely than men to claim weekly use of a fixed-line phone in the UK, France, Canada and Japan – but there is no significant difference between the sexes in mobile use, except in Japan where 94% of women used mobiles on a weekly basis compared to 88% of men (Figure 1.13).

35 The International Communications Market 2008

Figure 1.13 Proportion of male and female internet users using fixed-line or mobile on a weekly basis Proportion of individuals (%) 100% 1% 90% 6% 4% 1% 4% 3% 2% 80% 7% 11% 8% 5% Additional proportion of 1% 70% women, in addition 5% to male proportion, 60% claiming weekly use

50% 14% 96% 88% 88% Proportionof men 86% 84% 86% 40% 81% claiming weekly 77% 74% 76% 72% 70% use 30% 61% Denotes a statistically significant change 20% 41%

10%

0% UK FRA GER ITA US CAN JPN UK FRA GER ITA US CAN JPN Weekly use of a landline Weekly use of a mobile

Source: Ofcom’s Understanding International Communications Behaviour research, October 2008 Question: “Which of the following do you regularly do (at least once a week)? Select all that apply.” Base: All adults aged 18+ using the internet (UK=1001, France=1000, Germany=1002, Italy=1003, USA=1010. Canada = 1000, Japan = 1003). Note: As the questions were answered online these results may not reflect the attitudes of a representative sample of the whole population.

There are other technologies which appear to appeal more to men. In Italy, the US and Canada, men were more likely than women to claim to watch DVDs/videos on a weekly basis. Men in the UK, Italy, the US, Canada and Japan were also more likely to claim they played computer/console games in 2007; portable music devices were more likely to be used weekly by men in the UK, the US, Canada and Japan (Figure 1.14).

36 The International Communications Market 2008

Figure 1.14 Proportion of men and women using gaming and audio-visual devices on a weekly basis Proportion of individuals (%) 70% 1% 13% 8%

60% 8%

0% Additional

2% proportion

2% of men, in

50% 3% 2% 2% 1% 6% additional 7% to female 3% 7%

7% proportion, 3%

40% 10%

13% claiming 8%

10% weekly use 14% 0% 4% 1% 8% (%) 65%

30% 13% 3% 58% 58% 57% 57% 54%

52% Proportion 49% 49% 49% 49%

46% of women 45%

20% 43% 41% 41% 40% claiming 37% 36% 35% 34% 34% 33% 33% weekly use 30% 30%

28% (%) 10% 25% Denotes a statistically 0% significant change UK US UK US UK US UK US ITA ITA ITA ITA JPN JPN JPN JPN FRA FRA FRA FRA GER CAN GER CAN GER CAN GER CAN Videos/DVDs Music on a hifi/CD Console/computer Music on a portable player games device

Source: Ofcom’s Understanding International Communications Behaviour research, October 2008 Question: “Which of the following do you regularly do (at least once a week)? Select all that apply.” Base: All adults aged 18+ using the internet (UK=1001, France=1000, Germany=1002, Italy=1003, USA=1010. Canada = 1000, Japan = 1003). Note: As the questions were answered online these results may not reflect the attitudes of a representative sample of the whole population.

1.3.3 Consumers’ spend on communications services 1.3.3.1 Consumer spend on telecommunications services could be relatively resistant to an economic downturn

According to research conducted by Execution Research in September 2008, spending on telecoms services could be relatively resistant to the economic downturn, with evidence that consumers regard spending on mobile phones, fixed-line phones and broadband internet as relatively non-discretionary.2

Execution’s survey of 8,000 consumers in the UK, France, Germany and Spain found that overall, 56% of respondents said they were intending to spend a little or a lot less across 14 categories of discretionary expenditure in the next 12 months; 38% said they would spend the same and 6% more. Responses were very similar across the four countries, with consumers in France and the UK marginally more likely to cut discretionary spending than those in Germany and Spain.

But only 31% of consumers across the four countries said they intended to spend less on their mobile phones. The UK’s mobile market appears to be particularly resilient, with only 22% of consumers intending to reduce expenditure on mobile telephony (Figure 1.15).

2 The analysis below is based on research conducted and published by Execution Research Ltd, in the report Telecoms – Mobile is Defensive but not Immune, 27 October 2008.

37 The International Communications Market 2008

In part, this may be due to UK consumers believing they receive reasonable value for money. When asked to rate the value for money they believed they were getting from their mobile operator on a scale of 0 (very poor value for money) to 10 (excellent value for money), around 60% of consumers in the UK and Germany gave a score of 7 or higher, compared to around 50% of consumers in France and 20% of consumers in Spain.

But as consumers grow increasingly conscious of their spending during an economic downturn, some may seek better deals by going ‘SIM-only’ (i.e. keeping their existing handset at the end of a contract period, typically in return for a lower line rental). In the UK, 20% of mobile consumers said they were considering going SIM-only (43% of consumers were not, and 37% had never heard of SIM-only). In Germany, 31% of mobile consumers said they were considering a SIM-only tariff (Figure 1.15).

Figure 1.15 Consumers intentions on mobile telephony spending

Do you intend to increase / decrease the amount you spend on your mobile phone in the next 12 months? 80% 73 s 64 62 60 60% UK

40% France 23 23 25 Germany 20% 15 10 10 11 7 5 4 4 3 0 0 Spain Proportion of Respondent 0 0 0% Intend to spend Intend to spend Intend to spend Intend to spend Intend to spend a lot less a little less about the same a little more a lot more

Source: Execution Primary Research

The research suggests that the consumer telecoms sector as a whole is likely to be relatively resilient to an economic downturn. Execution’s research of 14 types of ‘discretionary’ expenditure considered that mobile, fixed and broadband were three of the four categories least exposed to reduced spending in the face of an economic downturn (Figure 1.16).

The mobile sector was ranked as more vulnerable than fixed voice or broadband, and this could be due to consumers being more willing to cut spending on mobile data services. The research found that 16% of UK mobile users say that they are likely to spend either a lot, or a little, less on data services in the next 12 months (this is nearly a third of all consumers who actually use mobile data services). Consumers in France, Germany and Spain are even more likely to cut spending on data services (Figure 1.16).

38 The International Communications Market 2008

Figure 1.16 Overall economic vulnerability scores for items of discretionary expenditure

10

00 9 8 7.2 7.2 6.8 6.6 6.6 6.5 6.4 7 6.2 5.9 6 5.6 5.5 4.7 5 3.9 score 4 3.5 3 2

Economic vulnerability 1 0 Gambling Electronics Mobile Phone home Broadband Internet pubs cosmetics weekend breaks other sports Fixed-line telephone calls Going away holidayson or Making improvementsto your Premium or organicgroceries Personal Care, toileteries and New furnitureNew flooror coverings Music, DVDs, books & games Health club membership, golf or Clothing, accessories footwear or Going out to restaurants, clubs or Source: Execution Primary Research Note: Consumers were asked to provide a score to assess the likelihood that they would cut back on a particular area of expenditure where 0 = not at all likely to cut back and 10 = extremely likely to cut back.

Consumers in all four countries are less likely to cut back on spending on fixed-line voice and broadband services than on mobile services, with consumers in Germany least likely to reduce fixed-line voice spending and consumers in Germany and the UK least likely to cut back on broadband services (Figure 1.17).

Figure 1.17 Likelihood of cutting back on expenditure

10 9 8 6.6 7 6.3 6.2 6.4 6.2 UK 5.7 6 5.3 France 4.7 4.4 Germany 5 4.1 4.1 4.0 3.8 4 3.3 Spain 3.0 3.0 3 2 1

Economic vulnerability score vulnerability Economic 0 Other Categories Mobile Phone Fixed-line telephone calls Broadband internet

Source: Execution Primary Research Note: Consumers were asked to provide a score to assess the likelihood that they would cut back on a particular area of expenditure where 0 = not at all likely to cut back and 10 = extremely likely to cut back

39

The International Communications Market 2008

1.4 The regulatory landscape

1.4.1 The relationship between market developments and the regulatory landscape The regulatory environment can be an important influence on developments in communications markets, by introducing constraints on market players to achieve specific public policy goals in light of regulatory objectives. Equally, market developments and technology/consumer trends determine the evolution of the regulatory framework. For both reasons, this section provides some regulatory context to the analysis of international communications markets elsewhere in this report. It does not aim to be a comprehensive examination of regulatory frameworks across the comparator countries, but rather an overview of the main regulatory and policy developments over the past year.

1.4.1.1 Market liberalisation drives have prompted rapid growth in the number of regulatory authorities worldwide

In telecommunications, national regulatory authorities (NRAs) came hand in hand with the promotion of competition among suppliers, to ensure that all citizens continued to receive a basic set of services. NRAs were required to be independent from industry under the EU framework, and in many cases (but not all) they were also structurally independent from government. From just 12 in 1990, the number of NRAs had grown to 148 by mid-2008.

The organisation, structure, powers and governance of these NRAs vary widely. Some are also responsible for other network industries (such as post or energy) and a few have joint media and telecommunications responsibilities. In the main, their role is limited to setting obligations on service providers (such as the terms and conditions for access to the incumbent’s network), but with no powers to investigate anti-competitive behaviour. But there is often strong cooperation between sector-specific regulators and the respective national competition authority. Ofcom, the UK regulator, is one of the few communications regulators with competition powers.

Figure 1.18 Growth of telecommunications NRAs: 1990 - 2008

160 140 120 100 80 Nos of NRAs 60

Number of NRAs of Number 40 20 0 1990 1994 1998 2002 2006 2008

Source: ITU-D GSR Reports

In broadcasting, the creation of regulatory authorities has had less to do with promoting competition and more to do with the recognition of the fundamental democratic role played by the media in society and the need to ensure quality and cultural diversity under conditions of spectrum scarcity. In the US, Canada and France, there is a single authority responsible for the regulation of both commercial and public service broadcasting; in other countries (e.g. Germany), there are separate supervisory bodies for public service broadcasters. Equally,

41 The International Communications Market 2008 while some matters of broadcasting policy require nationwide regulation, in some countries, (such as Spain, Germany and the US) regional and local authorities have some media regulation responsibilities.

Figure 1.19 shows the foundation of the communications sectors’ NRAs for the countries included in this report.

Figure 1.19 National regulatory authorities: timeline

Regulator - converged broadcasting Regulator - broadcasting regulator Regulator - telecoms regulator and telecoms regulator

FCC ALM1 CSA PTS (SWE) 1994 AGCOM COMREG ARCEP (USA) (GER) (FRA) (ITA) (IRE) (FRA) 1934 1984 1989 RTA (SWE) 1994 1997 2002 2005

OPTA BNetzA (NED) (GER) 1997 2005

1934 1968 1984 1990 1995 2000 2005 MIC (JAP) 1998

CRTC CvDM KRRiT CMT2 MII3 OFCOM5 UKE6 (CAN) (NED) (POL) (ESP) (CHN) (UK) (POL) 1968 1988 1993 1996 1998 2003 2006

BCI4 (IRE) 1998 Source: Ofcom Notes: (1) In Germany, broadcasting is regulated at the state (Länder) level, and coordinated at the national level through the Association of State Media Authorities (ALM); (2) In Spain the Ministry of Industry, Tourism and Commerce regulates broadcasting with three regional authorities in Catalunya, Navarra and Andalusia; (3) In China broadcasting is regulated through a subsidiary organisation called SARFT, which is accountable to and supervised by the MII; (4) In Ireland new legislation is pending adoption (expected before the end of 2008) that will re-name the BCI to the Broadcasting Authority of Ireland, and expand some of its competences; (5) Ofcom inherited the duties that had previously been the responsibility of five regulatory bodies: the Broadcasting Standards Commission, the Independent Television Commission, the Office of Telecommunications (Oftel), the Radio Authority and the Radiocommunications Agency; (6) In Poland the UKE replaced the Office of Telecommunications and Post Regulation, which was established in 2002

1.4.1.2 Converging markets led to converging regulatory authorities in some countries

Converging technologies allow the same content and services to be delivered over a range of digital distribution networks and devices, and IP-based delivery has revolutionised how consumers receive and make use of text, audio and audio-visual content. For regulators, this has required an increasingly joined-up approach across the communications sector.

Converged regulators that span both networks and content now exist in many of our comparator countries:

 in the US the Federal Communications Commission (FCC) has been responsible for the communications sector since its inception in 1934;

 Italy was the first European country to set up a converged regulator in 1997;

 in the UK, Ofcom replaced Oftel and four other previously distinct national regulators with responsibilities spanning telecoms, broadcasting and spectrum, in 2003; and

42 The International Communications Market 2008

 several other countries, including Finland, Australia, Slovenia, Canada, Israel, Japan and Switzerland, and more recently Malaysia and South Korea, also have converged telecommunications and broadcasting regulators.

But ‘regulatory convergence’ has not always led to full institutional convergence. There are still many instances of separate regulators for broadcast and telecommunications (e.g. France, Ireland, Poland, Sweden and the Netherlands) - but the challenges of convergence have been met through increased cooperation between these separate authorities. In certain countries, including the UK, Egypt, Germany, Hungary, Iceland, Sweden, Brazil and Turkey, NRAs also have some spectrum responsibilities.

The fast-moving pace of new media markets has strengthened the need to develop flexible tools, and to involve both consumers and market players in the process of regulatory design. This has led to the development of new self- and co-regulatory instruments. The Australian converged regulator (ACMA), for example, has for some years operated a co-regulatory system that spans content and internet services. The German and UK regulators are also very supportive of the benefits of self- and co-regulatory approaches, and the UK regulator (Ofcom) must consider self-regulatory approaches when reviewing its functions.

1.4.1.3 Global communication services have encouraged the development of regional regulatory networks

Regulators are increasingly dealing with companies outside their jurisdiction, or face challenges which are global in nature. Both of these trends require greater cooperation between regulators. This has triggered the creation of regional regulatory networks to deal more effectively with cross-border issues, to share experiences and to develop common regulatory guidelines and principles. Examples of such regional groups include the:

 European Regulators Group (ERG);

 Radio Spectrum Policy Group (RSPG);

 European Platform of Regulatory Authorities (EPRA);

 Mediterranean regulators (MEDA);

 Arab Telecommunications Regulators Network (AREGNET);

 Latin America Regulatory Forum (REGULATEL);

 West African Telecommunications Assembly (WATRA);

 ASEAN Telecommunications Regulators Council (ATRC);

 Telecommunications Regulators Association of South Africa (TRASA); and the

 East Caribbean Telecommunications Authority (ECTEL).

These regional groups meet to discuss international cooperation and to debate the most important regulatory challenges. For example, ERG held separate bi-lateral meetings with MEDA and REGULATEL in 2007, while in 2007, ERG and EPRA held a meeting to discuss matters of common interest. For the last eight years, the International Telecommunication Union has organised the Global Symposium of Regulators (GSR), gathering NRA representatives from approximately 100 countries.

43 The International Communications Market 2008

1.4.1.4 …and international bodies play a key role in standardisation and policy development

In addition to NRAs and regional groups, several international institutions influence regulatory regimes. Their role becomes increasingly important as the development of common approaches grows around technology standards, software protocols, spectrum use, international mobile roaming, intellectual property and content standards:

 The International Telecommunication Union - the ITU-T (Telecommunication) sector studies the principles for international telecommunications services and related economic and policy issues. The ITU-D (Development) sector provides substantial support to NRAs from developing countries, through documentation, case studies, a web-based online information system (G-REX) and a hotline facility.

 The Organisation for Economic Cooperation and Development - the OECD Information and Computer and Communications Policy (ICCP) Committee collects and publishes relevant data and contributes to the development of the regulatory and economic telecoms policies of its member countries.

 The World Trade Organisation - The Fourth Protocol of the General Agreement on Trade in Services (GATS) sets out the requirements for opening up national telecoms markets to competition. The Basic Telecommunications Agreement sets out a number of liberalisation and regulatory principles which member states that have signed up to it must meet.

1.4.2 In Europe there is a common regulatory framework for telecommunications operators The European Union (EU) has established a common regulatory framework for electronic communications networks and services. This applies across the 27 EU Member States and extends to Norway, Iceland and Liechtenstein, under agreement with the European Economic Area’s EFTA Surveillance Authority.

The EU regulatory regime has its roots in European competition law and is the result of a long process, the first stage of which culminated in the full liberalisation of the European telecoms sector in 1996. This regulatory framework was reviewed and due to the increased likelihood of convergence (amongst other developments) this review led to an amended regulatory framework based on competition law principles (largely adopted in 2002) and often referred to as the ‘Regulatory Framework’. It establishes the overall framework and covers issues of access, authorisation, universal service and data protection.

The Framework therefore aligns sector-specific regulation with the principles of competition law for assessing and regulating market dominance. It also sought to make regulation technology-neutral (covering all transmission platforms including circuit-switched and IP networks and fixed and mobile networks). The Framework aims to keep regulation to a minimum, and to be sufficiently flexible so as to allow regulation to develop (and be removed, as appropriate) as market conditions change.

In November 2007 the Commission published proposals for review which were in fact quite far-reaching, including:

 stronger technology and service neutrality principles and secondary trading for spectrum;

 a veto on remedies for market power for the European Commission;

44 The International Communications Market 2008

 the introduction of functional separation as a remedy for market power;

 reinforced provisions on NRA independence;

 enhanced consumer protection through increased information and tariff transparency requirements; and

 the creation of a new European regulatory agency.

At the time of writing, the European Parliament has adopted its First Reading report on the package and the French presidency is working towards reaching political agreement by the end of the year. The consumer provisions have been broadly welcomed and supported, but there has been little appetite in both institutions for the veto or the Agency, as originally designed by the Commission, favouring instead an enhanced ERG and supporting secretariat. Regulatory independence has proved surprisingly controversial in Council. Some have raised concerns regarding the use of functional separation and the need to balance technology and service neutrality with public interest objectives, particularly in the area of spectrum management. If negotiations go to plan, the package will be finalised before the dissolution of the European Parliament in the summer 2009, and transposed into the national law of Member States by mid-2010.

1.4.3 Regulatory developments in telecommunications markets The following sections provide an overview of regulatory developments in 2008 in key areas of the communications sector.

1.4.3.1 Next generation networks and access - the role of the market, state and regulation

Telecommunications operators worldwide are considering the roll out of next-generation core networks (NGNs), to replace multiple legacy core networks with a single IP-based network for the provision of all services. In addition, debates on the regulatory approach to next generation access (NGA)3 have been high on the agenda in many countries over the past year.4 Two issues are at the centre of the regulatory debate:

1. The role of the market and of the state

Japan and Korea have developed national strategies for NGA roll-out, involving some public support. Japan has given incentives to the incumbent operator (NTT) to invest in fibre through asymmetric regulation (with regulatory measures differing between copper-based and fibre deployments). This policy has involved the encouragement of infrastructure-based competition.

In Europe and the US, there has been a different strategy, with growth in NGA funded, or partly funded, by regional and local authorities. This accounts for Sweden’s strong European lead in customers connected using NGA. These schemes have sometimes proved controversial. The European Commission has scrutinised them on grounds of state aid, and they have faced legal challenge in the US. Deployments based on public intervention are generally based on arguments around market failure and digital inclusion. Also, best practice

3 NGA can be understood as new physical infrastructure relying on new access network technologies enabling a significant improvement in the broadband experience for end-users, through combinations of: higher bandwidths; more equal upstream and downstream bandwidths; and more reliable, higher quality services. 4 For a detailed overview of recent NGA market developments worldwide see section 5.1.5 below

45 The International Communications Market 2008 for publicly-funded NGA generally involves the use of open access platforms, allowing multiple service providers to operate on the publicly-owned network.

2. The role of regulation in encouraging investment in NGA while promoting competition between providers

Regulatory policy is coming under close scrutiny as policy-makers seek to encourage NGA investment. Regulation should balance competition against the industry imperative of an appropriate expectation of return on investment.

The US authorities have adopted a policy of ‘regulatory forbearance’ (meaning that once incumbent operators have upgraded their access network to NGA, they are no longer obliged to offer access to it to other operators), and other countries are considering similar policies. In the EU regulators are looking at risk premiums for NGA investments when setting regulated prices, but are not considering forbearance, which would not in principle be permitted under EU law.

An issue that remains unresolved is what form of regulated access to NGA should be imposed. Options include various forms of passive and active access. Passive access involves access to physical network elements, such as ducts and fibre. Active access measures rely instead on granting access to the electronic equipment that is connected to the physical infrastructure.

1.4.3.2 Functional separation - creating a level playing field in access to infrastructure

Fixed-line network regulation aims to promote fair competition between providers by ensuring that alternative operators can get access to the incumbent’s network. Many countries require the incumbent telecom operator to supply wholesale services to rival operators on a non-discriminatory basis.

’Functional separation’ is a remedy that can complement other access measures by placing the monopoly elements in a separate business unit. This allows any wholesale products and associated services to be offered both to the incumbent's own retail businesses and to those of rivals on equal terms. Functional separation began in the UK market in 2005, when Ofcom accepted undertakings under national competition law from BT to place its access and backhaul businesses in a separate business unit (Openreach). An Equality of Access Board with its own secretariat within BT monitors and reports on BT’s compliance.

Functional separation is not unique to the UK and is a remedy either implemented or under consideration in other European countries. These include Sweden, Italy, Poland and Greece, although these mechanisms are not identical to that of the UK.

In the context of the Review of the European Regulatory Framework currently under way, the European Commission sought to ensure that functional separation was an available remedy under the regulatory toolkit. This has generated considerable debate both in the European Parliament and in the Council. There is wide agreement that functional separation should only be used as a remedy after a careful assessment of the evidence on a case-by- case basis, with some arguing that this should be considered an exceptional remedy.

Functional separation has also attracted support outside Europe. In March 2008, a three- way operational separation of Telecom New Zealand was approved by the New Zealand Government with legally enforceable undertakings. In Australia, the Government Minister for Communications is considering whether functional or structural separation should be a condition for the incumbent operator to build a national broadband network.

46 The International Communications Market 2008

1.4.3.3 Regulating mobile termination rates to protect consumers

The level at which mobile termination rates (MTRs)5 are capped has always been a major issue for the industry and has a significant impact on the pricing of calls to mobiles for consumers. The divergent and, in some cases, high levels of MTRs across Europe prompted the European Commission to make proposals in June 2008 that would have the effect of substantially lowering MTRs across Europe by changing the way in which regulators calculate the levels of both mobile and fixed termination (making them symmetric).

Outside the EU, a number of jurisdictions have interconnection regimes that are not based on termination charges. Instead, a pricing scheme for the two-way interconnection of two or more networks operates under a regime in which the reciprocal call termination charge is zero and each network operator agrees to terminate calls from the other network at no charge. This form of interconnection pricing is sometimes known as bill and keep (B&K) and has been adopted in the US. Other countries and territories such as Canada and Hong Kong operate variants of this model, which is attracting the attention of European regulators, both in connection with the future regulation of mobile, and in considering interconnection pricing models in other contexts such as NGN.

1.4.3.4 Roaming regulation aims to deliver consumer benefits

In 2007 a new Regulation, aiming to ensure that consumers travelling in the EU were not charged excessive prices to make or receive calls, entered into force. In particular, the regulation required operators to offer all consumers a roaming voice call tariff (the ‘Eurotariff’). This had a significant impact on prices, which fell by up to 60% between June and September 2007. In September 2008, and drawing on recommendations from the ERG, the Commission proposed to:

 extend the current regulation of wholesale and retail voice roaming prices until 2013 (instead of 2010), with a continued decrease in the maximum price;

 introduce similar regulation of SMS wholesale and retail prices;

 introduce a maximum wholesale price for packet data roaming services, set at a ‘safeguard’ level to eliminate excessive prices at the fringes; and

 require operators to provide consumer information on SMS and packet data roaming prices, and enable consumers of packet data services to control the amount they spend by setting an upper limit.

The Council and European Parliament will discuss the Commission’s proposals in the autumn of 2008. If adopted, the Commission proposes that they enter into force in July 2009.

1.4.3.5 USO - the debate moves from fixed to mobile and broadband

‘Universal service’ is the principle that a defined minimum set of communications services (originally postal and telephony services, and progressively other services such as internet access) should be available to all end-users at an affordable price, regardless of their geographic location.

5 Charges levied by operators for the service of terminating a call on its network.

47 The International Communications Market 2008

In Europe, all 27 Member States (except Germany and Luxembourg) have introduced universal service obligations. In accordance with European law, these are at present limited to:

 the provision of voice telephony and associated services such as public payphones or directory enquiries; and

 functional (narrowband) internet access, including access for disabled users.

In September 2008 the European Commission initiated a review of the scope of universal service, the main focus of which is whether (and if so under what conditions) it should be extended to cover broadband and mobile services.

In the US there is a universal service fund that covers the provision of basic telephone services in high-cost and rural areas, as well as for discount telephone services and funding for schools, libraries, and rural health care providers. As in Europe, there is also a wider debate about the creation of a fund to stimulate greater access to affordable broadband services.

1.4.4 Developments in content regulation 1.4.4.1 AVMS: more flexibility for broadcasters in an increasingly competitive market

In 2008, European governments and content regulators worked on the transposition of the recently adopted Audiovisual Media Services Directive (AVMS), which extends broadcasting regulation to cover video-on-demand services, into national law. The deadline to do so is December 2009. At present, all EU countries are either in the process of consultation or drafting legislation. In some cases, such as France and Ireland, legislation is currently before Parliament and will also address the reform of public service broadcasting.

The Netherlands, the UK, Poland, Italy and Sweden are currently preparing draft legislation. Generally, it seems that the great majority of member states will opt to allocate responsibility for the regulation of VOD services to the existing content regulators, with the possible exception of the UK, where co-regulatory solutions may be considered preferable.

It also appears that most countries will embrace the opportunity to liberalise some of the current restrictions on television advertising, including the prohibition on product placement. These changes will provide greater commercial flexibility for broadcasters in an increasingly competitive environment.

1.4.4.2 New media markets – challenging the role of PSB and its funding

In Europe, as well as in other countries such as Japan and Canada, broadcasting systems have been characterised by the existence of a dual public and commercial broadcasting model, combined with strict regulation of content standards. In the US, by contrast, commercial broadcasters have long dominated the market, and regulation of content has been limited. In China, the great bulk of Chinese television content is produced and distributed through state-owned media outlets, and controlled by the regulator (SARFT).

A major focus of policy debate during 2008 has been the need for public service broadcasting to reconsider its role and funding sources in a new media environment. In January 2008 the French government announced proposals to ban advertising spots on public television channels between 8pm and 6am from January 2009, with a total ban in place in 2011. Compensation for revenue loss will be through the introduction of a levy on

48 The International Communications Market 2008 commercial broadcasters as well as other telecommunications operators (see text box in section 4.2.4.3).

In the UK, Ofcom is also conducting a second major review in this area, with a focus on how to maintain and strengthen delivery of public service content in a digital era. Ofcom published a consultation document in September 2008, setting out three possible future models for consideration, with a view to presenting recommendations to Government in early 2009.

Where public service broadcasters receive public funds, they must comply with EU rules on state aid. This requirement has triggered some complaints about state aid to the European Commission and, as a consequence, regulatory reforms in a number of EU countries, including Germany, the Netherlands, Denmark and Ireland. In Germany, for example, a new draft Interstate Broadcasting Treaty envisages that the internal councils of the public service broadcasters (ARD and ZDF) will conduct or commission from experts an assessment of the market impact of their new services.

1.4.4.3 Piracy - contrasting approaches in the UK, the US and France

In most countries, the creation and distribution of online content and the associated regulatory challenges are at the forefront of debates on content regulation. A major challenge is the fight against piracy. During 2008, the European Commission consulted on this issue, and also explored digital rights management and the possible need for a multi- territorial licensing approach in the online environment.

In parallel, a number of national legislative and non-legislative initiatives have focused on piracy through enhanced cooperation between content and network providers, legal offers, educational initiatives and better cooperation between ISPs in blocking pirated content.

 In France, draft legislation, acting against illegal file sharing and downloading and promoting the development of legal online offers for music, audiovisual, and cinematographic works, was presented to the Government in summer 2008 and is expected to be examined in the autumn. The law envisages the establishment of a public body empowered to take action at escalating levels against copyright infringers with the power to terminate accounts in cases of repeated violations.

 In the UK, the creative industries and internet service providers have signed a Memorandum of Understanding (MoU) with the aim of working together to tackle peer-to-peer copyright infringement. Some of the activities being explored include raising consumer awareness, encouraging the consumption of ‘legitimate’ offers, and analysing other potential remedies including legislative options and technical measures. Other EU countries including Sweden and Finland have expressed interest in this approach.

 In the US, existing copyright and privacy regimes have informed proposals for action. In particular, the impact of behavioural advertising6 was top of a substantial list of content-related issues being addressed by Congress and regulators in the US this year.

6 Behavioural advertising describes the use of automated systems to:  profile individuals, by tracking and analyzing their online behaviour – the sites they visit and the web searches they make; and  deliver targeted advertising which reflects the preferences and interests expressed through that behaviour

49 The International Communications Market 2008

1.4.4.4 Protecting minors – attention turns to online content providers

A common focus for regulators across the world is how to protect users from harmful content online, given the inherently global nature of the internet. Tools under consideration include age verification techniques, rating and classification tools, and awareness-raising campaigns.

In Sweden and the UK, there are ongoing efforts to promote awareness of internet safety issues and to complement regulation with media literacy initiatives (see box below).

Some countries have introduced legislation to regulate some of the material available on the Internet (particularly if harmful to minors). Often the regulator (e.g. in Korea) or a co- regulator (e.g., Germany and Australia) deals with the monitoring and enforcement of the rules. Japan is exploring whether ISPs should be answerable for breaches of minimum regulations to guard against illegal and harmful content. In China, new regulations, jointly issued by SARFT and the Ministry of Information Industry, indicate that only state-owned or affiliated companies may broadcast online programmes and that licences will include conditions about the potential harmful and offensive nature of the content.

Media literacy is emerging as a global theme in communications regulation

In the last few years, media literacy7 has climbed the agendas of a range of stakeholders and regulators worldwide. Statutory obligations to promote media literacy are rare (Ofcom is one of the few authorities with a duty to do so). But there are now other countries where it has been introduced (Ireland) or is being discussed (Israel, Belgium). Other initiatives (with different emphases) are taking place around the world:

 in New Zealand the Government has as an objective to ensure a 'media-literate citizenry' and has set out to incorporate media teaching into its school curriculum;  in the US, the American Centre for Children and Media aims to sustain a vibrant children’s media industry by developing, implementing and promoting policies and practices that respect young people’s wellbeing;  in Canada, the Association for Media Literacy provides a network for media literacy teachers throughout the world, and publishes curriculum anthologies and other support material in several languages for media teachers;  In the UK, Ofcom recently published its latest wave of Media Literacy Audits. These include research into the skills and behaviours of UK adults, UK children, and UK adults from ethnic minority groups.8  The UN’s Alliance of Civilizations has a media literacy clearing house that sits alongside its core work.

As initiatives develop and more resources are employed in this area across a range of territories, there are increasing efforts to link the different interpretations of media literacy from around the world. In December 2007 the European Commission called for a joint European approach, while in May 2008 Australia, Canada, Ireland, New Zealand, the UK and the US launched the International Media Literacy Research Forum.

7 Media literacy is not easy to define but generally refers to the capacity to use and understand communications. Ofcom defines media literacy as: ‘the ability to access, understand and create communications in a variety of contexts’ 8 http://www.ofcom.org.uk/advice/media_literacy/medlitpub/medlitpubrss/

50 The International Communications Market 2008

1.4.4.5 The net neutrality debate has implications for quality of service

The ‘net neutrality’ debate (whether, and where, there should be a principle of non- discrimination of internet traffic across networks) continued during 2008. It originated in the US, where there have been five abortive attempts at net neutrality bills (in each case, these bills would have prohibited ISPs from offering ‘tiered services’, priced according to the user's choice of level of quality of service).

The debate has a raised profile in Europe in the context of the review of the European Regulatory Framework. There seems to be a consensus that a combination of competition, information, and transparency is the right approach to any restrictions on access to applications and services, beyond reasonable network management. There remains the possibility of imposing minimum quality of service requirements, where competition proves insufficient.

51

The International Communications Market 2008

The International Communications Market 2008

2 2 Comparative International Pricing

53 The International Communications Market 2008

Contents

2.1 Comparative international pricing 55 2.1.1 Introduction 55 2.1.2 Methodology 56 2.1.3 Summary of findings: ‘multi-play’ 59 2.1.4 Summary of findings: Fixed voice 61 2.1.5 Summary of findings: mobile 63 2.1.6 Summary of findings: fixed-line broadband 66 2.1.7 Summary of findings: TV 67 2.1.8 Basket 1: a low-use household with basic needs 68 2.1.9 Basket 2: A broadband household with basic needs 71 2.1.10 Basket 3: A mobile ‘power user’ 73 2.1.11 Basket 4: A family household with multiple needs 76 2.1.12 Basket 5: An affluent two-person household with high use of mobile, internet and premium TV 80 2.1.13 Conclusion 83

54 The International Communications Market 2008

2.1 Comparative international pricing

2.1.1 Introduction There is wide international variation in the consumer experience of communications services. Super-fast broadband is more readily available in some countries, while others have a greater range of radio and television stations, or offer more developed innovative services such as mobile broadband or high-definition television. However, when comparing markets for communications services across the world, the metric which probably matters most to the greatest number of consumers is the price they pay for their services.

Unfortunately it is difficult to provide meaningful international comparisons to help place UK pricing in context. The complexity of tariffs, the wide range of usage profiles across households within countries, large variation in ‘average’ use between countries, the rise of ‘service bundling’ (where more than one service is offered on a single bill from the same provider), and the variations of installation and hardware costs, all require a holistic and multifarious approach if a price benchmarking exercise is to be meaningful.

To try to address these issues, we have developed a methodology for comparing prices which is based on consumption across ‘typical’ household types in the UK, France, Germany, Italy, Spain and the US (where we have used Illinois as a representative state), and which considers issues such as the impact of hardware subsidies and multi-service discounts. The 2008 analysis builds on that developed in the 2006 and 2007 International Communications Market Reports, but marks a step-change in terms of:

 the range of tariffs considered (4,849 in total across the six countries);

 the incorporation of additional complexities, both in terms of the baskets (for example, a range of call lengths are included in the fixed and mobile baskets); and

 the inclusion of more complex components of tariffs (for example, including promotional offers, subject to certain criteria).

We have organised our analysis of comparative international pricing into the following sections:

 Methodology - essential to understanding the basis of the findings, so we begin our analysis with a summary of methodological principles.

 Summary of findings - we provide an overview of the findings, providing details and commentary on the savings available through purchasing services as part of a ‘multi- play’ bundle, and on single-service pricing for fixed-line voice, mobile, fixed-line broadband and television.

 Basket analysis - we detail the relative prices for baskets of communications services representative of five household types. These include ‘average pricing’ analysis and the ‘best offer’ available, including where appropriate multi-service tariffs such as ‘triple-play’ deals offering fixed voice, broadband and television services on a single bill.

 Conclusion - we summarise findings across the baskets, highlighting that much of the variation is caused by mobile, which forms both the largest component of spend and has the greatest variation across countries. We also identify the savings that

55 The International Communications Market 2008

some consumers can achieve by purchasing two or more communications service in a ‘bundle’ from one operator.

2.1.2 Methodology Full details of the methodology are provided in Appendix B (available at: www.ofcom.org.uk/research/cm/icmr08 ), but the basic principles are as follows:

 We constructed five ‘typical’ household types, which collectively may be seen as representative of the average population across our countries. and defined a basket of communications services (fixed-line voice, mobile, broadband, TV) appropriate for each household type.

Figure 2.1 Household types

‘Typical’ household type Fixed Intern’l Mobile Mobile Fixed-line Mobile Television voice voice voice messaging broadband broadband 1 A retired low-income Low - - - - - Basic couple 2 A couple of late Medium Low Low - Low - Basic adopters 3 A single mobile-only - Medium High High - High Pay TV user 4 A ‘networked’ family High Medium Medium High Medium - Pay TV

5 Affluent couple with Low High High Medium High - Premium sophisticated use pay TV Source: Ofcom

 We included a wide range of components within the baskets to ensure as accurate as possible a representation of the real costs consumers pay. For example:

o Fixed voice minutes were distributed by whether they were to fixed or mobile lines, by call distance (local, regional, national and international, including a range of international destinations), and time of day (day, evening, weekend).

o In addition, mobile calls (and messaging) were split between ‘on-net’ and ‘off-net’, and voicemail was included.

o Call set-up costs and per-minute charging were incorporated, and a range of call lengths were used (distributed around a defined mean based on averages across 30 OECD countries).

o Incoming calls to mobile phones were included in recognition of the different pricing mechanism in the US.

o The broadband component was defined both by minimum headline speed and by minimum data and time online requirements.

o The television element included the licence fee, a digital receiver and (for some baskets) a digital video recorder (DVR). Because of difficulties in comparing channels and their programmes, two tiers of pay-TV were considered: the most basic pay service available over and above the channels available on free-to-air TV; and a premium service defined by first-run movies from the major Hollywood studios and the best package of top-tier football matches.

56 The International Communications Market 2008

 The average monthly use across the baskets was adjusted to ensure that it was closely aligned with average use in households across the six countries (for example, based on operator and regulator data, the actual average number of SMS per households across the six countries in 2007 was 115, so our average number of SMS across our five households is 115).

 Mobile phones, broadband routers, digital set-top boxes and DVRs are included within the baskets (and amortised over an appropriate period in order to attribute a monthly cost). This is necessary because they are often inseparable from the service price, as operators frequently include subsidised or ‘free’ equipment (for example, a mobile phone or a wireless router), but seek to recoup the cost of these devices from subscriptions and service payments across the life of a contract. For similar reasons, we include connection and/or installation costs.

 In July 2008, detailed data of every tariff and every tariff combination from the largest three operators in each country by retail market share were collected (or for more than three operators, if required to ensure that a minimum of 80% of the overall market was represented). Multi-play tariffs (i.e. those which incorporate more than one service) were also collected. Only those tariffs which were published on the website of the operators were included.

 Across the six countries, the tariff data included consisted of:

o fixed voice: 742 tariff options;

o mobile: 2481 tariff options;

o broadband: 324 tariff options;

o television: 502 tariff options; and

o multi-play: 800 tariff options.

 Our model identifies the tariffs that offer the lowest price for meeting the requirements of each of the household baskets.

 All prices are converted back to UK currency using a Purchasing Power Parity (PPP) adjustment based on OECD comparative price levels and an exchange rate in July 2008.

In order to provide both an illustration of representative prices for the individual services in each country, and an illustration of the best value that consumers could get for their full basket of services, we have provided two types of analysis for each basket.

The first (which we call ‘average single service’ pricing) illustrates the price of each individual service, as defined by the average of the lowest price tariff offered by three operators which provide the service in each country. These are then weighted by the market share of the service provider in order to ensure fair representation. This provides a useful comparison of the relative costs of communications services, but an important limitation is that single- service offers are sometimes not available from leading suppliers. For example, in the UK, TalkTalk only offers broadband together with fixed voice. In Spain over 80% of broadband is purchased in association with another service.

The second type of analysis (which we call ‘best offer’ pricing) identifies the lowest price that a consumer could pay for this basket of services, including, where appropriate, by

57 The International Communications Market 2008 purchasing ‘bundled’ services. Our view is that this type of analysis is essential in order to provide a true picture of the position of consumers in each market, since they increasingly buy multiple services from single operators. Examples in the UK are BSkyB’s See, Surf, Talk ‘triple-play’ offer, which provides TV, voice and broadband, and Virgin’s ‘quad-play’ offer which includes TV, voice, broadband and mobile. However, there are two key limitations to this type of analysis. First, ‘bundled’ service offerings are typically not available to all consumers as they are generally geographically constrained to areas where premises are connected either to a cable network or to an unbundled telephone exchange. Second, even in areas where these services are available, they may not have high take-up. Therefore, although the ‘best offer’ provides insight into the lowest prices available to some customers, it is not as good a reflection of the prices that consumers are actually paying as the weighted average analysis - which is only possible when looking at single-service pricing.

We believe that a multi-platform, basket-based approach is the most useful way of comparing international pricing of communications services. Nevertheless, there are some limitations to our methodology and the following notes and caveats are important in interpreting the analysis below.

 The analysis assumes a systematic and rational consumer who has a full understanding of his or her usage requirements and is prepared to shop around and undertake some often quite complex calculations to identify the tariff which offers the best value. In reality, many consumers do not act in this way, but we believe the assumption is necessary in order to provide effective international comparisons. It should be noted, however, that another measure of consumer choice and the competitive environment is the complexity of tariff structures and the ease of selecting an appropriate tariff, or switching to an appropriate tariff.

 In looking only at tariffs offered by the largest operators in each country, lower prices which might be available from smaller operators seeking to disrupt markets are not included, purely for practical reasons. Nevertheless, we believe that using the prices of the largest operators is appropriate, both because they are the best reflection of the general consumer experience and because their pricing both defines and is defined by the competitive environment in which they operate.

 Although we have been as comprehensive as possible, tariffs are often highly complicated and there are some components that we have been unable to incorporate into our model; for example, the benefits available from fixed-line and mobile tariffs which include free or reduced rates to nominated ‘friends and family’ numbers.

 In order to calculate the weighted average, we have used market share calculations based on operators’ retail customers. It should be noted that market share calculations are based on the overall subscriber base, not the subscriber base for the particular tariff (for which data are not available).

 Pay-TV services constitute a component of three of the baskets we examine. However, it has not been possible to compare like-for-like subscriptions principally because of differences in the composition of basic and premium channels across the six countries. As a consequence, quantitative comparison of international TV pricing is arguably less meaningful than for telecoms services. This is also an issue in the pricing of ‘triple-play’ services, where there is a wide variation in the types of TV content.

 For some communications services in some countries there are only two operators with nationwide coverage (or only one, for many premium TV offerings) and/or

58 The International Communications Market 2008

significant market share. In these instances, we have identified the best-value tariff from each of them and calculated a blended average based on their market shares.

 To avoid ‘skewing’ the average single service pricing analysis, tariffs which are over 100% higher than that offered by the lowest price provider are excluded from the weighted average (the aim here is to exclude tariffs which are clearly not targeted at the usage profile we are analysing).

 Some services are not available nationwide. This is particularly true for services which are available only where local exchanges have been unbundled, and for IPTV, which requires a high-speed broadband connection, but is also true for cable TV and all types of broadband.

 In this year’s analysis, we have not defined whether the mobile phone component in a basket is pre-pay or post-pay. We believe this enables better international comparison, given the very different pre-pay / post-pay splits in different countries (for example, around 90% of Italian mobile connections are pre-pay, while around 90% of US mobile connections are post-pay). However, a consequence of this is that the analysis does not recognise the different characteristics of the services; for example, a pre-pay mobile may be the only option available to consumers with a poor credit rating and also offer advantages to those who vary their use month-by- month.

 Representative pricing in the US as a whole is difficult, due to large regional variations as a result of local incumbent telco operators and cable operators offering localised prices for fixed-line services. We only use the tariffs available within the state of Illinois, chosen because it is reasonably representative of the US as a whole in terms of its relative wealth and rural-urban split (it incorporates the city of Chicago as well as large agricultural regions). Nevertheless, US pricing should not be viewed as representative of the whole country.

2.1.3 Summary of findings: ‘multi-play’ For the three of the five baskets that include broadband, consumers in the European countries can make savings by purchasing multiple services in a multi-play ‘bundle’ from one provider, rather than purchasing each service on a standalone basis.

Figure 2.2 below indicates that the lowest price available in the UK for Basket 2, which includes a basic broadband connection and a fixed-line voice line, is around £29. This involves purchasing a voice tariff which includes ‘free’ broadband, and saves nearly £15 compared to the lowest prices available by buying the services separately (Figure 2.3).

For Basket 4, which includes a basic pay-TV deal, the lowest prices available in the UK, France and Italy involve purchasing broadband, fixed-line voice and television services in a ‘triple-play’ bundle. In the UK and Germany, consumers can save around £18 a month through these deals rather than the equivalent lowest price deals for single services.

Basket 5 includes premium pay-TV services (top league domestic football and first-run Hollywood movies), and because these packages are typically offered as an ‘add-on’ to basic level services, they do not generally offer savings if bought within a triple-play subscription rather than on a standalone basis. However, in all of the European countries, the lowest prices achievable for this basket of services involve purchasing fixed-line voice and broadband together.

59 The International Communications Market 2008

In the US, there are no savings available by purchasing services in ‘bundles’ rather than purchasing the lowest price single services. This is probably the consequence of less diversification in local markets, with the incumbent telco and the local cable operator typically competing in a duopoly to serve voice, broadband and TV services to customers. In this environment, the bundling of ’free’ broadband with voice is value-destroying for operators who generally view voice, broadband and TV as three separate revenue streams.

This contrasts with Europe, where local loop unbundling and wholesale line rental with regulated price controls has led to a competitive landscape characterised by alternative network operators building market share by launching bundled services (the incremental costs of adding a broadband service to a voice service are low, and the consumer benefits high) - and incumbents have responded by doing the same.

Figure 2.2 Best prices available, including multi-play offers

Fixed voice Mobile Broadband Pay-TV Voice & Broadband Triple-play TV & Broadband £300

£250 213.92 207.49 193.78 £200 28 187.60 15 21 153.69 133.88 153.94 55 54 £150 22 131.29 29 28 127.01 114.44 112.95 104.35 29 24 31 Price per month £100 13 167 18 34 35 37 31 41 117 51.98 45 35 35.55 137 90 £50 36.59 27.08 102 97 28.86 25.93 16 73 73 91 91 28 20 14 50 55 20 19 23 22 19 27 19 £0 9 974 15 UK UK UK ITA ITA ITA FRA SPA USA FRA SPA USA FRA SPA USA GER GER GER

Basket 2 Basket 4 Basket 5

Source: Ofcom using data supplied by Teligen Note: Weighted average of best-value tariff from each of the three largest operators by market share in each country; July 2008; PPP adjusted

60 The International Communications Market 2008

Figure 2.3 Best prices available for standalone services

Fixed voice Mobile Broadband Pay-TV £300 260.02 247.50 £250 21 55 £200 41 187.60 193.78 165.71 50 153.22 21 155.47 143.54 54 £150 22 35 10 13 129.58 34 126.68 122.82 13 20 116.10 14 13 20 31 Price per month per Price 8 35 £100 14 18 167 45 117 137 52.82 97 14 22 43.63 43.31 51.98 102 91 91 90 39.01 73 73 £50 34.37 16 50 55 14 13 14 20 9 9 7 15 15 14 20 22 4 22 21 19 24 19 27 20 20 19 £0 18 15 17 17 18 15 17 UK UK UK ITA ITA ITA FRA SPA USA FRA SPA USA FRA SPA USA GER GER GER

Basket 2 Basket 4 Basket 5

Source: Ofcom using data supplied by Teligen Note: Weighted average of best-value tariff from each of the three largest operators by market share in each country; July 2008; PPP adjusted

2.1.4 Summary of findings: Fixed voice Figure 2.4and Figure 2.5 below look at the costs of the fixed-line voice components of those baskets which include a fixed-line phone. In terms of overall pricing, as calculated from the weighted average of the best value tariffs from the three largest operators in each country (Figure 2.4), Germany is the least expensive, although there is little difference between it and the UK, Italy and France. However, there are some notable differences between the baskets arising from different tariff structures within each country.

The UK is more expensive than France and Italy for the lowest-usage Basket 1, because it has relatively high line rental charges. However, it is the least expensive for the highest- usage Basket 4, due to the relatively low cost of purchasing enhanced tariffs or add-ons which offer unlimited any-time national calls, or reduced prices on international calls or calls to mobiles. By contrast, Italy and France offer the lowest prices for the lowest-usage Basket 1, but are significantly more expensive than the UK and Germany for the higher-usage Basket 4.

Spain comes out as the most expensive country, due to the tariffs offered by incumbent Telefonica (which has around 80% retail market share) being more expensive than those of incumbents in the other European countries. Unlike basic tariffs offered by BT, Deutsche Telekom, France Telecom and Telecom Italia, Telefonica’s basic tariff does not offer any inclusive calls.

The US appears more expensive than the European countries (other than Spain) as the cost of national calls more than outweighs the low line rental and free local calls. The US also offers the lowest price of calls from fixed lines to mobiles (as a consequence of the ‘receiving party pays’ interconnect regime, which means that mobile users typically pay for incoming calls). However, because the fixed-to-mobile call element in our baskets is small, this feature of the US market has little impact on the overall findings.

61 The International Communications Market 2008

Figure 2.4 Comparative single-service ‘weighted average’ fixed-line voice pricing

£120

28.98 £100 21.81 Basket 5 21.06 21.17 24.83 £80 22.10 34.85 Basket 4 31.47 £60 30.68 25.10 26.95 27.89 Basket 2

Price per month Price £40 30.69 26.91 23.05 25.61 24.63 24.30 Basket 1 £20 24.02 19.29 16.82 19.33 18.77 19.66 £0 UK FRA GER ITA SPA USA

Source: Ofcom using data supplied by Teligen Note: Weighted average of best-value tariff from each of the three largest operators by market share in each country; July 2008; PPP adjusted

In looking at the best tariff available from the three largest operators in each country (Figure 2.5), there are some striking differences from the ‘weighted average’ analysis.

While the ‘weighted average’ analysis is to a considerable extent a reflection of incumbent pricing (with incumbents having retail market share of over 60% of fixed-line voice connections in all the European countries), the ‘best offer’ analysis gives prominence to tariffs from the largest alternative network (‘alt-net’) operators. Germany and the UK offer the lowest and second lowest overall prices on the ‘weighted average’ basis, but because of a much lower differential between the pricing of the incumbent and of the two largest alternative networks, they have the highest overall prices of all the European countries when only the best tariff for each basket is considered. The UK is the only country in which a tariff from the incumbent appears as a ‘best offer’ tariff for one of the baskets.

By contrast, the best alt-net pricing in Spain typically undercuts the incumbent by around 50%, while alt-nets in Italy and Spain can offer savings of between 20% and 30% on incumbent pricing. However, it must be noted that while there is the potential for some consumers in these countries to achieve lower fixed-line pricing for these baskets than is available in the UK, alt-nets typically do not have nationwide coverage, and tariffs are often available only in areas where the local exchange has been unbundled (typically, in areas of high population density).

62 The International Communications Market 2008

Figure 2.5 Comparative single-service ‘best offer’ fixed-line voice pricing

£120

£100

Basket 5

h £80 19.78 18.83 20.43 Basket 4 18.17 £60 17.25 20.83 23.87 15.24 27.47 19.00 Basket 2 Price per mont £40 18.98 17.41 20.06 21.89 Basket 1 17.94 17.34 21.98 £20 14.54 18.59 16.82 16.45 10.83 14.29 14.42 £0 UK FRA GER ITA SPA USA

Source: Ofcom using data supplied by Teligen Note: Lowest tariff available for the fixed-line voice component of each basket from any of the three largest operators by market share in each country, July 2008; PPP adjuste.

2.1.5 Summary of findings: mobile The UK offers the lowest ‘weighted average’ prices for the mobile component of every basket except the lowest-use basket, where Italy offers the lowest mobile pricing (Figure 2.6). In general, the UK and Italy are significantly cheaper than all the other countries.

This is perhaps indicative of higher levels of price competition in Italy and the UK than in the other countries, driven by:

 saturated markets (in both countries the number of mobile connections has exceeded the population since 2005); and

 the disruption caused by new entrant Hutchison 3G (branded as ‘3’), which launched in both countries in 2003 and since then has sought to gain market share through low-priced offers. (Note that as Hutchison 3G is the fifth largest operator in the UK and the fourth largest in Italy, its tariffs are excluded from this analysis).

Section 5.2.4.11 of this report illustrates that the Herfindahl-Hirschman Index (often used as an index of the level of competition in the market) finds that the UK has the least concentrated mobile market in Europe.

However, although they offer the lowest prices, the characteristics of the mobile markets in the UK and Italy are very different.

In the UK, around 40% of mobile connections are post-pay, and these tariffs are characterised by heavily subsidised (or even ‘free’) handsets, with operators recouping the value over the course of the contract. Fixed monthly line rentals typically include a large number of inclusive any-time any-network minutes and SMS texts. The result is that high users tend to pay a ‘flat-rate’ for most of their use, and the value available from these tariffs is evident in the low relative prices for the high-use mobile connections in Basket 3, Basket 4 and Basket 5 (although of course, this assumes that consumers know their regular monthly usage level and select the correct tariff accordingly).

By contrast, around 90% of mobile connections in Italy are pre-pay and there is little by way of handset subsidy even for post-pay tariffs, where line rental is typically much lower than in

63 The International Communications Market 2008 the UK, with correspondingly lower numbers of inclusive minutes and SMS. Indeed, there is little variation between pre- and post-pay in Italy; they tend to have the same basic call charges, The result is that Italian tariffs are characterised more by metered than ‘flat rate’ pricing. Prices for consumers with low monthly use tend to be lower than in the UK (as in Basket 2, and for two of the connections in Basket 4). Although not captured in our findings, this pricing structure has benefits to consumers in that it offers greater flexibility to consumers who either do not know their monthly usage or, typically, vary it from month to month.

Higher prices in Spain are a feature of all our mobile baskets, and our findings are consistent with other research, including that published by the OECD. The structure of the Spanish market may go some way to explaining the relatively high prices, with just three mobile operators, of which the largest two combined have more than 75% share of the retail market. The Herfindhal-Hirschman Index of market concentration, shown in 5.2.4.11 of this report, indicates that the Spanish mobile market is less competitive than those of the other countries considered.

Another factor may be that mobile termination rates (MTRs) (i.e. the cost that a calling network must pay a receiving network in return for connecting the call) in Spain have historically been higher than in the other countries. Although MTRs were cut by over 40% in 2007, they remain higher than in all the other countries with the exception of Italy, and it could be that these cuts have not yet translated into equivalently lower retail prices for consumers.

However, it should be noted that two characteristics of our methodology may discriminate against the pricing regime in Spain – making mobile calls appear more expensive than they would be with a different methodology.

 Firstly, our approach has an average mobile call length of between 1.5 and 1.8 minutes, depending on the mobile profile (this is based on average call lengths across OECD countries). Unlike the other countries analysed, which overwhelmingly have only per-second or per-minute charging, Spanish mobile pricing is characterised by an initial call set-up charge for virtually all calls (prices vary between call types and operators but are typically between 12c and 30c). This therefore constitutes a large proportion of the overall price of calls. The absolute and relative price of Spanish mobile calls would fall significantly if the average call length was increased.

 Secondly, our methodology assumes that consumers have an exact understanding of their usage requirements and select the tariff which offers the lowest price available to them. It attributes no benefits to the flexibility offered by tariffs which allow users to vary their usage from month to month and pay accordingly. This is the case with most Spanish post-pay tariffs, where line rental is typically low but there are few inclusive minutes or messages, with a much larger proportion of the charging being on a metered basis than is the case with tariffs in other countries.

The US mobile market is very different from that in Europe because of a different interconnect regime which results in charges for incoming as well as outgoing calls; a consequence is that US mobile contracts typically include a very high number of inclusive (inbound and outbound) minutes in order to provide a ‘flat-rate’-style tariff which incentivises consumers to leave their phone switched on.

This has an impact on our pricing analysis in two related ways. Firstly, basic line rental is typically much higher in return for many more minutes, meaning that there are very few US tariffs targeted at the low users present in Basket 2 and Basket 4 of our analysis. Secondly,

64 The International Communications Market 2008 overall average mobile phone use in the US is much higher than in European countries (722 combined inbound and outbound minutes per mobile connection in 2007, compared to 116 outbound minutes in the UK and 62 in Germany). So, even though the baskets have been created to be representative of average use across the six countries, the mobile baskets collectively have a much lower usage profile than the US average. Because the baskets are less representative of the US market than of the European market, they contain a bias against the US. Put simply, were our baskets to contain much higher mobile usage, the US would be relatively less expensive; a sensitivity analysis we ran on this basis found that the US had the lowest price of all six countries for a basket of 1,000 mobile voice minutes.

Figure 2.6 Comparative single-service ‘weighted average’ mobile pricing

£500

164.98 £400 Basket 5 000

£300 116.23 100.42 Basket 4 106.51 193.31

£200 68.63 Basket 3 63.36 130.01 Price per month 121.15 149.52

87.66 Basket 2 £100 82.82 155.49 91.29 95.84 66.74 41.99 62.08 £0 10.22 11.95 9.76 6.78 16.31 23.21 UK FRA GER ITA SPA USA

Source: Ofcom using data supplied by Teligen Note: Weighted average of best-value tariff from each of the three largest operators by market share in each country; July 2008; PPP adjusted

In looking at the lowest prices available for the mobile phone components of each basket, the pattern is broadly similar to the ‘weighted average’ analysis. Generally, in all countries, there is a greater proportional difference between the ‘average’ pricing and the ‘best offer’ pricing for the higher-use baskets, largely a result of greater variation between post-pay and pre-pay tariffs (Figure 2.7).

The greatest difference between the ‘best offer’ and the ‘average’ pricing is in Germany. This is due to the significantly lower prices offered by the third largest operator, E-Plus, which offers the lowest German prices for all but one of the eight mobile connections in our five household baskets.

65 The International Communications Market 2008

Figure 2.7 Comparative single-service ‘best offer’ mobile pricing

£500

£400 Basket 5 136.93 h

£300 Basket 4

90.72 90.90 89.50 £200 167.23 Basket 3 Price per mont 49.87 54.89 101.94 96.84 116.70 £100 Basket 2 73.38 73.15 110.61 76.15 75.69 60.70 36.67 51.87 £0 9.28 8.53 7.22 4.40 15.09 14.03 UK FRA GER ITA SPA USA

Source: Ofcom using data supplied by Teligen Note: Lowest tariff available for the mobile phone component of each basket from any of the three largest operators by market share in each country, July 2008; PPP adjusted

2.1.6 Summary of findings: fixed-line broadband Single-service broadband pricing comparison should be treated with some caution, as broadband is very frequently bought as part of a multi-service bundle, and many operators do not even offer standalone broadband. (For example, Sky in the UK offers broadband only to its pay-TV customers, while every broadband tariff from France Telecom has IPTV included). In all of the countries that we analyse (except the US), some operators offer a basic broadband service at no incremental cost with some fixed-voice tariffs.

The high pricing of standalone broadband in Spain is largely due to operators generally targeting consumers with multi-play offerings, with less than 20% of all broadband connections billed as a single service. (‘Double-play’ voice and broadband tariffs in Spain are comparable to those available in other countries).

The lowest prices are available in France, where it is also notable that the most basic packages from all three of the leading operators meet the requirements of the highest specification basket (8Mbit/s and 5GB per month).

The UK offers the second-lowest prices, with 8Mbit/s basic tariffs offered by all the leading DSL operators, and relatively low prices being maintained by a competitive environment in which no one provider has more than 30% market share.

However, it should be noted that none of our baskets include genuinely high-speed broadband. This is because the very limited availability of next-generation access broadband in most countries would make price comparisons meaningless. Nevertheless, it should be recognised that high-speed alternatives, often at no great incremental cost, are available to many households in the US and to significant numbers of households in Italy, France and Germany.

66 The International Communications Market 2008

Figure 2.8 Comparative single-service ‘weighted average’ fixed-line broadband pricing

£120

£100 50.46 £80 Basket 5

32.23 37.12 £60 Basket 4 23.87 40.56

Price per month per Price £40 16.38 29.07 13.03 31.21 20.46 Basket 2 16.38 £20 13.03 22.81 24.92 15.14 13.03 18.50 16.93 £0 UK FRA GER ITA SPA USA

Source: Ofcom using data supplied by Teligen Note: Weighted average of best-value tariff from each of the three largest operators by market share in each country; July 2008; PPP adjusted

2.1.7 Summary of findings: TV The variation in numbers and types of channels and different types of programme content makes like-for-like comparison of the pricing of television services difficult. This is an issue which has been discussed in some detail in the context of Ofcom’s pay-TV market investigation9. Our current view is that it is difficult to draw strong conclusions from an analysis of comparative pricing levels for pay-TV packages10. For the purposes of this analysis we have used some headline prices of common pay-TV packages, but this is not intended to either supplement or replace the analysis conducted for the pay-TV investigation.

Licence fees are highest in Germany and the UK, which have the highest investment per head in public service broadcasting. There is no licence fee in Spain and the US, where public funding is raised by alternative means.

‘Basic pay-TV’ is defined as the lowest subscription required to receive channels in addition to those available on free-to-view television. Italy and Germany offer the lowest costs for this ‘entry-level’ service. In Italy this is primarily due to a €15 offer from satellite operator Sky Italia, which has a 90% share of the country’s pay-TV subscriptions, while in Germany packages are available from both cable and satellite operators at around €17 a month.

Under this analysis, the UK and Spain have higher prices than Italy, Germany and France for a basket of premium services consisting of the best package of top-flight football and first-run major Hollywood studio movies (Figure 2.9).

The US is the most expensive country for this premium package, although this may be misleading as in some respects it is driven by the range of choice in the US, where both NFL viewing packages and movie packages are wrapped up in many different tariffs. The requirement of this basket to have the best set of NFL matches led us to choose the most expensive of many options, which may not necessarily have the highest take-up.

9 http://www.ofcom.org.uk/tv/paytv/ 10 See paragraphs 7.56 to 7.71 of the Pay TV Second Consultation: http://www.ofcom.org.uk/consult/condocs/second_paytv/

67 The International Communications Market 2008

Figure 2.9 Comparative single-service TV pricing

£120

£100

TV licence £80

11.63 7.33 £60 60.60 Premium 13.3 TV 6.85 55.39 34.03

Price per month per Price £40 45.00 Basic pay-tv 35.15 34.88 £20 27.57 30.10 20.74 16.00 14.16 11.63 £0 UK FRA GER ITA SPA USA

Source: Ofcom using data supplied by Teligen Note: Basic pay-TV is defined as the minimum price required to purchase a pay-TV packages which includes channels not available over free-to-air TV; Premium TV is defined as the best package of top-league football (NFL in the US and first run films from major Hollywood studios; PPP adjusted.

Having provided an overview of findings on a single-service basis, we now detail the relative total prices for baskets of communications services representative of five household types.

2.1.8 Basket 1: a low-use household with basic needs Our first basket contains a usage pattern typical of a retired low-income couple in any of our comparator countries. They rely on a fixed-line phone for communications and spend around seven and a half minutes a day making calls, the majority of which are local. They only occasionally make calls to mobiles and do not make any international calls. They watch free- to-air multichannel digital television, which is available in all of our countries (largely via satellite in Germany and via the terrestrial platform in the other countries).

Figure 2.10 Composition of Basket 1 Fixed-line voice Mobile Broadband Television Total outbound: 225mins No connection No connection Free-to-air digital television - Local: 61% --- - Regional: 14% 1 digital receiver / set-top - National: 22% box - To mobile: 3%

- Daytime: 58% - Evening: 25% - Weekends: 17% Source: Ofcom

Using a weighted average of the best-value tariffs from the three largest operators in each country, the lowest prices for this basket of fixed voice calls are available in France, followed by Italy and Germany. Prices in the UK are around 18% more expensive than in France, while Spain is the most expensive, with prices over 40% higher than in France (Figure 2.11).

With a large proportion of local calls, this basket favours those countries where local calls are typically included free of charge, as is the case in France and the US. Despite reasonably low use, in most countries there are advantages to users who opt to purchase an

68 The International Communications Market 2008 additional ‘add-on’, or pay a higher line rental for a service which offers inclusive calls (or much lower-priced calls), rather than simply taking a basic package with line rental and metered calls. For example, the lowest prices for two of the three operators considered in the UK requires the consumer to pay additional monthly rental fees for ‘Anytime’ plans which offer inclusive calls to any UK fixed number at any time of day. This emphasises that the lowest prices are available only to consumers who have a good understanding of their requirements and do the research necessary to identify the tariff combination which best meets these requirements.

As these data represent an average of the lowest prices available from the largest operators, weighted by the market share of this operator, the fixed voice pricing, to a large extent, reflects the pricing of incumbent operators, which have over 60% retail market share in each of the European countries. The relatively high pricing in Spain is the consequence of incumbent operator Telefonica having 80% market share and not having a suitably priced ‘add-on’ available for this basket of use – meaning that although the price of line rental is in line with other countries, the metered price of calls is significantly more expensive.

There is significant variation in the cost of the television licence across the six countries (which, along with the cost of a receiver / set-top box, represents the only television costs for this basket, which does not take pay-TV services). With higher investment per head in public service broadcasting than in the other countries, the TV licence is most expensive in Germany and the UK. By contrast, there is no licence fee in the US or in Spain, where public funding for television is raised by alternative means (and is lower per head than in the other countries).

Digital terrestrial television is the largest platform for basic TV services in the UK, France, Italy and Spain - so the prices in Figure 2.11 are an accurate reflection of what the majority of people pay. Digital terrestrial television has also been used for the US as the cheapest way of receiving basic multichannel services, even though only around 15% of households receive terrestrial rather than cable or satellite television. In Germany, because less than 5% of households receive terrestrial television on their main set, we have used the free satellite service (received by over 20% of households) as the basic service, resulting in higher hardware and installation costs. The largest TV platform in Germany is cable (with around 60% market share), with monthly prices for access to a basic set of channels beginning at around €4 (£3) for apartment dwellers to €17 (£13) for those living in houses.

69 The International Communications Market 2008

Figure 2.11 Basket 1: ‘weighted average’ single-service pricing

40.86 £40 31.61 8.22 0.69 £30 24.78 26.76 25.39 TV hardware 11.63 13.30 1.14 22.66 0.63 1.37 TV licence 6.85 3.00 £20 7.33 Fixed voice

Price permonth 24.02 £10 19.66 19.29 16.82 19.33 18.77

£0 UK FRA GER ITA ESP USA

Source: Ofcom using data supplied by Teligen Note: Lowest tariff available for each service type from any of the three largest operators by market share in each country, July 2008; PPP adjusted

There are significant differences when looking at the lowest priced fixed-line voice tariff available from any of the largest operators, rather than the weighted average of tariffs (Figure 2.11). (Note that the television component remains the same, because the basket has free-to-air television, where the only costs are the licence fee and hardware).

In Spain, the third largest operator, Euskatel, with less than 5% market share, offers a price that is over 40% less expensive than the best deal available from the incumbent (Telefonica). An alternative network operator, Tele2, in Italy offers the lowest price across the six countries – its tariff being more than 45% less expensive than the equivalent tariff from the incumbent, Telecom Italia.

By comparison, there is much less variation between the prices of the three largest operators in the UK and Germany.

Figure 2.12 Basket 1: comparative ‘best offer’ pricing

£40 38.35

30.91 8.22 £30 0.69 24.41 TV hardware 11.63 0.63 13.30 18.82 £20 15.67 17.42 TV licence 7.33 1.14 3.00 Fixed voice 6.85 1.37

Price per month £10 18.59 16.45 16.82 14.29 14.42 10.83 £0 UK FRA GER ITA ESP USA

Source: Ofcom using data supplied by Teligen Note: Lowest tariff available for each service type from any of the three largest operators by market share in each country, July 2008; PPP adjusted.

70 The International Communications Market 2008

2.1.9 Basket 2: A broadband household with basic needs The second basket is representative of a couple of ‘late adopters’ who are fairly heavy users of the fixed-line phone, have one mobile between them which they use occasionally and have a basic broadband connection.

Figure 2.13 Composition of Basket 2 Fixed-line voice Mobile Broadband Television Total outbound: 430mins One basic handset Basic fixed-line Free-to-air digital connection television - Local: 65% Voice: --- - Regional: 18% Total outbound: 60mins Minimum speed: 1Mbit/s 1 digital receiver / set-top - National: 11% To national fixed: 24% Minimum usage: 0.5GB box - International: 3% To on-net mobile: 38% Minimum hours: 10 - To mobile: 3% To off-net mobile: 38% Total inbound: 60mins - Daytime: 58% - Evening: 25% Daytime: 58% - Weekends: 17% Evening: 25% Weekend: 17%

Source: Ofcom

There are some significant differences between the relative pricing of the fixed-line voice component of this basket and the lower-usage Basket 1 (Figure 2.10). The UK is the cheapest of the six countries for this basket, which is a reflection of the value available to UK consumers in purchasing ‘add-ons’ or paying a higher monthly line rental in order to receive inclusive calls (UK costs are just 19% higher than for Basket 1, despite this basket including almost twice as many minutes). Prices in the US for this basket are 37% higher. This is partly due to much higher prices for international calls and partly due to a market characterised by relatively low-cost line rental, but relatively expensive metered national calls, meaning that costs increase proportionally more with higher use.

The low use of the mobile phone in this basket is typical of a pre-pay mobile user. Around 90% of mobile connections in Italy are pre-pay, resulting in competition which focuses heavily on price-per-minute charges, which is reflected in the fact that Italy offers the lowest pricing for this basket. The second lowest prices are available in Germany, which may reflect the current focus of competition in the German pre-pay market - Germany is the only country among the six considered in which the number of pre-pay connections grew more quickly than the number of post-pay connections during 2007.

By contrast, mobile prices for this basket are high in the US. This is the consequence of two features of the US market. Firstly, pre-pay has a much lower take-up than in any of the European countries, resulting in the availability of a narrower range of tariffs; indeed, of the three tariffs included in the average pricing calculation of the US, two are post-pay (whereas for the European countries all the tariffs are pre-pay). Secondly, retail pricing in the US is characterised by consumers typically being charged for incoming calls (this is a consequence of the interconnect regime, which differs from that in Europe in that the call- receiving operator bears the cost for the incoming call, rather than the operator from which the call originated paying an ‘interconnect’ charge to the call-receiving operator). The response from many operators is to incentivise customers to purchase large numbers of additional minutes (in order to ensure that they keep their phone switched on), either included with the monthly line rental or, for pre-pay, through higher value top-ups. The result is that the price per minute for low users is higher than in other countries.

The highest mobile prices for any of the European countries are in Spain, with prices 35% higher than in France (the next most expensive European country). This is largely due to

71 The International Communications Market 2008

Spanish mobile pricing being characterised by call set-up charges in addition to per-second charging (the other countries in our analysis generally have only per-second or per-minute charging). This basket, like the other mobile baskets, has average mobile call lengths of less than two minutes, which gives heavy weight to these call set-up charges. Our call lengths are based on the OECD average, but if Spanish mobile call lengths are longer than this average, then our pricing for Spain is over-stated.

Single-service broadband pricing comparison should be treated with some caution, as broadband is very frequently bought as part of a multi-service bundle. Prices for this basket are highest in Spain, but this may in part be due to the fact that Spanish operators generally target consumers with multi-play offerings, and less than 20% of all broadband connections are billed as a single service. With the low usage requirements of this basket, most tariffs offer a flat-rate price, although there is a volume-driven usage element, in addition to the monthly fee, for one of the tariffs used for the average German pricing and one for the average Italian pricing.

France offers the lowest pricing for the basic broadband requirements of this basket, as a result of offers from two alternative network providers. The UK is the next cheapest, with little variation between the three largest operators, perhaps a reflection of a relatively mature market with long-established alternative networks and no one provider having more than a 30% retail market share of broadband connections.

Figure 2.14 Basket 2: ‘weighted average’ single-service pricing

78.72 £80 73.29 70.05 60.73 TV hardware 58.55 57.57 £60 24.92 16.93 TV licence Broadband 13.03 22.81 Mobile £40 15.14 18.50 16.31 23.21 Fixed voice 11.95 10.22 9.76 6.78 Price permonth £20 30.69 23.05 25.61 24.63 24.30 26.91 £0 UK FRA GER ITA ESP USA

Source: Ofcom using data supplied by Teligen Note: Lowest tariff available for each service type from any of the three largest operators by market share in each country, July 2008; PPP adjusted

In all of the European countries, the lowest prices available for this basket of services require the consumer to buy broadband in a package with other services (Figure 2.15). Indeed, in the UK, Italy, Germany and Spain the ‘best offer’ available for a package of voice and broadband services is cheaper than the weighted average of the best-value deals for voice services only; this reflects the fact that alternative network operators typically offer a ‘free’ basic broadband service in association with voice services. The best-priced voice and broadband offer in Italy (from the incumbent) also includes an IPTV offering.

In the US, the lowest price for this basket of services comes from purchasing broadband and fixed-line voice separately. This reflects pricing which is related to the market structure in the US, where, in the majority of areas, a local duopoly is in place, with the incumbent telecoms company in competition with the local cable operator for the supply of voice and broadband services. Whereas in European countries. new entrants have sought to gain market share by

72 The International Communications Market 2008 offering bundled services, the US has not seen the same level of market disruption and operators have looked to the incremental pricing of services, particularly at the lower end of the market.

Although the requirements of this basket are for a basic broadband service with a headline download speed of 1Mbit/s or more, in several countries the lowest price package offers headline speeds significantly in excess of this; the lowest-price Spanish tariff has speeds of 10Mbit/s, the UK 8Mbit/s and the Italian 7Mbit/s.

In terms of the best prices available for the mobile element of this basket, there is a similar pattern to the average prices, with pre-pay tariffs in Italy and Germany offering the lowest prices. There is less variation between the best-priced tariff and the average of the best tariffs available in the UK than in other countries.

Figure 2.15 Basket 2: comparative ‘best offer’ pricing

£60 54.98 47.46 £50 44.54 TV hardware 41.18 15.97 TV licence £40 36.93 33.93 Triple-play Voice & Broadband £30 14.03 20.46 Broadband 28.06 £20 19.58 Mobile

Price permonth 18.71 22.68 Fixed voice £10 21.98 15.09 9.28 8.53 7.22 £0 4.40 UK FRA GER ITA ESP USA

Source: Ofcom using data supplied by Teligen Note: Lowest tariff available for each service type from any of the three largest operators by market share in each country including multi-play offers July 2008; PPP adjusted

2.1.10 Basket 3: A mobile ‘power user’ The third basket represents a single-person household typical of a young professional or student. This person has eschewed fixed-line telecoms and is instead a heavy user of both a mobile phone and of mobile broadband (using a mobile ‘dongle’ to connect to the internet on a laptop computer).

73 The International Communications Market 2008

Figure 2.16 Composition of Basket 3 Fixed-line voice Mobile Broadband Television No connection One high-end handset Mobile broadband Entry-level pay-TV connection subscription (including Voice: channels which are not Total outbound: 550mins Minimum speed: 1Mbit/s available via free digital To national fixed: 13% Minimum usage: 3GB television) To on-net mobile: 37% Minimum hours: 15 --- To off-net mobile: 37% 1 digital receiver / set-top To international: 6% box To voicemail: 7% Total inbound: 550mins

Daytime: 60% Evening: 19% Weekend: 21%

Messaging and data: SMS: 150 MMS: 10 Internet: 100MB / 300mins Source: Ofcom

There is greater variation between countries in the total cost of this basket than for any other, ranging from £87.46 in the UK and £99.57 in Italy (the two countries with the highest mobile phone user per head) to £196.43 in Spain (Figure 2.17).

The three UK mobile phone tariffs included in this analysis all contain enough minutes and SMS to meet the needs of this basket within their basic line rental, with additional charges incurred for the international call, picture messaging (MMS) and data elements. Two of the tariffs also include a ‘free’ handset, while the third is heavily subsidised.

By contrast, operators in Italy rarely offer substantial handset subsidies (around 12% of the mobile phone cost in the Italian basket is accounted for by the purchase of the high-end mobile phone required) and line rental is typically lower than in the UK, as are the numbers of inclusive minutes and SMS texts. The result is that Italian tariffs are characterised more by metered than by ‘flat rate’ pricing - for this basket over 60% of the pricing in Italy is usage- related, compared to just 20% of the total price of the UK tariffs.

The largest ‘buckets’ of inclusive minutes are typically included within the US tariffs (this is related to the interconnect regime in the US, as discussed above), with higher-end tariffs typically including unlimited weekend, evening and on-net calls and/or 1,000 or more any- time, any-network minutes. However, for this particular basket, the US comes out as more expensive than both the UK and Italy as the consequence of usage charging for SMS and data browsing (both of which are used less in the US).

Spanish tariffs do not typically include any-time, any-network minutes, or SMS, within monthly line rental fees, and this, combined with call set-up charges, makes the metered usage charges much higher than in the other countries.

Mobile broadband prices are lowest in Germany, Italy, the UK and Spain, reflecting the fact that by July 2008 operators in these countries had launched mass-market consumer propositions via their HSDPA networks. The price for mobile broadband in these countries compares favourably with the pricing for standalone broadband, as used in Basket 2. By contrast, mobile broadband was largely a business proposition in France and the US (which have been slower to launch HSPA networks), and this is reflected in higher tariffs.

74 The International Communications Market 2008

This basket also includes basic ‘entry-level’ pay-TV services, which is defined as the lowest subscription required to receive channels in addition to those available on free-to-view television. Because of the variation in numbers and types of channels and quality of programming, like-for-like comparison is more problematic than for telecoms services. Germany and Italy have the lowest pay-TV costs. In Italy, this is primarily due to the €15 monthly cost of the lowest price service from the country’s satellite operator (Sky Italia), which has over 90% market share of the country’s pay-TV subscriptions, while in Germany entry-level packages are available both from cable and satellite operators at around €17 a month.

Figure 2.17 Basket 3: ‘weighted average’ single-service pricing

196.43 £200 188.64 20.74

27.57 20.2 139.55 £150 132.38 TV hardware 57.42 14.16 30.10 99.57 TV licence £100 87.46 15.6 TV 11.63 34.68 155.49 Broadband 16.00 18.61 Mobile Price per month per Price £50 16.17 91.29 95.84 62.08 66.74 41.99 £0 UK FRA GER ITA ESP USA

Source: Ofcom using data supplied by Teligen Note: Lowest tariff available for each service type from any of the three largest operators by market share in each country, July 2008; PPP adjusted

The lowest price tariff available for the mobile phone element of this package comes from a UK operator, T-Mobile (Figure 2.18), which offers all the voice minutes (including international calls), messaging and data required by this basket within a £35 monthly tariff. (The only additional cost of £1.67 a month is the £59.99 cost of the handset, which is amortised over three years).

In terms of mobile broadband, there is little variation between the best prices available and the average prices, although the range of tariffs available is much narrower – indeed, the relatively recent launch of mobile broadband had the result that, in July 2008, the UK was the only country in which all of the largest operators had consumer tariffs appropriate for this basket.

An IPTV operator in Italy (MediaSet) offers the lowest price for entry-level television (the availability of naked DSL in Italy means that this tariff is available to our Italian household, even though it does not have a fixed voice service).

75 The International Communications Market 2008

Figure 2.18 Basket 3: comparative ‘best offer’ pricing

£200

148.92 148.58 £150 20.74 15.08 118.50 17.22 107.93 TV hardware £100 45.32 13.27 80.54 85.07 21.07 TV licence 15.58 7.75 26.16 TV

Price per month per Price 18.61 Broadband 16.00 110.61 £50 14.58 Mobile 76.15 75.69 51.87 60.70 36.67 £0 UK FRA GER ITA ESP USA

Source: Ofcom using data supplied by Teligen Note: Lowest tariff available for each service type from any of the three largest operators by market share in each country, July 2008; PPP adjusted

2.1.11 Basket 4: A family household with multiple needs Basket 4 represents a family of two parents and two children, all with their own mobile handset but with different mobile needs, with the adults using more voice and the children more messaging. However, they are cost conscious and favour using the fixed-line phone whenever possible, which gets fairly heavy use. The family are also heavy users of the internet, requiring a minimum connection speed of 4Mbit/s, and subscribe to entry-level pay- TV services.

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Figure 2.19 Composition of Basket 4 Fixed-line voice Mobile Broadband Television Total outbound: 600mins One high-end handset Fixed-line broadband Entry-level pay-TV One mid-range handset connection subscription (including -Local: 68% Two basic handsets channels which are not - Regional: 9% Minimum speed: 4Mbit/s available via free digital - National: 14% Mobile connection 1 Minimum usage: 5GB television) - International: 7% Voice: Minimum hours: 50 --- - To mobile: 2% Total outbound: 300mins 1 digital receiver / set-top To national fixed: 17% box -Daytime: 59% To on-net mobile: 33% - Evening: 25% To off-net mobile: 33% - Weekends: 16% To international: 10% Voicemail: 7% Total inbound: 300 mins Messaging and data: SMS: 30 Internet: 30MB / 100mins

Mobile connection 2 Voice: Total outbound: 180mins To national fixed: 20% To on-net mobile: 34% To off-net mobile: 34% Voicemail: 12% Total inbound: 180mins Messaging and data: SMS: 160 MMS: 4

Mobile connection 3 Voice: Total outbound: 60mins To national fixed: 30% To on-net mobile: 30% To off-net mobile: 30% Voicemail: 10% Total inbound: 60mins Messaging and data: SMS: 70 MMS: 2

Mobile connection 4 Voice: Total outbound: 60mins To national fixed: 30% To on-net mobile: 30% To off-net mobile: 30% Voicemail: 10% Total inbound: 60mins Messaging and data: SMS: 65 MMS: 2 Source: Ofcom

Overall, the UK and Italy offer the lowest prices as a result of lower mobile prices, which account for over 50% of the total costs of this basket in every country (Figure 2.20).

There is little variation in the costs of fixed-line voice services. At this volume of calls, the UK offers the lowest prices as a combination of the availability (from all of the leading three operators) of ‘Anytime’ plans, which offer inclusive calls to any fixed line, and separate ‘add- ons’ which offer savings on calls to mobile and international calls. The UK is also the only one of the six countries where there is typically no difference between the cost of a local and a national call.

77 The International Communications Market 2008

Fixed-line voice tariffs for this basket are available from alternative networks in Italy, France and Spain, which are cheaper than the lowest-priced UK tariffs, but in all three countries the higher cost of the incumbents’ tariffs (all of which have retail market share of over 60%) mean that the weighted average cost of the best value tariffs from the three largest operators is higher than the equivalent cost for the UK.

Germany has the least variation between the prices offered by the three largest operators, with the most expensive tariff just 15% more expensive than the cheapest. Basic line rental charges and local and regional calls are low in the US, but overall, the pricing for this basket is higher than for most of the European countries because of the higher prices for national and international calls.

In most countries, the two mobile phones with the highest usage requirements (connections 1 and 2) achieve the lowest prices with post-pay tariffs, and the two phones with the lowest usage (connections 3 and 4) achieve the lowest pricing with pre-pay tariffs. Overall, the prices for connections 1 and 2 are lowest in the UK and the prices for connections 3 and 4 are lowest in Italy. This is the result of the UK having a post-pay market characterised by offering ‘free’ handsets and a large number of inclusive minutes for tariffs in the £20 to £30 range, and the Italian market having a greater focus on pre-pay, which accounts for around 90% of mobile connections.

Pricing in the US compares favourably to most of the European countries for mobile connections 1 and 2, and would be on a par with the UK but for the much higher cost of the international call element in connection 1. International calls from US mobiles cost typically more than double those from European mobiles, largely as a result of the introduction of the Euro-tariff in the European Union in 2007, which put a cap on the prices of mobile calls between EU countries. However, pricing for the lower-use connections 3 and 4 are more than double that in France, Germany, Italy and the UK.

Overall, the highest mobile costs are in Spain, largely as a consequence of call set-up charges, as detailed in the analysis of Basket 2.

The lowest broadband prices for this basket are in France, where, despite the higher speed and data use requirements, the costs are exactly the same as for Basket 2 - a reflection of the fact that the large majority of broadband tariffs offer a headline speed of at least 8Mbit/s and unlimited data use. By contrast, the price for broadband in Spain and the US for this basket is significantly higher than for Basket 2, as a result of higher charges for the higher- speed product. Pricing in Germany is higher relative to the other countries, because of the requirement to pay an installation fee and purchase a router, both of which are typically offered ‘free’ or at a much lower price in other countries. However, a benefit to the German consumer is that the broadband connection is not generally associated with a minimum contract length, whereas a commitment of between 12 and 24 months is generally required for broadband subscriptions in the other countries.

The television element in this basket is the same as in Basket 3.

78 The International Communications Market 2008

Figure 2.20 Basket 4: ‘weighted average’ single service pricing

£300 289.45 20.74 243.16 £250 40.56 214.13 204.79 30.96 £200 14.16 31.21 TV hardware 27.57 29.07 153.59 154.85 TV licence £150 13.03 11.99 TV 16.00 20.46 193.31 16.38 Broadband £100 149.52 Price per month per Price 121.15 130.01 Mobile 82.82 87.66 £50 Fixed voice

25.10 30.68 26.95 27.89 34.85 31.47 £0 UK FRA GER ITA ESP USA

Source: Ofcom using data supplied by Teligen Note: Lowest tariff available for each service type from any of the three largest operators by market share in each country, July 2008; PPP adjusted

As with Basket 2, there are considerable savings to be made in all European countries by purchasing services within a bundle (Figure 2.14).

Although the UK, followed by Italy, again offers the lowest overall prices as a consequence of its lower mobile prices, the lowest prices for the combined fixed-line voice, broadband and TV is in France.

In France, in the bid to win and retain market share, alternative operators Neuf Cegetel and Free have invested in unbundling telephone exchanges, and offer triple-play services using ADSL2+ technology and (particularly in Paris) high-speed fibre networks. Incumbent France Telecom has responded by offering its own triple-play services, and matching the €30 a month offers for basic triple-play services. The usage requirements of the voice element of this basket mean that this package is considerably more than €30, but it is still nearly £6 cheaper than the equivalent UK service. However, it should be noted that IPTV offers are available only in areas where the operators have installed the necessary equipment within the exchange and are able to guarantee actual connection speeds of greater than 3Mbit/s, the minimum for receiving standard definition TV.

Triple-play offers incorporating television, broadband and fixed-line voice also offer the lowest prices in Italy and the UK, while our German household achieves the lowest price by purchasing voice and broadband together, alongside a separate TV package. In Spain, the lowest-price combination is purchasing a broadband and TV package from a cable operator, combined with a separate fixed-line voice service from an alternative network operator.

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Figure 2.21 Basket 4: Comparative ‘best offer’ pricing including multi-play tariffs

£300

£250 TV hardware 215.04 TV licence £200 27.72 187.60 21.07 TV & Broadband 147.83 139.65 22.36 Triple-play £150 121.28 115.98 Voice & Broadband 29.35 23.77 £100 13.27 167.23 TV 30.98 41.29 116.70

Price permonth Broadband £50 101.94 96.84 73.38 73.15 Mobile 27.47 £0 18.98 Fixed voice UK FRA GER ITA ESP USA

Source: Ofcom using data supplied by Teligen Note: Lowest tariff available for each service type from any of the three largest operators by market share in each country including multi-play offers July 2008; PPP adjusted

2.1.12 Basket 5: An affluent two-person household with high use of mobile, internet and premium TV Our final basket is typical of a young couple of high-end users who have low price sensitivity. They both have mobile connections and are fairly high users of voice and (to a lesser extent) SMS. They also have a fixed line, but this has relatively low use. They have a fast broadband connection and are heavy users, and have a premium television package for watching sport and the latest movies, and also a digital video recorder (DVR).

Figure 2.22 Composition of Basket 5 Fixed-line voice Mobile Broadband Television Total outbound: 250mins One high-end handset Fixed-line broadband Premium pay-TV One mid-range handset connection subscription, including: - Local:60% - Best package of live top- - Regional:7% Mobile connection 1 Minimum speed: 8Mbit/s flight football / NFL - National: 13% Voice: Minimum usage: 5GB - Film package including - International: 8% Total outbound: 400mins Minimum hours: 50 first-run major studio movies - To mobile: 12% To national fixed: 20% - PVR service To on-net mobile: 29% --- - Daytime: 59% To off-net mobile: 29% 1 digital receiver -Evening: 25% To international: 14% 1 DVR - Weekends: 16% Voicemail: 8% Total inbound: 400mins Messaging and data: SMS: 80 Internet: 30MB / 100mins

Mobile connection 2 Voice: Total outbound: 200mins To national fixed: 30% To on-net mobile: 30% To off-net mobile: 30% Voicemail: 10% Total inbound: 200mins Messaging and data: SMS: 20 Source: Ofcom

As for Basket 4, the UK and Italy offer the lowest pricing for this basket because of significantly lower prices for the mobile component than in the other countries (Figure 2.23)

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However, for the relatively low use of the fixed-line, France and Germany offer the lowest prices, due to the availability of tariffs typically offering unlimited calls to national fixed lines, combined with relatively low prices for the international calls element of this basket. In general, prices are similar to those of Basket 1, which has a similar volume of calls, although prices are notably more expensive in Italy than for equivalent tariffs in France, Germany and the UK, as a result of higher charges for this volume of international calls. Prices in the US are in the middle of the range, with low line rental and free local calls offset by higher prices for national and international calls.

The UK offers the lowest price for both of the mobile connections in this household. The higher usage of mobile connection 1 is served by £35 or £30 contracts, with a high-end handset offered free of charge on 18- or 24-month contracts for two of the three contracts included within the calculation of the ‘average’ price, and with additional fees only for the international calls and the data requirements. The lower-use mobile connection 2 achieves the lowest prices from all three operators, through £15-a-month SIM-only contracts. These low-cost contracts have emerged in the last year in the UK and are typically targeted at consumers who already have a mobile, either from a pre-pay connection or an expired post- pay contract. Our analysis shows that for some consumers these tariffs are still the best available, even when a mid-range handset is purchased (our analysis adds on the price of purchasing the handset and amortises it over three years in order to identify the monthly cost). By contrast, at least two of the three lowest price tariffs in France, Germany, Italy and Spain for mobile connection 2 in this household are pre-pay tariffs, and in Italy and Spain pre-pay tariffs are also the best option from one of the three operators, even for the higher- using mobile connection 1.

Once again, France offers the lowest price for broadband; indeed, the three tariffs which offered the lowest price for Basket 1, which only required a minimum speed of 1Mbit/s and 0.5GB usage a month, are all still valid for the higher requirements of this household (8Mbit/s and 5GB per month). The UK is the second least expensive, with most operators, including the incumbent BT, offering 8Mbit/s and 5GB a month within their basic tariffs.

Among the European countries, Spain and the UK have the most expensive TV pricing for this top-end package of premium top-league football rights and first-run movies from the major Hollywood studios. This is partly a consequence of the cost of football rights, which are highest in the UK, followed by Italy and Spain, and partly because of the structure of the rights packages and the channel bundling strategies of the operators. BSkyB in the UK and Audiovisual Sport in Spain both own rights to most of the biggest games, and control access to them by bundling them for a relatively high monthly fee. (The requirements of this bundle are that the ‘best package’ of football rights is purchased; for example, the package offered by Setanta in the UK does not meet this criterion).

In Italy a fragmented football rights market creates more pressure on pricing; rights are sold on a club-by-club basis, and separate packages are sold to the terrestrial and satellite platforms. As a result, even though satellite operator Sky Italia has been able to secure a better overall package of rights than its competitors, the availability of a wide range of matches on digital terrestrial television (many on a pay-per-view basis) combines to create competition between the two platforms, while also putting an added burden on the wallet of the committed fan who wishes to purchase services from both suppliers. Lower prices for the equivalent premium television package in Germany and France are largely a feature of lower-priced football rights.

Comparisons with the US are harder to make, partly because we are comparing NFL with football, but also because a characteristic of the US market is that NFL viewing packages are wrapped up in many different ways and offered through a combination of pay-per-view and subscription. The requirement of this basket to have the best set of matches led us to

81 The International Communications Market 2008 choose the most expensive of many options, which may not necessarily have the highest take-up.

This basket does not contain the requirement for high-definition (HD) television, because of its low take-up in some countries. However, it is worth noting that the services in France and the US do include HD channels, an HD receiver and a DVR. If HD were included as a requirement, the relative pricing of this premium television package would be even higher in the UK, with an additional £10 monthly fee for the HD sports and movies and a higher cost for the DVR.

Figure 2.23 Basket 5: ‘weighted average’ single-service pricing

305.28 £300 55.39 £250 223.48 219.94 50.46 TV hardware £200 191.2 162.89 35.15 160.54 60.60 TV licence 34.03 32.23 TV £150 37.12 45.00 13.03 34.88 Broadband 23.87 164.98 £100 16.38 Mobile Price per month per Price 116.23 106.51 100.42 Fixed voice £50 63.36 68.63 28.98 £0 22.10 21.06 21.17 24.83 21.81 UK FRA GER ITA ESP USA

Source: Ofcom using data supplied by Teligen Note: Lowest tariff available for each service type from any of the three largest operators by market share in each country, July 2008; PPP adjusted

There are not many triple-play tariffs in any of the countries which meet the requirement of containing premium football and movies. Premium television packages are typically offered as an ‘add-on’ to a basic level service and so do not generally offer savings if purchased within a triple-play subscription rather than on a standalone basis, and none of the triple-play services available offer better value than purchasing TV separately. In all five of the European countries, a voice and broadband bundle offers the best value and the largest savings, compared to purchased services on a standalone basis, are found in Spain. (Indeed, with the price of combined voice and broadband considerably lower than buying a standalone broadband subscription for this basket, it is little wonder that more than 80% of Spanish broadband is bought in a bundle).

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Figure 2.24 Basket 5: comparative ‘best offer’ pricing including multi-play tariffs

£300

£250 TV hardware 212.96 193.78 TV licence £200 15.18 170.41 172.39 Fixed voice & mobile 55.39 54.27 135.09 Triple-play £150 128.99 29.09 27.64 31.19 Voice & Broadband 35.15 36.98 £100 18.07 34.13 TV

Price permonth 35.13 45.00 136.93 89.50 Broadband £50 90.72 90.90 Mobile 49.87 54.89 £0 18.83 Fixed voice UK FRA GER ITA ESP USA

Source: Ofcom using data supplied by Teligen Note: Lowest tariff available for each service type from any of the three largest operators by market share in each country including multi-play offers July 2008; PPP adjusted

2.1.13 Conclusion Figure 2.25 and Figure 2.26 below summarise the service pricing of each basket in each country (TV licence and equipment costs are excluded). The findings enable us to draw some general conclusions about the pricing of communications services, as well as highlighting differences between the six countries.

Consumers in all the European countries can make significant savings by purchasing communications services in bundles, compared to purchasing single services. Broadband and voice can typically be purchased in all countries except the US for little more than the price of voice alone, because broadband services are often offered ‘free’ in association with other services. This is usually fixed-line voice, but for some tariffs in this analysis it is offered with a pay-TV subscription (for example, as offered by BSkyB in the UK). It is sometimes also bundled with mobile voice (for example, as offered by Orange in the UK) and recently, even with mobile broadband (for example, as offered by O2 in the UK).

The mobile phone component is easily the largest cost for all of the baskets 3, 4 and 5. This is in line with the relative sizes of the fixed-line voice, broadband and mobile industry sectors – with mobile generating over 50% of telecoms industry revenue in all of the countries (see the Telecoms section of this report). However, it is also notable that it is the mobile component which shows greatest variation across the countries analysed. This is perhaps indicative that there is greater variation in mobile operators’ recent capital expenditure between the countries than is the case for fixed-line services (due to variations in spectrum licensing costs and network roll-out costs). It is also probably the consequence of the more complex industry structures. Unlike the fixed-line sector, mobile markets in all of the countries in our analysis do not involve a heavily-regulated incumbent operator in competition with alternative network operators.

The interplay between these operators, together with the evolution of network and handset technology (the migration from analogue to digital, to GPRS, to 3G, to HSPA; and the related move from voice-only to voice and messaging to multi-media) has resulted in very different market structures. For example:

 the Italian market is 90% pre-pay, whereas the US market is 90% post-pay;

 nearly 30% of Germany’s mobile connections are with mobile virtual network operators (MVNOs), while in Italy less than 1% of connections are with MVNOs; and

83 The International Communications Market 2008

 in Italy and the UK the award of 3G licences led to a new 3G-only operator entering the market, whereas in Germany, Spain and France 3G licences only went to existing operators.

All of these factors have contributed to complexity within national markets (our analysis included 2,481 tariff options for mobile, compared to 742 for fixed-line voice, 496 for pay-TV and 324 for broadband), and large variation between the national markets. Large differences in pricing are a manifestation of this.

In terms of overall pricing, the UK and Italy generally offer the lowest pricing both for single- services and in terms of the ‘best offer’, largely through lower mobile prices. Only in the basic baskets do consumers from other countries get comparable, or even better, pricing. France offers the lowest average pricing for Basket 1, which consists solely of fixed voice services; Germany offers the lowest ‘best offer’ price for Basket 2, driven by a low cost voice and broadband tariff.

Spain is the most expensive country overall. However, this is primarily due to much higher mobile prices, driven largely by the use of call set-up charges. The difference between ‘average pricing’ and ‘best offer’ pricing is greater in Spain than in any other country, as a result of alternative networks offering much lower prices than the incumbent for fixed-line voice services, and the prevalence of bundled voice and broadband services.

‘Double-play’ voice and broadband tariffs have the lowest prices in the UK, France and Italy. This is the consequence of alternative-network providers unbundling exchanges (and also rolling out fibre networks in France and Italy) and aggressively looking to win market share from the incumbent by focusing on bundled tariffs which offer line rental and voice and broadband services for a flat fee.

Figure 2.25 Comparative average pricing of ‘single services’ for all countries

Fixed Mobile Broadband TV 300 £300 289

£250 243 220 205 196 200 £200 192 176 175 152 140 148 147 £150 126 132 Price per month £100 92 74 72 67 57 48 51 50 £50 24 19 17 19 19 20 £0 UK UK UK UK UK ITA ITA ITA ITA ITA FRA FRA FRA FRA FRA SPA USA SPA USA SPA USA SPA USA SPA USA GER GER GER GER GER

Basket 1 Basket 2 Basket 3 Basket 4 Basket 5 Source: Ofcom using data supplied by Teligen Note: Weighted average of best-value tariff from each of the three largest operators by market share in each country; July 2008; PPP adjusted

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Figure 2.26 Comparative cost of lowest price services, including multi-play, for all countries

Fixed voice Mobile Broadband Pay-TV Voice & Broadband Tripleplay TV & Broadband £300

£250 214 207 £200 188 194 154 149 154 137 £150 131134 127 114 113 105 108 104 Price per month per Price £100 78 67 52 37 36 £50 29 27 19 26 16 17 11 14 14 £0 UK UK UK UK UK ITA ITA ITA ITA ITA FRA FRA FRA FRA FRA SPA USA SPA USA SPA USA SPA USA SPA USA GER GER GER GER GER

Basket 1 Basket 2 Basket 3 Basket 4 Basket 5 Source: Ofcom using data supplied by Teligen Note: Lowest tariff available for each service type from any of the three largest operators by market share in each country including multi-play offers July 2008; PPP adjusted

85

The International Communications Market 2008

The International Communications Market 2008

3 3 Convergence

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Contents

3.1 Convergence market developments 89 3.1.1 Introduction 89 3.1.2 Summary 89 3.1.3 Mobile broadband takes off 90 3.1.4 US top for free online TV shows, while the UK leads in Europe 92 3.1.5 Broadcast mobile TV – a mixed year 94 3.2 Content and aggregation 99 3.2.1 Content creation 99 3.2.2 Aggregation 104 3.3 Distribution and networks 111 3.3.1 Introduction 111 3.4 Consumption 117 3.4.1 Introduction 117 3.4.2 Device take-up 118 3.4.3 Consumers’ use of mobile handsets 120 3.4.4 Access to the internet and broadband connections 122 3.4.5 The profile of internet users 123 3.4.6 Internet consumption patterns 125 3.4.7 Concurrent use of different types of media (media ‘stacking’) 126 3.4.8 How consumers use online services and information 127 3.4.9 Accessing audio and audio-visual content online 129 3.4.10 Consumers’ use of the internet as a communication tool 131 3.4.11 The impact of the internet on consumers’ use of offline media 132 3.4.12 Dependence on different types of media 133

88 The International Communications Market 2008

3.1 Convergence market developments

3.1.1 Introduction For the purposes of this report, we define ‘convergence’ as the growing ability of a range of digital distribution networks to carry different types of content (audio, video, text and other data) and services to a variety of consumer devices. Examples include:

 new mobile handsets that can receive voice calls, video, data, and in some cases broadcast television;

 mobile “dongles” that connect laptop computers and other devices at high speed to the internet using mobile networks; and

 the different ways that audio-visual content can be distributed to consumers– via digital terrestrial television networks, satellite, cable and the internet.

While content reaches consumers by a number of different routes, it usually follows the same general pathway, and this chapter follows the same course:

 section 3.2 examines content (including digital music, online films, user-generated content and social networking) and aggregation (when content is packaged into a consumer proposition);

 section 3.3 moves on to content distribution and the means of carrying it over selected networks; and

 section 3.4 concludes with how people choose to consume content.

Please bear in mind when reading this section that analysis is not evenly distributed across each stage of the pathway, and that at some points the framework may be either strained or blurred. This reflects the degree to which the industries we regulate cannot yet be considered as fully converged.

But first, section 3.1 begins by highlighting a selection of recent international trends among converging communications markets.

3.1.2 Summary This section sets out a selection of key developments among converging markets that illustrate how operators and consumers are adapting to new digital distribution opportunities:

 The expansion of mobile broadband – the number of mobile broadband subscribers has recently grown rapidly in several of our comparator countries, driven by the availability of high-speed HSPA networks which are now available to more than 70% of households in many European countries and by the introduction of plug- in ‘dongles' for laptops.

 The ongoing development of broadcast mobile TV – operators in several countries across Europe have launched mobile TV services, but its underlying business model has yet to be proved, with the closure of several mobile TV services and a decline in confidence for its prospects in the near future.

 The growing consumption of free-to-air online TV shows – consumption of free- to-air online TV shows has grown rapidly in the US and the UK; in the UK

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consumption grew by 69% last year, while from a lower base consumption in France grew by 131%.

3.1.3 Mobile broadband takes off 3.1.3.1 High-speed mobile networks available to most people in our comparator countries

Many mobile operators have now upgraded their 3G networks, offering a step-change in the data transfer speeds available. This often makes use of high speed packet access (HSPA) technology, enabling consumers to access the internet over a mobile network at headline speeds (typically 3.6Mbit/s – 7.2Mbit/s) comparable to basic fixed-line broadband. According to the Global Mobile Suppliers Association, there are currently 221 commercial HSPA networks in 96 countries supported by 805 devices.

By the end of 2007, HSPA networks were available to at least 70% of the population of each of our larger comparator countries, with the exception of the US (Figure 3.1). Consumers in the UK and Italy benefited from the highest levels of availability, with 87% and 78% population coverage respectively.

HSPA is available to only 15% of the US population. Reasons for this include:

 the late deployment of HSPA technology;

 the difficulties involved in providing coverage for such a large land area; and

 the availability of fast mobile data services over other 3G standards (e.g. CDMA2000 EV-DO). This is an incompatible and competing standard to HSPA. EV-DO Revision A allows for headline speeds up to 3.1Mbit/s, and Verizon reported approximately 80% population coverage by the end of 2007.

Figure 3.1 HSPA availability: 2007

100% 87% 78% 80% 70% 70% 70%

60% HSPA availability 40% (%of population)

20% 15% Population coverage (%)

0% UK FRA GER* ITA USA JPN*

Source: IDATE Note: Availability figures for Germany and Japan are estimates. Data were not available for Canada. While HSPA coverage for the US was only 15%, coverage for CDMA EV-DO Rev A was approximately 80% of the population at the end of 2007.

3.1.3.2 Dongles drive the mobile broadband expansion...

Until the last 18 months, mobile operators generally positioned mobile broadband as a business service, targeting city centres and major transport hubs. But many have recently chosen to shift their focus to the residential market. As a result, the consumer market for

90 The International Communications Market 2008 broadband has grown rapidly. According to data from Wireless Intelligence, the number of HSPA subscribers worldwide grew from 5 million in July 2007 to 60 million by October 2008. However, the majority of these are via mobile handsets, and indeed some users are likely to either be unaware of the capability their mobile phone has for high speed data transfer or choose not to use it.

‘Mobile broadband’ is more usually used to refer to connecting to the internet via an HSPA network using a USB modem or ‘dongle’ which plugs into a PC or laptop, rather than via a mobile phone. In the past 18 months, mobile operators in parts of Europe have heavily promoted dongles as an alternative or a complement to fixed-line broadband. Rapid growth in take-up can be put down to a variety of factors, including

 extensive marketing of flat-rate data tariffs (typically associated with a cap of at least 1GB per month) at a price comparable to fixed-line broadband;

 rising laptop penetration; and

 the evident consumer demand for broadband on the move.

Figures from GfK show that dongles reached their highest monthly sales in the UK in July 2008 at 163,000 units sold. Swedish operators have also experienced rapid growth in dongle sales. According to the PTS (the Swedish regulator) the number of subscribers using datacards or dongles rose from 92,000 to 376,000 during 2007, a rise of 309%.

In the UK, Italy and Sweden, the role of Hutchison 3G (H3G – branded as ‘3’) in utilising spare network capacity to roll out attractively-priced mobile broadband to consumers was important in triggering wide-scale adoption. With other operators, particularly Vodafone, having already built market share among business users, H3G’s efforts focused on more price-sensitive users. As of October 2008, 3 Italia offered a 5GB a month mobile broadband tariff for €19 a month (£13), and 3UK offered a 3GB per month tariff for £15 a month as well as a 1GB tariff for £10 a month.

The development of mobile broadband in Japan has taken a different path. Mobile broadband on handsets is popular, with many subscribers using their mobile phone as their main way of accessing the internet. This is partly due to the early development of other mobile data services such as NTT DoCoMo’s i-mode.

In the US, mobile broadband is offered over HSPA and, more commonly, EV-DO Revision A. In October 2008 in Baltimore Sprint Nextel launched its roll-out of mobile WiMAX, which also supports mobile broadband, branded as Xohm. Localised WiMAX networks have also emerged elsewhere in the world, usually covering municipal areas or private networks.

But in our other comparator countries mobile broadband has not seen widespread consumer adoption. In France, where mobile broadband remains primarily a business proposition, high prices have prevented widespread take-up.

3.1.3.3 Mobile broadband: substitute or complement to DSL?

Mobile broadband typically offers a headline speed of 3.6Mbit/s or 7.2Mbit/s, with actual speeds typically around 1Mbit/s11. This is comparable to basic fixed broadband speeds in

11 Research commissioned by Vodafone and conducted by LCC International in March-May 2008 found that in the UK average speeds for Vodafone were 1.2 Mbit/s with average speeds for other networks varying between 683kbit/s and 993kbit/s, http://www.vodafone.com/start/media_relations/news/local_press_releases/uk_press_releases/2007/i ndependent_trials.html

91 The International Communications Market 2008 many countries. Price points are also similar to fixed offerings. For some consumers, mobile broadband may offer an attractive substitute to fixed broadband.

In the UK, the evidence suggests that mobile broadband is used mainly as a complement to fixed broadband. GfK research suggests that 68% of mobile broadband subscribers use mobile broadband in addition to a fixed connection (although this may include consumers who are currently tied in to fixed broadband contracts).12

But in countries where fewer consumers have already taken fixed-line broadband, substitution may be a more likely prospect; there are some indications that mobile broadband is cannibalising the future growth prospects of fixed connections. According to Analysys Mason, mobile broadband accounts for 30% of all broadband connections in Austria. Informa reported that 72.3% of Austrian net broadband additions in the first half of 2007 were mobile subscriptions. This may be explained by competitive pricing plans, lower fixed-line penetration, the high cost of fixed broadband and the fact that significant numbers of Austrian people live beyond the range of the nearest ADSL exchange.

The extent to which mobile broadband proves to be a substitute to fixed broadband is likely to depend on a variety of factors. These may be specific to individual countries and even consumers. They include:

 the quality of mobile broadband coverage indoors and in rural areas;

 the availability of and quality of fixed line infrastructure;

 the established base of fixed-line broadband subscribers;

 the comparative data caps on fixed and mobile broadband offerings;

 the relative price-points of fixed and mobile broadband;

 the comparative speeds of fixed and mobile broadband; and

 the purpose for which a consumer uses his or her connection.

3.1.4 US top for free online TV shows, while the UK leads in Europe 3.1.4.1 Consumer demand for free-to-view TV online growing rapidly…

Content providers increasingly distribute audio-visual (AV) content over the internet, taking advantage of the growing popularity of broadband. This content can include short clips or full programmes, produced either by industry professionals or by members of the public. Distribution is often supported by advertiser revenue. Traditional broadcasters in both the US and the UK have recently responded to consumers' growing appetite for AV online by introducing access to their own shows online.

People in the US were the most prolific consumers of online TV shows in 2007 (including short-form TV content such as clips and highlights), downloading an average of nearly 26 streams per head (Figure 3.2). People in the UK ranked second with 7.5 streams per person, followed by Germany (4.9) and France (4.8). In all four comparator countries consumer demand for online TV shows has been high, with streamed downloads per head growing rapidly since last year. Growth was highest in France at 131%.

12 See Ofcom’s The UK Communications Market Report 2008, section 5.1.5. www.ofcom.or.uk/research/cmr/cmr08

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Figure 3.2 Free-to-view streams of TV shows per head, 2006-2007

Annual change in streams downloaded (%) 69% 131% 73% 85% 27 24 21 18 15 TV show 25.9 12 streams per head 9 6 7.5 TV show streams per capita TV per show streams 3 4.8 4.9 0 UK FRA GER USA

Source: Ofcom calculations based on Screen Digest/Comscore data

The launch of two online TV aggregation services may have stimulated demand in the UK and the US:

 In July 2007 the BBC’s iPlayer soft-launched, using a programme download model, before launching fully at Christmas that year with both streamed and download access to content. The iPlayer is a free broadband internet service that lets viewers catch up on BBC radio and television programmes broadcast over the previous month (for downloads) or week (for streamed content). Since launch the service has proved to be popular with consumers, delivering an average of 700,000 daily streams and downloads in April 2008. It is possible that the ‘iPlayer effect’ contributed to the growth in streaming of TV shows in the UK in 2007. Other broadcasters in the UK that have launched TV online aggregators include ITV, Channel 4, Five and Sky.

 In the US, NBC Universal and News Corporation launched Hulu as a joint venture in March 2008. It offers free, ad-supported content from NBC, Fox and a variety of studios and networks. The service includes access to some archive content, catch-up and shows that are out to syndication. While this service launched too late to have an impact on the figure highlighted above, Nielsen Online reported that Hulu had attracted 2,632,000 unique viewers during August 2008.

It is possible that both these services will be available to international audiences at some point in the future. Both Hulu and the BBC suggest on their websites that they are working on international versions of their online TV services. Resolving rights issues connected to international distribution is one of the hurdles they need to clear before launch.

Other business models for TV show streams include pay-per-view or subscription. Using one (or more) of these models, most commercial broadcasters in our comparator countries have launched online catch-up services. Examples include TF1, LCI, France24, TV5 and BIS in France, and RTL.de, Spiegel TV and ZDF Mediathek in Germany.

3.1.4.2 …and AV online grows in popularity as a result

Ofcom’s international omnibus research suggests that the recent launch of free-to-view TV online content could be driving up consumption of longer-form video content. The proportion of adults using the internet to access longer video content rose by 3 percentage points in the

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UK and 4 percentage points in the US (Figure 3.3); over one in five in both countries claimed to have “watched or viewed longer video content” in October 2008.

Figure 3.3 Use of the internet to consume audio-visual content Which of the following do you use your internet connection for? 2007 percentage point change

3 -4 1 -7 4 0 -4 30%

s 27% UK 23% 23% 21% 22% FRA 20% 18% GER 14% ITA 10% USA

CAN % of adults with internet acces 0% JPN Watch or download longer video content such as feature films or complete television programmes

Source: Ofcom Understanding International Communications Behaviour research, October 2008 Base: all adults aged 18+ who use the internet (UK 1001, France 1000, Germany 1002, Italy 1003, USA 1010, Canada 1000, Japan, 1003)

3.1.5 Broadcast mobile TV – a mixed year Advances in converging technologies have expanded the ways in which AV content can be delivered to a mobile handset. These include:

 streamed or downloaded content using 3G networks;

 broadcast content using a dedicated mobile broadcasting standard such as DVB-H, MediaFLO, ISDB-T and DMB; and

 handsets with an integrated digital terrestrial television (DVB-T) tuner.

From the point of view of the end-user, there can often be little discernable difference between services.

3.1.5.1 Italy leads Europe on broadcast mobile TV

2008 saw the commercial launch of DVB-H services in the Netherlands, Austria and Switzerland in time for the European Football Championships and the Beijing Olympics. But it was Italians who first benefited from DVB-H services in Europe in 2006. According to Informa, the number of subscribers passed one million in May 2008. Three operators provide mobile TV services in Italy, with 3 Italia (3IT) the market leader. 3IT reported in August 2007 that 9.3% of its subscribers take broadcast mobile TV. This may be explained by 3IT's DVB- H handset subsidies and heavy promotion; since June 2008 3IT has been marketing a free- to-view mobile TV offer.

Consumers in Japan and in South Korea also have access to free-to-view broadcast mobile TV services alongside pay-TV services. In both countries the pay service uses a satellite (S- DMB) standard, while the free-to-air service uses terrestrial standards (ISDB-T in Japan and T-DMB in South Korea). At present, free-to-view services generate only modest advertising revenue, but – in an echo of some traditional terrestrial broadcast-based markets like Germany - they have the effect of suppressing the proportion of subscribers willing to take a

94 The International Communications Market 2008 subscription package. In Japan, the pay-TV offering MoBaHo! is scheduled to close in March 2009, partly as a result of this tension.

In the US, Verizon Wireless and AT&T both recently launched broadcast mobile TV services. They use Qualcomm’s proprietary MediaFLO technology and services begin at $15 (£7.50) per month.

Figure 3.4 Selected broadcast mobile TV offers

Country Operator Technology Launch Details Italy 3 Italia DVB-H 2006 12 channel offering Mix of free-to-air, subscription and pay- per-view Telecom Italia Mobile DVB-H 2006 8 channel offering Monthly subscription Vodafone DVB-H 2006 9 channel offering Monthly subscription Netherlands KPN DVB-H 2008 11 channel offering Monthly subscription USA AT&T Wireless MediaFLO 2008 10 channel offering Monthly subscription Verizon Wireless 2007 8 channel offering Monthly subscription Japan Broadcast/operator ISDB-T 2006 Free-to-air broadcast TV consortium MBCO S-DMB 2004 Monthly subscription to MoBaHo! Service (scheduled to close in 2009) South Korea SK Telecom/TU Media S-DMB 2005 Subscription and pay-per-view Broadcast consortium T-DMB 2005 Free-to-air broadcast TV

Source: Ofcom

3.1.5.2 European policy makers preparing to license DVB-H services…

Legislators and operators in several European countries have taken steps to help kick-start the roll-out of DVB-H networks. While DVB-H is just one of several standards for broadcast mobile TV, European Commissioner Reding formally encouraged the use of the standard when she announced the Commission’s strategy for mobile TV in July 2007.

Elsewhere policy makers have made the following announcements on DVB-H:

 After mandating DVB-H as the sole mobile TV technology permitted in late 2007, France’s CSA awarded 13 licences to broadcast mobile TV in France in May 2008. Launches are not expected before 2009.

 The Polish government announced a tender for a national DVB-H licence with a deadline of January 2009, which would allow operators to launch a service in the second half of the year.

 In Spain a legislative backlog and general election delayed the regulatory framework for DVB-H, which will now not be in place until the end of 2008. This will allow about 20 DVB-H services to launch in 2010 to coincide with analogue switch-off.

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 In the US, T-Mobile took part in a DVB-H trial in Las Vegas with HiWire in 2007. But at the time of writing, the future for DVB-H in the US looked uncertain, since HiWire’s parent company Aloha Partners sold its DVB-H spectrum to AT&T, which uses MediaFLO (a competing standard) for its mobile TV service. This is the second setback for DVB-H in the US, following the end of the Modeo service in July 2007.

Figure 3.5 shows recent DVB-H developments in 2007 and 2008:

Figure 3.5 Selected DVB-H service developments, 2007-2008

July – USA October – Germany HiWire and T-Mobile Mobile 3.0 awarded Las Vegas DVB-H trial nationwide German DVB-H licence

January – USA May - France October – Poland Modeo DVB-H 13 DVB-H licences DVB-H tender Trial in New York awarded by CSA announced trials and launches Service announcements, 2007 2008 2009 October – USA HiWire spectrum Sold to AT&T

July – USA October – Germany Modeo service ZAK asks Mobile 3.0

Service closures Service abandoned to return DVB-H licence

Source: Ofcom

3.1.5.3 But the German experience provides reason for caution…

Not all deployments of DVH-H services have been an unqualified success. In Germany Mobile 3.0 won the only DVB-H licence at the end of 2007. It planned to launch the service in spring 2008, but by October 2008 the German Commission for Approval and Supervision of Regulatory Authorities (ZAK) had asked Mobile 3.0 to hand its licence back after failing to roll out the service. The company failed to strike distribution agreements with the mobile network operators and faced competition from mobile handsets carrying integrated DTT (DVB-T) receivers.

Given that DVB-T technology is well established, this may offer an alternative route to market for mobile TV without the need for a new legislation and licensing round (and with an established business model). But even the take-up of this technology has been disappointing; in Germany sales of DVB-T handsets have so far been below expectations.

In the UK Virgin Mobile launched broadcast mobile TV using the BT Movio service in October 2006. But BT announced less than a year later that it was shutting down the service. Attention in the UK has now shifted to another mobile TV option that emerged in May 2008 when Qualcomm won the auction for 40MHz of L-Band spectrum in the UK. With their proprietary standard, MediaFLO, showing some signs of success in the US, one option for that spectrum could include a new UK-based mobile TV service.

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3.1.5.4 …and there are still questions about the future of broadcast mobile TV generally

The closure of broadcast mobile TV services in Japan, Germany and the UK, and the halting of trials elsewhere, show that there is still uncertainty about mobile TV, regardless of which standard it uses. It remains to be seen whether operators, vendors, policy makers and consumers can together generate the confidence and demand that mobile TV needs to become a success.

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3.2 Content and aggregation

3.2.1 Content creation 3.2.1.1 Introduction

In this section we examine how converging technologies have influenced content creation industries across our comparator countries. They have had the effect of:

 increasing the range of distribution channels for digital audio and audio-visual content; and

 encouraging consumers to play an increasing role in creating and distributing their own content, and using new tools to communicate.

3.2.1.2 Summary

 Online distribution of recorded music took an increasing proportion of total sales by value in 2007 – accounting for 24% of total revenue in the US (up by 7 percentage points), 16% in Japan (5 pp) and 8% (2 pp) in the UK. But overall, physical and digital music sales combined continue to slide year-on-year – by 20% in Spain, 17% in France and Italy and by 13% in the UK.

 At least half of UK and Canadian adults use the internet to access social networking sites, although user participation in generating content may be falling in popularity.

 The number of people using their mobile to capture content is highest in the UK (59%) and Italy (58%) – while recording video clips and uploading video content to the internet remain minority pursuits.

 Using a mobile to access video and TV content is still a niche activity – it is most popular in Japan where 8% claim to watch live TV on their mobiles.

 Mobile social networking takes off in the UK and US – 0.8 million UK and over 4 million US mobile subscribers now access social networking sites on their phones.

3.2.1.3 Audio content

Digital music accounts for a quarter of total recorded music sales by value in the US

Recorded music industries in all the comparator countries where data were available experienced at least a small increase in digital sales as a proportion of all sales in 2007. The biggest increase came in the US, where digital grew to 24% of the total (Figure 3.6) in 2007. This was more than twice as high as the proportion in any other comparator country except Japan, where the comparable figure was 16%.

One of the drivers of the growth in the popularity of digital recorded music has been widespread adoption of portable digital music devices such as MP3 players, and the iPod. Our consumer research suggests that MP3 player take-up among internet users was at least 50% (see Figure 1.12 in section 1.3) across all the countries surveyed. The next generation of mobile phones can also store and play large numbers of music tracks; examples include the Apple iPhone which comes in 8GB and 16GB versions and the Nokia N96 with 16GB storage.

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But despite digital taking a growing proportion of all recorded music sales, overall sales of recorded music (physical and digital) have continued to fall year-on-year. All the comparator countries except Japan experienced significant reductions of up to 20%; in Japan, sales remained flat (Figure 3.6).

Figure 3.6 Digital music share of total recorded music sales: 2006 and 2007

2006 2007 25% 24% s

20% 17% 16% 15% 11% 11% 10% 8% 8% 7% 6% 7% 7% 6% 6% 5% 6% 6% 5% 6% 5% 4% 4%

Digital all% sales as sale 0% UK FRA GER ITA USA CAN JPN ESP NED SWE Total physical & digital sales 2007 £1021m £543m £782m £182m £3028m£248m £1788m £153m £140m £75m

% change in value of -13% -17% -4% -17% -9% -14% 0% -20% -2% -9% total sales since 2006 Source: International Federation of the Phonographic Industry

Audio-visual content commissioned by broadcasters

Digital distribution of online audio-visual content has developed more slowly than music. This may be partly because the delivery of good quality video content requires more bandwidth than audio, particularly for professionally-produced online film and longer pieces of content produced for TV.

The experience of the Apple iTunes store in the US illustrates this. NBC Universal content – which at the time was estimated to account for 30% of TV sales - was withdrawn from iTunes in December 2007 in a dispute over pricing structures. Only after Apple and NBCU resolved their dispute in September 2008 did NBCU’s content reappear on iTunes.

Download-to-own drives online film growth in the US – the most developed market among our comparator countries

Film distribution over the internet typically uses one of two models. Video-on-demand (VoD) allows consumers to rent a temporary download or buy temporary access to a stream; download-to-own (DTO) gives the consumer a permanent copy. Of these, VoD is the more popular among consumers in most of the comparator countries for which data were available, with the exception of the US. There, DTO sales per head accounted for more than half of all downloaded/streamed films sales; and DTO sales in the US alone were larger than the combined DTO and VoD sales of any other comparator nation (Figure 3.7).

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Figure 3.7 Sales of online films per 100 population, 2007 (VoD/DTO)

Growth since 2006 403% 45% 28% 41% 171% 1183% 154% Total 0.26 2.17 1.62 0.15 4.39 0.07 0.17 4.5 4.0 3.5 2.48 Download to 3.0 own 2.5 0.15 2.0 0.04 1.5 Video on demand 1.0 2.02 1.58 1.91 0.02 Sales per 100 populationSales 100 per 0.5 0.01 0.01 0.05 0.0 0.24 0.14 0.05 0.12 UK FRA GER ITA USA CAN JPN

Source: Ofcom calculations based on Screen Digest data

3.2.1.4 User-generated content

UK consumers’ use of social networking sites rose over the year and closed in on Canada…

Our online consumer research shows that consumers’ claimed use of social networking sites has risen in every country we surveyed. The number of adults using social networking websites rose by 11 percentage points year-on-year in the UK, France and Italy, and by 22 percentage points in Germany (Figure 3.8). UK internet users remain the top social networkers in Europe, with one in every two people who have access to the internet saying they use social networking sites. Only in Canada were people more likely to say they were social networkers (55%), and the gap between Canada and the UK has narrowed by 9 percentage points since last year. Social networking was most popular in the English- speaking countries, and this may reflect the fact that many of the most popular sites such as MySpace, Facebook and Bebo started off as English-language sites.

…but uploading photos and video less popular?

While use of social networking sites has grown in popularity in many of our comparator countries, internet users in our survey countries appeared less engaged with uploading pictures and video to the web during 2007, with the notable exception of the UK. It is possible that this is because social networking sites are becoming the focus of UGC-related activity (e.g. creating profiles, updating news etc); it might also be because the novelty of uploading content to the internet has begun to wear off for some consumers.

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Figure 3.8 Use of the internet for user-generated content Which of the following do you use your internet connection for?

Percentage point change since 2007 (red boxes denote statistically significant movements)

+11 +10 +22 +10 +6 +2 +1 0 -7 -8 -4 -5 -9 -4 -1 -6 -1 -3 -1 -1 -1 80% UK 55% 60% 50% FRA 43% 42%44% 40% 36%38% GER 40% 34%32% 33% 31% 27% ITA 20% 15% 16% 20% 11% 11%10%9% USA 5% CAN 0% JPN % adults withinternet acce Using social network Uploading or putting Uploading video sites photos on to a content on to a website website

Source: Ofcom Understanding International Communications Behaviour research, October 2008 Base: all adults aged 18+ use the internet(UK 1001, France 1000, Germany 1002, Italy 1003, USA 1010, Canada 1000, Japan, 1003)

People in the UK and Italy are most likely to capture content using a mobile; those in Japan are most likely to use their mobile to upload content

Mobile users in the UK and Italy are most likely to use their mobile phones to capture content by taking photos and recording video clips (Figure 3.9). Using mobiles as a still camera is the most common form of content capture, and its popularity is highest in the UK at 59%, and lowest in Canada at 35%. Outside North America, over 50% of people claimed to use their mobiles to take still photos.

The popularity of recording video clips on a mobile phone was highest among mobile users in the UK and Italy (16% and 15% respectively), though claimed use fell (by 7 percentage points) in both countries during 2007.

Japanese users were most likely to upload that content to the internet using a mobile phone, with 17% saying they had done so. This may reflect higher use of the internet on mobiles in Japan.

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Figure 3.9 Use of the mobile phone for user-generated content Which of the following do you use your mobile phone for?

Percentage point change since 2007 (red boxes denote statistically significant movements)

Time series unavailable -7 -2 -2 -7 0 2 0 Time series unavailable 80%

s UK 59% 58% 60% 51%51% 52% FRA 42% GER 40% 35% ITA 16% 15% 17% 20% 9% 9% 11% 10%9% USA % mobile user 6%5% 7% 7% 5% 3% CAN 0% JPN As a still camera Record video clips Upload pictures/video content to the internet

Source: Ofcom Understanding International Communications Behaviour research, October 2008 Base: All adults who use the internet aged 18+ who own a mobile phone (UK 929, France 914, Germany 946, Italy 952, USA 834, Canada 765, Japan, 914)

Accessing video content using a mobile a minority activity – most popular in Japan

Japan, Italy and France are all markets with significant mobile television offerings. Japan has a free-to-air broadcast TV service, while Italy has a mixture of free-to-air and subscription content delivered over a DVB-H network. France does not yet have a broadcast mobile television service, although TV services delivered over 3G networks are available from providers including Orange and Canal Plus.

Despite the growing supply of video-for-mobile services, our consumer research shows that, among the countries we surveyed, its consumption remains a minority activity that is at its most popular in Japan (8% claim to use their mobile to watch live television) (Figure 3.10). In Europe it remains very much a minority pursuit – 3% of French and Italian mobile users claim to watch streamed video over their phones, while 4% of French users claimed to watch live television.

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Figure 3.10 Use of the mobile phone to watch video content Which of the following do you use your mobile phone for?

UK FRA GER ITA USA CAN JPN 10% 8% 8%

6% 5% 4% 4% 4% 4% 3% 3% 3% 3% 3% 3% 2% 2% 2% 2% 2%

% of mobile users of % 2% 1% 1% 1% 1% 1% 0% Download a new video Video streaming Watching live TV clip

Source: Ofcom Understanding International Communications Behaviour research, October 2008 Base: All adult internet users aged 18+ who own a mobile phone (UK 929, France 914, Germany 946, Italy 952, USA 834, Canada 765, Japan, 914)

Mobile social networking starts to take off in the US and the UK

Mobile social networking is now a feasible consumer proposition, thanks to the growing sophistication of mobile phones – bigger screens, faster processors, 3G technology – and application development and faster mobile networks. According to Nielsen Mobile data, mobile users in the UK were most likely to access social networking sites on their mobile (1.7%) closely followed by those in the US (1.6%). (Figure 3.11). On the face of it, these figures do not suggest widespread use – but bearing in mind the general popularity of social networking sites among a younger audience, these levels of claimed use could possibly represent a higher proportion of that group.

Figure 3.11 Social networking access via a mobile phone: 2007/8 Thousands 4079 1.8% 4000 1.7% 1.6% 1.6% 3500 Subscribers 1.4% 3000 accessing social 1.2% networking sites 2500 1.0% on their phone 2000 0.8% 0.8% % of subscribers 1500 0.6% 0.6% 0.6% 1000 812 accessing social 0.2% 0.4% networks over the 293 291 500 255 141 0.2% mobile internet 0 0.0% UK FRA GER ITA USA SPA

Source: Nielsen Mobile; EU data Q1 2008, US data December 2007

3.2.2 Aggregation 3.2.2.1 Introduction

Television channels, radio stations and online portals all aggregate content; they reduce the effort that consumers would otherwise expend in finding content that they want to watch,

104 The International Communications Market 2008 listen to or read. In this section we look at how converging communications technologies have affected aggregators by:

 setting out the revenues raised by other audio and AV aggregators that rely on pay- per-download business models; and

 highlighting trends in advertising revenue – which plays an important part in funding online aggregators,

3.2.2.2 Summary

 Mobile music is now a significant driver of digital music revenue – over half of digital downloads in Italy, France and Japan are to mobile phones.

 Online audio-visual content revenue per head is highest in the English- speaking countries – revenue per head stands at £1.70 in the US, £0.98 in the UK and £0.55 in Canada.

 Internet advertising is most important to advertisers in the UK and Sweden – the internet accounts for 19% of ad spend in the UK and 17% in Sweden, significantly more than the next highest European country, the Netherlands (9%).

 Games and video dominate Google search terms – while fast-rising search terms are exclusively concerned with user-generated content sites like Facebook and Dailymotion.

3.2.2.3 Audio aggregation

Digital music downloads mostly to mobile in Japan, and popular in France and Italy

Digital music has traditionally been distributed in one of two ways:

 Download-to-own (DTO) – consumers purchase a permanent download online (with or without digital rights management, depending on the store). iTunes is the market leader across the world, with around 70% of the online DTO digital music market.

 Subscription services – consumers pay a monthly fee to download music. Access to the music usually ceases if the user stops paying the monthly fee. Napster is an example of this model.

Music purchased and downloaded using a digital platform is growing in popularity, although its growth has failed to stem the recent overall reduction in recorded music sales. Music downloads to mobile phones are an important driver of digital music revenue in all the key comparator markets. In Japan they account for most digital music revenues and make up over half of digital music revenue per head in France and Italy; in the UK they accounted for 29% of total digital sales in 2007. (Figure 3.12)

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Figure 3.12 Digital music revenue per head, 2007

23.9% -1.6% 23.9% -4.3% 20.5% 62.7% 34.1% £2.50 £2.41 £2.24 £2.00 0.8 Mobile music £1.50 £1.34 revenue per capita 0.39 2.04 £1.00 £0.83 Online 1.62 £0.60 £0.57 0.35 music revenue per £0.50 0.95 0.36 0.18 Revenue(£) capita per p.a. £0.22 capita 0.39 0.48 0.23 0.12 0.2 £0.00 0.1 UK FRA GER ITA USA CAN JPN

Source: Ofcom calculations based on International Federation of the Phonographic Industry data Note: Mobile and online shares based on data for H1 2007. As a result it is possible that this chart understates the share of mobile music and overstates the share of online music.

But as consumer adoption of portable music devices has grown and as familiarity with acquiring music online has developed, so have the ways of delivering digital audio content to consumers. There are at least three recent trends:

 Music downloads with no digital rights management (DRM) – DRM allows rights holders to control consumers’ use of digital media, and can apply time restrictions to music, or constrain the number of devices that can play the content. Responding to consumer criticisms about the restrictive nature of DRM, a number of DRM-free services have launched, sometimes provided at a slight premium. These include amazonmp3 in the US (launched in September 2007), Apple’s iTunes Plus and Europe’s 7digital.

 Ad-supported online streaming (streaming on demand) – these services enable consumers to stream audio content ‘free’ using an ad-funded model. A variety of sites such as We7 (UK), SpiralFrog (US) and Deezer (France) provide music in this way.

 Mobile pricing models – Nokia recently launched its mobile offering Comes with Music that bundles a year’s worth of unlimited music downloads in with the purchase price of certain new Nokia phones; Sony Ericsson recently announced a similar service called Play Now Plus.

3.2.2.4 Audio-visual content aggregation

Audio-visual (AV) content distributed online has recently grown in popularity. There is now a wide selection of licensed (and unlicensed) websites that aggregate and package AV content online. Some cater particularly to user-generated content, such as YouTube or Dailymotion. Others, like the BBC iPlayer or Hulu offer access to professionally produced and broadcast content (see section 3.1.4 above). They use several different business models to fund this type of content:

. Pay-per-view – users pay each time they download or stream content. This model is used by Apple iTunes and Canal Play;

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. licence fee-funded – the BBC iPlayer is free-to-view in the UK, supported by the BBC licence fee;

. advertising-funded – in the US Hulu offers free online ad-supported video streaming of TV content and films from US television networks, and is already well established. Advertising also supports online services from Rai in Italy and local services in Spain; and

. subscription services – services such as L’Equipe TV Live (France) and dk4 livestream (Denmark) charge consumers a monthly fee in return for access.

Online TV/video revenue per head growing rapidly

Across all the key comparator countries AV revenue per head has grown at an annual rate of between 66% and 182% over the past three years. Revenue per head is highest in the US at £1.70, with the UK next, at just under a pound. As in previous years, there is a noticeable difference between the English-speaking countries and the other key comparator nations.

Figure 3.13 Online TV and video revenue per head, 2007

Year-on-year change (%)

182% 117% 135% 66% 89% 95% 137% £1.70 £1.75 £1.50 £1.25 0.80 2007 £0.98 increment £1.00 2006 £0.75 increment 0.63 £0.55 0.63 £0.50 2005 0.27 £0.22 £0.17

Revenue per capita (£) capita Revenue per 0.18 £0.12 £0.25 £0.08 0.17 0.13 0.17 0.09 0.07 0.27 £0.00 0.11 UK FRA GER ITA USA CAN JAP

Source: © Informa UK Ltd 2008. All rights reserved. Taken from "Online TV & Video: The over-the-top challenge to traditional TV”

3.2.2.5 Advertising

Many online content aggregators rely on a free-to-view (or hybrid free and pay) business model to make content available. Advertising is therefore a crucial (and sometimes the only) source of revenue for them. This section starts by looking at the internet’s share of total advertising expenditure across the comparator countries. It then goes on to look at Google and internet trends of relevance to advertisers.

Internet adspend share highest in the UK and Sweden

The internet’s share of total advertising expenditure varies across our comparator countries (Figure 3.14). As a proportion of total advertising it was highest in the UK (19%) and Sweden (17%), and lowest in Italy (3%) and Ireland (1%). It accounted for 13% of spend in the US, 10% in Canada and 10% in Japan.

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Figure 3.14 Internet advertising spend as a share of total advertising, 2006-2007

Percentage point change since 2006 4.4 1.1 1.1 0.8 2.7 2.4 2.0 1.0 1.8 2.2 3.5 0.5 2006 2007 20% 19% 18% 17% 16% 14% 14% 13% 13% 12% 10% 10% 10% 9% 10% 8% 8% 8% 6% 7% 6% 5% 4% 4% 4% 4% 3% 3% 3% 4% 2% 2% 1%1% Internet adspend (%) Internet 0% UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRE

Source: World Advertising Trends 2008, published by World Advertising Research Center

Paid-for search is a significant component of internet advertising. It allows advertisers to buy listings within advertised results on search engines such as Google, MSN and Yahoo. Google is the largest search engine in most of our comparator countries (see Figure 3.33 in section 3.4.8) and attracts a significant proportion of all paid-for search revenue.

3.2.2.6 Video and games dominate Google search terms, with searches for UGC sites growing in popularity

Although one of Google’s primary roles is in content navigation rather than traditional aggregation, it is increasingly seeking to play a part in content aggregation. Additionally, its significance in online advertising is difficult to ignore in any discussion of advertising and aggregation.

Google’s substantial market share in much of the world means that its most popular search terms provide some insight into consumers’ search habits in each country (Figure 3.15). In many countries the most popular search terms are location-specific. Examples include ‘BBC’ for the UK, ‘gry’ for Poland and ’wetter’ in Germany. But there are also common search interests among - those for video content, and in particular for ‘YouTube’, were especially popular in many countries. Other popular search terms included ‘games’ (including ‘jeux’ and ‘juegos’) and online auction sites.

The growing popularity of user-generated content was reflected in the search terms that rose up Google’s rankings the fastest in 2007. Without exception they were either social networking sites (‘Facebook’, ‘Badoo’ or ‘nasza klasa’), video content sites (‘YouTube’ or ‘Dailymotion’) or in the case of ‘webkinz’, a virtual world.

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Figure 3.15 Most popular Google searches, by country: 2007 Rank 1st 2nd 3rd Biggest riser UK bbc games ebay facebook FRA jeux video pages jaunes dailymotion GER ebay wetter youtube studivz ITA video libero youtube badoo USA lyrics myspace youtube webkinz CAN lyrics facebook youtube facebook JPN video yahoo youtube POL gry allegro mapa nasza klasa ESP youtube hotmail juegos youtube NED amsterdam marktplaats google youtube SWE lyrics download youtube facebook

IRE ireland bebo youtube youtube Source: Google Insights for Search (http://www.google.com/insights/search/) Note: ’Biggest riser’ unavailable for Japan

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3.3 Distribution and networks

3.3.1 Introduction Converged technologies let consumers access a range of media types through several distribution networks. In this section we examine the impact of convergence on content distribution, including:

 growth in the number of consumers receiving television over IPTV networks;

 the availability of VoIP services;

 the roll-out of mobile services; and

 convergence between fixed and mobile networks in the home.

3.3.1.1 Key points

 IPTV availability highest in France – 22% of French households can now receive IPTV, while France and Sweden lead in IPTV take-up.

 VoIP revenues were highest in North America during 2007 – but they accounted for the highest share of fixed telephony revenue in Canada, at 5.6%.

 High-speed HSDPA networks are now widely available in Europe and Japan – the UK has the highest coverage, at 87% of the population.

 ‘Homezone’ fixed-mobile convergence products attract more subscribers than dual-mode handsets – T-Mobile has secured 1.4 million subscribers to its Homezone tariff in Germany alone, while Orange’s dual-mode Unik/Unique service has only 470,000 subscribers across four markets.

3.3.1.2 Internet protocol television (IPTV)

Internet protocol networks are an obvious example of a network that can carry varying content types (voice, text, audio-visual). This section looks first at television content carried over IP networks, and the following section looks at voice over IP networks.

Over one in five French households can receive IPTV

IPTV services deliver audio-visual content over closed and managed networks using internet protocol technology. This allows operators to control content and guarantee quality of service to subscribers. It differs from television content delivered over the ‘open’ internet (sometimes called ‘over the top’ content) which offers no such quality of service guarantees.

France leads the major European countries in the availability of IPTV, with 22% able to receive the service (Figure 3.16). Italy has the next highest availability (15%), followed by the UK (11%) and Germany (9%).

IPTV typically requires a minimum amount of bandwidth to support both a standard television service and concurrent internet surfing. As a result, IPTV availability is limited by internet connection speeds in some places.

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Figure 3.16 IPTV availability, 2007

50%

40% % of TV households 30% able to receive 22.2% IPTV 20% 14.9% 11.3% 10% 8.6%

0% UK FRA GER ITA

Source: IDATE

Some IPTV operators have hybridised their service with DTT so that some live television channels are broadcast while others (and on-demand services) are delivered over the IPTV infrastructure. Examples of this include BT Vision in the UK (its live channels are all taken from DTT) and Free’s Freebox in France.

French consumers still most likely to take IPTV

With nearly 3 million subscribers, people in France are still more likely to take an IPTV service than in any other country. In 2007 they made up nearly 20% (2.9 million) of all French digital TV subscriptions, 13% (0.4 million) in Sweden and over 5% (0.6 million) in Spain. There were 1.4 million US connections, but that number only represents 1.8% of digital households.

Nearly all of the nations covered by this report experienced robust growth in IPTV subscribers between 2006 and 2007, although this was from a very low base. Apart from Poland, where growth of 1223% was from a base of only 3000 households in 2006, growth was highest in Sweden (610%), the US (100%) and France (93%). Key drivers of IPTV in Europe have included bundled options that include cheap or even free IPTV services and the presence of many IPTV operators in existing fixed-line and broadband markets.

Figure 3.17 IPTV subscribers: 2007

Year-on-year change (%) 6% 93% -- 49% 100% 43% 67% 1233% 43% 41% 610% -- 2900 1400

) 1500 20%

15% 1000 IPTV 10% 569 subscribers 453 500 400 355 % of digital 300 5% TV subs 186 120 36 40

Subscribers households (000 9 0 0% UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRE

Source: World Television Markets 2008, IDATE

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3.3.1.3 Voice over internet protocol (VoIP)

IPTV is not the only consumer service that relies on internet protocol technology. VoIP services carry voice calls over the internet (instead of the public switched telephony network, PSTN) and typically cost less than those carried over the PSTN. Consumers can make VoIP calls in several ways:

 from a PC;

 using a traditional phone and VoIP phone adaptor or special VoIP phone (i.e. without using a PC);

 using a WiFi-enabled VoIP phone; or

 over a mobile phone (either via a WiFi-supported handset or over a cellular network).

Owing to the difficulty of measuring PC-to-PC VoIP traffic, the remaining analysis excludes these calls.

VoIP share of fixed telephony revenues highest in North America and Japan

Revenue as a proportion of fixed telephony share was highest in Canada (5.6%), followed by Japan (4.9%) and the US (4.7%). Share, in both Canada and the US, has jumped since 2005, largely as a result of increased take-up by business. This contrasts with France and Japan where VoIP use is more widespread among domestic subscribers.

Figure 3.18 VoIP share of fixed telephony revenues: 2005-2007

2005 2006 2007

) 6% 5.6% 4.7% 4.9% 4.0% 4% 3.4% 3.4% 2.9% 2.1% 2% 1.8% 1.8% 1.2% 1.2% 0.9% 0.6% 0.7% 0.8% 0.6% 0.6% 0.3% 0.2% Share of fixed revenues (% revenues fixed of Share 0% UK FRA GER ITA USA CAN JAP

Source: IDATE Note: excludes those who make PC to PC calls

For analysis of VoIP take-up across the comparator countries, please see Figure 5.53 in section 5.3.3.4.

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Net neutrality

IPTV, VoIP and other video and peer-to-peer applications can contribute to heavy traffic and congestion on the internet. Many of these applications are time-sensitive and are far less tolerant of delay than, for example, email or web browsing.

To respond to these new applications and their associated demands, service providers are developing a range of business models. Some of these prioritise different types of traffic. Improvements in network technology allow greater identification of internet packets associated with different applications, and this lets service providers prioritise traffic accordingly.

This had led to debate about regulatory intervention to ensure ‘net neutrality’. The debate echoes previous arguments about the public interest requirements of the telecommunications industry, and whether companies involved in broadcasting are best viewed as ‘community trustees’ (with obligations to society and consumers) or ‘marketplace participants’ (with obligations only to their shareholders). Proponents of net neutrality such as internet applications providers and consumer groups argue that it is fundamental to the protection of consumer choice and innovation on the internet. Opponents of net neutrality base their case on the need to differentiate their offers on two grounds:

 quality of service (QoS) – to improve the consumer experience for services such as VoIP or video streaming; and

 on the need to recover their infrastructure investment costs.

3.3.1.4 Mobile distribution

UK leads the comparator countries in HSPA availability

Mobile networks, some of which can now carry a whole range of content types, vary in their availability by country:

 2G – second generation networks are near-universal across all the countries in this study, and several have effective 100% population coverage;

 3G – Japan has universal 3G coverage, reflecting earlier roll-out and higher take-up of 3G services there. Apart from in France where the figure is only 70%, 3G is available to at least 78% of the population in all the comparator countries; and

 HSPA - in the UK 87% of the population can access HSPA, the highest availability of all the key comparator countries (Figure 3.19). Outside North America, HSPA coverage is at least 70% of the population. As discussed in section 2.1.3, the low US figure for HSPA coverage reflects the availability of fast mobile data services over other 3G standards, the geographical size of the US, and the late deployment of HSPA technologies.

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Figure 3.19 Mobile distribution: 2G, 3G and HSPA availability

2G 3G HSPA 100% 99% 99% 100% 98% 100%100% 100% 92% 95% 87% 80% 78%78% 78% 78% 80% 70%70% 70% 70% 60%

40%

20% 15%

0% UK* FRA GER* ITA USA CAN* JAP*

Source: IDATE Note: *Some figures for the UK, Germany, Canada and Japan are estimates. No data are available for HSDPA availability in Canada.

3.3.1.5 Converging distribution networks

The relatively high residential penetration of WiFi and the increasing number of public wireless hotspots make WiFi increasingly important for fixed-mobile convergence (FMC) – see Figure 5.67, section 5.3.5.4 for an analysis of WiFi hotspots. FMC sees voice and data originating from the same device travelling over different networks to its recipient depending on the location of the user and the networks available. Very often this involves potentially cheaper backhaul over the fixed network using a WiFi device (rather than a cellular network) when a WiFi signal is available. Examples include

 dual-mode handsets (handsets that function as a ‘cordless’ fixed handset when in range of a WiFi network and as a mobile elsewhere, such as those provided for Orange’s Unik/Unique service). This is sometimes supported using technology known as unlicensed mobile access (UMA);

 mobile handsets that can access public WiFi networks;

 VoIP on mobile handsets (e.g. Skype on 3UK);

 ‘home zone’ offerings, where users are offered low price calls when they use their mobiles at home, although the network that carries the call doesn’t change; and

 femtocells (see below).

‘Home zone’ offers more popular than dual-mode propositions

Take-up of dual-mode FMC services has so far been poor (Figure 3.20). Reasons for this include the limited range and availability of handsets, poor battery life and modest cost savings. Additionally, due to the cannibalisation of fixed services by FMC services, FMC products can lead to disagreements in pricing between operators’ fixed and mobile arms.

BT has now stopped offering its Fusion services to new customers. This leaves Orange’s Unik/Unique services, with 470,000 subscribers across four countries, as the main and most popular offering in Europe. In comparison the ‘home zone’ offering from Bouygues claims 1.25 million subscribers.

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Figure 3.20 Selected fixed-mobile convergence offerings

FMC offering Country Subscriber numbers Dual-mode/UMA BT Fusion UK 35,000 Orange Unik FRA/UK/POL/ESP 470,000 T-Mobile USA 125,000 Home Zone T-Mobile GER 1,400,000 Bouygues FRA 1,250,000 Vodafone UK/GER 1,000,000

Source: IDATE/Ofcom

Femtocells – an important development in fixed-mobile convergence

Femtocells are yet another example of converging use of distribution networks. A femtocell is a miniature cellular base station that can connect to the core mobile network through a residential or business broadband connection. When in range of the femtocell, a mobile user can make calls on his or her cellular network. This has the benefit of providing high quality cellular coverage in areas not well served by macrocells, usually rural areas or indoor environments. Compared to other FMC solutions, femtocells have the advantage that they do not require a dual-mode handset as they use existing licensed spectrum.

At the moment only two operators have started femtocell deployment for advanced coverage – Sprint in the US and NTT DoCoMo in Japan. In the US this technology allows Sprint to serve rural areas outside its current coverage footprint cost-effectively. In Japan DoCoMo uses femtocells to provide coverage to blackspots particular to the environment of many Japanese cities – high buildings and basements. Several other operators, including Vodafone, Verizon and Telefonica, have initiated technical trials in various markets.

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3.4 Consumption

3.4.1 Introduction In this section we examine the ways in which consumers are accessing content and services over new delivery platforms, and how the availability of these platforms is changing the way in which people consume communications services. Its findings include:

 Our research shows than among the countries for which we had data, internet users in the UK were most likely to have a broadband connection (93% claimed to do so), a PVR (30%) or a digital radio set (34%).

 There was almost one fixed broadband connection for every four people in our comparator countries at the end of 2007 (23 per 100 people, up from 19 in 2006) while the UK figure was 26 per 100, up from 21 in 2006, and the use of mobile broadband services is also increasing.

 Internet use was highest in the US, where the average internet user spent over 15 hours a week online in August 2007 (the figure for the UK was just under 14 hours a week – the highest of the European countries for which we had data).

 Consumers in Japan were most likely to say that the internet was their main source of information for two of the three topics which we asked about (sports at 33% and entertainment at 42%) and second most likely to say the internet was their main source of national news information (at 36% one percentage point lower than the US). Twenty-four per cent of people in the UK said the internet was their main source of national news, 23% for sport and 28% for entertainment news.

 Research suggests that people are increasingly using social networking sites to stay in touch with people, and the UK had the second highest growth in the proportion of internet users using social networking sites to contact each other – up 11 percentage points on a year previously.

 More than seven in ten internet users in all of the countries where data were available said that they accessed the internet while watching TV (in the UK 74% of internet users said that they did so mostly or sometimes).

 Respondents in Japan were the most likely, and those in Germany least likely, to mainly use their mobile phone while at home – in the UK 51% of people said that they always or mostly used a fixed-line phone when in the house.

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3.4.2 Device take-up The mobile phone probably remains the most widely adopted converged device; but the internet connectivity available with many new devices (in particular games consoles) enables device manufacturers to roll out new services as required, via firmware updates. This, along with hardware add-ons, enables device functionality to evolve over time; product capabilities are no longer set at the point of manufacture. Examples in the UK include the Nintendo Wii, which can now offer consumers access to the BBC iPlayer, the Microsoft Xbox 360, which BT broadband customers can now use to access BT Vision’s VoD IPTV services, and the PlayStation 3, which can now function as a DVR with a hardware add-on, PlayTV.

Device convergence is not just concentrated among games consoles: in the US hardware manufacturer Samsung and online movie rental service Netflix recently announced that some of Samsung’s Blu-ray players will be able to play video content streamed from the Netflix website (Netflix also has a similar deal with hardware manufacturer LG). French electrical and entertainment retailer FNAC has also recently launched hardware which combines an HD digital terrestrial receiver, a PVR, access to FNAC’s on-demand IPTV services and internet access via either an Ethernet port or WiFi.

3.4.2.1 Internet users in the UK most likely to have broadband, a DVR and digital radio

Our research asked internet users about the communications devices and services that they used, and from the results we were able to calculate whether people in each country were less or more likely to use a device than the average for all seven countries.

Figure 3.21 Take-up of consumer communications devices Is there a landline phone in your home that can be used to make and receive calls? Which of the following devices do you own and personally use? UK FRA GER ITA USA CAN JPN

Fixed telephone line 95% 95% 96% 92% 79% 89% 90%

Mobile phone 93% 91% 94% 95% 83% 77% 91%

Broadband connection 93% 74% 81% 84% 78% 72% 67% Mobile broadband 22% 25% 17% 22% 16% 16% 10% connection PVR 30% 17% 11% 21% 20% 20% 13%

Digital radio set 34% 15% 21% 32% 12% 14% 7%

Source: Ofcom Understanding International Communications Behaviour research, October 2008 Base: All adults aged 18+ who use the internet (UK 1001, France 1000, Germany 1002, Italy 1003, USA 1010, Canada 1000, Japan=1003 Note: As the questionnaire was answered online it may not reflect the attitudes of a representative sample of the whole population; figures in green are statistically significantly higher than average, while those in red are statistically significantly lower than average.

Internet users in the UK, France and Germany were more likely than average to have access to a fixed-line phone (all at least 95%), while those in the US (79%) were less likely than average, perhaps as a result of widespread internet access via cable, which does not require a voice line in the way that most DSL internet access does (Figure 3.21). Respondents in the US (83%) and Canada (77%) were less likely than average to own a mobile phone, while those in the UK, Germany and Italy were more likely to. Use of broadband among internet users was lower than average in France, Canada and Japan, and higher than average in the UK (93%) and Italy (84%).

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Internet users in the UK, France and Italy were more likely than average to use a mobile broadband connection, while those in Japan (10%) were less likely. The UK had the highest level of PVR use among the nations for which data were available, at 30% of internet users, while take-up was lower than average in Germany (11%) and Japan (13%). Take-up of digital radio sets was also higher than average in the UK (34%) along with Italy, and it was lower than average in France, the US, Canada and Japan.

The UK was the only country where take-up of all of the services / devices among internet users was higher than average.

3.4.2.2 People in Italy are most likely to live in a mobile-only home

The European Commission’s Household Survey Special Eurobarometer reports show cross- ownership of household telecoms technologies. This survey was conducted among all households, rather than just those with an internet connection as in our own research, so the two sets of figures are not directly comparable.

The report shows that at the end of 2007 Italy had the highest proportion of mobile-only households among our European comparator countries, up by 12 percentage points in three years to 37% (Figure 3.22). The number of mobile-only households is high in Italy as fixed- line take-up has historically been relatively low, and many households went straight to mobile telephony rather than fixed, a pattern which is also evident in a number of developing and Eastern European countries, including Poland.

People in Germany were the most likely among our EU comparator nations to live in a fixed- only household in 2007, at 20% (down from 24% two years previously), as a result of relatively expensive historic mobile pricing. (Price benchmarking information for our main comparator countries can be found in Section 2.1). Homes in Sweden were most likely to take both fixed and mobile telephony in 2007, with 88% doing so - 35 percentage points higher than Poland (53%) where people were least likely to take both. Those living in Poland were also most likely (5%) to have no access to telephony services in the home, although the proportion in this category has halved since 2005.

Figure 3.22 Cross-ownership of household telephony services: December 2005 to January 2006 and November to December 2007

100 1 000 00 2 2 133 5 3 4 9 7 3 2 1 14 11 10 4 9 9 13 15 16 11 6 18 20 25 24 Neither 80 13 37 20 32 25 11 21 18 24 20 14 9 12 17 60 16 Mobile only 6 23 16 93 87 85 88 Fixed only Per cent 40 72 71 69 64 64 63 64 60 66 53 56 52 20 46 46 Fixed and mobile 0 2005 2007 2005 2007 2005 2007 2005 2007 2005 2007 2005 2007 2005 2007 2005 2007 2005 2007 UK FRA GER ITA POL ESP NED SWE IRE Sources: European Commission E-Communications Household Survey Special Eurobarometer reports, number 249 (published July 2006) and 293 (published June 2008)

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3.4.3 Consumers’ use of mobile handsets 3.4.3.1 Fixed to mobile substitution most prevalent in Japan

The interplay between established technologies, such as fixed-line telephony, and newer devices is illustrated well by consumers’ relationship with mobile phones. There are marked differences between the ways in which telephony services were used in the home among the key comparator nations considered in our report.

Respondents in Germany were the most likely to use their fixed line to make a call while in the home, with 76% of people saying that they only, or mostly, used their fixed line to make calls while at home, and only 13% saying that they only, or mainly, used a mobile to make calls at home (Figure 3.23). This may be explained by historically high mobile prices in Germany, and the fact that, until recently, many mobile packages did not include a bundle of inclusive call minutes.

By contrast, people in Japan were the least likely to use their fixed line to make a call at home, with less than a third of respondents (32%) saying that they only, or mainly, used their fixed line, and over half (51%) claiming to only, or mainly, use their mobile. Consumers in the US were more likely to claim to be more even-handed in their use of fixed lines and mobiles in the home - 41% mainly, or always, using a fixed line to make calls in the home, compared to 40% for mobile, and 16% saying that they used both equally.

Figure 3.23 Main method of making voice calls while in the home Which of the following best describes how you make voice telephone calls from home?

100% 2% 2% 0% 4% 3% 1% 7% 5% 9% 4% Never make 9% 8% 11% 21% 9% 21% calls 20% 11% 80% 20% 9% All mobile 26% 19% 60% 18% 18% 30% 35% Mostly 49% 15% 16% mobile 40% 31% 32% 12% Equal fixed 27% 22% and mobile 20% 20% 38% Mostly fixed 20% 21% 27% 17% 19% 12%

Proportion of respondents (%) 0% All fixed UK FRA GER ITA USA CAN JPN

Source: Ofcom Understanding International Communications Behaviour research, October 2008 Base: All adults aged 18+ who use the internet (UK 1001, France 1000, Germany 1002, Italy 1003, USA 1010, Canada 1000, Japan=1003) Note: As the questionnaire was answered online it may not reflect the attitudes of a representative sample of the whole population

3.4.3.2 SMS remains the most popular non-voice mobile function

SMS messaging was the most popular non-voice mobile function among consumers in all of our comparator countries except Japan (Figure 3.24). European mobile users were more likely than those living in the US, Canada or Japan to use SMS: use in Europe ranged from 74% of mobile users in France to 86% in Germany, while in all of the non-European nations less than 60% of mobile phone users claimed to send SMS messages, despite the fact that use increased in all of these countries during the year.

Emailing was more popular than SMS among Japanese consumers, with 75% of respondents saying that they used mobile email (18 percentage points more than had done so in the previous year) compared to just 27% who said that they used SMS. Use of mobile email in Japan was exceptional among our comparator countries – people in Italy were the

120 The International Communications Market 2008 second most likely to claim to use mobile email, but they accounted for less than 15% of those whom we surveyed.

Figure 3.24 Use of mobile phone functions to contact people Which of the following do you use your mobile phone for?

100% 86% 79% 78% 75% 80% 74% Text messaging 60% 55% 46% 41% 40% MMS or 27% 26% 25% 27% photo messaging % of mobile users 14% 16% 20% 12% 10% 13% 10% 9% 6% 8% Emailing 0% UK FRA GER ITA USA CAN JPN

Source: Ofcom Understanding International Communications Behaviour research, October 2008 Base: All adults aged 18+ who own a mobile phone (UK 929, France 914, Germany 946, Italy 952, USA 834, Canada 765, Japan=914) Note: As the questionnaire was answered online it may not reflect the attitudes of a representative sample of the whole population

3.4.3.3 MP3 and radio functions still popular on mobile handsets

There were few changes in the proportion of people who used their mobile handset to listen to music, MP3s or FM radio in the year to October 2008 (Figure 3.25). Use of a mobile handset’s MP3 / music player function ranged from 12% of respondents in Canada to 28% in Italy, where consumers were also most likely to use the FM radio function on their handset, with 22% of people claiming to do so.

Use of a mobile handset as a music player was unchanged in all countries during 2008, except the US and Canada, where it increased. The proportion of people listening to FM radio on their mobile handset was also unchanged in all of our comparator countries over the same period. Internet users in the US and Canada were the least likely to listen to FM radio on their mobile handset (at just 3% and 4% respectively), possibly a result of the availability and popularity of satellite radio services in both countries.

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Figure 3.25 Use of mobile phone to listen to music or FM radio Which of the following do you use your mobile phone for? 1-1-116 4 4 -20-10-110 2007 %age point change 30% 28% 25% 26% UK 22% 21% 20% FRA 20% 16% GER 14% 12% 13% 13% ITA 10% 8% USA 3% 4% CAN 0% Listen to music using MP3 function Listen to FM radio JPN

Source: Ofcom Understanding International Communications Behaviour research, October 2008 Base: All adults aged 18+ who own a mobile phone (UK 929, France 914, Germany 946, Italy 952, USA 834, Canada 765, Japan=914) Note: As the questionnaire was answered online it may not reflect the attitudes of a representative sample of the whole population

3.4.4 Access to the internet and broadband connections 3.4.4.1 There is almost one fixed broadband connection for every four people across our comparator countries

Broadband internet services are changing the ways in which consumers access and consume media. In 1998, almost all internet connections were narrowband, unable to support many of the services which we now take for granted with today’s faster, more stable connections. Radio streaming, VoIP and web-based video-conferencing were available to some, but were often poor quality and unreliable, a casualty of dial-up’s slow 56kbit/s connections speeds and frequently dropped connections.

By the end of 2007 there was almost one broadband connection for every four people living in our comparator countries (Figure 3.26). Many consumers are now able to use services over the internet which would have been unthought-of by most users a decade ago, such as accessing broadcast-quality audio-visual content.

Among our comparator countries, the number of fixed broadband connections per 100 population ranged from nine in Poland to 35 in the Netherlands, averaging 23 per 100 across all 12 comparator countries. In all these countries the number of fixed broadband connections increased in the three years to 2007, rising fastest in the UK, France, Germany, the Netherlands, Sweden and Ireland.

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Figure 3.26 Broadband connections per 100 population, 2004 and 2007

40 35 31 30 26 25 24 24 24 22 2004 20 18 20 17 17 18 15 15 12 2007 11 10 9 10 9 8 8 2 3 0 Connections per 100 population UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRL Average annual 533535 4 23555percentage point change Source: IDATE / industry data / Ofcom

3.4.4.2 Mobile internet services are gaining in popularity

The take-up of fixed broadband connections only tells part of the story since a growing number of consumers are accessing the internet using a mobile internet connection. Internet services have been available on mobile handsets since the late 1990s, evolving from simple text-based sites (often managed by and exclusive to the mobile network operator) to today’s more sophisticated open-access mobile-optimised internet sites. These offer access to text, picture, audio and video content as well as applications such as instant messaging and email. However, a mobile phone’s small screen and keypad is not always ideally suited for navigating around internet sites, viewing content and entering information.

Alongside offering access to the internet on mobile phones, mobile operators have for many years also offered internet connections to laptops, using 2G and now 3G datacards. However, until recently these services were expensive, did not generally offer connection speeds in excess of 512kbit/s and were targeted primarily at business users.

But in the last two years the target audience for so-called ‘mobile broadband’ has widened, as 3G operators have sought to monetise their unused network capacity by launching lower priced mobile broadband services aimed at residential consumers. With the roll-out of high- speed HSDPA on 3G networks, the speeds offered are comparable to those from basic fixed broadband services, while competitive pricing has also resulted in service charges on a par with fixed offers. Section 5.1.4.3 shows that some households are using a mobile broadband connection instead of a fixed-line broadband service.

3.4.5 The profile of internet users 3.4.5.1 More women than men accessed the internet in most countries in August 2008

According to Nielsen Online, in August 2008 the number of internet users was split equally between men and women in the UK and France, while in Germany, Italy, Japan and Spain more women went online than men, accounting for between 54% and 56% of the total unique audience. The US was the only nation where the majority of internet users (52%) were men.

Browsing habits may change from month to month (depending on current affairs and sports events, etc) and the figures will also be partly determined by the differing population profiles of each country: in the countries in question the proportion of the population who were

123 The International Communications Market 2008 female ranged from 50.4% in Canada to 51.2% in Japan, according to the CIA’s World Factbook13.

Figure 3.27 Internet unique audience, by gender

100%

80% 48 50 50 54 56 55 55 60% Female

40% Male 50 50 52 20% 46 44 45 45

0% Proportion of unique audience(%) UK FRA GER ITA USA JPN ESP

Source: Nielsen Online, August 2008 Note: Home and work use including applications, except Germany (home use only) and Japan (home use only excluding applications)

3.4.5.2 Internet users in the US most likely to be under the age of 18

The US had the highest proportion of internet users who were under 18 among the comparator countries where data were available; 20% of the unique internet audience were aged 2-17 in August 2008 (Figure 3.28). This was significantly higher than in the other nations, where the proportion ranged from 9% in Italy and Spain to 14% in France. Other key findings from the data are:

 in all of the nations for which data were available at least half of all internet users were aged 35-64;

 Spain commanded the highest proportion of internet users who were aged under 35, at 46%;

 although the US had the highest proportion of internet users who were children, it had the lowest proportion of users aged 18-34, at 20%; and

 Germany was the nation with the highest proportion of internet users aged 65 or older, at 12%, while in Spain just 2% of users fell into this age group.

It should be noted that the data below will partly reflect the differing age profiles of the populations in each country.

13 https://www.cia.gov/library/publications/the-world-factbook/geos/sp.html

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Figure 3.28 Unique internet audience, by age

100% 2 8 7 12 5 10 65 and older 80% 52 51 55 56 50 35 to 64 60% 56

40% 18 to 34 20 29 24 36 20% 21 29 2 to 17 20 11 14 11 9 9 0% Proportion of unique audience (%) UK FRA GER ITA USA ESP

Source: Nielsen Online, August 2008 Note: Home and work use including applications, except Germany (home use only)

3.4.6 Internet consumption patterns 3.4.6.1 Internet users in the US spend the most time online each week

Among the countries for which data were available, internet users in the US spent the most time online in August 2008, with an average of 913 minutes, or over 15 hours a week (Figure 3.29). This includes internet use at home and at work and not all of this time will be active surfing, as the figures include use of applications such as email and the streaming of audio and video content.

Among the European countries covered in this report, UK internet users ranked first in terms of time spent online in 2008 (with 839 minutes or just under 14 hours a week) having overtaken France during the previous four years. Average time spent online by internet users rose in all the countries for which data were available over the period, possibly driven by the fact that average connection speeds have increased, as have the number of online services which users are able to access.

While UK internet users ranked second for the weekly use of the web, growth in weekly use among UK users rose at an average of 21% per annum in the four years to 2008, the highest among the nations for which data were available. The second fastest increase in time spent online was in Italy where it rose by 18% a year, albeit from a relatively low base point, to just under nine hours a week in 2008.

3.4.6.2 Web 2.0 services are helping to drive web use

Web 2.0 is a term used to describe a perceived second generation of web-based communities and services (such as social networking sites and wikis) which facilitate collaboration and sharing between users. The growing prevalence (and popularity) of Web 2.0 sites, which for many users have made using the internet a more creative, engaging experience is another factor that may be driving increasing average times online.

Websites such as Facebook, Wikipedia and YouTube allow users to create their own profiles and/or upload content (such as text, pictures and video) for others to view and comment on, and this increased user involvement is having an upward effect on total surfing times. For example, according to Nielsen, the average UK internet user spent three hours and 40 minutes on ‘member community sites’ in September 2008, up 42% on the figure of two hours and 35 minutes for a year previously.

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Figure 3.29 Time spent online: 2004 and 2008

1000 913 839 794 800 k 712 573 600 2004 491 523 449 385 400 350 318 271 2008

Minutes per wee 200

0 UK FRA GER ITA USA ESP

21% 13% 13% 18% 6% 9% 4 year CAGR Source: Nielsen Online, August 2004 and 2008 Note: Home and work use including applications, except Germany & Spain (home-only data), a new methodology was introduced in 2006

3.4.7 Concurrent use of different types of media (media ‘stacking’) 3.4.7.1 More than seven in ten internet users access the web while watching TV

Our research asked explored internet users’ concurrent use or ‘stacking’ of media services. The results showed that media stacking was commonplace; between 70% (in Italy) and 83% (in Japan) of internet users across the countries we surveyed said they ‘sometimes’ or ‘most times’ accessed the internet while watching TV.

Figure 3.30 Frequency of surfing the internet while watching TV Do you ever watch TV at home and go on the internet at the same time? 100% 83% 79% 79% 74% 80% 72% 70% 73% Sometimes 60% 43% 44% 50% 46% 42% 43% 48% 40% Most times

% of internet users 20% 36% 39% 28% 30% 27% 29% 25% 0% UK FRA GER ITA USA CAN JPN

Source: Ofcom Understanding International Communications Behaviour research, October 2008 Base: All adults aged 18+ who use the internet (UK 1001, France 1000, Germany 1002, Italy 1003, USA 1010, Canada 1000, Japan=1003) Note: As the questionnaire was answered online it may not reflect the attitudes of a representative sample of the whole population

There was greater variation between our comparator countries when it came to the proportion of respondents who used a fixed phone while watching TV – perhaps reflecting cultural differences relating to people’s need to give the person on the line their undivided attention (Figure 3.31). Less than 4 in 10 (36%) of Japanese internet users said they ‘sometimes’ or ‘mostly’ used a landline when watching television, while the figure rose to nearly eight in ten (76%) in among those in Germany.

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Figure 3.31 Frequency of using a landline phone while watching TV Do you ever watch TV at home and use a landline phone at the same time?

80% 76% 75% 70% 69% 61% 63% 60% Sometimes 67% 36% 40% 62% 58% 67% 51% 56% Most Times

% of internetusers 20% 32%

8% 11% 9% 10% 7% 8% 0% 4% UK FRA GER ITA USA CAN JPN

Source: Ofcom Understanding International Communications Behaviour research, October 2008 Base: All adults aged 18+ who use the internet (UK 1001, France 1000, Germany 1002, Italy 1003, USA 1010, Canada 1000, Japan=1003) Note: As the questionnaire was answered online it may not reflect the attitudes of a representative sample of the whole population

Our research also showed that using a fixed phone while watching TV at home was more common than using a mobile phone while watching TV in both Germany and Canada, while the opposite was true in Italy and Japan. Using either a fixed or a mobile phone while watching television was significantly more commonplace than was listening to radio or music or playing a games console while watching TV.

3.4.8 How consumers use online services and information 3.4.8.1 Websites visited: Google and Microsoft are the only brands that appear in the top ten of every comparator country

Only Google and Microsoft appeared in the top ten sites (by reach) of those comparator countries where data were available. And since visits to Microsoft’s site are not under the control of the user – PCs running a Windows operating system automatically check for updates from the Microsoft domain - its appearance in the lists does not necessarily reflect internet users’ actions and preferences.

Google’s nearest competitors in search, Yahoo! and MSN/Windows Live, each appeared in the top ten of six of the seven countries (they did not rank in Germany or Japan). Other than search engines, sites that encourage user participation also proved popular with internet users in 2007. YouTube, eBay and Wikipedia / Wikimedia Foundation all appeared in five out of the seven top tens.

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Figure 3.32 Top ten website brands, by share of unique audience

UK FRA GER ITA USA JPN ESP

1 Google Google Google Google Google Yahoo! Google

MSN/Windows MSN/Windows MSN/Windows MSN/Windows 2 Microsoft Yahoo! Google Live Live Live Live MSN/Windows 3 BBC Microsoft eBay Microsoft Rakuten Microsoft Live AOL Media 4 Yahoo!Orange Virgilio Microsoft NTT Comms Yahoo! Network MSN/Windows AOL Media 5 Microsoft Free Yahoo! GMO internet YouTube Live Network

6 eBay Yahoo! Wikipedia Libero YouTube Microsoft Blogger

Fox Interactive 7 Facebook TF1 Network Amazon eBay Nifty Terra Media 8 YouTube PagesJaunes T-Online YouTube eBay FC2 Wikipedia

L Internaute Wikimedia 9 Amazon Web.de Wikipedia Wikipedia Orange Magazine Foundation AOL Media 10 eBay YouTube eMule Apple Livedoor eMule Network Source: Nielsen Online, August 2008 Note: Home and work use including applications, except Germany (home data only) and Japan (home use excluding applications)

3.4.8.2 Search: Google is the search engine with the highest reach in all countries but Japan

Among most comparator countries where we had data, Google emerged as the most popular search engine when ranked by unique audience reach (defined as the proportion of the total active internet population visiting a website at least once in the period in question). The notable exception was Japan, where Google ranked second (63%) behind Yahoo! whose reach stood at 88% (Figure 3.33).

In the other nations, Google’s reach ranged from 78% in Germany (where until recently its use had lagged behind that in other nations) to 89% in Spain. In the US Yahoo! was also popular, with a reach of 71%, just 3 percentage points behind Google. The US was the only nation where Google, MSN / Windows Live and Yahoo! each individually benefited from reach of over 60% of internet users.

Figure 3.33 Selected search websites’ reach and rank among all sites, by reach

1 23 12 123 123 132 2 1 123 Rank 100 88 89 84 84 82 78 79 80 74 71 67 69 Google 61 62 63 60 52 41 43 44 MSN / 40 36 Windows Live 26 Yahoo! 20

0 Proportionof unique audience (%) UK FRA GER ITA USA JPN ESP

Source: Nielsen Online, August 2008 Note: Home and work use including applications, except Germany (home data only) and Japan (home use excluding applications)

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3.4.8.3 Internet users in Japan are most likely to use the web to explore a variety of different types of information

As part of our online consumer research we asked about the ways in which people research different topics. It showed that there was wide variation in how respondents use the internet to find information on different topics. For example, for national news stories, internet users in the US were most likely to cite the internet as their main source (37%), while less than half this proportion (18%) did so in France (Figure 3.34).

Internet users in Japan were more likely than average to say that the web was their main source in searching for a variety of different types of information:

 thirty-six per cent said it was their main source of national news stories, the second highest proportion among the nations for which data were available after the US; and

 for sports news, a third (33%) claimed that the web was their principal source, while 42% made the same claim about entertainment news, both the highest proportions among the countries for which we had data.

Figure 3.34 Use of the internet as a main source of information Which is your main source of information for the following interests? 50

s 42 40 37 36 32 32 33 News about 28 29 29 your country 30 26 26 24 23 24 23 23 24 24 21 Sports news 20 18 18 Entertainment 10 % of adult internet user

0 UK FRA GER ITA USA CAN JPN

Source: Ofcom Understanding International Communications Behaviour research, October 2008 Base: All adults aged 18+ who use the internet (UK 1001, France 1000, Germany 1002, Italy 1003, USA 1010, Canada 1000, Japan=1003) Note: As the questionnaire was answered online it may not reflect the attitudes of a representative sample of the whole population; figures include not interested and other responses

3.4.9 Accessing audio and audio-visual content online 3.4.9.1 Accessing audio content online is most widespread in Canada and Italy

Listening to and downloading audio content over the internet is relatively well-established – even when dial-up was the principal method of internet access, streamed audio was popular because audio data files are relatively small (at least when compared to video content) and do not require high bandwidth broadband connections to access or download them.

Our research showed that listening to the radio over the internet was most popular in France, where 37% of internet users claimed to do this, followed by Germany and the UK (34% and 33% respectively). Audio on demand services, such as music downloads and podcasts, were most popular in Canada and Italy, where 40% and 39% respectively of internet users said that they did this (Figure 3.35).

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Figure 3.35 Use of the internet to consume audio content For which of the following do you use your home internet connection? 50% s 39% 40% UK 40% 37% 36% 33% 34% 35% 31% 31% FRA 30% 26% 27% 27% GER 20% 17% 18% ITA

10% USA

0% CAN % of adults with internet acces Listen to the radio Listen to or download audio content such as music tracks or podcasts JPN

Source: Ofcom Understanding International Communications Behaviour research, October 2008 Base: All adults aged 18+ who use the internet (UK 1001, France 1000, Germany 1002, Italy 1003, USA 1010, Canada 1000, Japan=1003) Note: As the questionnaire was answered online it may not reflect the attitudes of a representative sample of the whole population; figures are not comparable to those in the 2007 report

3.4.9.2 Almost half of all internet users access video clips online

In all of the comparator countries we surveyed, internet users were more likely to say they downloaded or watched short video clips online (including those made by other people) than longer video content such as movies or complete TV programmes (Figure 3.36).

The proportion watching shorter clips varied between 39% of internet users in Japan to 50% in Canada; by contrast, those watching longer video content ranged from 14% in Germany to 27% in Italy. This might reflect:

 the popularity of sites such of YouTube (which mainly contain short clips of user- generated content);

 the fact that there are relatively few sites where professionally produced full TV programmes and movies can be downloaded or viewed legally, although the number is growing with the recent launches of sites such as BBC iPlayer, Hulu and Joost; and

 the possibility that not all internet users feel comfortable sitting in front of a PC or laptop to view full-length television programmes or films.

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Figure 3.36 Use of the internet to consume audio-visual content For which of the following do you use your home internet connection? 3-41-74 0-4 2008 %age 60% point change 50% 47% 47% 47% UK 43% 45% 39% 40% FRA 27% GER 23% 21% 23% 22% 18% ITA 20% 14% USA

0% CAN Watch or download short video clips, including Watch or download longer video content such as those made by other people feature films or complete television programmes JPN

Source: Ofcom Understanding International Communications Behaviour research, October 2008 Base: All adults aged 18+ who use the internet (UK 1001, France 1000, Germany 1002, Italy 1003, USA 1010, Canada 1000, Japan=1003) Note: As the questionnaire was answered online it may not reflect the attitudes of a representative sample of the whole population; figures for shorter video clips are not comparable to those in the 2007 report due to questionnaire re-phrasing

3.4.10 Consumers’ use of the internet as a communication tool 3.4.10.1 Social networking sites are increasingly being used to contact people

We asked internet users about the methods they used to contact other people. The results suggest that there has been a significant increase in the number of people using social networking sites (SNS) such as MySpace and Facebook to contact each other (Figure 3.37). This has been accompanied by a reduction in the use of instant messaging (IM) services in some countries.

People in every country except Canada and Japan were more likely in 2008 to claim they used social networking sites to contact each other, compared to 2007 - in Canada and Japan the figures remained unchanged since last year. Use of IM was unchanged in all of the countries except Italy, Canada and Japan, where it fell. There were no changes in the use of email in any of our countries in the year to October 2008.

Figure 3.37 Uses of the internet to contact people For which of the following do you use your home internet connection? 2008 %age -1 -3 11 -2 -5 10 1 5 22 -3 -6 10 -2 -5 6 -2 -8 2 -2 -6 1 point change 100% s Accessing 80% email

60% Instant messaging 97% 93% 93% 91% 91% 89%

40% 87% Using social 69% 56%

55% networking 50% 49% 20% 48% 44% % of adult internet user 42% 40% sites 34% 33% 32% 27% 0% 18% UK FRA GER ITA USA CAN JPN

Source: Ofcom Understanding International Communications Behaviour research, October 2008 Base: All adults aged 18+ who use the internet (UK 1001, France 1000, Germany 1002, Italy 1003, USA 1010, Canada 1000, Japan=1003) Note: As the questionnaire was answered online it may not reflect the attitudes of a representative sample of the whole population

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3.4.11 The impact of the internet on consumers’ use of offline media 3.4.11.1 TV viewing among US internet users affected the least by the internet

Section 3.4.6 illustrated how internet users are spending large and growing amounts of time online. Up to a point, this may result in consumers substituting the internet for other media- related consumption (e.g. newspapers). Our research suggests that some consumers believe they spend less time on other, ‘offline’, media since acquiring access to the internet, while others believe the opposite. Analysis earlier in this section showed that concurrent media consumption, or ‘stacking’, does not necessarily mean that more time on the web results in less time spend on other media consumption.

Figure 3.38 shows that among the nations where data were available, between a fifth (21% in the US) and a third (33% in Italy and France) of respondents said that they believed they watched less TV than they had done before having access to the internet. By contrast between 8% (in Canada and Japan) and 15% (in Italy) of internet users said that they believed they watched more TV.

Subtracting the proportion of people who said they believed they were watching less TV from those that believed they watched more, we calculated the net proportions of people who believed they watched less TV since having access to the internet. This analysis suggests that TV has been least affected by increasing internet use in the US (where the net difference was seven 7) while among other countries the net proportion of people who said they thought they watched less television ranged from 15 to 21 percentage points, the impact on TV viewing appearing to be most significant in Japan.

It is important to note that this calculation does not take into account the extent to which people think they are watching more or less TV, and that no other data were available to support these findings, therefore any conclusions drawn from the analysis are only indicative.

Figure 3.38 Impact of the access to the internet on watching television Since starting to use the internet, which if any of the following activities do you believe you undertake more or less offline?

100% 21 26 26 27 29 s 80% 33 33 Less 60% The same 64 40% 63 54 64 53 65 62 More 20%

% ofadult internetuser 11 14 9 15 14 88 0% UK FRA GER ITA USA CAN JPN Net %age 15 19 17 18 7 19 21 watching less TV Source: Ofcom Understanding International Communications Behaviour research, October 2008 Base: All adults aged 18+ who use the internet (UK 1001, France 1000, Germany 1002, Italy 1003, USA 1010, Canada 1000, Japan=1003) Note: As the questionnaire was answered online it may not reflect the attitudes of a representative sample of the whole population

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3.4.11.2 Newspaper reading impacted most by the internet – watching DVDs the least

Reading national newspapers is the offline media activity which appears to have been hit most by increasing internet use. In all the nations for which data were available, over a quarter of people said that they believed they read national newspapers less now that they had the internet, and in France that figure rose to nearly half of all respondents (47%). In all but one country (Italy, at 14%), less than 10% of people believed that they read national newspapers more than they had done before going online.

Figure 3.39 Impact of the internet on reading national newspapers Since starting to use the internet, which if any of the following activities do you believe you undertake more or less offline? 100%

s 27 32 27 32 31 26 80% 47 Less 60% The same 65 59 40% 61 60 62 66 45 More 20% % of adult internet user 8 9 14 8 0% 6 7 7 UK FRA GER ITA USA CAN JPN

Source: Ofcom Understanding International Communications Behaviour research, October 2008 Base: All adults aged 18+ who use the internet (UK 1001, France 1000, Germany 1002, Italy 1003, USA 1010, Canada 1000, Japan=1003) Note: As the questionnaire was answered online it may not reflect the attitudes of a representative sample of the whole population

Our research also showed that the offline activity which had been least affected by growing internet use was watching videos or DVDs. A possible reason for this is that online promotion and discussion of films arouses consumers’ interest in new video and DVD releases, and competition between online retailers has led to lower prices for both DVD purchases and rental.

3.4.12 Dependence on different types of media 3.4.12.1 Internet users say they would miss web access more than any other media activity

Consumers spend comparatively large amounts of time watching TV, surfing the internet and, in some countries, reading newspapers or listening to the radio. This suggests some level of dependency among consumers on these types of media, which our consumer research explored by asking people which they would miss most, if it were taken away.

A word of caution must be attached to these results – as the questionnaire was answered online it may not reflect the attitudes of a representative sample of the whole population, as only internet users were able to answer it. For example, internet users will be more likely to say that they would miss using the internet most out of all media activities than the population as a whole.

In all of the countries covered by our research, internet users were more likely to say that they would miss accessing the internet via a PC or a laptop than any other medium. The proportion of people giving this answer ranged from 36% in Canada to 51% in Germany

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(Figure 3.40). Considering the relative newness of the internet, this indicates a strong attachment to the internet on the part of some people.

But other media also play an important role in consumers’ lives; 16% of consumers in Italy would miss their mobiles the most – the highest proportion among our comparator countries and consistent with the high levels of take-up of mobiles. Respondents in Italy were also the least likely to miss TV the most (18%), while those in the US and Canada were the most likely, with a third citing television as their most-missed media activity.

Figure 3.40 Most-missed media activity Which of these activities would you miss doing the most? 100% 3 4 3 4444Unsure 10 10 9 9 9 12 7 2 3 3 4 2 6 80% 5 7 7 7 5 5 1 Other 8 5 9 6 7 11 5 16 Read newspapers / 21 24 60% 28 magazines 25 33 33 18 Listen to the radio 40% Use a mobile phone 51 50 43 20% 41 43 38 36 Watch TV

0% Use the internet via a Proportionof unique audience (%) UK FRA GER ITA USA CAN JPN PC or laptop

Source: Ofcom Understanding International Communications Behaviour research, October 2008 Base: All adults aged 18+ who use the internet (UK 1001, France 1000, Germany 1002, Italy 1003, USA 1010, Canada 1000, Japan=1003) Note: As the questionnaire was answered online it may not reflect the attitudes of a representative sample of the whole population

3.4.12.2 One in six internet users take VoIP in the Netherlands and France

VoIP’s popularity continues to grow rapidly in most of the comparator countries, especially in France and the Netherlands, where nearly one in six internet users take a subscription (Figure 3.41). In Japan, 13% of internet users took a VoIP subscription, illustrating that this service’s popularity is not just a European phenomenon. In both France and Japan telecoms operators have played an important role in pushing VoIP take-up. In France VoIP has been an important part of operator strategies to retain customers through the deployment of triple- and quad-play options. Examples include France Telecom’s Livebox service and Free’s Freebox offering.

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Figure 3.41 Use of Voice over IP subscribers per 100 population: 2005-2007

20 17 17 2007 15 5 increment 7 13 2 10 2 2006 increment 6 5 7 7 7 55 2 5 4 3 4 2 9 2005 3 3 2 2 5 2 2 115 2 1 1 1 211 2 1 1 2 Subscribers per 100 population 0 0 0 0 01 UK FRA GER ITA USA CAN JAP POL ESP NED SWE IRE 2 year 300% 81% 83% 89% 100% 87% 20% n/a 83% 88% 71% n/a CAGR Source: IDATE Note: Excludes users who only make PC to PC calls; two year CAGR unavailable for Poland or Ireland

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The International Communications Market 2008

The International Communications Market 2008

4 4 Television

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Contents

4.1 Television market developments 139 4.1.1 Television industry key metrics, 2007 139 4.1.2 The analogue terrestrial platform begins to disappear on main sets in Europe 140 4.1.3 In the face of growing platform competition, pay-TV maintains its market share 143 4.1.4 Consumers beginning to embrace pay-TV service enhancements 146 4.1.5 Advertising’s share of global TV revenue fell below 50% for the first time in ‘07 150 4.2 The television industry 153 4.2.1 Summary 153 4.2.2 Global television industry revenues 153 4.2.3 Total television industry revenue, by country 155 4.2.4 Sources of television industry revenue 156 4.2.5 Television broadcaster revenues 160 4.2.6 Television platform operator revenues 162 4.2.7 Television output from public service broadcasters (PSBs) 165 4.3 The television viewer 171 4.3.1 Summary 171 4.3.2 Platform availability 171 4.3.3 Take-up of television platforms on main television sets 172 4.3.4 Viewers’ consumption of television services 176 4.3.5 Consumer attitudes towards television 179

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4.1 Television market developments

4.1.1 Television industry key metrics, 2007

UK FRA GER ITA USA CAN JPN

Ads, subscriptions and public funds £10.4bn £7.0bn £9.3bn £6.3bn £66.6bn £4.4bn £17.7bn

Revs per head £172 £109 £113 £109 £221 £135 £139

from advertising £58 £38 £36 £55 £110 £34 £67

from subscription £71 £52 £37 £35 £111 £86 £48

from public funding £43 £20 £39 £19 £1 £14 £25

Annual licence fee £140 £79 £140 £73 n/a n/a £108*

Largest TV platform DTT DTT ACab ATT DCab ACab DSat Proportion of homes (%) 37% 29% 50% 40% 33% 35% 36%

ATT channels 5 7 13 9 5 7 7

Viewing per head (mins/day) 218 207 208 230 272 223 n/a

Share of largest channel (%) 22% 31% 13% 22% 8% 9% 19%

Share of three largest channels (%) 50% 63% 38% 54% 22% 18% 53%

DTV penetration 86% 66% 32% 56% 70% 53% 65%

DSO date 2012 2011 2009 2012 2009 2011 2011

Source: IDATE/Eurodata/Ofcom *The Japanese licence fee comes in two parts. This higher fee shown is payable for those households where broadcast satellite services are taken.

This section highlights several TV sector developments from our comparator countries:

 Eighty-six per cent of UK main sets were connected to digital in 2007 (up from 77% in 2006), followed by the US (70%, up 9 pp), France (66%, up 13 pp) and Japan (65%, up 8 pp). In the Netherlands and Sweden analogue terrestrial TV has already been switched off.

 More households chose to pay for additional television channels in 2007 in every comparator country, with the result that the majority of households in each country apart from the UK, Italy, Japan and Spain took a pay package; the majority (59%) of Polish households took pay TV for the first time in 2007. In the UK, pay television households remained in the minority – 47%, up by 2 percentage points on the year.

 Across ten of our comparator countries in 2007 there were an estimated 28million pay-TV households with a digital video recorder (DVR), up by 52% since last year. Three countries accounted for 96% of the total: the US (73%), the UK (13%) and France (10%).

 Around 9million subscribers paid for HD services in 2007 across the UK, France, Germany, Italy, the US and Canada. Subscribers in the US and Canada accounted for 87%, or 7.9 million of the total, with the UK responsible for over half of the remaining 1.2 million.

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 Global TV industry revenue reached an estimated £166bn in 2007 (£10.4bn was from the UK), up by 6% on the year. Advertising was the largest component, at £81bn, although for the first time it didn’t account for the majority of the total.

4.1.2 The analogue terrestrial platform begins to disappear on main sets in Europe Homeowners in each of the countries in this study continued to replace analogue TV technology with a digital counterpart during 2007. Digital switchover (DSO), which took place in the Netherlands during 2006, was completed in Sweden during 2007. However, main sets in each of these countries did not rely heavily on terrestrial television, thereby reducing the challenge of converting them to digital in the approach to DSO.

Even in countries where terrestrial TV is more popular on main sets (such as the UK, France and Italy) the switchover process has either begun or is about to:

 In Italy, switchover began in Sardinia during 2007 and will be completed in late 2008. The process has also begun in Val d’Aoste and will soon commence in Turin/Cuneo, Trentino and Alto Adige.

 In the UK, switchover in Copeland took place in November 2007, and Selkirk was the second part of the Borders region to switch to digital in November 2008.

 In France, Coulommiers will be the first pilot switchover area, while the country’s media regulator (the CSA) has recommended that switchover should start in those regions of France where DTV take-up is highest.

With the digital switchover date approaching in several of our comparator countries, policy makers/regulatory authorities are arranging for DTT roll-out to an increasing proportion of the population:

 it currently covers 98% of Sweden (for four out of five available multiplexes);

 73% of the UK population is currently covered by all six multiplexes;

 by the end of 2008, 89% of French viewers and 90% of German viewers will be covered; and

 at its 2009 launch, about 70% of viewers in the Republic of Ireland will be able to get DTT.

France has also joined the US in mandating the inclusion of digital tuning technology in all new television sets produced and sold, while US consumers are able to apply for discount vouchers that contribute towards the cost of DTT receivers.

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Figure 4.1 Timeline for DSO

Switched over Key: Purple - switched over Pink - transition to switchover has begun Canada Orange - switchover deadline Japan Sweden USA France 2007 2009 2011 2013

2006 2008 2010 2012 2014 The Germany Italy Poland Netherlands Spain UK

Source: Ofcom research

To put the rate of analogue terrestrial migration into context, just two years ago the majority of households in France, Italy and Spain still had analogue terrestrial television (ATT) on their main set. Digital conversions have reduced that total substantially in every case – to just one in five French households and to about two in five households in Italy and Spain (Figure 4.2).

Figure 4.2 Analogue terrestrial television take-up: 2005 - 2007

Proportionate reduction in ATT in homes, 2005 - 2007 -55% -62% -87% -28% -55% -50% -65% -15% -40% -100% -100% -21% 70

60 13% Homes switching 7% 50 from ATT in 2005/06 21% 8% 2% 5% 11% 40 Homes switching from ATT in 30 13% 2006/07 7% 2% 20 40% 39% 3% 36% 9% ATT takeup in 4% 2007 10 21% 3% 4% 19% 13% 4% 3% 5% 1% 1% 1% 2% 5% 6% 5% 4% 0 UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRL Source: IDATE

But migrations to digital are also being driven by platform operators’ network upgrades. Digital cable and satellite networks can carry a wider range of channels, while digital cable technology can support television on-demand services and network operators have been proactively marketing digital services to their analogue customers. As a result, analogue cable take-up fell by 17 percentage points in the Netherlands, by 5pp in the US and Sweden and by 4pp in Canada. In Poland, analogue satellite’s share of main sets dropped by 5pp during 2007, possibly reflecting the competition for subscribers among the three competing pay-satellite providers.

By country, different platforms benefited from analogue platform migration during 2007:

 digital satellite was the main choice in Poland and the Republic of Ireland;

 digital terrestrial was popular in Spain, France, the UK and Italy;

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 IPTV take-up grew rapidly in France and Sweden; and

 digital cable was the most popular choice in the Netherlands and Canada (Figure 4.3).

Figure 4.3 The changing television platform mix during 2007 Proportion of households (percentage points) IRL -0.2 -2 -3 5 1 SWE -1 -5 -2 -4 2 3 7 NED -17 15 0.5 2 1 ESP -0.5 -1 -11 1 9 1 1 POL 0 -6 -5 1 9 0.3 JPN -3 -1 -5 3 4 1 CAN -4 -1 -3 4 1 1 1 USA -5 0 -4 4 3 1 1 ITA -0.5 -8 5 3 1 GER -2 -2 -1 2 1 2 0.3 FRA -1 -13 9 6 UK -0.5 -9 1 6 2

-20 -15 -10 -5 0 5 10 15 20 ATT Asat Acab Dcab DTT Dsat IPTV

Analogue platforms Digital platforms Source: IDATE

DTT first launched as a pay-TV platform in the UK and Sweden ten years ago, followed by Spain a year later, in 1999. While the pay-TV proposition survived in Sweden, the UK and Spanish platforms relaunched largely as free-to-view platforms (although a pay service - Top Up TV - continued to play a role in the UK). Later launches (e.g. in France and Germany) followed a similar model. The availability of a subscription-free DTT proposition has, in each case, had the effect of stimulating take-up in DTT, as illustrated below in Figure 4.4.

But pay-DTT has retained a presence in several of the countries in this study, including France, Italy and the UK. And there are signs that the pay-DTT pioneers are now exploiting their expertise in newer DTT markets:

 Top-up TV, which has operated a pay-DTT service in the UK for five years, launched its TNTop channel bundle in France in May 2008, offering up to eight live pay-TV channels.

 Boxer, the Swedish pay DTT platform operator, is part of a consortium that won the right to manage three DTT multiplexes in the Republic of Ireland, which will launch in 2009 with 30 TV channels (Figure 4.4).

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Figure 4.4 DTT take-up since launch Number of years since DTT platform launched 40 UK FRA GER ITA 20 USA JPN ESP NED 0 123456789 SWE

Source: IDATE

4.1.3 In the face of growing platform competition, pay-TV maintains its market share Consumers in all the countries in this study are able to choose between two or more digital television services, at least one of which normally offers a subscription television service. When homeowners make the switch to digital television, paying for more channels becomes an option, and with DSO imminent in a number of countries in this study, pay-TV operators have continued to build up their subscriber bases.

Between 2002 and 2007 pay-TV take-up rose across all the countries in this study, and for the first time in 2007, the majority of households in Poland (59%) paid for additional channels (a threshold reached by France in 2006), following an increase of 21 percentage points over the period (Figure 4.5). At the opposite extreme, pay-TV operators in Spain and Germany experienced only modest subscriber growth of 1 and 3 percentage points respectively. But it was in Italy that the largest proportion of households migrated to pay television over the five years to 2007 (69%), albeit from a low base, with the result that just over one in five Italian households now pay for additional television services, up from just over one in ten five years ago.

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Figure 4.5 Pay-TV take-up: 2002 to 2007 Proportion of households (%) Total Pay-TV homes 2007 47% 56% 69% 22% 86% 86% 46% 59% 27% 99% 91% 76% 100% 5%

5% 11% 80% 22% 11% 3% Increase 60% between 02 and 07 14% 21% 94% 10% 81% 8% 40% 75% 69% 66% 1% 65% 2002 42% 20% 37% 9% 38% 38% 26% Proportion of homes (%) 13% 0% UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRL 5 yr CAGR 4.8 5.9 0.9 11.4 1.3 2.8 3.9 9.4 0.8 1.1 5.7 3.3 (%)

Source: World Television Markets 2008, IDATE/Ofcom Note: The data for Germany and the Netherlands should be treated with caution as pay-TV figures include households that pay a small ‘cable relay’ payment in return for access to free-to-view channels

Pay-TV players in each market have faced and responded to a range of recent industry trends, technological innovations and consumer challenges. These include:

1. The launch of free ‘multichannel’ TV

Several newer, sometimes cheaper alternatives to pay-TV have emerged which have tested the competitive position of established pay-TV operators. For example, pay-TV operators CanalSatellite in France, Digital+ in Spain and BSkyB in the UK have each been joined recently by a (mostly free) DTT service, which has in each case experienced rapid consumer adoption.

Pay-TV operators have sought to take advantage of the free platform’s growth, either by launching a pay proposition over the platform (e.g. France’s Canal+ channels are available on DTT for a monthly fee) or by using the growing popularity of DTT to ‘shop window’ pay television services (e.g. BSkyB is a shareholder in the UK’s Freeview and offers access to some of its free-to-air channels).

There has also been a move by some satellite-based pay-TV operators to draw consumers onto the satellite platform using a free satellite service; for example, CanalSatellite in France launched its free-to-air service TNTSAT in June 2007. BSkyB has offered a free satellite service for some time, which recently re-branded as Freesat from Sky; this came as new entrant Freesat, the free-to-air service from the BBC and ITV, launched in May 2008.

2. IPTV launches

IPTV services have also expanded the range of pay-TV services on offer to consumers, resulting in increased consumer choice. Italy’s IPTV market leader, Fastweb, was a pioneer of IPTV in 2003. In France and Sweden, IPTV already accounts for 12% and 8% of households respectively. In Japan, satellite pay-TV market leader Sky PerfecTV has also ventured into this market through its part-owned subsidiary Opicast with its Hikari service, although it is still in its infancy.

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3. Retaining key content rights

Sports and film rights have traditionally been drivers of pay-TV subscriber growth, and platform operators periodically compete to secure exclusive distribution rights. In Germany, for example, the pay-satellite operator Premiere lost subscribers in 2006, when it lost live Bundesliga soccer to Unitymedia-owned Arena. A subsequent sub-licensing agreement allowed Premiere to carry the Bundesliga packages once again on its platform and on other cable and IPTV operators’ platforms within Unitymedia’s cable footprint. In Italy, where football rights are currently sold club-by-club, Sky Italia shows all live league soccer matches on a subscription basis, but since 2005 Mediaset and Telecom Italia both offered matches on a pay-per-view basis. But from 2010, the top Italian soccer clubs will sell rights collectively; this change could have a significant impact on Italy’s pay-TV market.

In the last quarter of 2006 France’s two satellite operators, CanalSat and TPS, merged to create Canal Plus France, which controls the satellite platform CanalSat. One of the 59 government conditions for this merger was that, in the absence of pay-TV competition, Canal Plus’ output deals with Hollywood studios must not run for more than three years.

4. Launching enhancements to the core pay-TV service

Pay-TV operators have responded to market challenges, such as increasing platform choice, by seeking to differentiate their offer, by diversifying away from premium content and by identifying new revenue streams to bolster ARPU (average revenue per user). Introducing new services such as HD, VOD and DVRs have been popular solutions.

Figure 4.6 offers a snapshot of the recent developments by the pay-TV leaders in the various countries. For example, in the UK, Sky+ DVR subscriptions reached 4.1 million by the end of September 2008, equivalent to 46% of Sky DTH households. BSkyB launched HDTV in May 2006, and reported 591,000 HD subscribers by end-September 2008.

Figure 4.6 Summary of developments from leading pay-TV operators

Broadcaster Developments

UK BSkyB • Launched Sky+ HD in May 2006 and currently offers 26 HD channels (as at October 2008) • 591,000 HD subscribers at end-September 2008 • Sky+ DVR subscribers reached 4.1 million at the end-September 2008 • Launched VOD service Sky Anytime to Sky+ customers in March 2007

FRA CanalSat • HD launched in 2006 and there are currently 9 HD channels • Launched Canal+ on demand in March 2008 to existing customers

GER Premiere • Launched HDTV in December 2005 and currently has two HD channels • In June 2005 launched VOD service Premiere Direkt+ • In April 2008 signed deal with Warner Bros to show films on VOD simultaneously with DVD release

ITA Sky Italia • Introduced DVR decoder MySKY in November 2005 • Introduced HD in April 2006 with four channels which have increased to six (October 2008)

USA Comcast • Comcast claims over 1,000 hours of HD programming at any one time available on broadcast channels and on demand (October 2008) • Offers over 10,000 on demand titles each month

DirecTV • Currently offers over 100 HD channels (October 2008), with plans for 120 by the end of the year • Launched DirecTV on Demand service nationwide in June 2008 to DVR subscribers

CAN Rogers cable • Last figures reported were 2006 HD subscriber numbers of 200,000 (8.8% of its basic subscribers) • However 2007 annual report claims “strong demand for HD and PVR digital set top box equipment. “

JAP SkyPerfectTV • Currently with 15 HD channels (October 2008), “SKY PerfecTV! HD” plans to expand to more than 70 channels in October 2009, and ultimately providing over 100 HD channels to subscribers • In October 2006, Sky began offering a DVR service

Source: Industry data/Ofcom

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4.1.4 Consumers beginning to embrace pay-TV service enhancements Consumer demand for pay-TV service enhancements, like digital video recorders and high- definition television, has risen steadily.

4.1.4.1 Homes in the US, the UK and France most likely to have a digital video recorder

Among nine of our comparator countries1 an estimated 28 million pay-TV households14 had a digital video recorder (DVR) in 2007, up by 52% on the year15; over the last five years, take-up has roughly doubled every year. Among the ten countries, three accounted for 96% of the total: the US (73% or 20.8 million), the UK (13% or 3.8 million) and France (10% or 2.7 million). While the US continued to drive DVR market growth in 2007, the UK and French markets have also begun to make growing contributions, driving down the US share of DVR devices by 8 percentage points during 2007 (Figure 4.7).

Figure 4.7 Pay-DVR take-up Volumes of digital video recorders by country (millions) 30 28.4m

25 IRL SWE

20 18.7m NED 20.8 ESP 15 POL 11.2m USA 15.1 ITA 10 6.3m GER 9.6 FRA 5 2.7 2.5m 5.4 UK 1.0 0.2m 0.7m 2.1 3.8 1.3 2.0 0 0.6 0.3 0.6 2001 2002 2003 2004 2005 2006 2007

Source: Ofcom calculations based on data supplied by Screen Digest

The platform driving DVR take-up differs by country, which may partly reflect:

 consumers’ historic allegiances to one platform (e.g. cable in the Netherlands); and

 the recent popularity of a newer digital platform (such as IPTV in France).

Across the nine comparator countries, satellite was the preferred platform for DVRs among pay-TV subscribers in 46% of households, followed by IPTV with 41%; cable households accounted for the remaining 13%. Satellite was the main supplier of DVRs to pay-TV subscribers in Spain, Poland, Ireland, the UK and Sweden. In the US, Italy and Germany, DVR services supplied by satellite and IPTV providers tended to be popular (Figure 4.8).

14 Note that this does not take account of ‘free’ homes with DVRs – e.g. those with free DTT or free satellite services. 15 This includes the UK, France, Germany, Italy, the US, Poland, The Netherlands, Sweden and the Republic of Ireland.

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Figure 4.8 DVR take-up by country and platform

Total installed base of DVRs, end 2007 3.8m 2.7m 0.4m 0.3m 20.8m 0.1m 0.1m 0.1m 0.04m 100 3 4 2 14 16

80 38 42 IPTV 60

60 92 14 14 100 96 98 Cable 86 40 81

Proportion of DVRs (%) 48 20 40 44 Satellite

1 7 0 UK FRA GER ITA USA POL NED SWE IRL Source: Ofcom calculations based on data supplied by Screen Digest

At least two factors appear to drive the proportion of pay-TV households converting to DVRs:

 first, the tendency of people in a country to pay for digital subscription TV; and

 second, the length of time DVR services have been available.

Pay-TV platform operators in the US and the UK were the first to launch DVRs, introducing services in 2001; with relatively high levels of digital pay-TV penetration; these countries lead in overall DVR take-up. By contrast, take-up in Germany and Italy is lower, despite services having been available for some time – because low levels of pay-TV take-up limit the size of the addressable market. A third category of countries where DVR adoption is high includes the Republic of Ireland, Sweden, the Netherlands and Poland; although DVR services launched there only recently, pay-TV take-up is relatively high, which has enabled rapid consumer adoption (Figure 4.9).

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Figure 4.9 DVR take-up versus digital pay-TV take-up

70 IRL 2 years 60 USA SWE 7 years 50 4 years NED UK 40 2 years 7 years Higher levels of DTV pay TV FRA DVR services launched <4years POL 5 years 30 Higher levels of DTV pay TV 2 years DVR services launched >5 years 20 ITA

Proportion of homes with pay TV of Proportion 7 years 10 GER Lower levels of DTV pay TV 5 years DVR services launched >5 years 0 0 2 4 6 8 10 12 14 16 18 20 Proportion of pay homes taking with a DVR Source: Ofcom calculations based on data supplied by Screen Digest

4.1.4.2 Subscribers in the US and Canada have access to the largest number of HD channels

Viewers in Japan were the first to benefit from high-definition (HD) television, using an analogue terrestrial standard, during the 1980s. High-definition services using digital transmissions were launched first in the US in 2000 to coincide with that year’s Superbowl. Since then, platform operators in many other countries that form part of this study have rolled out similar services, although platform operators in the US and Canada continue to offer more channels than elsewhere (Figure 4.10).

Figure 4.10 Number of HD channels on offer, by platform and country Number of channels

86 50 45 45 45 40 Satellite 40 38

35 33 Cable 30

25 21 20 IPTV

15 11 10 7 7 7.5* DTT 5 55 6 5 2 2 2 3 0 00000 0 0 0 UK FRA GER ITA US CAN JAP Source: IDATE Notes: *Japanese DTT figure represents an average of HD channel availability across different regions

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4.1.4.3 The UK has the largest proportion of HD subscribers among larger European countries

High-definition has often been introduced as a value-added service, attracting an additional monthly fee (the exception is Japan, where free-to-view channels have been available in HD since the launch of the analogue standard). Over time, however, prices in some countries have been restructured to attract a wider range of subscribers (for example, Premiere in Germany reduced its HD tariffs in 2007, BSkyB halved the cost of its HD set-top box in 2008). High-definition services may soon begin to enter the mainstream:

 HD services on terrestrial television are already available in Japan and the US, although not all programmes are available in HD;

 Ofcom in the UK and CSA in France have both begun to take steps towards launching HD services on Freeview and TNT respectively; and

 free-to-view satellite services, such as Freesat in the UK, offer consumers access to HD services for a one-off equipment/installation fee.

There are an estimated 9 million subscribers paying for HD services among six of our large comparator countries (the UK, France, Germany, Italy, the US and Canada). Subscribers in the US and Canada account for 87% or 7.9 million of the total; the UK, France, Germany and Italy combined account for the remaining 13% or 1.2 million, of which the UK accounted for 0.7 million subscribers at the end of 2007 (Figure 4.11).

Figure 4.11 Number of HD subscribers, by platform and country: end 2007 Number of subscribers 7

6.0m 6 0.1m DTT 5 2.7m 4 IPTV

3 Cable

2 1.9m 0.1m 1.2m 3.2m 0.1m 0.9m Satellite 1 0.4m 0.7m 0.8m 0 UK, FRA, GER, ITA US CAN Source: IDATE Note: This does not include households in the US and Japan that receive HD without a charge over the DTT platform

By country, different platforms have been responsible for driving HD subscriptions. Satellite accounted for the largest proportion of HD households in the UK, France, the US and Italy. In Canada, cable households commanded the larger proportion, while IPTV was a significant provider of HD subscriptions both in France (through Free) and, to a lesser extent, in Canada. As a proportion of all subscription television households in Canada, HD was the most popular platform, with nearly one in five paying subscribers taking it; the US ranked

149 The International Communications Market 2008 second with 6% of its subscriber base paying for additional HD channels, while the UK ranked third, with nearly 3% (Figure 4.12).

Figure 4.12 Number of households paying for HD , by platform and country Number of subscribers Total 0.7m 0.2m 0.2m 0.1m 6.0m 1.9m 5.8% 1.4% 0.8% 1.4% 6.2% 17.6% 100% 0.004m 0.1m 0.1m

0.1m 80% 0.3m 0.1m 2.7m IPTV 0.9m 0.03m 60%

0.1m Cable 40% 0.5m Proportion of HD homes (%) 0.1m 0.1m 3.2m 20% 0.8m Satellite

0% UK FRA GER ITA US CAN

Source: IDATE Note: This does not include households in the US and Japan that receive HD without a charge over the DTT platform.

4.1.5 Advertising’s share of global TV revenue fell below 50% for the first time in ‘07 The growing popularity of pay-TV services has recently lifted revenues worldwide, not just through additional pay television subscribers, but also by the revenue-enhancing impact of new value-added services that attract additional subscription fees, such as DVRs and HD services. Taken together, these factors have had the effect of driving up subscription revenue’s share of total market revenue, further strengthened by modest growth in TV advertising revenue.

Figure 4.13 illustrates the distribution of industry revenue over time among the three principal sources – advertising, subscriptions and public funding. Ofcom estimates that global television industry revenue reached £166bn in 2007, up by 6% since the previous year and by nearly one-third since 2003. Advertising was the largest component of the total, at £81bn, while subscriber income made up a further £71bn; the remaining £14bn was drawn from public funding sources. Subscriber revenue grew by just under 10% during 2007– ahead of the four-year trend rate of 9.9% p.a. Its pace of growth far outstripped advertising (which grew at 3.7% in the last 12 months and by nearly 6.1% p.a. on average over the last four years) and public funding, whose growth of 2.5% in 2007 was below the five-year average of 3.1% p.a. (Figure 4.13).

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Figure 4.13 Global television sector revenue, 2002 and 2007 Global revenue (£bn) £125bn £138bn £146bn £156bn £166bn 200 Growth 4 yr YOY CAGR £14bn 150 £14bn 2.5% 3.1% Public Funding £14bn £13bn £13bn £71bn £64bn £59bn 100 £54bn 10.1% 9.9% Subs £49bn

50 £78bn £81bn 3.7% 6.1% Advertising £64bn £71bn £74bn

0 2003 2004 2005 2006 2007 Source: Ofcom analysis based on data taken from PricewaterhouseCoopers Global Entertainment and Media Outlook 2007-2011, Ofcom and IDATE for US public funding and subscriber revenue. Notes: Data analysis and Interpretation is solely Ofcom’s responsibility.

Figure 4.14 illustrates the growth in average subscriber revenue raised per pay-TV household (ARPU) among our comparator countries. In 2007 ARPU rose ahead of the five- year trend in Canada, Japan and the US, (by 6.3%, 13.5% and 6.8% respectively). It also grew among pay-TV operators in Italy, the UK, Poland and Sweden, although at a rate somewhat below the five-year trend (3.6%, 1.2%, 1.3%, 1.6%).

A number of factors might explain how pay-TV operators continued to build average revenue per user over this period:

 by offering a growing number of channels for the same price, or a modestly higher price;

 by introducing platform enhancements and charging a premium for them; or

 through real-terms increases in subscription tariffs.

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Figure 4.14 Average subscription revenue per subscriber, by country Average subscriber revenue per subscriber per annum (£) Growth 2007 480 5 yr value YOY CAGR £268 6.3% 4.0% CAN 400 £345 -0.8% 4.0% ESP £239 -2.6% -2.3% FRA GER 320 £118 -0.2% 0.3% £167 -2.2% -0.3% IRE £407 3.6% 6.7% ITA 240 £274 13.5% 8.7% JAP £94 -0.1% 3.6% NED 160 £124 1.3% 4.2% POL £134 1.0% -0.6% SWE £351 1.2% 2.9% UK 80 £344 6.8% 6.1% US

0 2002 2003 2004 2005 2006 2007

Source: Ofcom calculations based on IDATE data

The comparatively rapid expansion of subscriber revenue has increased its share of global industry revenue from 39% in 2003 (£49bn) to 43% (£71bn) in four years. During this period advertising’s share experienced a two percentage point reduction, now representing 49% of total revenue (£81bn) – the first occasion, according to Ofcom calculations, when advertiser revenue has not accounted for the majority of total global TV revenue. Public funding, which is present in only a relatively small number of television markets worldwide, took a 9% share, down by one percentage point since 2003 (Figure 4.15).

Figure 4.15 Proportion of industry revenue by source

Global revenue (£bn) £125bn £138bn £146bn £156bn £166bn 100% 10% 9% 9% 9% 9%

Public Funding 80%

39% 39% 41% 41% 43%

60% Subs

40%

51% 52% 50% 50% 49% Proportion of global revenue (%) 20% Advertising

0% 2003 2004 2005 2006 2007

Source: Ofcom analysis based on data taken from PricewaterhouseCoopers Global Entertainment and Media Outlook 2007-2011, Ofcom and IDATE for US public funding and subscriber revenue. Notes: Manipulation and Interpretation of data is solely Ofcom’s responsibility.

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4.2 The television industry

4.2.1 Summary In this section we consider the revenue dynamics of international TV markets, including:

 global industry revenue trends and the split of revenues between its three principal components (subscriptions, advertising and public funding);

 the growth in television market revenues, by country and by component; and

 individual platform and broadcasters’ financial results.

We also examine trends in first-run originated programmes among the European PSBs in our comparator countries.

The key points in this section include:

 Global television industry revenue reached an estimated £166bn in 2007, up by 6% year-on-year. Advertising formed the largest component, at £81bn; subscriber income made up £71bn; and the remaining £14bn was drawn from public funding sources.

 The US TV industry is the world’s largest, and expanded by 4.5% in 2007 to £67bn. The Canadian and European sectors covered by this study together raised a further £47bn over the same period (up by 4.5%), with the UK contributing 22% or £10bn of this total. Japan accounted for a further £18bn, up 4.2% year-on-year.

 Growing volumes of subscriptions drove revenue growth in many countries; for the first time it overtook advertising revenue (just) in the US to become the largest single source of industry funding. In the UK subscriptions accounted for 41% of revenue per head, against 34% from advertising and 25% from public funding.

 Television’s share of total advertising spend stood at 27% in the UK, compared to 52% in Italy, 48% in Poland and 41% in Japan. Spend on TV advertising fell in most of our comparator countries during 2007. It fell furthest in Canada, by 1.1 percentage points, followed by the UK and Italy, where its share fell by 0.9 percentage points.

 Overall, first-run originated output accounted for 49% of all hours broadcast by the European PSBs that form part of this report, compared to 53% in the UK. First- run acquired programmes accounted for an average of 15%, and repeats for the remaining 36%.

4.2.2 Global television industry revenues 4.2.2.1 Global TV industry revenue exceeded £165bn in 2007

In 2007 Ofcom estimated that worldwide television industry revenues reached £166bn, up by 6.2% (£9.8bn) in twelve months and by 33% (£41bn) in four years (Figure 4.16). Note that this figure does not include revenue generated from additional digital-based services, such as video on demand, pay-per-view, mobile TV, betting and gaming; nor does it include ancillary revenues from services such as telephony. Revenue from these services is significantly smaller than that from traditional funding sources, but is growing rapidly.

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Figure 4.16 Global television sector revenue Revenue (£bn) 200 £166bn £156bn £146bn £138bn 150 £125bn

100

50

0 2003 2004 2005 2006 2007

Source: Ofcom analysis based on data taken from PricewaterhouseCoopers Global Entertainment and Media Outlook 2007-2011, Ofcom and IDATE for US public funding and subscriber revenue. Note: Ofcom has used an exchange rate of $2.001 to the pound. Data analysis and interpretation is solely Ofcom’s responsibility.

4.2.2.2 Revenue from subscription TV commands a rising proportion of the industry total

The majority of commercial television markets were founded on the back of free-to-view advertiser-funded television channels; as a result, advertising revenue has long been the largest component of total TV industry revenue. Over time, its share has declined as the numbers of people paying additional fees for more channels have risen. In the last four years, advertising’s share of total revenue fell 2 percentage points to 49% (£81bn) in 2007, while subscriptions’ market share rose by 4 percentage points to 43% (£71bn). This shift reflects not only the success that pay-TV operators have had in attracting additional subscribers, but also the recent pressures on growth in television advertising spend.

Public funding represents a diminishing share of total revenue, and its share fell by one percentage point in four years, to 9% or £14bn of the total (Figure 4.17).

Figure 4.17 Global television sector revenue: 2002 and 2007 Proportion of total revenue (%)

£125bn £166bn CAGR (4yr) 100% £13bn £14bn 2.4% Public funding 80% £49bn £71bn 60% 7.8% Subscriptions

40% 4.8% Advertising £64bn £81bn 20%

0% 2003 2007

Source: Ofcom analysis based on data taken from PricewaterhouseCoopers Global Entertainment and Media Outlook 2007-2011, Ofcom and IDATE for US public funding and subscriber revenue. Notes: Data analysis and its interpretation of data is solely Ofcom’s responsibility.

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4.2.3 Total television industry revenue, by country 4.2.3.1 The US TV market was the largest in the world in 2007, generating £67bn in revenue

The US television industry, the largest in the world at £67bn, expanded by 4.5% in 2007, below the five-year annualised trend of 5.9% p.a. The European and Canadian television sectors covered by this study raised a combined £47bn over the same period, also up by 4.5% on the year and approximately on trend with the five-year annualised average. The Japanese market expanded ahead of its five-year average growth rate in 2007, growing by 4.2% year-on-year to total £18bn (Figure 4.18).

Figure 4.18 Comparative analysis of television industry revenue Revenue (£bn) Growth (%)

CAGR (5 yr) YOY £67bn £70bn £64bn £59bn 5.9% 4.5% US £60bn £56bn £53bn £50bn £50bn £45bn £47bn £41bn £42bn £39bn 4.7% 4.5% £40bn £37bn Eur + CAN £30bn

£17bn £17bn £18bn £20bn £15bn £16bn £16bn 3.1% 4.2% JAP

£10bn

£0bn 2002 2003 2004 2005 2006 2007

Source: World Television Markets 2007, IDATE, CRTC and Ofcom analysis Note: EUR includes the European countries in this analysis – UK, France, Germany, Italy, Poland, Spain, the Netherlands, Sweden and the Republic of Ireland

4.2.3.2 Italian and Republic of Ireland markets expand fastest in Europe

Figure 4.19 illustrates the annual revenues of the nine European countries we have examined alongside Canada (the US and Japan, with the two largest TV markets, have been omitted for ease of comparability).

The UK television market generated the largest proportion of total revenue among these countries in 2007, accounting for 22% or £10.4bn of the total; it grew by 4.3% in the year, just behind the five-year annualised average of 4.8%. The UK’s share of total revenue has remained relatively stable at around 22% - 23% for the last five years. Germany’s television revenue ranked second, at £9.3bn or 20% of the total in 2007, having risen by 2.7% since last year – ahead of the five-year trend of 1.9% p.a.

A number of other markets grew rapidly over the past twelve months. The Polish, Dutch and Irish markets developed most rapidly, expanding by 17.0% (to £1.6bn), 7.0% (£1.8bn) and 6.7% (to £0.6bn) respectively during 2007 ().

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Figure 4.19 Revenue analysis among European countries and Canada Revenue (£bn) Total revenues (£bn) Growth (%)

£37bn £39bn £41bn £42bn £45bn £47bn CAGR YOY £12.0bn (5 yr) 4.8% 4.3% UK £10.4bn £9.9bn £10.0bn £10.0bn £9.4bn £9.3bn 4.4% 4.9% FRA £8.8bn £8.9bn £9.0bn £8.4bn £8.4bn 1.9% 2.7% GER £8.0bn £8.3bn £7.0bn 9.4% 5.7% £8.2bn £6.6bn ITA £6.3bn £6.2bn £6.3bn £5.8bn £6.0bn 6.5% 0.5% ESP £6.0bn£5.6bn £5.6bn £5.2bn £4.6bn £4.2bn £4.4bn 6.0% 5.1% CAN £4.0bn £3.7bn £3.8bn £4.0bn £3.6bn £3.3bn -1.0% 17.0% POL £4.1bn £4.1bn £3.0bn £3.4bn £3.3bn £3.6bn £1.8bn £1.9bn £1.8bn 3.6% 7.1% NED £2.0bn £1.7bn £1.6bn £1.6bn £1.5bn £1.5bn £1.6bn £1.2bn £1.4bn £1.6bn 4.8% 4.6% SWE £0.9bn £0.9bn £1.0bn £1.1bn £1.1bn £1.2bn £0.0bn £0.4bn £0.4bn £0.4bn £0.5bn £0.5bn £0.6bn 9.5% 6.7% IRL 2002 2003 2004 2005 2006 2007

Source: World Television Markets 2007, IDATE

4.2.4 Sources of television industry revenue 4.2.4.1 Subscriber revenue became the dominant funding source in the US during 2007

While television industry revenue is typically drawn from a combination of advertising, subscriptions and public funding, its composition varies between countries. This reflects different industry origins (for example, public funding has traditionally played a significant role in European television but not in the US); varying rates of pay-TV take-up; and television advertising attracting a different proportion of total spend.

The US market generated the highest industry revenue per head at £221, up by £7.55 or 3.5% on the year. The UK ranked second at £172, with revenue rising by £6.59 or 4.0% on the year. The Japanese television sector generated £139 per head (up by £5.63 or 4.3%) while the ROI market ranked fourth with £137 (£7.16 or 5.5%). The Polish market, while comparatively small, generating £42 per head in 2007, grew rapidly, gaining nearly one-fifth of its value (£6.13 or 17%) in the last twelve months.

Reflecting the growing penetration of pay-TV in many countries, subscriptions represented the largest component of revenue per head in seven of the 12 countries in 2007. It already made up the majority of income in the Canadian and Polish industries, but for the first time in 2007, that threshold was also crossed – just – in the US, with subscriber revenue per head standing at £110.5 while advertiser revenue came in at £109.8. Since public funding forms such a small component of the US television market, subscriber revenue also came close to representing the majority of US TV revenue. Subscriber revenue per head in Canada was second to the US in 2007 at £86, followed by the UK with £71. Advertiser revenue continued to make the larger contribution to revenue per head in Italy (£55), Japan (£67), Spain (£48) and the Republic of Ireland (£59), and in Spain and Italy it accounted for the majority of all TV revenue, reflecting relatively low levels of pay-TV penetration. Public funding continued to make a substantial contribution in the UK, Germany, France, Japan, the Netherlands,

156 The International Communications Market 2008

Sweden and the Republic of Ireland, in each case exceeding £20 per head in 2007 (Figure 4.20).

Figure 4.20 Revenue per head, by source: 2007

Revenues/cap £172 £109 £113 £109 £221 £135 £139 £42 £91 £106 £130 £137 YOY change (£) £6.59 £4.45 £2.94 £5.80 £7.55 £5.40 £5.73 £6.13 -£1.00 £6.48 £5.48 £7.16 100% £1 £2 £14 £13 £20 £19 £25 Public £43 £30 £31 £33 80% £39 funding £111 £30 £35 £48 £25 60% £45 £52 £86 £71 £40 £60 Subscription £37 40%

£48 £55 £110 £67 20% £59 £58 £38 £36 £14 £36 £39 Advertising £34

0% UK FRA GER ITA USA CAN JAP POL ESP NED SWE IRL

Source: World Television Markets 2007, IDATE, CRTC and Ofcom analysis Note: Figures inside the bars represent industry revenue per head. Red boxes highlight figures that are substantially above (or in Japan’s case, below) the average. Population estimates can be found in the country profiles.

4.2.4.2 Subscriptions drove revenue increases in Canada, Japan, Italy and the US

In 2007, revenue growth in most comparator countries was driven by subscriptions. It accounted for almost all the growth in Canada, Japan, Italy and the US, and for much of it in the UK and Sweden.

Advertising revenue did help to drive up revenue per head in the ROI and Spain (by £4.20 and £3.11 respectively), reflecting comparatively low levels of pay-TV penetration in Spain (leaving much of the per-capita growth to movements in advertiser revenue) and continuing buoyancy in advertising revenues in the Republic of Ireland. Public funding was a substantial driver of rising revenue per head in the UK, the Republic of Ireland and the Netherlands. (Figure 4.21)

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Figure 4.21 Components of revenue growth, per head: 2006 to 2007 Increase (£) Subscription Public funding Advertising Net effect IRL £1.16 £1.79 £4.20 £7.16 SWE £3.85 £0.18 £1.46 £5.48 NED £0.14 £4.15 £2.19 £6.48 -£5.21 ESP £1.11 £3.11 -£1.00 POL -£0.02 £5.78 £0.36 £6.13 JPN -£1.39 £6.32 £0.80 £5.73 CAN -£0.98 -£0.44 £6.82 £5.40 USA -£0.54 £8.01 £0.08 £7.55 ITA £4.79 £0.37 £0.63 £5.80 GER £0.37 £0.78 £1.78 £2.94 FRA £2.93 £0.36 £1.16 £4.45 UK £4.08 £1.43 £1.08 £6.59

-£3.50 -£1.50 £0.50 £2.50 £4.50 £6.50 £8.50 Source: World Television Markets 2007, IDATE, CRTC and Ofcom analysis

4.2.4.3 Public funding – licence fees charged across Europe and in Japan

In many European countries and in Japan, public service broadcasting is funded from a combination of income from the licence fee and revenue from advertising; it often also benefits from ‘regulatory assets’ such as free spectrum and/or EPG prominence.

There is no licence fee in the US, Canada, Spain or the Netherlands. Dutch PSBs have been funded directly by the government since 2000. In Spain the PSBs are funded by government grants and advertising, while in Canada they are supported by tax revenues and advertising; PBS in the US is funded through donations and federal grants (Figure 4.22).

Figure 4.22 Cost of a licence fee: 2007 Cost per annum (£) £150

£120

£90 £45 £150 £140 £140 £60 £109 £79 £73 £30 £63 No fee No fee No fee No fee £34 £0 £0 £0 UK FRA GER ITA USA CAN JPN POL ESP SWE NED IRL

Source: Ofcom research Note: The Japanese licence fee costs £63 in terrestrial households or £108 for to receive a larger number of channels via satellite.

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Proposals to introduce an industry levy to finance PSB in France

The future of public service broadcasting and its financing has been under discussion in many countries this past year.

France is no exception; in January, President Sarkozy announced his intention to review the organisational framework and funding system for France Télévisions – France’s public service broadcaster. In addition to extensive consultation, an expert advisory committee was commissioned to report, with recommendations, to the President.

In June the Government outlined its preference to remove advertising from public television. To replace advertising revenue (which currently amounts to over 50% of France Télévisions’ income) it was proposed that an industry levy (or tax) be introduced. The proposals involve:

 3% tax on the advertising income of private channels (if over €11m)  0.9% tax on the revenue of fixed and mobile operators, as well as ISP coming from subscription fees and other payments from end users.

Some specific changes were proposed regarding the Board appointments process at France Télévisions; President Sarkozy proposes that the chairman of France Télévisions will in future be appointed by the government.

This is now in the form of draft law and is expected to be examined by Parliament during autumn 2008.

4.2.4.4 Broadcast-based advertising

Television broadcasters attracted a large proportion of overall advertising spend in 2007. TV was the most popular medium among advertising budget holders in France, Italy, the US, Japan, Poland and Spain, and second to newspaper advertising in the remaining comparator countries.

In Italy TV advertising accounted for the majority of all spend, at 52%, followed by Poland, Spain and Japan, where it took 48%, 43% and 41% respectively.

Internet advertising in the UK attracted a larger share of expenditure than in the other countries in this study at 19%; higher than spend on outdoor, cinema and radio combined. (Figure 4.23)

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Figure 4.23 Distribution of advertiser expenditure, 2007 Proportion of expenditure (%)

100% 4% 3% 4% 5% 6% 9% 5% 13% 10% 10% 9% Internet 19% 10% 5% 8% 7% 17% 4% 4% 4% 4% 8% 7% 9% 80% 7% 17% 9% 4% 7% 11% 13% 3% Outdoor 3% 26% 3% 22% 24% 20% Cinema 52% 60% 32% 27% 31% 43% 2% 38% 48% 18% 10% Radio 41% 20%

40% TV 12% 19% 11% 10% 9% 17% 55% 9% 14% 46% Magazines 20% 42% 39% 31% 31% 26% 25% 25% Newspapers 20% 19% 16% 0% UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRL Source: World Advertising Trends 2008, published by World Advertising Research Center.

Television’s share of advertising spend fell in most countries between 2006 and 2007, except in Ireland, where it increased substantially from a small base, and in France where its share rose modestly. The Polish and Spanish TV markets experienced the greatest losses in advertising spend share (3 percentage points each), while outdoor and internet advertising’s shares of total spend increased. The internet’s share of advertising spend rose by 4 percentage points both in the UK and in Sweden (Figure 4.24).

Figure 4.24 Changes in patterns of advertiser spend: 2006 to 2007 Change in spend (percentage points) 5

4 Internet 3 0.5 4.4 Outdoor 2 2.7 1.0 3.5 0.4 2.4 2.0 2.2 Cinema 1 1.1 1.8 1.8 1.1 0.8 1.0 0.4 Radio 0 0.3 -0.4 -0.5 -0.9 -0.8 -0.6 -1.2 -1.4 -0.8 -1.7 TV -1 -2.1 -1.1 -1.9 -0.4 -2.5 -0.4 -2.6 GER ITA -0.5 -0.7 -2 FRA ESP -0.5 Magazines -1.1 -0.5 JPN NED -1.2 -0.5 POL -0.7 -3 CAN IRL Newspapers US -0.9 -4 SWE UK -5

Source: World Advertising Trends 2008, published by World Advertising Research Center

4.2.5 Television broadcaster revenues Figure 4.25 (page 162) shows the revenues of a selection of broadcasters. It can be difficult to separate the revenues generated by the channel from those generated from other

160 The International Communications Market 2008 sources, such as radio, therefore caution is required when comparing these figures (US broadcasters have been excluded from the analysis for this reason).

In the UK, the largely publicly-funded BBC reported £2.6bn in revenue (for TV), while ITV Plc’s revenue has fallen since last year by around £0.1bn (or 4.5%) to £2.1bn, as a result of reductions in its advertising income and declining revenues from premium-rate services.

In Japan, NHK reported yearly earnings of £2.8bn, up 1.9% from 2006, while Fuji TV’s revenue declined 1.6% to 1.2bn. Meanwhile, partially publicly-funded France Télévisions’ (FT) revenue fell by 3.6% over the year to £1.8bn, while commercial broadcaster TF1’s income rose by 4.1% to £1.9bn.

Major broadcasters’ share of total advertising spend (especially on flagship analogue channels and on linear TV) is decreasing, driven by audience fragmentation (which may accelerate as digital switchover is completed) and by proliferation in the range of media services. In response, some broadcasters have adopted diversification strategies designed to reduce their dependence on television advertising from a single channel:

 Advertising revenue is increasingly drawn from a family of digital channels, to counteract the impact of audience fragmentation– in the UK, ITV Plc now generates 19.4% of its advertising revenues from its digital channels.

 Broadcasters are investing in more content through in-house production or independent production companies, thereby increasing revenue from content rights and international distribution. In 2007, Italian firm Mediaset bought Endemol and two additional Italian production companies, contributing to its 9.1% revenue rise on 2006 figures.

 Some have also moved into broadcasting capacity management. Mediaset’s revenue from DTT multiplex management rose by 24% to E187m, reported in its latest annual accounts.

 Broadcasters with a core free-to-air offering are expanding pay-TV operations. German-based ProSiebenSat.1 (P7S1) has expanded its video-on-demand service Maxdome, while Mediaset launched its pay-TV service Premium Gallery in January 2008; its revenue doubled year-on-year to €226m.

Broadcasters have also invested in Eastern European television markets. :

 In July 2007, ProSiebenSat1 acquired the emerging markets specialist SBS Broadcasting Group, which came with TV networks in Hungary, Bulgaria and Romania. This, along with strong growth in its international business, contributed to its 29% rise in revenue over 2007.

 In July 2008 Scandinavian operator Modern Times Group acquired Bulgarian broadcaster Nova TV Bulgaria for £500m.

In addition, public service broadcasting policy and future funding has been the subject of scrutiny among European countries over the past year.

 In the UK, Ofcom is currently in the midst of its second review of public service broadcasting. It has highlighted the financial challenges faced by ITV1, Channel Four and Five, and has published a second consultation document on options to maintain plurality in public service broadcasting provision.

161 The International Communications Market 2008

 The French government launched a review of the organisational framework and funding system for the public service broadcaster France Télévisions. In June 2008 it outlined its recommendation to remove advertising from public television (which currently provides over 50% of France Télévisions revenue), proposing that this should be replaced by an industry levy.

Figure 4.25 Latest reported revenues from major free-to-view TV operators Annual revenue for latest available period (£bn)

EUR JAP UK UK ITA FRA GER FRA ITA JAP UK £3.5bn 0.5% 1.9% 3.7% -4.5% 9.1% 4.1% 29% -3.6% 3.4% -1.6% 0.9% Percentage £3bn change on £2.5bn 2006 figures

£2bn

£1.5bn £2.9bn £2.8bn £2.6bn £1bn £2.1bn £2.1bn £1.9bn £1.8bn £1.8bn £1.8bn £0.5bn £1.2bn £0.9bn £0bn RTL NHK BBC ITV MediaSet TF1 P7S1 FT RAI Fuji C4

Source: IDATE and latest available Annual Reports Notes: Comparisons between operators should be regarded as indicative only due to the possibility of differences in financial reporting between operators. RTL figures include revenues from broadcasting related activities in countries part of this study (Germany, France UK and Netherlands). RAI figures includes licence fee which combines TV and Radio.

4.2.6 Television platform operator revenues 4.2.6.1 US platform operators increase revenue

Figure 4.26 shows a number of the pay-TV market leaders’ subscriber numbers as a percentage of the total TV households in the country in which they operate. In spite of the emergence of other, sometimes cheaper, DTV services, pay-TV operators such as Sky Italia, DirecTV, Premiere and BSkyB have all seen subscriber numbers continue to grow (at average annualised rates of 16%, 7%, 6% and 5% p.a. respectively since 2003). But most pay-TV operators’ subscriber increases in 2007 were lower than the four-year annualised average.

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Figure 4.26 Subscriber numbers as a percentage of TV households, for a range of leading pay-TV operators Subscribers as a percentage of Total TV households % Pay-TV CAGR 35% market 4 yr 1 yr BSkyB (UK) 72% 4.9 4.2

30% Kabel Deutsch. 41% 0.8 (GER) Comcast (US) 25% 3.3 -0.9 25% CanalSat (FRA) 38% 5.6 2.9

20% Rogers (CAN) 22% -0.7 -0.8

Sky Italia (ITA) 89% 15.6 9.8 15% DirecTV (US) 17% 7.2 5.0 10% Premiere (GER) 14% 5.7 7.2

SkyPerfect (JPN)17% 4.1 1.8 5% 2003 2004 2005 2006 2007

Source: Ofcom/Industry data/IDATE Note: Before 2006 the CanalSat figure takes CanalSat and TPS subscribers combined.

In the US, the revenues of each of the platforms operators, shown in Figure 4.26, rose by at least 10% since the last annual reporting period. Most significantly, following Time Warner’s and Comcast’s July 2006 joint acquisition of cable operator Adephia, Time Warner reported a cable revenue increase of 35.6% to £8.0bn, while Comcast reported a 17.4% rise in revenue to £8.8bn. The acquisition of Adelphia gave Time Warner an additional 3.3 million subscribers, taking its total customer base to 14.4 million, while Comcast gained an additional 1.7 million subscribers, taking its total to 23.3 million. During this time, Time Warner also went public and began trading on the New York Stock exchange in March 2007..

Sky Italia’s revenue rose by 21.9% over the year to £1.9bn, reflecting a surge of subscriber additions – a net increase of approximately 366,000 – following its increased investment in domestic content, the launch of new channels and the November 2005 release of My Sky, a digital receiver with PVR and surround-sound capabilities.

In France, Canal Plus Group’s revenue climbed 24.9% to £2.6bn, following CanalSat’s merger with TPS at the beginning of 2007 and its addition of a range of new channels, including the HD channel Canal+ High Tech.

In the UK, however satellite provider BSkyB saw a 2007 revenue increase of 11% to £3.8bn, while cable provider Virgin Media experienced a 4.7% decline to £2.5bn.

German-based pay-TV operator Premiere experienced 15.7% losses this year, partly due to its loss of the Bundesliga football rights. In May 2008, NewsCorp increased its stake in the company to 25.01%, and is providing strategic support while the operator works on diversifying its content offering, beyond a focus on premium sports. To increase subscriber numbers, Premier is re-branding itself as a key provider of family entertainment, and as part of this, in August 2008, Premiere signed a deal with Fox to carry its international channels.

163 The International Communications Market 2008

Pay-TV operators are also looking to expand on and consolidate their presence in Central and Eastern Europe, with low pay-TV take-up and rising GDP providing opportunities for growth. With lower levels of cable network availability in this region, there has been a proliferation of new satellite platforms, with EU accession for some states also providing favourable investment conditions:

 Viasat Ukraine – a joint venture between Modern Times Group and Strong Media Group – launched the first of several DTH satellite platforms in the Ukraine in April 2008, followed by the domestic provider Poverkhnost Plus.

 France Telecom, which already has an IPTV presence in Eastern Europe, launched a satellite platform in Poland under its TPSA subsidiary in October 2008, to expand its consumer reach beyond its DSL footprint. Deutsche Telekom is launching a DTH satellite platform in Hungary, which has an increasingly competitive pay-TV market.

 Chellomedia, the content subsidiary of US-based cable operator Liberty Global, bought Spektrum in September 2008, a pay-TV documentary channel in Eastern Europe. This is the company’s fifth acquisition in the region in less than 18 months, after its consolidation of Minimax and the acquisitions of thematic channels Filmmuzeum, TV Paprika and TV Deko.

Figure 4.27 Latest reported subscription revenues for a range of pay-TV operators

USA USA USA USA UK FRA UK ITA GER GER £12bn Percentage 17.4% 35.6% 13% 10.1% 11% 24.9% -4.7% 21.9% 3.8% -15.7% £10bn change on £8.8 2006 figures £8.0 £7.8 £8bn

£6bn £5.6

£3.8 £4bn £2.6 £2.5 £1.9 £2bn £0.7 £0.5 £0bn Comcast TimeWarner DirecTV Dish BSkyB Canal+ Virgin Media Sky Italia Kabel Premiere Deutschland Source: Latest available annual reports Notes: Every effort has been made to separate subscriber revenue from other sources, but differences in accounting conventions between operators mean that comparisons should be regarded as indicative only e.g. Virgin Media revenue includes telephony. Percentage change has been calculated on figures that may have differed from last year’s report due to due to restatements.

The average revenues per user (ARPU) of the main satellite-based pay-TV operators have remained relatively stable (Figure 4.28). The US-based operator DirecTV generated the highest ARPU at £474 (a 7.2% increase on 2006), which it attributed to price increases on programming packages, HD and DVR equipment and service fees. BSkyB experienced a 6% increase in ARPU which was explained in part by its decision not to renew viewing package discounts that had been in operation in the previous year. German-based Premiere has traditionally had a low ARPU, due to competition from the country’s extensive cable network. However, competition between pay-TV operators intensified in 2007, and following its decline in revenue, Premiere’s ARPU also declined 15.5% on 2006 figures, largely due to the loss of the Bundesliga football rights (to the satellite platform Arena) for the 06/07 and 08/09 seasons.

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Figure 4.28 Latest reported ARPU for some key pay-TV operators

USA UK USA ESP ITA GER £500 £474.0 £427.0 £395.0 £400 £370.0 £361.0

£300

£200 £175.0

£100

£0 DirecTV BSkyB Dish Digital+ Sky Italia Premiere

Source: Latest available annual reports Notes: Comparisons are for indicative purposes only as definitions of ARPU may differ

4.2.7 Television output from public service broadcasters (PSBs) Information on programmes broadcast by European PSBs is gathered each year by the European Broadcasting Union (EBU), an association of 75 active member organisations from 56 countries. Together, the channels represented in the association achieve a weekly reach of some 650 million viewers and listeners.

Output data presented in this section are collected and analysed using a set of standard EBU definitions to categorise programmes within genres, which aims to provide consistency across broadcasters, allowing valid comparisons to be made. This section focuses on European PSB data, as comparable figures for North America and Asia are not available.

Figure 4.29 gives an overview of the pattern of programme output by genre, illustrating the make-up of the hours broadcast by EBU-member PSB channels in each country for 2007. The chart compares network programme hours only, so national and regional output, which is part of the broadcasting landscape in some countries, is not included here.

 In the Netherlands, the UK and Sweden, Factual programmes predominated, accounting for 38% of all output in the Netherlands, 31% in the UK and 23% in Sweden. In all countries except Ireland, Factual and News programming, taken together, accounted for more than a fifth of broadcast hours.

 Fiction, which includes all kinds of drama programmes, soaps and feature films, was top of the ranking in terms of the number of hours broadcast in Ireland and Poland, where it comprised 56% and 50% of output respectively. In Spain, Fiction amounted to 31%; 30% in Germany, 21% in Italy and 20% in the UK.

 Entertainment, on the other hand, tended to feature less frequently in the PSB schedules, accounting for between 6% and 21% of output, while Sports programming averaged just 6% across the markets surveyed, perhaps reflecting the fact that non- PSB broadcasters tend to win the rights for sports events; sport has become a less prominent feature of the PSB schedules than was once the case.

165 The International Communications Market 2008

Figure 4.29 PSB network output, by genre: 2007 Proportion of total hours (%)

100% 3%1% 2% 4% 3% 4% Other 4% 11% 17% 8% 14% 10% 16% 14% 8% 17% 1% Arts and 14% 4% 5% 80% 9% music 13% 5% 7% 5% 21% 6% 12% Education 10% 12% 34% 9% 14% 9% 20% 10% 9% 60% 3% Sports 8% 10% 17% 21% 6% 13% News 9% 40% 20% 19% 50% 30% 21% 31% 56% Entertainment 21% 20% 17% 38% Fiction 31% 23% 19% 17% 16% 13% 15% Factual 0% 2% UK FRA GER ITA POL ESP NED SWE IRL

Source: Ofcom/EBU Members Note: The UK figures include BBC One, BBC Two, ITV1, Channel 4, and S4C digital

Figure 4.30 shows how the output breaks down by first-run programmes, as opposed to repeats; and between programmes produced or commissioned by broadcasters (originations) and those bought in from other sources (acquired). Public service broadcasters are more likely to invest in programmes made in-house or commissioned from independent producers than are their commercial rivals, which typically rely more heavily on higher volumes of less expensive types of programmes – repeats and acquisitions.

Overall, first-run originated output accounted for 49% of all hours broadcast by the PSBs that form part of this report. They represented the majority of broadcasts by PSBs in the UK (BBC One, BBC Two, ITV1, Channel 4, S4C), France (France 2, France 3, France 5, Germany (ARD and ZDF), Italy (RAI1, RAI2, RAI3), and Spain (TVE and La 2). Those in Italy and Spain led the field, at 63% and 60% of all programmes. Among the countries surveyed, just over a third of programmes broadcast in Poland and Sweden were originated, while in Ireland the figure dropped to 23%. In most countries studied, fewer acquired programmes featured in the programme schedules, accounting for only 5% of output in the UK and 9% in Germany. The proportion was a little higher in Italy and Spain, at 15% each and 19% in Sweden. The figure was highest in Ireland where 30% of programmes were ready-made programmes, bought in from other suppliers.

Repeats accounted for over 40% of programmes broadcast in Sweden (51%), Ireland (47%), Poland (45%) and the UK (41%) while in France, Spain and Italy the figure was around a quarter. In Germany, 37% of programmes were repeats. These figures include repeats of both originations and acquired programmes.

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Figure 4.30 First-run originations, acquisition and repeats Proportion of total hours (%) 100%

23% 33% 31% 80% First run 53% 51% 54% 49% Originations 63% 60% 60% 19% 30% 22%

5% 9% 15% First run 40% 23% Acquired 15% 15% 51% 41% 45% 47% 20% 37% 36% 26% 22% 25% Repeats 0%

K A U ITA SP IRL age FR GER POL E SWE r Ave Source: Ofcom/EBU Members Note: The ‘average’ figures represent a weighted average of the data illustrated in the chart.

The following three charts show how the proportions of originations, acquired programmes and repeats have changed over the last five years.

Despite challenging financial conditions, European PSBs have managed to maintain the proportion of first-run originated programming in their schedules, even though these are usually more expensive to produce. At the same time, the proportion of acquired programmes shows a definite downward trend across the countries considered in this section. The volume-weighted average fell from 22% in 2002 to 15% in 2007, which may be explained by an increase in competition from commercial channels for popular acquisitions, which PSBs are increasingly unwilling or unable to buy if they are priced out of the market. Repeats have been used to fill the resulting gaps, accounting for an average of 36% of hours in 2007, up from 29% in 2002.

The proportion of first-run originated output across all countries surveyed remained relatively stable between 2002 and 2007, ranging from 48.1% in 2005 to 50.7% in 2003. In 2007 the figure fell very slightly, by 0.3 percentage points to 49.4%. Within an overall pattern of stability of first-run originations, there were fluctuations by country – notably reductions in the PSB schedules of Sweden, Poland and the UK, which fell from 46% in 2002 to 31% in 2007, 41% to 33% and 57% to 53% respectively. In contrast, PSBs in Italy and France produced and broadcast a higher proportion of first-run originated output in 2007 than in 2002.

167 The International Communications Market 2008

Figure 4.31 First-run originations: trends Proportion of output (%) Average

49.6% 50.7% 49.9% 48.1% 49.7% 49.4% 70% ITA

60% ESP

50% GER

40% UK

30% FRA

20% POL 10% SWE 0% IRL 2002 2003 2004 2005 2006 2007

Source: Ofcom/EBU Members Note: The UK figures include BBC One, BBC Two, ITV1, Channel 4 and S4C digital.

Overall hours of acquired output fell from 21.6% of PSB schedules in 2002 to 14.5% in 2007, and no country increased the proportion of acquisitions in the schedule. The most significant reductions were seen in the Republic of Ireland and in Spain, where the figures went down by 21 and 18 percentage points (pp) respectively between 2002 and 2007, and in France, where the figure fell by 8pp. In Poland, Italy and the UK, the reductions were less dramatic at around 3 percentage points each, while in Sweden and Germany the proportions remained fairly level.

Figure 4.32 Acquisitions: trends Proportion of output (%) Average

21.6% 20.8% 20.2% 20.2% 18.3% 14.5% 60% IRL

50% FRA

POL 40% SWE 30% ESP 20% ITA

10% GER

0% UK 2002 2003 2004 2005 2006 2007

Source: Ofcom/EBU Members Note: The UK figures include BBC One, BBC Two, ITV1, Channel 4 and S4C digital.

Compensating for the reductions in acquired output, repeats are on the increase in the schedules of most PSBs, with the exception of Italy, where the proportion of repeats in the schedules of RAI1, RAI2 and RAI3 dropped from 26% in 2002 to 22% in 2007. The largest

168 The International Communications Market 2008 rises were seen on RTE1 and RTE2 in ROI (20 percentage points), in Spain on TVE and La2 (17pp), on SVT1 and SVT2 in Sweden (16pp) and in Poland on TVP1 and TVP2 (11pp); increases in the remaining countries were in single figures.

Figure 4.33 Repeats: trends Proportion of output (%) Average

28.6% 28.5% 29.7% 31.7% 32.1% 36.1% 50% SWE

IRL 40% POL 30% UK

20% GER

FRA 10% ESP

0% ITA 2002 2003 2004 2005 2006 2007

Source: Ofcom/EBU members Note: The UK figures include BBC One, BBC Two, ITV1, Channel 4 and S4C digital.

169

The International Communications Market 2008

4.3 The television viewer

4.3.1 Summary This final section of the television report sets out the consumer trends among television viewers during 2007. It examines TV platform availability and take-up, and patterns of television consumption. In concludes by examining people’s attitudes towards television content. The main points in this section include:

 There were more main television sets in the UK (86%) connected to a digital TV receiver than in any other of our comparator countries at the end of 2007. The US ranked second with 70%, followed by France (66%) and Japan (65%). The rate of conversion to digital television was highest in France, with take-up rising by 13 percentage points on the year; it was followed by the UK and the US with year-on- year growth of 9 percentage points each.

 A growing number of people are choosing to pay for additional TV channels. Take-up rose in every comparator country during 2007, with the result that the majority of households in every country took a pay-TV package apart from the UK, Italy, Japan and Spain; 2007 saw the majority (59%) of Polish households take pay- TV for the first time. In the UK, by contrast, pay-TV households remain in the minority – 47%, up by 2 percentage points on the year.

 Viewers in the UK watched 3.6 hours of TV a day, slightly more than the average of 3.4 hours across the other European countries covered in this report, but an hour less a day than viewers in the US (4.5 hours).

 European PSBs that formed part of this study commanded an average share of 38% in 2007, down by 2 percentage points since last year. UK PSBs attracted a slightly higher share (39%) also down by 2 percentage points.

 Viewers in Japan and the UK were the least likely to express concerns about content on television (e.g. poor quality, offensive content), with 25% and 39% respectively of the people we surveyed agreeing that they “had concerns”. The proportion was higher among viewers in France (54%), Germany (53%), the US (47%), Italy (46%) and Canada (43%).

4.3.2 Platform availability The availability of television platforms for the large comparator countries in this study is shown in Figure 4.34. The majority of viewers are able to access satellite services (either pay or free); the satellite platform often offers coverage in areas that are unable to receive cable or terrestrial signals due to geographic or cost barriers.

Digital terrestrial services are also widely available in all seven countries and this is becoming an increasingly popular choice of platform. IPTV services, although growing in reach and popularity, are not yet widely available to viewers in all areas of the seven countries examined.

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Figure 4.34 Platform availability, by country: 2007

UK France Germany Italy US Canada Japan

Analogue Terrestrial

Digital Terrestrial

Digital Satellite

Digital Cable .

Source: World Television Markets 2008, IDATE and Ofcom estimates Note: IPTV excluded as not widely available

4.3.3 Take-up of television platforms on main television sets 4.3.3.1 Analogue platform market share shrinks as consumers begin to prepare for DSO

The mix of platforms through which households access television on their main sets varies by country; but two patterns can be seen (Figure 4.35):

 One platform connected to the majority of main sets, such as in Germany and the Netherlands, where analogue cable is the most popular choice for households, and takes a 50% and 60% share of main sets respectively. In Germany, cable growth is the favoured platform, as it overcomes the problems of free-to-air transmission interference from neighbouring countries.

 A mix of platforms, with two or three technologies accounting for a substantial share of households. In the UK in 2007, two platforms, digital terrestrial and digital satellite, had comparable shares of main sets - 37% and 36% respectively. In Italy, Poland and Spain three platforms combined took a sizable portion of the market (95%, 95% and 82%) with ATT being joined by digital terrestrial and digital satellite in Italy and Spain, and by digital satellite and analogue cable in Poland. In the US and Canada digital cable, digital satellite and digital terrestrial together served 85% and 83% of households respectively.

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Figure 4.35 TV reception devices connected to the main set in the home: 2007 Proportion of households (%)

100% 3% 4% 9% 8% 13% 12% 11% 7% IPTV 21% 6% 24% 22% 12% 29% 33% 30% 80% 9% 17% Digital cable 27% 36% 18% 50% 4% 6% 20% Analogue cable 60% 39% 35% 26% 4% 24% 25% 29% Digital satellite 36% 60% 40% 2% 40% 29% 37% 19% 16% Analogue satellite 27% 24% 20% 40% 39% 2% 36% Digital terrestrial 17% 18% 25% 21% 8% 4% 11% 19% 13% 5% 6% 0% 5% 5% 4% Analogue terrestrial UK FRA GER ITA USA CAN JAP POL ESP NED SWE IRL

Source: World Television Markets 2008, IDATE

When analogue and digital technologies are combined, most of our comparator countries saw one platform (terrestrial, cable or satellite) accounting for the majority of connections to the main TV set; in the Netherlands, 82% of households connect to cable. The exceptions were Japan, Poland and Ireland, where platform choice is less concentrated, and the most popular services account for 39%, 37%, and 42% of households respectively (Figure 4.35).

In the UK and France, where broadcasters have historically used terrestrial technologies and consumers often remain with this platform when they switch to digital, terrestrial platforms were chosen by 50% of households.

Figure 4.36 TV reception devices connected to the main set in the home: 2007 Proportion of households (%)

100% Satellite 80% Second largest Satellite Satellite platform Satellite Satellite Satellite 60% Satellite Satellite Terrestrial Cable Cable Cable 50% 40% Cable Largest Terrestrial Terrestrial Cable Cable Cable 20% Cable platform Terrestrial Terrestrial Satellite Satellite Terrestrial 0% UK FRA GER ITA USA CAN JAP POL ESP NED SWE IRL

Source: World Television Markets 2008, IDATE

4.3.3.2 Analogue TV take-up fell across all platforms as consumers migrate to digital

In all the countries in this study the proportion of main sets connected to an analogue device fell, or remained stable, across all three platforms – terrestrial, satellite and cable (Figure 4.37). The proportion of terrestrial analogue main sets decreased over the year as countries prepared for DSO (except in the Netherlands where switchover took place in 2006). Sweden completed DSO in 2007, and the remaining 4% of households migrated to a digital platform,

173 The International Communications Market 2008 while a good proportion of households in France, Spain and the UK converted to digital over the year, with 13%, 11% and 9% respectively selecting digital television for the first time.

The most sizeable beneficiary of analogue migration was the digital cable platform in the Netherlands, which saw its market share rise by nearly 15 percentage points during 2007. The digital satellite platform in Poland was another to benefit, with its share of households rising by 9 percentage points in the year - capturing the majority of the analogue terrestrial and analogue satellite reductions of 5% and 6% respectively.

IPTV take-up has also risen in many countries – but was particularly successful in France and Sweden during 2007, with its market share rising by 6 and 7 percentage points respectively over the period.

Figure 4.37 Changes in platform take-up 2006 – 2007: percentage points

Platform UK FRA GER ITA US CAN JPN POL ESP NED SWE IRL

Terrestrial Analogue -8.7 -13.2 -1.2 -8.3 -4.0 -2.6 -5.1 -4.5 -11.3 0.0 -3.7 -3.4 Digital 6.2 8.5 1.1 4.9 2.8 0.8 4.3 0.0 9.4 0.5 3.0 0.0

Satellite Analogue 0.0 0.0 -2.1 -0.5 0.0 -0.6 -0.6 -5.7 -0.6 -0.1 -2.2 -0.5 Digital 2.0 -1.3 2.0 2.9 1.3 1.2 0.7 9.3 1.2 1.6 -0.9 5.0

Cable Analogue -0.5 0.0 -1.9 0.0 -4.6 -4.3 -2.7 -0.4 -0.5 -17.4 -5.2 -1.6 Digital 0.9 0.3 1.9 0.2 3.9 3.7 3.1 0.9 0.6 14.7 2.1 -0.2

IPTV 0.0 5.6 0.3 0.6 0.6 0.9 0.2 0.3 1.1 0.7 6.9 0.6

Source: World Television Markets 2008, IDATE/Ofcom Note: Red boxes denote the biggest changes in platform take-up

Overall, people in the Netherlands, France and Spain converted their main sets to digital in the greatest numbers, with 18%, 13% and 12% respectively making the switch in 2007. In France and Spain this was largely due to a well-developed DTT platform, whereas in the Netherlands consumers switched to digital cable, reflecting analogue cable network upgrades (Figure 4.38).

Figure 4.38 Proportion of analogue main sets converted to digital, 2006 – 2007 Growth in the proportion of main sets connected to a digital decoder (%) 40%

30% 2005/06 22.6% 20% 14.0% 4.5% 8.1% 8.2% 6.4% 8.2% 6.6% 2006/07 7.9% 5.2% 11.0% 10% 7.0% 17.6% 13.2% 12.3% 9.2% 8.7% 8.6% 8.4% 10.5% 11.0% 5.2% 6.6% 5.4% 0% UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRL

Source: World Television Markets 2008, IDATE/Ofcom

The net effect of DTV migrations in 2007 left the UK with the greatest proportion (86%) of main sets connected to digital, followed by the US (70%), France (66%) and Japan (65%). Despite Polish and Dutch consumers migrating rapidly to digital during 2007, they (along with consumers in Germany) were the least likely to have converted their main sets to digital; just 32% had done so in Germany, 29% in Poland and 40% in the Netherlands (Figure 4.39).

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But consumers are preparing for DSO; in 2007, for the first time, the majority of households were receiving television channels through a digital decoder in Canada, Spain, Italy and Sweden.

Figure 4.39 Analogue and digital television households, 2007 Proportion of households (%) 100% 14% 30% 34% 35% 39% 38% 80% 44% 47% 44% 60% Analogue 68% 71% 60%

40% 86% Digital 70% 66% 65% 62% 56% 53% 56% 61% 20% 40% 32% 29% 0% UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRL

Source: World Television Markets 2008, IDATE

4.3.3.3 Pay-TV growing in popularity in Poland

While pay-TV take-up rose during 2007, the rate of consumer adoption varied significantly among the countries covered by this report (Figure 4.40).

In the Netherlands, take-up slowed to just 0.1% in 2007, from 2.2% in 2006, as the number of pay-TV households almost reached saturation point (99.4% by the end of 2007 – Figure 4.40). In other mature pay-TV markets, such as the US and Canada, take-up was also comparatively slow.

By contrast, 61% of consumers in Poland chose to pay for additional television services in 2007, up by 10 percentage points on the year. Pay satellite was the driver behind many of those conversions, perhaps explained by the existence of three competing pay satellite operators. Nevertheless, cable still accounts for the largest share of Polish consumers paying for television services.

175 The International Communications Market 2008

Figure 4.40 Migration to pay-TV: 2006 - 2007

Migration to pay-TV 2005 to 2007 3.9% 10.2% 0.6% 4.8% 1.9% 4.9% 1.2% 16.9% 3.4% 2.3% 7.4% 5.1% 10%

8% 6.1% 5.9%

6% 3.5% 2005 to 2006

4% 2.1% 2.6% 1.7% 3.8% 2006 to 2007 2.3% 2% 4.3% 10.2% 3.9% 0.8% 2.2% 3.0% 2.1% 2.2% 0.5% 1.1% 1.1% 1.2% 0.9% 0.6% 0.1% 0% -0.3% Proportion of homes (%) homes of Proportion UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRL -2%

Source: World Television Markets 2008, IDATE

The majority of households in the Netherlands, Sweden, the US, Canada, and to a slightly lesser extent, Ireland and Germany, took pay-TV in 2007. In Poland this was the first year when the majority of households had switched to a pay package, explained by the substantial migration to satellite during the year; the same threshold was reached by French households during 2006. The pay television market remained small in both Spain and Italy, where historically the analogue terrestrial platform has been popular, and consumers have been slower to migrate to digital and/or pay-TV (Figure 4.41).

Figure 4.41 Pay versus free-to-view television, 2007 Proportion of households (%) 100% 22% 27% 80% 47% 46% 56% 59% 69% Pay 60% 76% 86% 86% 91% 99% Free 40% 78% 73% 53% 54% 20% 45% 41% 31% 24% 14% 14% 9% 0% UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRL

Source: World Television Markets 2008, IDATE

4.3.4 Viewers’ consumption of television services Figure 4.42 illustrates that the average amount of time spent watching television per day remained largely constant year-on-year across the countries in this study.

Viewers in the US consumed the most television, watching on average 4.5 hours, an hour more than the average (3.4 hours per person per day) across the European countries that form part of this study. Polish viewers watched more television than any other nation in Europe, at 4.0 hours a day (241 minutes), and people in Sweden were the lightest TV consumers, at just 2.6 hours (157 minutes) a day.

176 The International Communications Market 2008

Figure 4.42 Minutes of viewing per head Minutes per day Proportionate change, 2006 to 2007 0.9% 1.5% -1.9% -3.8% 0.4% -2.2% 0.4% 2.8% -5.6% 1.9% -0.5%

280 2006 2007

210

140 272min 271min 241min 240min 239min 230min 228min 223min 223min 218min 216min 217min 212min 208min 207min 204min 197min 186min 182min 70 181min 157min 154min

0 UK FRA GER ITA USA CAN POL ESP NED SWE IRL

Source: One Television Year in the World 2008 Eurodata/Mediametrie, based on national audience measurement systems.

Owing to the wide range of channels available to US and Canadian viewers (because of their willingness to pay for additional channels), viewing patterns are less concentrated, with the most popular channels attracting a comparatively low share. The top five attracted just 31% of viewer hours in the US and 24% in Canada (Figure 4.43).

Viewers in Poland showed greater loyalty to a smaller number of channels during 2007, with the result that the five most popular TV channels attracted 79% of all viewer hours. French viewers also devoted the majority of their viewing hours to just five channels, the top five commanding a share of 78%.

French commercial channel TF1 attracted the greatest share of any channel in this study, at 31%; the next highest was RTE 1 in Ireland with 25% share. Viewing patterns were also highly concentrated in Italy (where the top five accounted for 74%) and Spain (67%), where, like Poland, a significant majority of households continued to receive free-to-view television on their main sets.

177 The International Communications Market 2008

Figure 4.43 Collective audience share of top one, three and five channels, all households: 2007 Share (%) Proportionate reduction in top five channel share, 2006 - 2007 -6.0% -5.1% -6.0% -14.2% -2.6% -7.8% -11.3% -2.8% -4.1% -3.2% -8.5% -4.6% 100%

78% 79% 80% 74% 70% 67% Fourth and fifth 60% 63% 15% 21% 60% channels 60% 55% 20% 12% 54% 18% 14% 14% 10% 32% 16% 14% Second and 35% 40% 32% 31% 35% 32% 24% third channels 28% 24% 26% 23% 25% 9% 20% 5% 31% 14% 10% Top channel 19% 22% 22% 23% 20% 18% 21% 25% 13% 8% 9% 0% Av UK FRA GER ITA USA CAN POL ESP NED SWE IRL

Source: One Television year in the World 2008, Eurodata/Mediametrie, based on national audience measurement systems Note: The pink increment represents the additional share added from the second and third most popular channels. The purple increment represents the additional share added by the fourth and fifth channels

The average share of the European PSB channels covered in this study fell by 2 percentage points over the year, down to 38% in 2007 (Figure 4.44). Sweden’s SVT1 and SVT2 suffered the greatest reductions in share, down by 4 percentage points in 2007 (on top of a three percentage point reduction in 2006). For the first time, in 2007, Polish PSB channels POL1/2 failed to command the majority of viewer hours, with an all-day share of 46%.

Figure 4.44 PSB share of viewing, all households Share (%) Proportionate change in PSB share of viewing, 2006 - 2007 -5.9% -5.6% -4.7% -4.0% -4.1% -10.5% -13.0% -7.2% -6.3% -4.6% -13.2% -4.1% 50%

40%

30% 2006 50% 46%

20% 44% 42% 42% 41% 42% 40% 41% 40% 39% 39% 38% 37% 36% 33% 33% 32% 31% 31% 10% 2007 5% 4% 2% 2% 0% Av UK FRA GER ITA USA CAN POL ESP NED SWE IRL

Source: One Television Year in the World 2008 Eurodata/Mediametrie, based on national audience measurement systems Notes: UK figures include BBC One, BBC Two and Channel 4/S4C Average calculated using European channels.

The growing popularity of multichannel television is continuing to erode the share of terrestrial television channels in the six larger countries in this study, as shown in Figure 4.45.

In the US the multichannels are unique in attracting the majority of viewer hours. In 2007 their share stood at 71%, up from 67% in 2006. In the remaining countries in this study, terrestrial channels continued to attract the majority of all viewer hours. In Spain and Italy the

178 The International Communications Market 2008 share of viewing for terrestrial channels stood at 86% and 85% respectively in 2007, with the French channels TF1, France 2, France 3, M6, France 5 and Canal+ accounting for an 83% share.

Figure 4.45 Terrestrial channels versus multichannel viewing shares Share (%) Proportionate increase in multichannel viewing share, 2006 - 2007 10.2% 26.8% 5.7% 11.5% 5.9% 10.0% 100% 13% 14% 18% 13% 15% 14% 33% 30% 32% 80% 37%

67% 71% 60% Multichannel

86% 87% 85% 87% 86% 40% 83% 71% Terrestrial 67% 63% 68%

20% 33% 30%

0% 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 UK FRA GER ITA US ESP Source: One Television Year in the World 2008 Eurodata/Mediametrie and Ofcom based on national audience measurement systems

4.3.5 Consumer attitudes towards television 4.3.5.1 TV is consumers’ first choice for media interests

In most countries in this study, around half of our respondents with internet access (the survey was conducted online) said that TV was their first choice of media to find out about world or national news, as opposed to using the internet, newspapers or radio (Figure 4.46). A higher proportion of respondents in France chose television as their first choice for news, at 57% for world news and 61% for news about France; whereas in Japan only 35% turned to television first for news about the world, with the most popular choice of media being the internet, at 50%.

However, a higher proportion of respondents in Japan chose TV as their main source for sports news, at 46%, while the figure in other countries was between 28% and 39% of respondents - making it the favourite choice in all nations except France, where the internet was slightly more popular. A high proportion of those surveyed (for example, 36% in the UK) said that they weren’t interested in sports news, so percentages for all media types were proportionately lower in this category.

TV was the most popular first choice for entertainment across all countries surveyed, ranging from 45% of respondents in the US to 60% in France and Germany.

In the UK the second most popular choice for all four categories was the internet, with 28% choosing it as the first medium for entertainment, 26% for news about the world, 23% for news about the UK and 23% for sports news.

A word of caution must be attached to these results - the research was undertaken online, and there will be a bias towards the internet in users’ responses to the questionnaire, resulting in a likely overstatement of the internet figure.

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Figure 4.46 TV as a source for media interests Which is your main source for the following interests?

Per cent (%) 80% UK France Germany Italy US Canada Japan

60%

40% 61% 60% 60% 57% 54% 53% 53% 51% 51% 49% 49% 48% 48% 47% 47% 46% 46% 46% 46% 20% 45% 43% 39% 35% 34% 33% 32% 30% 28%

0% News about the world News about your country Sports news Entertainment

Source: Ofcom Understanding International Communications Behaviour research, October 2008 Base: All adults aged 18+ who use the internet (UK 1001, France 1000, Germany 1002, Italy 1003, USA 1010, Canada 1000, Japan, 1003)

4.3.5.2 Consumer concerns about television

Viewers in Japan were less likely than viewers in the other six countries surveyed to have concerns about television content, with just 25% of Japanese respondents expressing a concern (Figure 4.47). Respondents in the UK were also less worried; 39% said they had concerns about what is shown on TV, compared to more than half of viewers in France (54%) and Germany (53%) and almost half in Italy (46%) and the US (47%).

Of those respondents who expressed a concern, poor quality content was an issue for most; ranging from 84% in Japan to 94% in Italy; with 93% of respondents in the UK highlighting this as a concern.

Offensive content (e.g. violent or sexually explicit material) was also raised by the majority of respondents across all seven countries as being an area of concern. Viewers in the US were the most likely (89%) to cite this as an issue.

A high proportion of respondents with concerns in the UK and Germany flagged issues surrounding trust or fixed, fake or biased content ( 62% and 69% respectively), around double the percentage of respondents in the US and Canada.

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Figure 4.47 Concerns about television, all individuals Do you have any concerns about what is on TV? What sorts of things on TV are you concerned about? Per cent (%) UK France Germany Italy US Canada Japan

100%

80%

60% 94% 93% 93% 92% 89% 88%

40% 86% 85% 85% 84% 83% 83% 80% 74% 69% 62% 54% 53% 52% 50% 47%

20% 46% 43% 40% 39% 32% 28% 25% 0% Any concerns Poor quality content Offensive content Don't trust/ fixed/ fake/ biased Base: All respondents Base: All respondents who expressed any concern

Source: Ofcom Understanding International Communications Behaviour research, October 2008 Base: All adults aged 18+ who use the internet (UK 1001, France 1000, Germany 1002, Italy 1003, USA 1010, Canada 1000, Japan, 1003) All respondents who had any concern about television (UK 388, France 538, Germany 529, Italy 460, USA 477, Canada 429, Japan 248)

The following two charts (Figure 4.48 and Figure 4.49) split out viewer concerns about TV content by age of respondent. In most countries in the study, older adults (45 to 64 year - olds) were more likely to have concerns than younger adults (18 to 24 year-olds). The exceptions were in Italy and Japan, where the opposite was true, with a higher concern rate among younger viewers.

In the UK, the percentage of older adults with concerns was14 percentage points higher than younger adults. The difference was even greater when comparing concerns about offensive content, which was 20 percentage points higher among 45 to 64 year olds, and trust issues, which were 29 percentage points higher.

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Figure 4.48 Concerns about television, 18 to 24 year olds Do you have any concerns about what is on TV? What sorts of things on TV are you concerned about? Per cent (%) UK France Germany Italy US Canada Japan

100%

80%

60% 98% 95% 93% 90% 40% 89% 85% 85% 82% 82% 79% 78% 71% 68% 66% 64% 56% 55% 49% 47%

20% 46% 46% 40% 39% 38% 36% 35% 29% 24% 0% Any concerns Poor quality content Offensive content Don't trust/ fixed/ fake/ biased Base: All respondents aged 18-24 Base: All respondents aged 18-24 who expressed any concern

Source: Ofcom Understanding International Communications Behaviour research, October 2008 Base: All adults aged 18 to 24 who use the internet (UK141, France 190, Germany 193, Italy 191, USA 141, Canada 139, Japan 231) All 18 to 24 year old respondents who had any concern about television (UK 41, France 94, Germany 106, Italy 107, USA 55, Canada 50, Japan 56) Figure 4.49 Concerns about television, 45 to 64 year olds Do you have any concerns about what is on TV? What sorts of things on TV are you concerned about? Per cent (%) UK France Germany Italy US Canada Japan

100%

80%

60% 97% 96% 96% 94% 92% 91% 90% 87% 87% 86% 40% 86% 83% 79% 77% 75% 72% 59% 57% 57% 53% 53% 48% 20% 47% 43% 33% 33% 28% 21% 0% Any concerns Poor quality content Offensive content Don't trust/ fixed/ fake/ biased Base: All respondents aged 45-64 Base: All respondents aged 45-64 who expressed any concern

Source: Ofcom Understanding International Communications Behaviour research, October 2008 Base: All adults aged 45 to 64 who use the internet (UK 390, France 274, Germany 291, Italy 272, USA 360, Canada 361, Japan 196) All 45 to 64 year old respondents who had any concern about television (UK 168, France 145, Germany 165, Italy 90, USA 192, Canada 175, Japan 42)

182 The International Communications Market 2008

The International Communications Market 2008

5 5 Telecoms

183 The International Communications Market 2008

Contents

5.1 Telecoms market developments 185 5.1.1 Overview 185 5.1.2 Introduction 185 5.1.3 The implications of rising mobile voice use 187 5.1.4 Broadband growth rates slowing in some countries 192 5.1.5 Next-generation access broadband networks emerge 196 5.1.6 The rise of Mobile Virtual Network Operators (MVNOs) 200 5.1.7 The continuing growth of text messaging 204 5.2 The telecoms industry 207 5.2.1 Introduction 207 5.2.2 Telecoms revenues 208 5.2.3 Fixed voice services 210 5.2.4 Mobile telephony services 213 5.2.5 Broadband internet services 221 5.3 The telecoms user 227 5.3.1 Introduction 227 5.3.2 Take-up of telecoms services 227 5.3.3 Fixed-line voice services 230 5.3.4 Mobile services 233 5.3.5 Internet and broadband 240

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5.1 Telecoms market developments

Figure 5.1 Key Indicators, 2007

UK France Germany Italy USA Canada Japan

Telecoms service revenues £26.9bn £24.4bn £30.4bn £20.5bn £133.0bn £14.2bn £50.4bn

Telecoms revenues per capita £443 £382 £369 £353 £442 £432 £395

Fixed lines per 100 population 55.5 45.1 66.0 44.4 53.1 58.3 47.4

Monthly outbound fixed-line 203 138 171 122 223 182 78 minutes per capita

Mobile connections per 100 121.0 86.9 117.9 154.4 85.3 61.6 78.9 population

Share of mobile post-pay 36% 66% 45% 10% 92% 78% 98% connections

3G connections per 100 20.6 9.2 10.6 41.4 14.0 0.9 65.4 population

Monthly outbound mobile minutes 136 130 69 136 588* 261* 103 per capita

Broadband connections per 100 59.9 58.0 49.8 40.7 61.3 66.1 57.2 population

DSL as % of broadband 77.9 95.2 94.4 96.8 42.1 41.0 46.4 connections

Source: IDATE / operators / national regulators Notes: Total service revenue excludes revenue from narrowband internet and corporate data services; * USA and Canada: mobile use includes both outbound and inbound calls; 3G includes W-CDMA and CDMA20000 1xEV-DO - It does not include CDMA2000

5.1.1 Overview The telecoms section of this report is split into three sections:

 The year in telecoms – this section provides an overall context and highlights the key trends in the telecoms market in 2007 and 2008.

 The telecoms industry – provides a ‘top-down’ approach by looking at the telecoms sector from the point of view of operators, and compares and contrasts trends in revenues and market structures across our comparator countries before looking specifically at fixed-line voice, broadband and mobile markets.

 The telecoms user – provides a ‘bottom-up’ approach from the point of view of consumers, and looks at the overall take-up of communications services before focusing specifically on consumers’ experience of fixed-line voice, broadband and mobile phone use.

5.1.2 Introduction It is difficult to overstate the importance of the telecoms sector in terms of its economic and social impact. The data above indicate that, in terms of revenue, the telecoms sector

185 The International Communications Market 2008 generates over £350 per head in each of the countries; around three times as much as television and radio combined.

IDATE estimates that global telecoms service revenues were over £800bn in 2007 (approximately equivalent to the GDP of Spain), with a further £174bn generated by telecoms equipment.16

And of course, these direct revenues are only part of the story; telecommunications are a key enabler for almost all industries in the world. As a ‘multiplier’ industry, investment in telecommunications delivers economic benefits in terms of productivity and employment far beyond the telecommunications industries.17

More difficult to quantify is the transformative social impact of developments in telecommunications; within the last decade the majority of people in all of our comparator countries have acquired a mobile phone and begun to use the internet, fundamentally changing the world in which we live.

It is in this context that we examine variations between market structures and the take-up and use of communications technologies across our comparator countries.

The two following sections do this by using data sourced from operators, national regulators and consumer surveys to compare and contrast the telecoms sectors across our comparator countries, first from an industry and then from a consumer perspective.

In this section, we look at how different consumer behaviour emerges from different industry structures, by focusing on five key trends in the telecoms market during the last year, and looking in particular at what drives variation across our comparator countries:

 The implications of rising mobile use – we use data from the last year to examine the relationship between use and revenue, the reasons why people are talking more on the phone than ever before, the drivers of and constraints to fixed-to-mobile substitution, and how mobile operators are targeting in-home use in order to maintain growth in the voice market.

 Signs of slowing rates of broadband growth – the pressure that fixed operators are under in voice markets is echoed in the broadband market, as narrowband migration nears completion, internet penetration approaches PC ownership levels, and competition emerges from the mobile broadband providers.

 The development of next-generation access networks - in the long term, high speed broadband is the great hope for fixed-line operators looking to develop new revenue streams; it promises to transform the ways in which we use communications, information and entertainment services. We look at developments in the last year and examine how different industry structures, socio-demographic contexts and regulatory regimes have combined to create different patterns of development.

 The rise of mobile virtual network operators (MVNOs) - in a year in which there has been a good deal of activity in many countries, we look at the different market contexts that have led to the emergence of different types of MVNOs. We explore

16 IDATE, DigiWorld Yearbook 2008, pp46-49 17 The European Mobile Industry Observatory quantifies the employment multiplier for the mobile industry as about 4.6 – with 590,000 European directly employed by the industry and “induced employment” of 2.7 million (GSMA, European Mobile Industry Observatory 2008, p20.)

186

how the launch of ‘no-frills’ MVNOs has created new competition in some countries at the low-use end of the market, and how new business models are being developed as highly specific MVNOs have launched, targeting the needs of niche segments.

 The continuing growth of text messaging - despite handset and network developments which enable more sophisticated types of communications such as instant messaging, the humble SMS had remarkable growth in many countries in 2007. We look at different levels of SMS use to explore how marketing initiatives, cultural preferences and the ‘network effect’ combine to create differing consumer behaviours.

5.1.3 The implications of rising mobile voice use 5.1.3.1 Mobile call volumes rising much faster than voice revenues

Mobile voice is now a mature market in all of our comparator countries. The number of mobile connections has exceeded the number of fixed connections in every country since 2006 (and in every European country since 2002). However, as Figure 5.2 shows, in most countries the market continues to grow in terms of call volumes and revenues (Figure 5.34 later in this report also shows that the number of mobile connections grew in every country during 2007).

Nevertheless, there is evidence of diminishing returns for operators as revenues fail to keep pace with increasing use. During 2007, mobile voice volumes grew by an average of nearly 17% across the 12 countries, with average revenues increasing by just 4.5%. The performance of the mobile market in Germany is most striking, with call volumes increasing by 20% during the year, but voice revenues falling by 5%, while in the UK the growth in mobile voice revenues was just one third of the growth in mobile call volumes.

In a mature market there are limited opportunities for growth through targeting new mobile users, so operators have had to look to drive higher use from existing mobile users by reducing prices or by increasing the number of minutes included within a monthly line rental fee. For example, in September 2007 the €60 a month Relax tariff from T-Mobile in Germany included 400 inclusive minutes, whereas in July 2008 a Relax tariff offered 1,000 minutes for the same monthly price.

The most mature market of all is Japan, where growth in mobile connections peaked before 2001 and mobile voice volumes overtook fixed-line voice volumes in 2005. It is also the only country in our analysis where mobile call volumes actually fell during 2007, as a result of the rise of other types of communication services available on mobile phones, including instant messaging and e-mail, and an increase in VoIP use on fixed lines.

187 The International Communications Market 2008

Figure 5.2 Growth of mobile voice volumes and revenues 2006-2007

40% Mobile call volumes Mobile voice retail service 31% revenues 30% 24% 25% 22% 21% 20% 20% 18% 17% 12% 11% 10% 10% 8% 10% 6% 6% 7% 4% 5% 5% 4% 2%

Change 2006-2007 0% -2% -10% -5% -7% UK UK ITA IRL ITA IRL JPN JPN FRA FRA POL POL USA CAN ESP NED USA CAN ESP NED GER GER SWE SWE Source: IDATE / industry data / Ofcom Note: Outbound call volumes for all countries except the US and Canada, where combined outbound and inbound call volumes are used

5.1.3.2 Growth in mobile puts pressure on fixed-line voice

As Figure 5.3 shows, fixed call volumes and fixed call revenues fell or remained the same in all 12 countries during 2007. Part of this reduction was due to the substitution of mobile for fixed calls, but there are also other pressures on fixed-line operators. The largest fall in call volumes was in the US, where national calls are rarely included in fixed-voice line rental tariffs and where the increasing use of Voice over Internet Protocol (VoIP) has combined with increasing use of mobile in substitution for traditional voice calls. The largest fall in service revenues was in the Netherlands, where the availability of ‘naked DSL’ (fixed-line broadband connection without the requirement for a voice service over the same line) has led to fewer fixed-line voice connections and been accompanied by falling voice pricing.

The countries where fixed-line call volumes have shown most resilience are those where fixed-line operators, perhaps in response to increasing ‘buckets’ of inclusive minutes with post-pay mobile connections, have moved to ‘flat-rate’ pricing models, with line rental fees typically including unlimited calls at off-peak times. For example, in the UK (where fixed-line call volumes fell by just 2% in 2007, despite a 21% rise in mobile call volumes), the incumbent offers unlimited national evening and weekend calls within its basic line rental (subject to committing to a 12-month automatically-renewing contract), while the German incumbent offers unlimited any-time national calls on a €30 tariff.

Figure 5.3 Decline of fixed-line voice during 2007 UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRL UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRL 0% 0% 0% 0% 0% -2% -2% -3% -3% -3% -5% -4% -4% -4% -4% -5% -6% -6% -6% -7% -7% -8% -10% -9%

-12% -13%

Change 2006-2007 -15% Fixed-line voice retail -16% Fixed-line call volumes service revenues -20% Sour ce: IDATE / industry data / Ofcom Note: Local and VoIP calls are excluded for the US and Canada

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5.1.3.3 But overall, people in most countries are spending longer talking on the phone

The rise in inclusive minutes in mobile tariffs and ‘flat-rate’ fixed tariffs contributed to people spending more time talking on the phone in 2007 than in 2006 in all of our comparator countries except Japan and the Netherlands (which both have high levels of VoIP use). The highest overall increase between 2006 and 2007 was in the UK, where people spent on average 23 minutes more per month making mobile phone calls in 2007 than they did in 2006, but just five minutes less making calls on a fixed-line phone.

Figure 5.4 below also highlights large variations in the share of fixed and mobile minutes across the comparator countries. In 2007, 57% of voice minutes originated on mobile phones in Japan, 56% in Poland, 53% in Italy, but just 29% in Germany.

In Poland, and to a lesser extent in Italy, the high proportion of mobile calls is explained by the penetration of fixed lines being historically relatively low, and many households going straight to mobile. In Germany, the large proportion of fixed calls is explained by a greater differential between the price per minute of mobile and fixed calls (see Section 5.3.3.3). However, this gap is closing, through a combination of higher numbers of inclusive minutes within post-pay mobile contracts (it is only in the last two years that post-pay tariffs have started to typically offer inclusive minutes), and a range of pre-pay contracts which offer reduced prices per minute for larger top-ups.

Japan represents an interesting case study for other mobile markets such as the UK. Mobile voice volumes exceeded fixed volumes for the first time in 2005. However, the share of mobile has remained relatively stable; at 54% in 2005, 56% in 2006 and 57% in 2007. Operators still tend to use metered pricing for mobile voice calls, and in 2007 mobile volumes actually declined for the first time as consumers increasingly used completely ‘flat- rate’ applications such as email and instant messaging.

For fixed and mobile operators the rise of internet protocol-based applications such as VoIP and instant messaging are threatening the traditional pricing models which are based on per- minute charges. The response is to move more towards ‘flat-rate’ tariffs, and the consequence has been that people are spending more time talking on the phone than ever before – but there has not been a proportional rise in revenues.

Figure 5.4 Fixed and mobile call volumes per head , 2006 and 2007

Monthly fixed call volumes per capita Monthly Mobile call volumes per capita

a 398 400 380 371 339 353 321 315307 144 300 268 117 263 258 253 179 240 241 238 145

136 235 113 188 167

181 176 69

200 58 130 124 126 136 112 133 109 118 105 263 103 100 254 74 207 208 203 57 192 177 171 149 139 138 131 129 129 128 122 83 78 61 59 0 Monthly Voice minutes per capit per minutes Voice Monthly 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 UK FRA GER ITA JPN POL ESP NED SWE IRL Source: IDATE / industry data / Ofcom Note: Local and VoIP calls are excluded for the US and Canada

189 The International Communications Market 2008

5.1.3.4 Mobile-only households falling in some countries

There are large variations in the proportions of mobile-only households across our comparator countries. According to a survey commissioned by the European Commission, by the end of 2007 37% of Italian households had at least one mobile connection but no fixed connection (Figure 5.5). This compares to just 3% of households in Sweden, 9% in the Netherlands and 15% in the UK.18

Historical and socio-demographic factors provide much of the explanation for these variations. Relatively low take-up of fixed lines in Poland and Italy has resulted in many households going straight to mobile. Ofcom’s research into mobile-only households in the UK finds that 19% of households in socio-economic group DE are mobile-only compared to just 4% of socio-economic group AB19.The reasons for this are two-fold.

 Firstly, poorer households are more inclined to save expenditure by having only one type of phone line, and pre-pay mobile typically offers greater control over cost while the absence of a line rental fee brings down the overall cost for low users.

 Secondly, DE households are less likely to have a broadband connection, and a fixed phone line is a requirement for most DSL broadband connections (DSL is the dominant broadband platform in all the European countries in our analysis). Sweden and the Netherlands have both the highest take-up of DSL broadband and the highest wealth per head, and the lowest proportion of mobile-only households.

The number of mobile-only households increased sharply in most countries between 2005 and 2006, with an increase from 25% to 38% in Italy, from 18 to 24% in Ireland and from 14% to 18% in France. But, as Figure 5.5 illustrates, in some countries this trend slowed down or even reversed in 2007. Indeed, the proportion of households with a fixed line increased in France, Italy, Sweden and Ireland. It appears that fixed-to-mobile substitution, measured by the numbers of connections, is slowing down, largely due to the increasing penetration of DSL broadband.

Nevertheless, two recent developments in the market represent a potential challenge for fixed-line voice operators:

 the impact of a global economic downturn; significant numbers of consumers may reduce their household expenditure by forsaking their fixed line and relying solely on a mobile phone; and

 the rise of mobile broadband (discussed in Section 3.1.3 of this report) may remove the requirement for a fixed voice line, as required for most DSL broadband connections.

18 Ofcom’s own consumer research found 11% of UK households to be mobile-only in Q1 2008. See Ofcom’s The UK Communications Market Report 2008, section 5.1.3. www.ofcom.or.uk/research/cmr/cmr08 19 Further detail will be provided in the Consumer Experience Report 2008, published on 24 November 2008, www.ofcom.org.uk/research/tce/

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Figure 5.5 Mobile-only households, 2005- 2007

40

38 37 30 32 27 25 25 20 23 24 24 20 20 18 18 15 16 10 13 13 14 11 11 10 9 7 Percentage of households of Percentage 4 4 0 3 2005 2006 2007 2005 2006 2007 2005 2006 2007 2005 2006 2007 2005 2006 2007 2005 2006 2007 2005 2006 2007 2005 2006 2007 2005 2006 2007 UK FRA GER ITA POL SPA NED SWE IRL Note: Proportion of households in each country which have a mobile connection but no fixed-line voice connection Sources: European Commission, Special Eurobarometer, 249 (July 2006), based on fieldwork in December 2005-January 2006; European Commission, Special Eurobarometer, 274 (April 2007), based on fieldwork in November-December 2006; European Commission, Special Barometer 293 (June 2008), based on fieldwork in November-December 2007

5.1.3.5 The battle for share of in-home use

In 2007, overall call volumes were higher on fixed lines than on mobile for all of our comparator countries except Japan, Italy and Poland. Although mobile markets in all our comparator countries are mature, there is still the potential for more growth in the market if operators can target the calls made by consumers in their homes.

Our research indicates that there is large variation between countries in the extent to which consumers use mobiles in the home (Figure 5.6). In Japan, 51% of people claim either ‘mostly’ or ‘always’ to use a mobile in the home; just 13% of Germans and 18% of Canadians claimed that this was the case.

The increasing availability of dual-mode handsets, which offer access to both cellular and WiFi networks, and the emergence of ‘femto’ technology which enables the installation of a mini base station in a consumer’s home (and backhaul via a fixed-line connection) mean that ‘fixed-mobile convergence’ (FMC) products will continue to be weapons in the battle for in- home use.

However, with the exception of Germany, where over two million mobile subscribers have taken up Homezone services (whereby users are charged a different rate for calls made in and outside the home), FMC services have been far less successful at driving fixed-to- mobile substitution than simple tariff structures which offer large numbers of inclusive calls for a fixed monthly fee. For example, our research in the UK found that over 70% of mobile users claimed to make mobile calls inside their home, with 29% of these claiming this was to “use up my allowance of minutes”, and 28% claiming that it was because “some calls are cheaper”.20

20 Ofcom, The UK Communications Market 2008, pp294-295, www.ofcom.org.uk/research/cm/cmr08/

191 The International Communications Market 2008

Figure 5.6 Use of mobiles in the home

What best describes how you make voice telephone calls from home? 100% 9% 7% 5% 9% 8% 11% 21% 9% 21% All mobile 80% 20% 20% 11% 26% 9% 19% Mostlly mobile 18% 60% 18% 30% 15% 35% 49% 16% Equal fixed 12% and mobile 40% 31% 32% 27% 22% Mostly fixed 20% 20% 38% All fixed 20% 21% 27% 17% 19% 12% 4% 3% 4% Proportion of respondents (%) 0% 2% 2% 1% Never make calls UK FRA GER ITA USA CAN JPN

Source: Ofcom Understanding International Communications Behaviour research, October 2008 Base: All adults aged 18+ who use the internet (UK 1001, France 1000, Germany 1002, Italy 1003, USA 1010, Canada 1000, Japan 1003)

5.1.4 Broadband growth rates slowing in some countries 5.1.4.1 Signs of a slow-down in broadband take-up and revenues in some countries

In all countries covered by this report, most fixed-line operators have to some extent been able to offset declining voice revenues with broadband revenues. Indeed, in 2007 broadband was the fastest-growing sector in all of our 12 comparator countries with the exception of Sweden (where mobile revenues had higher growth). Across the 12 countries, by the end of 2007 broadband revenues accounted for 11% of all telecoms service revenue and 25% of fixed-line revenue (see Section 5.2.2 for more details).

However, there are signs that the pressures that fixed operators are experiencing in voice markets are echoed in broadband markets. Although growth in take-up of services remains strong, growth is slowing in some countries. In terms of take-up, among our 12 comparator countries only the US and Germany saw more net broadband additions in 2007 than in 2006 (Figure 5.7).

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Figure 5.7 Growth in take-up of broadband services, 2003 to 2007

35

a 30 4 31 25 26 6 5 2007 24 24 3 24 4 3 5 2006 20 4 22 5 18 6 5 17 3 18 5 2 2005 5 3 3 3 6 6 5 2 3 8 3 3 3 6 4 4 4 2004 10 9 4 5 4 6 3 4 4 2 3 2003 5 5 3 5 4 3 2 3 3

Connections per 100 population 100 population per Connections 5 1 3 2 2 3 2 1 3 0 0 1 UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRL

Source: IDATE / operators / national regulators

In terms of retail revenues, the picture is more complex; there is evidence of significant declines in growth rates in the UK and Italy between 2006 and 2007, but accelerated growth in France, Germany, the US and Ireland (Figure 5.8).

Figure 5.8 Growth in broadband service revenues as a proportion of 2007 revenues

100% 7% 14% 14% 13% 14% 13% 12% a 22% 22% 21% 24% 13% 28% 11% 11% 80% 15% 15% 20% 25% 2007 15% 16% 10% 16% 17% 19% 10% 17% 29% 19% 2006 60% 17% 11% 10% 14% 15% 14% 15% 23% 11% 2005 19% 21% 13% 40% 20% 12% 14% 23% 26% 2004 55% 49% 42% Pre- 20% 36% 36% 40% 23% 30% 33% 33% 35% 12% 2004 proportion of 2007 service revenues service 2007 of proportion 10% 7% Growth in broadband service revenues as a as service revenues in broadband Growth 0% UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRL

Source: IDATE / operators / national regulators

5.1.4.2 Growth slows as broadband penetration approaches PC ownership

Three general trends threaten the continued growth of broadband revenues:

 slowing growth rates through market saturation as migration from narrowband completes and household internet take-up approaches household broadband take- up;

 new competition from mobile broadband; and

193 The International Communications Market 2008

 increased pricing competition, particularly through the bundling of broadband with other services.

Unsurprisingly, there is a correlation between high levels of broadband take-up and slower growth rates (Figure 5.9). In mature broadband markets with high take-up such as such as the Netherlands, Canada and Japan, the growth rate was much slower in 2007 than in countries such as Ireland and Poland, which had much lower take-up. In countries with high broadband penetration, the migration from narrowband (dial-up) internet access is nearing completion; according to a European Commission survey, at the end of 2007 93% of internet connections in the Netherlands were via a broadband connection, 91% in France and 85% in the UK (see Section 5.3.5.2). By contrast, just 39% of internet connections in the Republic of Ireland were broadband.

However, although there is a general correlation between broadband penetration and growth rates, Poland, Spain and Italy, which have among the lowest broadband penetration of our comparator countries, all experienced slowing growth in 2007. This is in part due to much lower ownership of PCs in these countries. At the end of 2007, 46% of households in Spain had a PC, 48% in Italy and 52% in Poland; this compares to 90% of households in the Netherlands and 82% of households in Sweden.21

Figure 5.9 Broadband penetration and growth rates

80 NED R2 = 0.41 CAN 60 JPN SWE UKFRA USA GER 40 ITA IRE ESP POL

households, 2006 20

Broadband connections per 100 0 0% 10% 20% 30% 40% 50% Annual growth rate, 2007

Source: IDATE / operators / national regulators

5.1.4.3 Emergence of mobile broadband threatens fixed operators

Mobile broadband, whereby consumers can connect to the internet via a cellular network by plugging a USB modem (or ‘dongle’) into their PC, launched as a mass market consumer proposition in many of our comparator countries in 2007 and 2008, enabled by the upgrading of 3G networks to HSPA (further details are available in Section 3.1.3 of this report, where mobile broadband is discussed in more depth). In the UK, Italy, Germany and Spain the price of mobile broadband is comparable to fixed-line broadband, with 3GB of data per month at headline speeds of 3.6Mbit/s or 7.2Mbit/s typically available for under £20 per month (see Section 2.1.10 for details on the prices of mobile broadband).

The extent to which mobile broadband is being substituted for fixed-line broadband is unclear. Ofcom research in the UK in July found that around 68% of mobile broadband users also had a fixed-line connection, and this is in line with a claim by 3UK that around 30% of its

21 European Commission, Special Barometer 293 (June 2008), based on fieldwork in November- December 2007

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mobile broadband users used it as their only internet connection.22 However, in other countries the impact of mobile broadband launches is almost certainly higher. While mobile broadband has gained market share in some countries, such as the UK and Sweden which already have high fixed-line broadband take-up, it has been even more successful in gaining share in countries where fixed-line broadband has lower penetration, and where many first- time broadband users have gone straight to mobile. This is the case in Italy, where 41% of households do not have a fixed-line voice connection, and in Ireland, where a majority of internet users at the end of 2007 were still connecting via dial-up (see Section 5.3.5.2). The bundling of mobile broadband with laptops also provides mobile operators with a way of targeting those households which do not currently have a PC (over 50% of households in Italy and Spain at the end of 2007, and around 36% of UK households).

While the number of fixed-line broadband connections has continued to rise in all of our comparator countries, fixed-line operators will note the example of Finland (outside the scope of this report), which in Q2 2008 was the first country in the world to see a decline in fixed-line broadband connections as consumers migrated to mobile broadband.

5.1.4.4 Downward pressure on pricing despite increases in broadband speeds

In all of the European countries covered in this report, the average revenue per broadband connection fell between 2006 and 2007 (see Figure 5.10). This is despite significant improvements in the headline speeds of connections delivered by investment in network upgrades to ADSL2+ or other higher speed technologies.

In most European countries, broadband roll-out has been accompanied by national regulators (and European Commission directives) mandating that incumbent operators offer access to alternative network operators, both by offering wholesale line rental, and by allowing alternative operators to install their own equipment within telephone exchanges and take over the line to the end-users’ premises (local loop unbundling).

The result has been to create competition between suppliers: this has exerted downward pressure on pricing as operators battle for the market share they need to exploit economies of scale. This is evident in the rise of ‘service bundling’ in most European countries, where broadband is offered in association with another communications service such as fixed-voice (‘doubleplay’) or voice and television (‘tripleplay’). In the UK, broadband is often offered ‘free’ with other services, and some leading suppliers do not even offer it on a single service basis: for example, BSkyB offers broadband only in association with satellite TV services, while TalkTalk offers it only in association with fixed-line voice. In Spain, over 80% of broadband connections are bought in combination with another service.

By contrast, average revenue per broadband connection has increased in the non-European countries covered by this report (the US, Canada and Japan). In part, this is due to the improved service offered by the roll-out of high speed fibre networks. However, it also indicates that in countries where broadband suppliers typically operate in local duopolies (as in the US and Canada, where the local cable operator typically competes with the incumbent telco operator for the supply of broadband services, or in Japan where fibre-to-the-home suppliers typically have sole access to households), operators are better positioned to maintain or increase prices by improving service quality, such as offering higher speed connections.

22 Ofcom, The UK Communications Market 2008, p.302; www.ofcom.org.uk/research/cm/cmr08/; 3UK media briefing, 8/12/2008

195 The International Communications Market 2008

Figure 5.10 Average monthly retail revenue per broadband connection, 2006 and 2007

25 000 000 20

15 2006 24.00 10 23.86 2007 21.78 21.52 21.26 21.07 21.00 20.91 20.50 20.68 20.42 19.50 19.15 18.90 17.58 17.45 16.50 16.50 15.91 15.48 15.48 14.66 13.98 5 13.50 broadband connection

Average monthly revenue per 0 UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRL Annual -7% -1% -6% -2% 2% 1% 4% -8% -9% -3% -11% -15% change

Source: IDATE / industry data / Ofcom

5.1.5 Next-generation access broadband networks emerge 5.1.5.1 Operators and governments focus on the promise of super-fast broadband23

In order to deliver sustained broadband speeds in excess of 20Mbit/s over a copper fixed line it is usually necessary to replace sections of, or all of, the copper-wire access network between exchange and premises with an optical fibre connection capable of transporting data at high speeds without degradation. In addition to fibre via co-axial cable networks, fibre connections can broadly be categorised as follows:

 fibre-to-the-home (FTTH), where a fibre connection is in place all the way from the exchange to the end-user;

 fibre-to-the-building (FTTB), where fibre is laid to the building with existing in-building copper wiring used for the final part of the delivery; and

 fibre-to-the-cabinet (FTTC), where a fibre connection is laid from the exchange to a local ‘sub loop’, with the final part of the delivery (typically less than 500m) over existing copper wire connections, usually using a technology known as VDSL.

The step-change in terms of available speeds means that for operators, fibre networks potentially offer new revenue streams by enabling new types of services, while for business and residential consumers, the (largely unproven) promise of next-generation access (NGA) is that it will transform the way in which we use communications, information and entertainment services. The scale of these promises, together with the scale of the costs involved in laying fibre networks, have led governments all round the world to pay a great deal of attention to NGA, not least because huge variations in the progress of NGA roll-out between countries and regions is perceived as having the potential to change relative national competitiveness. The 2008 Caio review in the UK is one example of a government- sponsored initiative to evaluate the barriers to investment in next generation broadband.24

23 For a definition of super-fast broadband and for a detailed review of the context in the UK see Ofcom’s consultation document Delivering super-fast broadband in the UK www.ofcom.org.uk/consult/condocs/nga_future_broadband (September 2009) 24 Francesco Caio, The Next Phase of Broadband UK: Action now for long term Competitiveness, September 2008, www.berr.gov.uk/files/file47788.pdf

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Figure 5.11illustrates that there is large regional variation in the take-up of super-fast broadband, with Asia a clear leader. By the end of 2007, there were 11.3 million FTTH/B subscribers in Japan, more than in any other country in the world, driven by the availability of service to over 85% of households. There is significant variation in the availability of fibre networks in Europe, with 20% of households in Germany having access to FTTC broadband at the end of 2007 and nearly 8% of households in Sweden having access to FTTB/FTTH. In contrast, there was virtually no NGA broadband available in the UK, Ireland or Spain at the end of 2007.

Figure 5.11 FTTH/B subscribers, by region, end 2007

Europe, 1.1 million North America, 5% 2.5 million 10%

85%

Asia, 19.2 million

Source: IDATE

5.1.5.2 National contexts determine types and timings of NGA roll-out

The reasons behind large variations in the timings and nature of fibre deployments between countries are complex. However, it is possible to identify four broad variables that contribute to decisions to invest in next-generation access: demographics, topography, the regulatory and political context, and consumer demand.

Demography, or the distribution of population, is a major determinant of the cost of deploying next-generation networks, which generally require large-scale civil engineering in order to lay cables. It follows that the cost per head is significantly lower in countries with high population density and a large proportion of people living in urban areas. Roll-out of fibre networks in Japan was eased because 32% of the population live on just 4.5% of the land mass. High population density in urban areas has driven relatively high availability in Sweden and the Netherlands. Housing patterns are also an important contributory factor to the cost of NGA deployments; in the UK around 85% of people live in single family houses, and about 95% in Ireland. In contrast, over 50% of the populations in Spain, Italy and Germany live in multiple dwelling units (MDUs), and can therefore potentially be served by fibre-to-the-building deployments rather than the more expensive fibre-to-the-home.

A second determinant of the cost and the type of NGA deployment is topography, both in terms of existing telecoms networks, and other aspects of the physical landscape. The following factors have all influenced NGA deployment:

197 The International Communications Market 2008

 VDSL (very high rate DSL) is a technology which can be used to transmit data over existing copper wires, for example from the cabinet to the home. However, a characteristic of VDSL is that connection speeds degrade quickly with distance. The relatively short typical length of the ‘sub loop’ has made VDSL deployment feasible in Germany, but unfeasible, for example, in much of France, because of the longer length of the sub-loop. An additional factor favouring VDSL deployment in Germany is the large average cabinet size; this reduces civil engineering costs.

 The cost of upgrading cable networks to offer high-speed broadband can often be less than the cost of replacing a copper network. Virgin Media will offer the first widely available NGA network in the UK in 2009, as it upgrades two-thirds of its cable network to the EuroDOCSIS 3.0 standard, offering services of up to 50Mbit/s to 9 million premises.

 There is variation in the extent to which the deployment of NGA can reduce the cost base of operators. In the US, Verizon estimated that network problems are up to 80% less for its FTTH network than for its legacy voice and DSL services.

 In some cases, the sale of exchange premises can offset the cost of network investment, as has been the case in the Netherlands, where KPN has achieved windfall payments through the sale of exchange buildings.

 Civil engineering costs have been much lower for NGA deployments in Paris than in other cities in the world, because cables can be laid relatively easily through the sewer system. As a consequence, many Paris residents have a choice of FTTH supplier; alternative-network operator Free plans to make FTTC/B available to 90% of the city’s homes and businesses by 2009. In other countries, including the UK, the use of alternative routes (including sewers) is being considered, as operators seek ways to reduce the costs of deployment.

Regulatory approaches and government intervention have provided clear incentives for NGA investment in some countries, although, potentially, at the expense of future competition. The policy challenges presented by NGA are discussed in more detail in Section 1.4.3.1, but the following interventions have contributed to varying levels of investment across our comparator countries:

 The regulatory policy of ‘forbearance’ removes the obligation for fibre operators to offer wholesale access or to unbundle fibre loops, thereby incentivising operators to invest in NGA with the promise of monopoly returns. This has promoted widespread investment in FTTH in the US, predominantly by Verizon (which accounts for 66% of US FTTH subscribers). This policy is more suited to markets with competition between end-to-end infrastructure owners, as is the case in the US, where local duopolies typically exist between cable and telco operators.

 In Japan, the authorities initially pursued a light-touch approach to wholesale access pricing regulation, to stimulate the roll-out of fibre networks. With NGA roll-out having reached the majority of the population, a more interventionist stance has been taken, which has resulted in reduced wholesale access prices.

 In many countries, public funding has contributed to the roll-out of NGA networks. Local government-funded ‘munifibre’ schemes have contributed to the widespread roll-out of NGA in Sweden, while local deployments in the US and France are also often part-publicly funded.

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 Governments and regulators also have a role to play in facilitating the civil engineering associated with NGA roll-out. In Japan, permitting overhead cabling has significantly reduced costs. As part of its strategy to achieve four million NGA broadband subscribers by 2012, in 2008 the French government passed a law for the modernisation of the economy (known as LME), with a range of requirements including the obligation for new-builds to have fibre optic wiring, and measures to facilitate operators’ access to existing buildings and to duct infrastructure. The UK government-sponsored Caio review, published in September 2008, recommended some similar measures.

There are several commercial rationales for the deployment of high speed broadband services. Cable operators may seek relatively simple network upgrades, increasing broadband speeds to gain market share from DSL operators. In response, telecoms operators may seek to deploy fibre to defend their broadband customer bases.

However, in general, investment in super-fast broadband is based on the expectation of future demand rather than existing demand for high-speed services. Indeed, there is little evidence that large numbers of residential consumers are prepared to pay a premium for ultra high speed broadband. While high quality video sharing, 3D television, public services such as online healthcare, and peer-to-peer information sharing have all been touted as future services enabled by high speed fibre networks, the most obvious current commercial proposition is IPTV, with high-speed networks enabling multiple high-definition channels to be delivered. This has been a key driver of investment in the US, as telco operators have been able to move into competition with cable providers for the provision of television services (it is a feature of the US market that poor quality copper networks and lengthy local loops make TV over DSL unviable in many areas). By the end of 2007, nearly one million of Verizon’s 1.5 million FTTH subscribers were taking HDTV services. Similarly, in Europe, triple-play offers incorporating HDTV have been central to the FTTH propositions of operators like Fastweb in Italy and Free in France. In contrast, however, IPTV is yet to take off in Japan; fewer than 250,000 of its 11.2 million FTTH subscribers take a TV service.

There may be fewer commercial opportunities for fibre operators in countries which already have high levels of digital television take-up and mature pay-TV markets. Such is the case in the UK, which has one of the highest levels of digital television penetration (86% at the end of 2007, compared to 66% in France and 32% in Germany); has a mature pay-TV market in the world (45% of UK household took pay-TV services at the end of 2007); and has HD services available over satellite and (to a lesser extent) cable platforms.

Figure 5.12 below details major developments related to NGA services in our key comparator countries during 2007 and 2008.

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Figure 5.12 Major NGA developments, 2007 and 2008

Country Major NGA developments

UK December 2007: Cable operator Virgin Media announced that it was to upgrade two thirds of its cable network to the Euro DOCSIS 3.0 standard offering speeds of up to 50Mbit/s to 9 million households by 2008/9. June 2008 : Incumbent BT announced plans to roll-out an NGA network to up to 10 million homes by 2012, predominantly based on fibre-to-the cabinet. September 2008: The government-sponsored Caio review emphasised that the private sector should play the principal role in investing in high-speed broadband, and detailed some practical recommendations to reduce cost by facilitating duct and pole access to install fibre cables. September 2008: Ofcom published a consultation document Delivering super-fast broadband in the UK in emphasising a competition-based approach with the market setting prices for wholesale products.

France March 2007: France Telecom launched commercial FTTH services in areas of Paris, with an expanded roll-out in June. April 2007: Neuf Cegetel launched triple-play services including some HD channels over its FTTH service in areas of Paris. September 2007: Iliad becomes the third operator to offer FTTH services in Paris. August 2008: Law on modernising the economy (LME) introduces a range of measures designed to facilitate hitting a target of 4 million NGA broadband subscribers by 2012 including measures to reduce civil engineering costs by duct sharing, and requiring all new builds to have fibre optic wiring.

Germany April 2007: Regulator BnetzA mandates access to the ducts between local exchanges and cabinets in incumbent Deutsche Telekom’s VDSL network, but not to the cables themselves, meaning alt-nets need to install their own fibre if they are to provide VDSL services. March 2008: As part of announced plans to roll out a national VDSL network using Deutsche Telekom’s cabinets, alt-net Arcor released details of a pilot in Thringa to be activated later in the year. July 2008: Alt-net Hausenet stated plans to roll out its own fibre network, with its first phase a limited FTTB trial in Hamburg. July 2008: Kabel Deutschland is upgrading sections of its cable network and claims that it has tested download speeds of up to 200Mbit/s during DOCSIS 3.0 trials in Hamburg.

Italy August 2007: Alt-net Fastweb announced plans that it is to expand its fibre-optic footprint by 1.4 million households. March 2008: Telecom Italia’s 3-year plan includes a target of offering FTTC to over 2 million households by 2010 (8% of population).

USA January 2008: Three years after beginning its $23bn programme of rolling out FTTH to 19million households, Verizon reports 1.5 million subscribers. June 2008: A resolution is introduced into the House of Representatives calling for government policy on a new generation network offering universal availability of 100Mbit/s broadband by 2015.

Canada March 2007: Bell announces $1.5bn investment in high speed internet access for residential and business customers, mainly focusing on DSL technologies for residential customers and optical ethernet services for larger business customers. August 2008: Bell announces that it will deploy FTTB for all new-build MDUs in Quebec-Windsor corridor.

Japan November 2007: The government revised its ambitious target of 30 million FTTH/B subscribers by 2010 down to 20 million. January 2008: Leading FTTH operator NTT lowers rates for third parties to access its FTTH network for the first time since 2001. September 2008: The Ministry of Internal Affairs and Communications reported that for the first time the number of FTTH connections (13.1 million) exceeded the DSL connections (12.3 million). Source: Ofcom

5.1.6 The rise of Mobile Virtual Network Operators (MVNOs) 5.1.6.1 MVNOs offer new growth opportunities in mature markets

The last 18 months have seen significant changes in the structure of mobile markets across the world, as the consequence of the emergence of a raft of new mobile virtual network operators (MVNOs) and service providers.

In many respects, this trend can be viewed as indicative of a mature market seeking to expand into new areas; either to ‘mop up’ late adopters with low-margin offers targeted at the mass market, or to offer highly specific services targeted at clearly defined market

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segments with specific needs. Mobile network operators (MNOs) are able to generate additional revenues as sections of the market which they have been unable to target effectively are served by wholesale deals with MVNOs, while these MVNOs are able to direct their retail and marketing skills and assets into developing and selling mobile services without the need to invest in a mobile network.

However, the extent of MVNO activity varies significantly across our comparator countries, with MVNOs’ share of connections falling slightly in some mature markets (the UK and the US), but increasing in most countries as a result of launches of new services (Figure 5.13)

Figure 5.13 MVNO share of total mobile connections, 2006 and 2007

30% 28% 25%

0 25%

20% 15% 2006 15% 14% 9% 2007 10% 8% 6% mobile connections 5% 4% 4% MVNOs' share of total of share MVNOs' 5% 3% 2% 1%2% 0% 0.4% 1%1% 0% UK FRA GER ITA USA CAN ESP NED SWE

Source: IDATE / Ofcom Note: UK and Germany figures includes reseller subscriptions in addition to full MVNOs

5.1.6.2 Wide variation in levels of MVNO activity across countries

Over the last 12 months the number of MVNOs and mobile service providers has increased in most of the key comparator countries. Mobile service providers are similar to MVNOs in that they purchase wholesale service from MNOs and re-sell them to end-users, but different in that they do not have their own switching infrastructure and therefore use the MNOs’ own inter-connect agreements. Typically, they also use SIM cards provided by the MNO rather than their own.

However, in some mature markets, despite new entrants, the number of MVNOs and service providers has remained relatively static, as increased competition has led to consolidation among providers.

Historically, the Netherlands has had the highest number of MVNOs and service providers, targeting low-end and niche markets ranging from multi-cultural and ethnic groups to international business travellers (see Figure 5.14). The largest group of Dutch providers offers SIM-only offerings at the low-cost end of the market where price competition and churn are high. MVNO and service provider numbers continue to fluctuate; both through withdrawals and consolidation such as Tele2 Mobitel and Versatel, and as new providers continue to enter the market.

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Figure 5.14 Numbers of MVNOs and service providers (estimated) in European countries, November 2008

60

50

40 MVNO/service providers 30 52

20 31 24 26 10 22 9 10 8 3 0 UK FRA GER ITA POL ESP NED SWE IRL

Source: TelecomPaper.com

5.1.6.3 Regulatory pressure leads to growth of mass market MVNOs in Spain and Italy

The first MVNOs in Spain and Italy were launched in 2006 and 2007 following regulatory pressure on operators to open up their networks. Most of the 13 MVNO licence holders in Spain are fixed-line providers offering integrated mobile and fixed services, alongside pan- European brands such as Carphone Warehouse, Simyo and Carrefour. In Italy, high-profile retailers have been quick to build up market share since launching in Q4 2007; by mid-April 2008 the Italian communications regulator reported that MVNO subscriptions exceeded 500,000, led by UnoMobile (Carrefour) and CoopVoce (Co-op).

Drawing on the loyalty of their existing consumers, retailers such as supermarkets typify the low cost, value proposition adopted by the majority of the MVNOs that have launched in European markets. The retailer Carrefour has MVNO services in four countries and Tesco Mobile, with two million mobile subscribers using its service in the UK, launched in Ireland in November 2007. Other high-profile retail brands operating as MVNOs include Aldi (Germany), Co-op (Italy) and Asda and Ikea in the UK.

5.1.6.4 New MVNO business models emerge to serve niche markets

In markets with established MVNOs, particularly in northern Europe and the UK and, to a lesser extent, in Japan, there has been renewed impetus from virtual operators targeting particular niche markets and user requirements.

MVNOs offering low-cost international calls to consumers with family roots in other countries have grown quickly: Lebara (around 700,000 subscribers in seven countries by mid-2008), Lycatel Mobile and Ortel Mobile have launched services in multiple European markets, the latter being acquired by the Dutch incumbent operator KPN in April 2008.

In the UK, MVNO Blyk has grown rapidly; its innovative business model, targeting 16–24 year olds with the proposition of free calls and SMS in return for viewing advertisements, has delivered 200,000 users in the year since its launch in September 2007, and it plans to roll out in other countries.

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Business-focused MVNOs, already popular in Japan, launched in the UK in 2007 - Gamma Telecom, on 3UK’s network and IDT Mobil, in partnership with Orange - while Vodafone is reportedly considering wholesale data deals with navigation company TomTom and wireless web company Datawind.

Figure 5.15 Selection of multi-country MVNOs/service providers

MVNO Type Countries launched

Denmark, Germany, France, Netherlands, Debitel Retail Slovenia

Germany, France (joint venture with Virgin Carphone Warehouse Retail Mobile), UK

Carrefour Retail Belgium, France, Italy, Spain,

Denmark, Germany, France, Netherlands, Debitel Retail Slovenia

Enterprise/International IDT Europe Belgium, Denmark, Netherlands, UK calls

Belgium, Denmark, Norway, Sweden, Lycatel Ethnic Switzerland, UK

Denmark, Netherlands, Norway, Spain, Lebara Ethnic Sweden, Switzerland and the UK

Simyo Low-cost Belgium, Germany, Netherlands, Spain

Tesco Retail Ireland, UK

MVNO/full service Virgin Australia, Canada, France, UK, USA telco

Source: Ofcom

5.1.6.5 Some markets are better suited to MVNOs than others

Regulatory conditions and market dynamics have meant that in some markets MVNO market share has been relatively slow to develop, and has in a few cases resulted in high- profile failures.

In France, MVNO subscriber market share has been relatively slow to develop since the launch of the first MVNO, Transatel in 2002. Several new MVNOs have recently launched, targeting specific niche markets, but in 2007 there were some notable exits from the market including Debitel and TEN, bought out by SFR and France Telecom respectively. The US market has several high-profile large MVNOs such as Tracfone and Virgin Mobile, but also has had high-profile MVNO failures, with ESPN Mobile (2006) and Disney Mobile (2007) both discontinuing their services following poor take-up.

Despite claims from Japan Communications to be the world’s first MVNO, the use of sub- brands by MNOs to target specific market segments has made Japan a challenging market for consumer MVNOs to enter. Existing providers have only been able to offer wholesale- type services, and MNOs did not generally permit MVNOs to offer proprietary devices. However, the recent launch of three high profile MVNOs suggests that they may play an

203 The International Communications Market 2008 increasingly important role in Japan’s mobile sector; Japan Communication’s 3G data- focused service (the ‘world’s first interconnected MVNO’) launched in 2007, and 2008 saw the launch of Disney Mobile and the Internet Initiative Japan (IIJ) MVNO.

5.1.7 The continuing growth of text messaging 5.1.7.1 Big variations in the use of text messaging

The above sections have highlighted how different market structures have delivered different outcomes in respect to the relationship between fixed and mobile, types of broadband deployment and the characteristics of the mobile market. However, the very different levels of text messaging evident across our comparator countries are less easy to explain in terms of market structure, as are the very different growth rates (Figure 5.16). Text messaging services have been available in all countries with interconnection between all mobile operators for a decade, and have been available on virtually all handsets for at least five years. Moreover, from the operators’ point of view, the costs of text messaging, and therefore the margins available, are largely the same in every country.

Therefore, we need to look beyond market structures to explore why there are such large variations in the use of text messaging: why people in the UK sent on average more than three times the number of text messages than their counterparts in France and Germany, and why the use of text messaging increased by over 70% in Sweden during 2007 while its use declined slightly in Spain (Figure 5.16).

Figure 5.16 Text messages per head, 2002 and 2007

aa 150

125

100 2006

75 154 2007 118 108 50 107 81 59 25 57 44 45 31 26 26 25 25 24 24 22 23 20

0 11 Monthly text messages percapita UK FRA GER USA CAN POL ESP NED SWE IRL Annual 36% 24% 1% 140% 135% 90% -5% 30% 69% 31% change

Source: IDATE / operators / national regulators NOTE: USA data are not comparable as they include SMS and push-to-text

5.1.7.2 Pricing and marketing initiatives partly explain the variation…

Analysing the different levels of text messaging can provide some insight into how a combination of pricing and other marketing initiatives, cultural preferences and the ‘network effect’ can create different consumer behaviours.

Figure 5.17 below illustrates that there is some relationship between the use of text messaging and the average revenue per SMS (which can be used as a proxy for pricing). Among the countries for which data are available, the highest use per head is in Poland, where the revenue per SMS is lowest, and the lowest use is in Germany, where the revenue per SMS is highest. However, the correlation is far from perfect. Most notably, SMS messages cost around half as much in Sweden as in the UK, but Swedes on average send only around half the number of messages as UK consumers. The structure of UK tariffs may

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provide part of this explanation, with large numbers of SMS messages included in some tariffs (for example, Orange’s Dolphin tariff) leading to effectively ‘flat-rate’ pricing, while other tariffs such as T-Mobile’s Flext allow users to spend an inclusive allowance interchangeably on voice and SMS.

Figure 5.17 SMS messages per mobile connection and average revenue per SMS, 2007

GER

S 12 CAN

10 ESP R2 = 0.58 8 FRA 6 UK 4

message (pence) SWE POL 2

Aveerage revenue per SM per revenue Aveerage 0 0 20406080100120 SMS messages per capita, 2007

Source: IDATE / industry data / Ofcom Note: Data are not available for the US or Japan

5.1.7.3 … but cultural differences may also play a role in explaining variation between countries

Cultural differences are very difficult to quantify, but may contribute to the differing levels of use of text messaging between countries. In an analysis of how mobile phone use reflects national cultures, Carphone Warehouse surveyed 5,000 consumers in the UK, France, Germany, Spain and Sweden. It found that UK mobile users sent proportionally many more text messages than calls than did consumers in the other countries, and concluded: “This British use of the mobile phone in a way which reduces the need for human contact is a reoccurring feature in our findings, one could wonder whether this reflects the often noted British reserve, or if it in fact reflects the longer working hours in Britain, a quick text replacing the need for a lengthier call”.25

The ‘network effect’ also drives volumes of text messaging. Individuals will send more text messages as the ‘network’ of those who send and receive text messages expands. This may explain the sudden increase in SMS use in Sweden during 2007. In contrast, text messaging has never reached critical mass in Japan, where people have instead used email functionality on their phones. While SMS contributes over two-thirds of total mobile data revenues in all of the European countries covered by this report, in Japan the contribution of SMS is negligible (see Section 5.2.4.5 for more details).

25 The Carphone Warehouse, The Mobile Life European Report 2007, p16

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5.2 The telecoms industry

5.2.1 Introduction In this section we look at the major trends in the telecommunications markets in the 12 nations covered in this report from an industry perspective. After an overview of overall industry revenue, we will look at the industry on a sector-by-sector basis, addressing fixed- voice markets first, followed by the mobile sector and concluding with the broadband sector.

Most of the analysis covers the five years to 2007, although shorter periods are used where earlier data are not available. Some of the key findings in this section include:

 The UK over took the US to become top in terms of telecoms spend per person as average revenue per person increased from £420 in 2006 to £443 in 2007;

 Although broadband revenues were the fastest growing element of telecoms revenue in 2007, growing by an average of 36% a year in the previous five years (50% in the UK), broadband contributed only 11% of telecoms revenue in the same year (10% in the UK).

 Over the five years to 2007 the total number of fixed lines in the nations covered by the report fell by 12% to 428 million, although the number of lines did increase in Germany, Canada and the Republic of Ireland (in the UK it fell by 4%).

 Fixed voice call minutes per capita declined in all tier one countries in 2007, however, Canada was unique among them as it was the only nation where this happened for the first time;

 In most countries the majority of voice calls still originate on fixed lines - among the nations where separate outgoing call volumes data were available, an average of 46% of voice call minutes originated on mobile networks in 2007, up from 28% in 2002 (in the UK it increased from 24% to 40%).

 There were more mobile connections than fixed lines in all of the comparator countries at the end of 2007, and Poland and Italy had the highest proportion of telephony connections which were mobile at 80% and 78% respectively (69% in the UK).

 During 2007 Poland overtook Japan to become the country where the highest proportion of total telephony revenues which were from mobile (69% in 2007, up from 65% in 2006);

 In 2007 the US overtook Japan to become the largest country in terms of mobile data revenues (including SMS), with revenues of £12bn (up from £8bn in 2006);

 Broadband connection growth averaged 37% a year between 2002 and 2007, with highest average annual growth in the Republic of Ireland at 166% and lowest in Canada at 19% (63% in the UK).

 In all of our comparator nations except the US and Canada the majority of broadband connections at the end of 2007 were DSL-based - in the US and Canada most broadband connections are via cable (in the UK 78% were DSL-based at the end of 2007).

207 The International Communications Market 2008

5.2.2 Telecoms revenues 5.2.2.1 Broadband revenue growing fastest, but only contributes 11% of total revenue

Total telecoms revenue generated in the 12 countries covered in this report was £335bn in 2007, an increase of 3% on the £324bn figure for 2006 and 20% (£55bn) higher than the total for 2002 (Figure 5.18).

Mobile revenue made up the majority (54%) of telecoms revenues in 2007, an increase of one percentage point on 2006. Although broadband revenues were the fastest growing revenue element, increasing by 22% to £38bn during 2007, they made up only 11% of the total, while revenue from fixed-line services was £116bn (or 35% of total revenue), a 5% drop on the £122bn for 2006.

Broadband was also the fastest-growing sector in terms of revenue in the five years to 2007, with a compound average growth rate of 36% per year. Over the same period mobile revenues increased by an average of 8% annually, while fixed voice revenue fell by an average of 5% per year. Declining fixed voice revenues and growth in mobile telephony revenues are related to increasing mobile use in all of the comparator countries, while rapid growth in broadband revenue reflects increasing service take-up, driven both by migration from dial-up access and by new internet users.

Figure 5.18 Total telecoms service retail revenue, by sector: 2002 to 2007

5 year 400 CAGR 324 335 305 315 280 292 31 38 300 19 25 Broadband 36% 8 14

121 135 150 200 160 170 181 Mobile 8% Revenue (£bn) 100 Fixed -5% 150 143 135 130 122 116 0 2002 2003 2004 2005 2006 2007

Source: IDATE / industry data / Ofcom Note: Excludes revenue from narrowband internet and corporate data services; covers only the 12 countries in the analysis; figures have been restated to reflect more accurate data

5.2.2.2 Poland has the highest proportion of telecoms spend which is from mobile

The US was by far the largest telecoms market of our comparator countries in terms of revenue in 2007, generating £133bn in retail telecoms revenues, or 40% of the total (Figure 5.19). The US population (over 300 million) accounts for 36% of the total population of the comparator countries.

As in 2006, Sweden and Canada were the only countries where combined revenues from fixed and broadband services were higher than those from mobile services in 2007. Sweden and the Republic of Ireland had the highest proportions of total revenues generated by fixed voice services (40% of the total in each country), while Sweden also had the highest proportion of revenues generated by broadband services (18% of the total), meaning that Sweden had the lowest proportion of total revenue generated by mobile services (42%). This was more than 20 percentage points lower than Poland (the highest, at 63%).

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Poland had the joint lowest proportion of revenues from fixed voice services (along with the Netherlands, at 28%), while the Republic of Ireland had the lowest proportion of total revenues which was generated by broadband services (8%).

It should be noted when considering these figures that allocating revenue between fixed voice and broadband is often not straightforward because of the prevalence of service bundling in some countries. In our data we have relied on operators’ and regulators’ own figures.

Figure 5.19 Telecoms service retail revenue, by sector: 2007

150 133 16 Broadband 100 69 Mobile

50 Fixed 50 5 Revenue (£bn) 27 30 24 21 3 3 31 17 3 15 2 48 14 15 13 11 2 6 2 7 3 2 7 15 10 1 0 9812 8 5 241 5 24 111 10 UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRL

Source: IDATE / industry data / Ofcom Note: Total service revenue excludes revenue from narrowband internet and corporate data services; the UK figure is not comparable to those published previously as it no longer contains an estimate of retail telephony revenues from non-regulated services.

5.2.2.3 Canada has the highest growth in telecoms revenue

Among the seven ‘key comparator’ nations covered in this report, the average annual growth in telecoms retail revenues was highest in Canada, at 6% in the five years to 2007 (Figure 5.20). Strong growth in mobile revenues in Canada (which increased by £3bn over the period) was the main driver behind this.

The fastest growth in broadband revenue over the same period was in the UK, where it averaged 50% per year (despite falling average costs per connection) as a result of increasing take-up. The fastest average decline in fixed voice revenues was in the US, where it averaged 7% a year, while the slowest rate of decline was in Italy, at 2% a year.

Figure 5.20 Telecoms service retail revenues, 2002 and 2007

150 133 109 16 4 100 Broadband 38 69 49 50 Mobile 50 30 15 Revenue (£bn) 27 24 28 21 19 17 21 67 29 31 3 3 1 3 48 11 14 Fixed 90 15 1813 14 15 2 8 11 31 72 19 15 0 12 9 11 8 14 12 9 8 65 2002 2007 2002 2007 2002 2007 2002 2007 2002 2007 2002 2007 2002 2007 UKFRAGER ITA USA CAN JPN 5 year 5% 5%2% 4% 4% 6% 1% CAGR Source: IDATE / industry data / Ofcom Note: Total service revenue excludes revenue from narrowband internet and corporate data services

209 The International Communications Market 2008

5.2.2.4 Telecoms spend per head is highest in the UK and the US

In 2007 per-capita spend on telecoms services among our key comparator countries ranged from £353 in Italy to £443 in the UK, averaging just under £400 (or £33 a month). The UK overtook the US to become top in terms of per-capita telecoms spend as average spend per person increased from £420 in 2006. In the five years to 2007 the highest growth rates in per-capita telecoms spend were in the UK and Canada, where growth averaged 5% a year (Figure 5.21). The lowest growth was in Japan, where it increased by less than1% per year.

Germany and Japan were the only ‘tier one’ countries where there was evidence of falling per-capita spend on telecoms services in recent years: in Japan average spend fell in 2003 but increased in subsequent years, while in Germany, spend fell in each of the three years to 2007. This was primarily as a result of falling fixed call volumes, although there was some evidence of declining mobile revenues in 2007.

Figure 5.21 Total telecoms service revenue per head: 2002 to 2007

5 year CAGR 500 UK 5%

400 FRA 4%

300 GER 2%

ITA 200 4% £ per capita USA 3% 100 CAN 5% 0 JPN 1% 2002 2003 2004 2005 2006 2007

Source: IDATE / industry data / Ofcom Note: Total telecoms service revenue excludes revenue from narrowband internet and corporate data services

5.2.3 Fixed voice services 5.2.3.1 Fixed voice revenues fall by an average of 5% a year

Fixed voice revenues fell in all our comparator countries in the five years to 2007, with the steepest levels of decline being in the US, Poland and the Netherlands, where revenues declined by an average of 7% per year (Figure 5.22). The rate of fall in fixed-line revenues was lowest in Italy and Spain, where it declined by an average of 2% a year.

Across our 12 comparator countries fixed telephony revenues fell by an average 5% a year between 2002 and 2007. The main factor behind this decline was the increasing use of mobile telephony (as outlined in Section 5.2.4) and, in total, fixed-line voice revenues in the comparator countries fell by almost a quarter to £116 billion over the same period.

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Figure 5.22 Fixed-line voice revenues: 2002 and 2007

80 67

60 48 2002 40 2007

Revenue (£bn) 19 15 20 12 1412 9 11 8 9 8 6 5 5 5 2 2 3 2 2 1 1 1 0 UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRL -5% -5% -3% -2% -7% -3% -4% -7% -2% -7% -6% -3% CAGR Source: IDATE / industry data / Ofcom Note: Excludes revenue from narrowband internet and corporate data services

5.2.3.2 Per-capita fixed-line spend highest in Ireland

There were significant variations in average spend per head on fixed-line services in the 12 countries covered by this report. Fixed-line spend per head in 2007 ranged from £41 in Poland to £199 in the Republic of Ireland (Figure 5.23), averaging £138 a year across all of the nations covered.

Spend per head on fixed voice services fell in the five years to 2007 among all of our comparator countries. The fastest decline in spend was in the US and the Netherlands (where it fell by an average of 8% a year to £158 and £121 respectively in 2007). The slowest rate of decline was in Italy, where spend fell by an average of 2% a year to £131 per person in 2007.

Figure 5.23 Fixed-line voice revenue per head: 2002 and 2007

300

200 2002

247 2007 234 £ per capita 100 202 199 195 194 180 172 165 166 158 152 148 148 142 143 131 131 130 121 120 110 58 0 41 UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRL 5 year -5% -5% -3% -2% -8% -4% -4% -7% -3% -8% -6% -4% CAGR Source: IDATE / industry data / Ofcom Note: Excludes revenue from narrowband internet and corporate data services

5.2.3.3 Average per-capita fixed call volumes highest in the US

The US had the highest average fixed voice call volumes per person (of the key comparator countries covered by this report) in 2007 and in each of the previous five years (Figure 5.24). In 2007 US residents made an average 223 minutes of voice calls (including local calls but excluding VoIP calls) per month, almost two-and-a-half hours more per person than the 78 minutes per month in Japan, where average fixed voice use was lowest. In Canada, 2007 was the first year in which average fixed voice calls per head had fallen.

211 The International Communications Market 2008

Japan had the fastest decline in per-capita fixed voice volumes in the five years to 2007, with volumes falling on average by 13% a year. This steep fall is partly due to increasing use of mobiles, but falling mobile voice call volumes in 2007 also suggest that voice calls in general are being substituted by other forms of communication, such as email, instant messaging and VoIP (see Section 3.4.3.2).

Figure 5.24 Monthly fixed-line voice call minutes per head: 2002 to 2007

5 year CAGR

s 400 UK -2%

300 FRA -2%

GER -3% 200 ITA -4%

100 USA -9%

CAN 4%

Per capita monthly call minute 0 JPN -13% 2002 2003 2004 2005 2006 2007

Source: IDATE / industry data / Ofcom Note: Data for the UK and US excludes VoIP calls

5.2.3.4 Germany is the only nation where the incumbent’s fixed call volume share is under 50%

There were marked differences in the proportions of fixed voice call volumes which originated on the incumbent operators’ fixed network among the countries in this report, with the proportion being lowest in Germany at 42%. Conversely, the proportion of incumbent- originated fixed voice call minutes were highest in Poland and Spain in 2007, where almost two-thirds (66%) of fixed voice calls originated on Telekomunikacja Polska SA’s and Telefonica’s networks.

In all of the countries where historical data were available, the proportion of incumbent- originated voice call minutes fell between 2004 and 2007, suggesting that fixed-line competition has increased over the period. The introduction of wholesale products such as WLR (where an operator buys a wholesale access service, typically from the incumbent) or LLU-based services (where a provider takes over the line from the customers’ premises to the local exchange, and uses its own equipment) - has contributed to the incumbent’s declining retail market share in most of these countries.

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Figure 5.25 Incumbent share of fixed voice call volumes: 2004 and 2007

100 87 76 80 73 71 70 66 67 66 65 66 66 65 62 61 61 2004 60 53 53 51 48 51 42

Per cent 40 2007

20

0 UK FRA GER ITA USA JPN POL ESP NED SWE IRL

Source: IDATE / industry data / Ofcom

5.2.3.5 The rate of decline in the number of fixed lines is highest in the Netherlands

The number of fixed telephony lines declined in all of the countries in this report between 2002 and 2005,except the Republic of Ireland and Germany, although the average annual fall was less than one percentage point in Canada and Spain (Figure 5.26). The fastest rate of decline in the number of fixed lines was in the Netherlands, where the number of lines fell by an average of 7% a year, from 10 million in 2002 to seven million in 2007, partly as a result of the availability of ‘naked DSL’ which enables consumers to have a DSL broadband connection without the need for a voice line.

The average fall in the number of fixed lines (including ISDN channels) was 2% a year, and over the five years to 2007 the total number of fixed lines in our comparator countries fell by 58 million (12%) to 428 million.

Figure 5.26 Fixed exchange lines: 2002 and 2007

200 189 ) 160 150 2002 100 72 5454 60 2007 50 3534 3429 29 26 2119 2020 1210 10 7 7 6 2 2 0 PSTN lines & ISDN channels (m UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRL 5 year -1% -3% -0% -2% -3% -1% -3% -4% -0% -7% -3% 2% CAGR Source: IDATE / industry data / Ofcom

5.2.4 Mobile telephony services 5.2.4.1 Mobile revenue growth continues despite high take-up levels

Between 2002 and 2007 total mobile revenues increased by 49% (£59bn) to £181bn among the 12 countries covered in this report. The highest growth was in Canada, where revenues from mobile services increased by an average of 15% a year over the period as a result of increasing take-up and use. The slowest mobile revenue growth over the period was in Japan, where average mobile revenue growth has averaged just 1% per year.

213 The International Communications Market 2008

Revenue growth in Japan has been inhibited by fierce competition among operators for subscribers and the introduction of mobile number portability. These factors have driven down prices, and average revenue per user fell by more than 24% in the five years to 2007. Despite the maturity of the market, mobile take-up in Japan (79 connections per 100 population) is also low in comparison to that in most of the comparator countries, in two- thirds of which there were more mobile connections than people at the end of 2007.

Figure 5.27 Mobile revenues: 2002 and 2007

80 69

60 2002 38 40 2931 2007 Revenue (£bn) 20 15 13 1415 11 10 9 8 8 7 5 4 3 2 4 3 1 1 1 1 0 UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRL 5 year 11% 9% 2% 7% 13% 15% 1% 13% 14% 5% 2% 6% CAGR Source: IDATE / industry data / Ofcom

5.2.4.2 Mobile accounts for the majority of telephony revenues in most countries

In all of the countries covered in this report, revenues generated by mobile services were higher than those from fixed voice services in 2007 (Figure 5.28). The proportion of total telephony revenues contributed by mobile services ranged from 52% in Sweden to 69% in Poland in 2007, averaging 61% across our comparator countries, up from 45% in 2002. During 2007 Poland overtook Japan to become the country where the highest proportion of total telephony revenues which were from mobiles.

The largest growth in the proportion of telephony revenues contributed by mobile services in the five years to 2007 was in the US and Poland, where the proportions grew by 23 percentage points over the period to 59% and 69% respectively. The lowest growth was the six percentage point increase in Japan, where mobile revenues were lower in 2007 then they had been in 2003, for the reasons outlined previously in Section 5.2.3.3.

Figure 5.28 Mobile as a proportion of total fixed and mobile revenues: 2002 and 2007

80 69 67 66 66 62 61 58 59 61 57 55 56 60 52 52 50 49 47 46 45 44 44 42 2002 40 36 34 2007 Revenue (£bn) 20

0 UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRL

Source: IDATE / industry data / Ofcom

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5.2.4.3 Mobile data revenues are growing five times faster than voice…

Mobile data revenue growth between 2002 and 2007 was higher than mobile voice revenue growth in all the key comparator countries covered in this report (Figure 5.29). This is unsurprising, because of increasing SMS use over the period, together with growth in other data services, enabled by faster mobile data speeds which have increased from the 144kbit/s of GPRS to HSDPA’s 7.2Mbit/s (while CDMA’s speeds have increased from 153kbit/s to 2.4Mbit/s and beyond using EVDO).

While total mobile voice revenues in the seven key comparator countries increased by 31% to £126bn over the five-year period, corresponding data revenues increased by 171% to £35bn. Average annual growth in data revenues ranged from 9% in Germany to 43% in the US, while the average yearly change in voice revenues was highest in Canada at 13% and lowest in Japan, where voice revenues fell by an average of 3% a year over the period. The US overtook Japan to become the largest country in terms of turnover mobile data services in 2007, with revenues (including SMS) increasing by 53% to £12bn.

Figure 5.29 Mobile revenue, by service type: 2002 and 2007

80 69 12 60

Data 38 40 2 29 31 58 6 10 Voice Revenue (£bn) 20 15 14 15 13 11 36 9 4 8 3 8 2 2 7 23 21 1 0 1 3 8 11 8 11 12 12 8 1 0 7 03 6 2002 2007 2002 2007 2002 2007 2002 2007 2002 2007 2002 2007 2002 2007 UK FRA GER ITA USA CAN JPN 9% 7% 1% 4% 10% 13% -3% Voice 5 year 21% 35% 9% 22% 43% 33% 13% Data CAGR Source: IDATE / industry data / Ofcom

5.2.4.4 …but voice continues to contribute the majority of mobile revenue

As mobile data revenue has increased, so has the proportion of total mobile revenue that is generated by data services. The contribution of data revenue to total mobile revenue increased across all of our comparator countries between 2002 and 2007, with the highest proportional growth being in Japan and Italy (both particularly heavy users of mobile telephony services) where the increases were 13 percentage points, to 32% and 26% respectively (Figure 5.30).

Among the countries covered in this report the proportion of mobile revenues generated by data services was highest in Japan in 2007 (32%), lowest in Sweden (at 11%) and averaged 21% across all of the comparator countries. Section 3.4.3.2 shows that consumers in Japan are particularly high users of mobile email, but SMS messaging is not as popular with them as in the other nations.

215 The International Communications Market 2008

Figure 5.30 Data as a proportion of total mobile service revenue: 2002 and 2007

40 32 30 26 25 24 24 23 21 2002 19 18 20 17 17 17 16 16 15 16 16 Per cent 14 13 2007 10 11 10 8 6 5

0 UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRL

Source: IDATE / industry data / Ofcom

5.2.4.5 SMS continues to generate the majority of mobile data revenue

SMS messaging generated the majority of mobile data revenue in all of the countries for which data were available in 2007 (Figure 5.31). However, it looks unlikely that this pattern will continue, as in Sweden (where the proportion was highest in 2007) non-SMS data services contributed 48% of total mobile data revenue, up from 34% in 2006. Non-SMS data services’ share of mobile data revenues was lowest in Poland (of the countries for which data were available for 2007) at just 5%. In all these nations the proportion of non-SMS data revenue increased in the three years to 2007, and the largest increase was in Sweden, at 40 percentage points.

Figure 5.31 Non-SMS data, as a proportion of total mobile data revenues: 2004 and 2007

50 48

40 32 31 30 2004 30 27 28 19 Per cent 20 2007 13 13 9 10 10 8 4 5 0 UK FRA GER ITA POL ESP SWE

Source: IDATE / industry data / Ofcom

5.2.4.6 Mobile voice call volumes continue to increase across almost all countries…

Mobile voice call volumes increased in all the countries in this report in the five years to 2007 (Figure 5.32). This is as a result of growth in both the number of mobile connections and average calls per connection in all of our comparator countries. The fastest growth was in Poland, where mobile voice call volumes grew on average by 32% a year during the period, while the slowest volume growth was in Japan, where they increased by an average of just 2% a year. Japan was the only country in which mobile voice call volumes showed any sign of decline: in 2007 mobile-originated voice call minutes were 2% lower than they had been in 2006, partly as a result of increasing use of mobile data services.

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Figure 5.32 Mobile voice call volumes: 2002 to 2007

2,124

s 650 200 158 2002 143

99 100 95 103 2007 100 68 68 Billions of minute of Billions 52 53 47 43 34 34 25 35 9 11 6 16 9 0 UK FRA GER ITA JPN POL ESP NED SWE IRL USA CAN 5 year 14% 13% 15% 15% 2% 32% 22%26% 20% 27% 19% CAGR Include incoming mobile calls Source: IDATE / industry data / Ofcom Note: USA and Canada also include incoming calls

5.2.4.7 …but in most countries the majority of voice calls still originate on fixed lines

The proportion of voice call volumes which originated on mobile networks ranged from 29% in Germany to 57% in Japan, among the countries for which separate outgoing fixed and mobile call volumes were available in 2007 (Figure 5.33). The lower proportion of mobile- originating voice calls in Germany is due to mobile telephony services being expensive in comparison with most countries, and the fact that until recently most mobile tariffs did not include an inclusive call allowance.

Among the nations where separate outgoing call volumes data were available, an average of 46% of voice calls originated on mobile networks in 2007, up from 42% in 2006 and 28% in 2002, as consumers increase the mobile calls they make, some of which are in substitution for those made over fixed lines.

Figure 5.33 Mobile voice call volumes as a proportion of total voice call volumes: 2002 and 2007

100

80 72

57 57 59 60 53 56 2002 49 50 48 40 43 37 36 Per cent 40 34 32 29 31 2007 24 23 25 20 15 15

0 UK FRA GER ITA JPN POL ESP NED SWE IRL USA CAN Include incoming mobile calls Source: IDATE / industry data / Ofcom

5.2.4.8 The number of mobile connections continues to grow, but growth rates vary

The total number of mobile subscriptions increased by 65% across the 12 countries covered by this report in the five years to 2007 (Figure 5.34). Average annual growth in the number of mobile subscriptions over the period was highest in Poland (at 24% a year) and lowest, at

217 The International Communications Market 2008

5% a year, in Sweden (where mobile take-up was already at nearly 90% in 2002). The largest actual increase in mobile subscriptions over the period was in the US, where there were 118 million more mobile connections in 2007 than there had been five years earlier, and the rate of growth was the second highest, at an average of 13% a year.

Figure 5.34 Mobile connections: 2002 to 2007

300 257 )

200 2002 139 101 97 90 2007 100 74 74 50 55 59 54 39 41 48

Subscriptions (millions Subscriptions 34 20 14 19 12 12 8 10 3 5 0 UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRL 5 year 8% 7% 10% 11% 13% 11% 6% 24% 8% 9% 5% 10% CAGR Source: IDATE / industry data / Ofcom

5.2.4.9 There are more mobile connections than fixed lines in all of the comparator countries

At the end of 2007 all of our comparator countries had more mobile subscriptions than fixed lines (Figure 5.35). Poland and Italy had the highest proportion of telephony connections which were mobile (at 80% and 78% respectively) while across all of the countries in the report the average was just under two-thirds (66%). The proportionally higher number of mobile connections in Poland is partly due to the fact that fixed-line availability extends to only about 80% of the population.

Figure 5.35 Mobile as a proportion of total telecoms connections: 2002 and 2007

100

78 80 80 71 73 70 69 66 64 66 62 62 65 58 62 61 54 55 2002 60 53 52 51 50 53 42 37 Per cent 40 2007

20

0 UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRL

Source: IDATE / industry data / Ofcom

5.2.4.10 Proportion of MVNO users grows in France and Canada

Mobile Virtual Network Operators (MVNOs) provide mobile telephony services to retail or business customers by agreeing wholesale contracts to effectively use the infrastructure and radio frequency allocations of a mobile network operator. The introduction of services by MVNOs increases consumers’ choice of providers, and therefore the level of competition in a market (Figure 5.36).

218

Growth in the proportion of MVNO connections in the three years to 2007 also varied among the nations; in France it increased by 5 percentage points due to the success of MVNOs such as Virgin Mobile, while in the Netherlands it fell by 6 percentage points as a result of network operators buying up MVNOs. In three of the countries for which historic data were available the proportion of mobile customers using MVNOs declined between 2004 and 2007.

Figure 5.36 MVNO share of total mobile connections, 2004 and 2007

30 28 26

20 2004 14 12

Per cent 11 2007 9 10 8 6 5 4 2 3 0 0 0 1 000 1 0 UK FRA GER ITA USA CAN POL ESP NED SWE

Source: IDATE / industry data / Ofcom Note: UK and Germany figures includes reseller’s subscriptions in addition to full MVNOs

5.2.4.11 The UK and the US have the least concentrated mobile markets

The Herfindahl-Hirschman Index of market concentration, based on the relative market share of individual operators, can be used as an indicator of levels of competition in mobile markets across our comparator nations.

Herfindahl-Hirschman Index of market concentration

The Herfindahl-Hirschman Index (HHI) is a measure of the size of firms in relation to the size of the industry as a whole and is an indicator of the level of competition in a market. The HHI is defined as the sum of the squares of the market shares of each individual firm. As such, it can range from 0 for a perfectly competitive market (one with a large number of firms with equal market share) to 10,000 for a monopoly.

The HHI is a particularly useful metric for analysis of the mobile market, where the number of operators is constrained by the requirement to license spectrum.

Decreases in HHI generally indicate a loss of pricing power and an increase in competition, whereas increases imply the opposite. Our calculations of HHIs for the mobile market are based on the subscription shares of retail providers, and as such will reflect the effect of MVNOs and service providers on the retail market rather than the number of network providers

Among the comparator countries in this report, the UK had the least concentrated mobile market in terms of connections at the end of 2007, with an HHI of 1,454 (Figure 5.37). This is because there are five network operators in the UK (compared to three or four in all the other countries included in our analysis) as well as more than ten MVNOs and many more service providers.

219 The International Communications Market 2008

Figure 5.37 Herfindahl-Herschman index of mobile subscription concentration: 2004 and 2007

4,000

3,000 2004

HHI 2,000 4,282 4,142 3,944

3,818 2007 3,681 3,587 3,462 3,408 3,400 3,402 3,359 3,357 3,360 3,196 3,032 3,012 3,043 2,990 2,935

1,000 2,536 1,952 1,750 1,493 1,454 0 UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRL

Source: IDATE / industry data / Ofcom Note: Figures for the UK have been updated from those published in the 2007 report, and are now comparable to those of the other comparator countries

The weighted average HHI value across all of the countries in this report was just over 2,700 at the end of 2007, while Japan had the most concentrated mobile market in terms of connections, with an HHI value of 3,944. This is as a result of NTT DoCoMo having a market share of around 50%. The HHI fell in all of the nations covered in the three years to 2007 except for the US, Canada and the Netherlands. In the Netherlands, a large increase in the degree of concentration in the market over the period was driven by a number of MVNOs being taken over by network operators.

Definition of 3G mobile technologies

3G technologies provide increased voice capacity and higher-speed mobile data access compared to 2G and support multimedia applications. The distinction between 2G, 2.5G and 3G is primarily based upon data speeds, resulting in some difference of opinion on the categorisation of various technologies.

We have defined the technologies below as 3G. Note that because of the slower data speeds we do not include CDMA2000 or EDGE as 3G.

W-CDMA (Wideband Code Division Multiple Access) is part of the UMTS family standardised by 3GPP. It is the most popular 3G technology in Europe and Japan (NTT DoCoMo’s FOMA) while it is also becoming increasingly popular in the US. The maximum downstream speed is 384Kbit/s although actual speeds are around 200Kbit/s. It is a mass- market technology, with 75 million subscribers worldwide.

HSPA (High Speed Packet Access), often referred to as 3.5G, is an extension to the original W-CDMA standard providing significantly higher data rates. HSDPA (downlink) can provide theoretical maximum downlink speeds of 14.4Mbit/s. However, current implementations and devices support maximum speeds of 1.8Mbit/s, 3.6Mbit/s and 7.2Mbit/s while typical speeds range from 0.5 to 1.5Mbit/s. More than 220 networks worldwide support HSDPA today. HSUPA (uplink) supports maximum uplink speeds of 5.76Mbit/s (increased from 384Kbit/s available with HSDPA) and there are over 50 commercial HSUPA networks in operation. Initial deployments support up to 1.5Mbit/s. The investment required to develop HSPA networks consists mainly of relatively cheap software upgrades which will probably lead to a decrease in average cost per bit carried over mobile networks.

TD-CDMA (Time Division CDMA) is also part of the 3GPP UMTS family with limited adoption to date, mostly for fixed/nomadic wireless access. In the UK it is being used by UK

220

Broadband. It is suitable for use in unpaired spectrum bands and offers variable uplink/downlink data rate ratios (a feature particularly useful for asymmetric or broadcast services such as mobile TV). TDtv, the mobile TV standard developed by IPWireless, is based on this technology. Maximum downlink speeds of up to 12Mbit/s have been reported.

TD-SCDMA (Time Division Synchronised Code Division Multiple Access) is a 3G standard developed in China and is currently being commercially trialled in several cities in China.

CDMA2000 1xEV-DO (Evolution-Data Optimised) is an extension to CDMA2000 (similar to what HSDPA is for WCDMA) that can provide downlink speeds of up to 2.4Mbit/s (average 300-600Kbit/s). EV-DO Revision A will provide maximum downlink at 3.1Mbit/s and 1.8Mbit/s uplink (average 300-600Kbit/s both ways).

WiMAX (Worldwide Interoperability for Microwave Access) is a wireless MAN (metropolitan area network) technology, based on the 802.16 standard. Available for both fixed and mobile data applications, the technology was approved as a 3G standard by the International Telecommunications Union (ITU) in 2007.

5.2.4.12 Use of 3G mobiles highest in Japan

In all of our comparator countries the proportion of mobile users with a 3G subscription increased between 2004 and 2007 (Figure 5.38). Japan continued to have the highest proportion of mobile connections which were to 3G networks; at 83%, more than 50 percentage points higher than any other of the countries covered in this report. Italy had the second highest take-up of 3G among mobile connections, at 27%, while use of 3G was lowest in Canada at the end of 2007, where just 1% of mobile connections were using 3G networks.

Across all of the nations in the report, the average proportion of mobiles which were using 3G networks was just under a quarter (24%).

Figure 5.38 3G as a proportion of total mobile subscriptions: 2004 and 2007

100 83 80

60 2004

Per cent 40 2007 27 26 21 22 17 16 20 20 13 11 9 4 4 4 00 001 0003 0 0 UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRL

Source: IDATE / industry data / Ofcom

5.2.5 Broadband internet services 5.2.5.1 Availability of fixed broadband services high among most countries

Across all of the countries for which data were available, more than 90% of the population were able to receive broadband internet services by the end of 2007, when availability of broadband ranged from 93% in Canada to almost 100% in the UK (Figure 5.39). In all of the

221 The International Communications Market 2008 nations for which historic data were available the proportion of people living in areas where broadband was available grew in the three years to 2007 as the roll-out of services continued.

Although availability was high in all countries, a minority of people live in areas where they cannot get broadband. These are often remote areas, and in many cases it may be necessary to use wireless technologies such as satellite broadband or 3G over cellular networks in order for these consumers to receive service.

Figure 5.39 Availability of broadband services, 2004 and 2007

100 95 98 96 96 96 100 91 91 94 93 91 85 89 80 2004 60

40 2007

20 Proportion of population (%) 0 UK FRA GER ITA USA CAN JPN

Source: IDATE / industry data / Ofcom

5.2.5.2 Annual broadband revenue growth averages 36% in the five years to 2007

Increasing take-up of broadband services resulted in strong broadband revenue growth in all of the countries covered in this report over the five years to 2007 (Figure 5.40). Average annual broadband revenue growth between 2002 and 2007 ranged from 19% in Canada and Sweden to 139% in the Republic of Ireland (where DSL services launched in 2002, so growth rates have been calculated from a small base).

Average broadband revenue growth was 36% per year across the countries covered in this report, slightly lower than the 37% growth in the number of connections identified in Section 5.2.5.5 below. This suggests that despite increases in service quality offered by the availability of higher speed connections, average prices have fallen.

Figure 5.40 Broadband revenues: 2002 and 2007

20 16 15 2002 10 2007

Revenue (£bn) 4 5 5 3 3 3 2 2 2 1 1 1 0 1 1 0 0 1 000 1 0 0 0 UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRL 5 year 50% 40% 42% 45% 33% 19% 42% 74% 44% 32% 19% 139% CAGR Source: IDATE / industry data / Ofcom

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5.2.5.3 Average monthly broadband revenue per head was £3.79 in 2007

Per-capita broadband revenue increased across all of the countries in the five years to 2007 as a result of take-up growth (Figure 5.41). It was highest in the Netherlands in 2007 at £75, equivalent to £6.29 a month, and lowest in Poland at £14 (£1.15 a month) and across the countries in this report averaged £46 (£3.79 a month). Average per-capita revenue growth rates between 2002 and 2007 were similar to those for overall broadband revenues and averaged 35% across the comparator nations in this report.

Figure 5.41 Broadband revenue per head: 2002 and 2007

80 75 65 61 60 53 47 42 43 2002 39 40 38 40 36 26 27 2007 £ per capita 19 20 14 14 9 6 7 6 6 7 1 1 0 UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRL 5 year 49% 40% 42% 45% 32% 18% 42% 74% 42% 31% 19% 137% CAGR Source: IDATE / industry data / Ofcom

5.2.5.4 Broadband’s contribution to total fixed revenues is highest in the Netherlands

In most of our comparator countries broadband services contributed between 20% and 30% of total broadband and fixed-line revenues in 2007 (Figure 5.42), the average being 25%. The exceptions were the Netherlands and Sweden (both higher, at 38% and 31% respectively) and the Republic of Ireland, which was much lower, at 16%, as a result of its relatively low broadband take-up and high fixed-voice revenue per line.

Figure 5.42 Broadband as a proportion of total fixed revenues: 2002 and 2007

40 38 31 30 27 28 26 25 25 23 2002 22 22 23 20 16

Per cent 2007 12 12 10 10 5 5 5 3 4 4 4 1 0 0 UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRL

Source: IDATE / industry data / Ofcom

5.2.5.5 Broadband connection growth averaged 37% a year between 2002 and 2007

There was strong growth in the number of broadband connections in all the countries covered in this report in the three years to 2007 (Figure 5.43). The highest average growth rate was in the Republic of Ireland, where the number of connections increased by an average of 166% a year, albeit from a low starting point. Canada had the lowest rate of

223 The International Communications Market 2008 growth over the period, with connections increasing by an average of 19% a year. Among the comparator nations in this report, annual growth rates averaged 37%.

The US had the most broadband lines among our comparator countries at the end of 2007, although according to Point Topic, China overtook the US in Q3 2008 in terms of its total number of broadband connections (see Section 7.1 for more detail on the telecoms market in China).

Figure 5.43 Broadband connections: 2004 and 2007

80 71

60 2002 40

Millions 28 2007 20 18 20 16 16 10 8 8 8 3 4 3 6 1 2 1 0 1 1 1 3 0 1 0 UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRL 5 year 63% 56% 42% 55% 32% 19% 29% 77% 43% 39% 31% 166% CAGR Source: IDATE / industry data / Ofcom

5.2.5.6 Spain has the highest proportion of broadband connections faster than 2Mbit/s

The proportion of broadband connections with a headline speed of above 2Mbit/s showed wide variation among our European comparator countries (data were not available for the US, Canada and Japan), ranging from just 8% in Poland to 83% in Spain (Figure 5.44). The high figure in Spain is partly due to the fact that broadband headline speeds in Spain are often far-removed from those actually received by consumers, an issue which Comisión del Mercado de las Telecomunicaciones (CMT), the telecoms regulator in Spain, is particularly active on. The weighted average across the EU countries in this report showed that just under half (48%) of connections had a headline speeds above 2Mbit/s, with the figure for the UK (47%) being slightly below this average.

It should be noted that these figures are for headline speeds only, and will be higher than the proportion of consumers actually receiving downstream broadband speeds above 2Mbit/s.

Figure 5.44 Proportion of broadband connections with a headline speed above 2Mbit/s: end 2007

100 83 80 63 57 60 55 47 45

Per cent 40 32 19 20 8

0 UKFRAGERITAPOLESPNEDSWEIRL

Source: IDATE

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5.2.5.7 Most broadband connections are provided using DSL technology

DSL is the most prevalent broadband technology in most of the countries in this report, and by the end of 2007 the US and Canada (where long local loop lengths result in restricted ADSL performance for many customers and where there are extensive cable networks) and Japan (where many broadband connections are provided over fibre) were the only nations where the majority of broadband connections were not DSL-based (Figure 5.45). Technology news and opinion website The Register 26 reported in October 2008 that cable operator Comcast was on the verge of overtaking AT&T to become America's largest broadband provider in terms of connections.

The percentage of broadband connections which were provided using DSL varied from 41% in Canada and 42% in the US to 97% in Italy at the end of 2007. The average across all of the nations in this report was 61% – 8 percentage points higher than in 2002 as a result of DSL availability being higher than cable broadband and fibre-based service availability in most countries.

Figure 5.45 DSL as a proportion of all broadband connections: 2002 and 2007

95 9794 97 100 88 83 78 79 80 72 72 72 6869 68 61 59 60 2002 60 46 42 42 4241 Per cent 40 35 32 2007

20

0 UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRL

Source: IDATE / industry data / Ofcom

5.2.5.8 Total market share of the top three broadband providers averaged 65% in 2007

There is a mixed picture among the countries in this report in terms of levels of market concentration, as measured by the market share of the three largest broadband providers across all platforms (Figure 5.46). In half of the nations the share of the top three broadband providers rose in the five years to 2007, while in the other six countries it fell.

Overall, the average market share of the three largest broadband operators increased by 5 percentage points to 65% over the period. This is partly due to mergers and acquisitions in broadband markets, as operators look to gain the critical mass necessary to offset the capital expenditure required for investment in core network infrastructure, local loop unbundling and (in some countries) new access networks.

It should be mentioned that the figures for the US are slightly misleading as operators offer services on a regional basis. Therefore, regional sub-national markets may be highly concentrated, and many consumers may face a duopoly of an incumbent local exchange carrier (ILEC) and the local cable franchise.

26 http://www.theregister.co.uk/2008/10/29/comcast_q3_earnings/

225 The International Communications Market 2008

Figure 5.46 Retail subscription share of the top three broadband providers: 2004 and 2007

100 89 87 85 84 81 80 75 7775 80 72 71 73 71 71 7067 70 70 69 69 68 59 2004 60 50 45

Per cent 40 2007

20

0 UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRL

Source: IDATE / industry data / Ofcom

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5.3 The telecoms user

5.3.1 Introduction This section looks at trends in consumer use and availability of telecoms services in the 12 telecommunications markets, starting with an overview of the take-up of each service. This is then followed by an analysis of spend, use and availability of each individual service, starting with fixed-line, then mobile and finally broadband services. Some of the key points highlighted in this section include:

 Fixed-line voice penetration declined in most countries in 2007, irrespective of the level of take-up; the exceptions were Spain and the UK where take-up increased slightly.

 More mobile calls than fixed were made in Italy, Japan, Poland and the Netherlands during 2007, while just under half of all voice calls were made on a mobile in France, Spain and Ireland (40% in the UK).

 Mobile connections exceeded population in Poland for the first time in 2007, reaching 107%, joining seven other countries including the UK (121%) and Italy (154%).

 Average revenue per fixed line declined by 13% from 2002 to 2007 across the 12 countries in this report. Revenue fell fastest in Ireland (down 23%) and by 17% in the UK.

 High use of SMS in the UK brought average monthly revenue from SMS to £3.18 in 2007. This compares to £0.64 in Sweden, where SMS use per mobile connection was 70% lower.

 Average spend on non-SMS data services is highest in Japan (£8.48 per mobile connection per month), compared to just £0.09 per month in Poland. The highest spend across the European countries is in the UK, at £1.11.

5.3.2 Take-up of telecoms services 5.3.2.1 Take up of fixed-line voice continues to fall in most countries

Germany and Sweden had the highest fixed-line take-up of the 12 countries in this analysis, at over 60 lines per 100 population (Figure 5.47). Fixed-line use has been the main form of telephony for both residential and business users in these countries over a long period of time, due to its wide availability and affordable pricing. In contrast, less extensive availability (with a fixed-line voice network available to just 80% of the population) and relatively high prices in relation to low GDP have constrained take-up in Poland, with less than one in three of the population connected to a fixed line.

In most countries, irrespective of the level of take-up, fixed-line voice connections are in decline while mobile use increases. In Poland, despite having the lowest fixed-line take-up of any of the countries covered, connections fell by 7.5% in 2007 while in the US, a market with a relatively high fixed-line take-up, there was a 4.5% fall.

Increasing use of retail Voice over Internet Protocol (VoIP) services had a negative impact on fixed connections in some countries; in the Netherlands a decline of 1.4 million connections during 2007 was largely due to consumers switching to broadband services over naked DSL and cable.

227 The International Communications Market 2008

Spain and the UK are the only countries where fixed-line penetration increased in 2007, partially driven by rising demand for connections due to growth in the number of households, as the average number of people per household declines. Growth in the number of business lines has also contributed to a rise in the number of fixed lines in the UK.

5.3.2.2 More mobile connections than people in many countries

Mobile connections exceeded population in Poland for the first time in 2007 while Italy had the highest take-up of mobile services, at 157 connections per 100 population (Figure 5.47). High levels of mobile take-up are partly a result of multiple device ownership, but are also closely connected to the take-up and availability of pre-pay SIM cards. In six of the eight countries where mobile connections exceed the population, including Poland, Italy and the UK, pre-pay accounts for the majority of mobile connections. In Italy consumers often buy two or three pre-pay SIM cards from different operators and swap them in and out of their handset (SIM swapping) to take advantage of the different promotions and tariffs available.

Mobile take-up in Canada exceeded fixed-line for the first time in 2007, although, take-up was significantly lower than in the other countries in this analysis. In countries with the lowest number of mobile connections per 100 population (Canada, US, France and Japan) the majority of subscriptions are on post-pay and therefore multiple subscription ownership is less prevalent than in countries where pre-pay accounts for a larger proportion of subscriptions. In addition, there are a large number of mobile connections using CDMA handsets in Canada, Japan and the US, and this prevents SIM swapping as there is no SIM card present in the handset; the identity of the user is tied to the handset rather than to a SIM card.

Figure 5.47 Take- up of fixed and mobile services, 2007

154 160 n

121 122 118 116 115 120 107 107 87 85 79 Fixed 80 66 5862 63 55 53 52 Mobile 45 44 47 45 42 40 27 Connections per 100 populatio 0 UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRL

Source: IDATE / industry data / Ofcom

5.3.2.3 Wide variation in broadband take-up across European markets

Average broadband take-up per 100 households across the 12 countries covered in this analysis was 56 in 2007 (Figure 5.48), compared to 12 in 2002. There were significant differences between countries at the end of 2007: the Netherlands had the highest take-up, at 81 connections per 100 households, due to a combination of high GDP and a highly urbanised population, enabling broadband coverage to be deployed at relatively low cost (95% of households are passed by cable). By contrast, lack of fixed-line take-up and competition from mobile broadband have kept penetration of fixed broadband in Poland down to 27 connections per 100 household.

228

Figure 5.48 Take-up of broadband services, 2007

90 81

66 61 62 Per 100 60 58 57 60 population 50 50 51 41 35 31 26 27 30 24 24 24 25 22 Per 100 17 18 18 households 9

0 UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRL

Source: IDATE / industry data / Ofcom Note: For most countries separate data for residential and business broadband connections are not available and household take-up figures will include some business connections (although the corporate access market is excluded).

5.3.2.4 Broadband growth begins to slow in some less-penetrated markets

Annual growth in the number of fixed-line broadband connections per 100 population slowed during 2007 in half of our comparator countries (Figure 5.49). While slowing growth in the Netherlands can be explained by a market approaching saturation, growth also slowed in Spain, Italy and Poland, which have the lowest take-up of broadband, indicating that demand from potential users may be smaller than in other countries which have higher take- up. The reasons for low levels of demand vary between countries; above average household numbers and therefore less demand per population is partly responsible for lower take-up per population in Poland and Spain, while low GDP per capita in Poland and low PC take-up in Italy are also contributory factors. In addition, the high numbers of mobile-only households in Italy and Poland (see Section 5.1.3.4) indicate that many consumers are using a mobile broadband connection in place of fixed broadband.

In Ireland there was significant growth in take-up of broadband in 2007 (a 47% increase in connections), largely due to a national government initiative to encourage investment in extending broadband coverage and to greater competition from alternative operators, leading to a decline in prices.

229 The International Communications Market 2008

Figure 5.49 Growth in take-up of broadband services, 2002 to 2007

35

a 30 4 31 25 26 6 5 2007 24 24 3 24 4 3 5 2006 20 4 22 5 18 6 5 17 3 18 5 2 2005 5 3 3 3 6 6 5 2 3 8 3 3 3 6 4 4 4 2004 10 9 4 5 4 6 3 4 4 2 3 2003 5 5 3 5 4 3 2 3 3

Connections per 100 population 100 population per Connections 5 1 3 2 2 3 2 1 3 0 0 1 UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRL

Source: IDATE / industry data / Ofcom

5.3.3 Fixed-line voice services 5.3.3.1 Average use per fixed line falls in all countries except France and Poland

Outbound call volumes per fixed line have fallen since 2002 across most countries, as users switch to making more calls on mobiles and, in some countries, via VoIP. Only France and Poland showed an increase in calls per line, as fixed-line connections fell at a faster rate than call volumes (Figure 5.50).

Sweden had the highest number of monthly outbound minutes per fixed line in 2007. The low cost of fixed-line calls and the high fixed-line take-up and GDP per capita mean that consumers in Sweden are less inclined to switch more of their voice calls to mobile, as the cost difference between fixed and mobile is less likely to play a part in influencing how they make calls.

Call volumes fell fastest in Japan between 2002 and 2007, down 41% to 160 minutes per month. The growth of VoIP use (which is covered in more depth in the convergence section within this report) is the main reason for this decline. Along with fixed to mobile substitution, VoIP is increasingly replacing traditional fixed-line use in some countries. According to the German regulator, the volume of VoIP traffic in Germany grew to 16 billion minutes, or approximately 10% of overall traffic, at the end of 2007 (German Federal Agency for Electricity, Gas and Telecommunications, Post and Railway Annual Report 2007).

230

Figure 5.50 Monthly outbound minutes per fixed line, 2002 and 2007

500 441 388 397 402 400 366 374

301 309 315 275 291 274 273 287 281 300 258 2002 212 199 200 160

Minutes per line per Minutes 2007

100

0 UK FRA GER ITA JPN POL ESP NED SWE IRL

Source: IDATE / industry data / Ofcom

5.3.3.2 Average revenue per fixed line falls in all countries

Average revenue per fixed line declined on average by 13% from 2002 to 2007 across the 12 countries in this report. The trend towards ‘flat rate’ pricing, in which certain types of calls, or numbers of minutes, are included within the line rental prices, has resulted in average revenue per line falling faster than call volumes in half of the countries in this analysis. Revenue fell fastest in Ireland (down by 23%) as increased competition pushed down prices (Figure 5.51), although at £32 per month, average revenue per line remains the highest of any of the 12 countries.

Figure 5.51 Average monthly voice revenue per fixed line, 2002 and 2007

50 42 40 32 29 30 28 26 25 25 26 23 23 24 23 24 2002 21 22 21 21 21 22 22 18 19 20 16 2007 £ per month£ per 12 10

0 UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRL -4% -2% -3% -1% -4% -3% 0% -5% -2% -2% -3% -5% CAGR Source: IDATE / industry data / Ofcom

5.3.3.3 Revenue per minute falls fastest in Poland

An analysis of average revenue per fixed line call minute between 2002 and 2007 reveals that the biggest decline was in Poland, to 5.8 pence per minute, driven largely by regulatory cuts in interconnection charges paid to the incumbent and by a reduction in wholesale line rental, which has stimulated price competition within the market (Figure 5.52). Italy and Spain are the only markets where revenue rose over the period; although, after an 8% rise between 2002 and 2005, revenue per minute in Spain was back to 2002 levels by 2007.

The high take-up and use of fixed lines, combined with long-standing competition between the incumbent and alternative network operators, are the main reasons why Sweden had the

231 The International Communications Market 2008 lowest revenue per minute of any of the European markets (at 4.7p) in 2007. But in Ireland, competition within the fixed-line market has only recently been subject to competition (the incumbent holds a 70% share of total fixed-line revenue). Here, revenue per minute was highest among the European countries in this analysis in both 2002 and 2007.

The figures are calculated using fixed-line voice revenue and outbound call volume data, and are therefore a crude proxy for call costs in each country. The calculations do not take into account the average calling patterns between each country (for example, a larger proportion of higher-cost international calls) and with fixed-line services increasingly bundled with other services, revenue from other services such as broadband may be excluded or included within the revenue figures.

Figure 5.52 Average fixed-line revenue, per minute: 2002 and 2007

12 10.4 9.5 9.0 8.6 8.0 8.2 7.8 8 7.1 7.1 6.9 7.2 7.2 6.3 5.8 2002 4.9 4.7 2007 4 Pence per minutePence

0 UK FRA GER ITA POL ESP SWE IRL

Source: IDATE / industry data / Ofcom

5.3.3.4 Voice over Internet Protocol (VoIP) use highest in France and the Netherlands

VoIP enables voice calls to be made over the internet, usually at a price that is considerably lower than for a call made through a public switched telephony network (PSTN).

Although information is available on the number of users making VoIP calls that terminate on a PSTN line or mobile network, it is not possible to measure the number of users who make PC-to-PC calls (Skype, Google or MSN VoIP services) as it is difficult to differentiate VoIP traffic from other data traffic over the internet.

Using this measure, France and the Netherlands had the highest proportions of VoIP users per 100 population at the end of 2007 (Figure 5.53). In France, this was due to the take-up of multi-play services such as Orange’s ‘Livebox’, within which the consumer can use a single box to access broadband, WiFi services, and make VoIP calls to other fixed lines. In the Netherlands, VoIP was initially stimulated by the cable operators (38% of broadband subscribers). In 2006 incumbent operator KPN launched the InternetPlusBellen VoIP service but in 2007, unable to cope with high levels of demand for the service, it placed limits on the number of users.

The comparatively low use of VoIP in other European countries (ranging from just 1% take- up in Spain to 7% in Sweden) suggests that consumers are either unaware that such services exist, or that that there are fewer incentives for using VoIP. This may be as a result of the absence of naked DSL, which means users need a fixed-line subscription to access VoIP services, in addition to the low-price or ‘flat-rate’ calls available from PSTN providers. In the UK, for example, all tariffs from incumbent BT include unlimited off-peak calls to UK fixed lines.

232

Figure 5.53 Use of VoIP among internet users: 2007

20 a 17 17

13 12 10 11 2006 10 2007 7 7 6 5 5 5 5 3 4 3 2 2 2 0 1 1 1 1 VoIP users per 100 population population 100 users per VoIP 0 UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRL

Source: IDATE / industry data / Ofcom PC-to-PC calls not included

5.3.4 Mobile services 5.3.4.1 Large growth in minutes per connection in all countries except Japan

There are significant differences in the number of outgoing minutes per mobile subscription across the 12 countries in this analysis. The highest level per subscription in 2007 was in the Netherlands, doubling to 158 minutes over the five-year period as declining fixed-line connections, combined with an increase in the number of mobile-only households, drove growth in mobile use. In contrast, mobile use in Japan fell by 20% as consumers used alternative services to voice on their mobile, such as email and instant messaging. German subscribers use the least amount of minutes, perhaps because of the high cost of mobile services in relation to fixed-line costs.

The US and Canada are considered separately in this analysis as only combined figures on total outbound and inbound call minutes are available (this is due to their interconnect regimes, under which, unlike in other countries in this analysis, users are charged both for incoming and outgoing calls). Combined volumes per subscriber for both these countries increased substantially between 2002 and 2007, almost doubling in the US as a result of operators offering increasing ‘buckets’ of inclusive call minutes within basic line rental charges,.

233 The International Communications Market 2008

Figure 5.54 Monthly outbound minutes per mobile subscription

723 200 169 155 158 153 600 135 130 2002 441 116 117 119 407 400 100 92 93 311 2007 74 73 75 69 62 60 65 50 200 Minutes per month

0 0 UK FRA GER ITA JPN POL ESP NED SWE IRL USA CAN 5% 6% 5% 5% -4% 4% 13%17% 14% 12% 7% CAGR Includes incoming and outgoing volumes Source: IDATE / industry data / Ofcom

5.3.4.2 Mobile becoming main method of telephony in more countries

More mobile calls than fixed were made in Italy, Japan, Poland and the Netherlands during 2007 (Figure 5.55), while just under half of all voice calls were made on a mobile in France, Spain and Ireland. Increasing fixed-to-mobile substitution has eroded traditional fixed-line use in all the countries covered in this analysis, and in Italy and Poland, the relatively under- developed fixed line voice markets have been quickly overtaken by mobile. In Japan, which has mature fixed and mobile markets, the increasing use of IP phones connected to broadband-only connections has had the effect that, even though mobile call volumes have fallen, fixed-line call volumes have fallen at a much faster rate, and as a result, mobile’s share of voice volumes has increased.

In Germany, France and Sweden, the proportion of calls made over mobile is lower, mainly due to higher fixed-line volumes than in most other countries in this analysis, rather than to lower than average mobile volumes.

Figure 5.55 Mobile as a proportion of all voice call volumes

a 60 57.0 55.7 57.4 52.6 48.6 49.6 48.3 50 40.2 37.3 40 36.3 2002 32.0 28.8 30.7 30 24.7 24.0 23.1 2007 20 15.0 15.1

10

0 Percentageof allvoice call volumes UK FRA GER ITA JPN POL ESP NED SWE IRL

Source: IDATE / industry data / Ofcom

234

5.3.4.3 Around 90% of Italian mobiles are pre-pay, compared to just 2% in Japan

There are large variations in the split between pre-pay and post-pay among the key comparator nations in this report (Figure 5.56). Around 90% of mobile connections in Italy were pre-pay at the end of 2007, while in contrast 98% of connections in Japan were post- pay, mainly due to strict laws on the identification required when purchasing a pre-pay phone. The proportion of post-pay subscribers grew in France and in the UK between 2002 and 2007, as operators focused on reducing churn and increasing average revenue per user, and encouraged pre-pay users to migrate to contract plans by broadening their product range to include lower-value monthly contracts and SIM-only tariffs such as T-Mobile UK’s Solo 30 day SIM-only plans. In Germany pre-pay connections have increased due to the popularity of discounted prepaid brands such as Aldi and Tchibo.

The proportion of pre-pay subscribers remained relatively unchanged in the US from 2002 to 2007, growing in line with overall subscriptions despite the presence of high-profile pre-pay brands such as Virgin Mobile (which had over 5 million customers by the end of 2007).

Figure 5.56 Mobile subscriptions, by type: 2002 and 2007

100 s 88 3 2 25 22 34 80 44 53 55 69 64 60 90 90 Pre-pay 92 92 97 98 40 75 78 66 Post-pay 56 20 47 45 31 36 10 10 0 Percentage of mobile subscription mobile of Percentage 2002 2007 2002 2007 2002 2007 2002 2007 2002 2007 2002 2007 2002 2007 UK FRA GER ITA USA CAN JPN

Source: IDATE / industry data / Ofcom

5.3.4.4 Average revenue per subscriber grows in Canada and the UK

Average revenue per mobile subscription between 2006 and 2007 fell in five of the main comparator nations covered in this report, by an average of 2%. Canada and the UK were the only countries where average revenue increased, driven by much higher use of both voice and data services.

In some European markets increased multiple SIM ownership has diluted the average revenue generated per subscription (lack of data makes it impossible to compare average revenue per user rather than per subscriber). Italy, with the highest number of mobile connections per head (1.54) has the lowest revenue per subscription, because users spread their spend over several subscriptions. In contrast, countries such as Canada, Japan and the US, dominated by post-pay contracts, have relatively low levels of multiple subscription ownership and therefore higher revenue per subscription.

The biggest fall in revenue has been in Japan, declining by 24% to £26.10 in 2007 (Figure 5.57). Increased competition on monthly price plans, stimulated by the introduction of number portability in 2006 and focus on discount call plans by Softbank Mobile (formally Vodafone KK), have led to voice revenue declining at a faster rate than rising revenues from data services.

235 The International Communications Market 2008

Figure 5.57 Monthly mobile average revenue per subscription, 2002 to 2007

CAGR 40 UK 2%

30 FRA 2%

GER -7% 20 ITA -3% £ per month £ per USA 0% 10 CAN 4%

0 JPN -5% 2002 2003 2004 2005 2006 2007

Source: IDATE / industry data / Ofcom

5.3.4.5 Revenue per subscription highest in post-pay markets

An analysis of the relationship between mobile take-up and average revenue per mobile subscription in 2007 shows a strong correlation. The absence of a significant pre-pay subscription base in France, the US, Japan and Canada has maintained higher revenue, as one subscription usually represents one user.

In contrast, the trend of owning more than one pre-pay subscription in Italy has diluted revenue and pushed take-up to new levels. Sweden is the only country with a high level of take-up based on a large proportion (55%) of post-pay users and low ARPU (Figure 5.58). This is due both to low call charges and to the fact that Swedish operators do not need to recoup the costs of subsidised handsets; consumers buy their handset separately from their mobile contract. This factor also needs to be taken into account when analysing ARPU in markets where pre-pay accounts for the majority of subscriptions; revenue per user in countries characterised by handset subsidies is over-stated, as the cost of the handset is included within the service revenue.

Figure 5.58 Mobile take-up and average monthly revenue per subscription: 2007

160 n ITA GER UK IRL 120 NED ESP USA SWE JPN 80 FRA

CAN 40 R2 = 0.62 Connections per 100 populatio per Connections 0 10 15 20 25 30 Monthly average revenue per subscription (£)

Source: IDATE / industry data / Ofcom

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5.3.4.6 Spend on mobile data services significantly higher in Japan

There is a wide variation in the average voice and data revenue per subscription across the 12 countries (Figure 5.59), reflecting the extent to which each service is used. Nearly one- third of total revenue per subscription in Japan is spent on data services (£8.48 per month) compared to 11% in Sweden (£1.24).

In addition to text messaging, revenue is derived from data services such as picture messaging, email and internet browsing and other multimedia applications such as video streaming and mobile TV.

Figure 5.59 Monthly mobile voice and data revenue, per subscription: 2007

30 29 26 24 5 20 4 9 18 18 18 20 3 17 Data 4 14 3 3 5 12 3 10 24 £ per month 10 20 8 1 17 3 18 Voice 13 2 14 15 14 11 10 8 6 0 UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRL 24% 16% 21% 27% 17% 18% 33% 23% 17% 17% 11% 25% % data Source: IDATE / industry data / Ofcom . 5.3.4.7 SMS spend highest in the UK

SMS accounts for the highest proportion of revenue data services in all the European countries in this analysis. High use of SMS in the UK resulted in average monthly revenue from SMS of £3.18 in 2007. This compares to £0.64 in Sweden, where SMS use per mobile connection was 70% lower (Figure 5.60).

In Japan, the high take-up of mobile internet services over 2G, such as i-mode, combined with the early roll-out of new technologies (3G was launched in Japan in 2001, but in 2003 onwards in other markets covered in this report) and the related availability of advanced services and handsets, has resulted in many Japanese consumers using their mobile phone as their primary way of accessing the internet. So in Japan non-SMS data revenues are high (£8.48 per mobile connection per month), while SMS has never taken off, as mobile users communicate via internet applications such as email and instant messaging.

In contrast, spend on non-SMS data services in European countries is as low as £0.09 per month in Poland; the highest is the UK at £1.11.

237 The International Communications Market 2008

Figure 5.60 Monthly mobile SMS and non-SMS ARPU: 2007

10.0 8.5 0.0 8.0

6.0 SMS 4.3 8.5 Non-SMS 4.0 3.2 2.9 2.9 £ permonth 2.7 3.2 2.2 1.7 2.0 2.4 1.9 2.1 1.2 1.7 0.6 1.1 1.0 0.9 0.9 0.0 0.6 0.1 0.6 UK FRA GER ITA JPN POL ESP SWE

Source: IDATE / industry data / Ofcom

5.3.4.8 Mobile data revenue increases as proportion of total revenue

In 2007, mobile data revenue accounted for 21% of total mobile revenue across the seven key comparator countries, compared to 12% in 2002. The highest average growth rate over a five-year period was in the US, reflecting strong growth in mobile take-up and rapid adoption of SMS and advanced data services.

Nearly one-third of mobile revenue in Japan comes from data services, compared to 16% in France (Figure 5.61), where rollout of 3G coverage and services has been slower in comparison to Japan and the other large European markets.

Figure 5.61 Mobile data revenue, as a proportion of total mobile revenue: 2002 to 2007

CAGR 40 UK 9%

30 FRA 23%

GER 7% 20 ITA 14% Per cent data cent Per USA 27% 10 CAN 15%

0 JPN 11% 2002 2003 2004 2005 2006 2007

Source: IDATE / industry data / Ofcom

5.3.4.9 Revenue per outgoing call minute falls fastest in Germany

Average mobile revenue per outgoing voice minute, calculated from outgoing mobile call revenue and volume data, fell by an average 32% across our comparator countries between 2002 and 2007 (Figure 5.62). The largest decline was in Germany, falling by nearly half to 18p per minute due to the popularity of discount value brands and homezone tariffs; the latter enables mobile users to make calls at a lower price or at no cost if they are within the vicinity of their home and is intended to encourage fixed to mobile substitution within the home.

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The lowest revenue per minute was in Italy at 8p in 2007, falling from 14p in 2002. As there are no handset subsidies in Italy, operators do not have to factor the repayment of handsets into their prices, resulting in lower prices per minute, and the arrival of several new low-cost MVNOs in 2007 has led to further price reductions.

Figure 5.62 Average mobile revenue per outgoing voice call minute, 2002 to 2007

CAGR

40 UK -5%

-6% 30 FRA -12% GER 20 -3% ITA -5% Pence per minute 10 JPN -7%

ESP 0 -7% 2002 2003 2004 2005 2006 2007

Source: IDATE / industry data / Ofcom

5.3.4.10 3G coverage population coverage highest in Japan

Japan deployed the first 3G service in 2001, several years before any other market, and this early launch, combined with its relatively dense population, meant that it was the only country in our analysis to have reached 100% penetration by 2007. At 92% (Figure 5.63), the UK had the highest level of 3G population coverage of any of the larger European markets, reflecting the regulatory requirements of the UK’s 3G licences, a high level of demand from consumers, and competition between mobile operators to roll-out advanced mobile services.

The lowest level of 3G coverage was in France, reflecting the low population density and large land mass, combined with lower regulatory requirements for 3G coverage (70% at the end of 2007 compared to 80% in the UK). The high level of 2G coverage in comparison to 3G in all the countries in this analysis (with the exception of Japan) is consistent with 2G services being present in these markets for over ten years, together with the lower costs of 2G network deployment, which typically requires fewer base stations to serve a specific geographical area.

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Figure 5.63 Mobile availability, by technology: 2007

100 99 99 100 98 100100 100 92 95 80 78 78 78 80 70

60 2G

40 3G

20 Percentage of population

0 UK FRA GER ITA USA CAN JPN

Source: IDATE / industry data / Ofcom

5.3.5 Internet and broadband 5.3.5.1 High availability of DSL broadband in major European countries

DSL broadband (delivered over ordinary copper-based phone lines) is available to over 90% the population in all of the larger European countries covered by this report, with availability highest in the UK, where nearly 100% of the population have access to DSL broadband.

Canada and the US are the only countries where cable availability matches or exceeds DSL coverage, due to the comparatively early roll-out of the platform from the 1940s onwards. But in Italy DSL has been the only broadband option, as no public cable network is in place, although fibre availability is growing. In Germany the incumbent operator Deutsche Telekom has opted for a fibre-to-the-curb (FTTC) network upgrade with VDSL in the local loop. Availability of next-generation access fibre networks was low in the UK in 2007, but Virgin Media is in the process of upgrading much of its cable network to offer speeds of up to 50Mbit/s to 9 million premises in 2009, while BT has announced plans to roll out fibre-based broadband to up to 10 million homes by 2012, predominantly based on fibre-to-the-cabinet (FTTC). More detail on the roll-out of next-generation access networks is provided in Section 5.1.5.

Figure 5.64 Broadband availability by platform: 2007

100 98 100 96 94 96 89 89 82 80 DSL 60 49 47 Cable 40 FTTH 26 20 Percentage of population 8 7 0 2 0 0 0 0 UK FRA GER ITA USA CAN

Source: IDATE / industry data / Ofcom

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5.3.5.2 Speed of migration from broadband to narrowband varies across Europe

The European Commission’s annual E-Communications Household Survey, undertaken towards the end of 2006 and 2007, shows that levels of broadband use vary widely among internet households in the EU countries covered in this report. Over 90% of internet users in France and the Netherlands used broadband in 2007, compared to 58% in Italy and less than 25% in Ireland.

Interestingly, the proportion of internet connections using broadband in Poland was higher than in both Italy and Germany, largely due to a significant and established base of broadband cable connections. It should be noted that due to the small sample sizes used in most of the countries covered in the research for the report, the figures should be treated as indicative only.

Figure 5.65 Proportion of home internet connections that are broadband: Q4 2007

100 93 A 90 91 85 83 78 81 81 80 72 74 66 64 61 58 60 53 2006 42 39 40 2007 23 20

Percentage of internet connections 0 UK FRA GER ITA POL ESP NED SWE IRL

Source: European Commission E-Communications Household Survey published April 2007 and June 2008, fieldwork conducted Q4 2006 and Q4 2007 by TNS Opinion and Social network Note: Excludes connections classed ‘other’ and responses from consumers who were unsure of their connection type. Figures should be treated with caution due to small sample sizes in some countries.

5.3.5.3 UK, Germany and Poland have the lowest revenue per broadband connection

Revenue per broadband connection fell in all our comparator countries except Japan, between 2002 and 2007. The largest percentage drop over the five-year period was 63% in Ireland, driven largely by increased competition, stimulated by the wholesale broadband providers. There is much less variation between the countries in 2007 than in 2002, because by then broadband had reached the mass market in all countries.

The low revenue per connection in the UK and Germany is the result of the downward pressure on pricing created by competition between platforms (cable and DSL) and competition between alternative network operators and the incumbent, both a result of relatively lightly-regulated wholesale line rental pricing, and the proliferation of local loop unbundling. Low revenue per connection in Poland is also partly driven by relatively low GDP per head.

Japan, which in 2002 had the lowest revenue per broadband connection, is the only country where revenue has increased. The main drivers behind this rise are the shift in users from DSL broadband to fibre, and the use of more advanced multimedia and entertainment services.

241 The International Communications Market 2008

Figure 5.66 Average revenue per broadband connection: 2002 and 2007

60 56

50

39 39 40 34 33 29 2002 30 27 23 22 21 21 20 21 21 21 2007 £ per£ month 19 19 20 17 16 15 15 14 15 12 10

0 UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRL -15% -15% -1% -12% -2% 2% 12%-7% -5% -8% -11% -18% Source: IDATE / industry data / Ofcom

5.3.5.4 France doubles number of public WiFi hotspots

We can judge the level of public wireless (WiFi) hotspots in different countries by comparing the number of hotspots per 100,000 population. The average number of hotspots across the nations where data are available was 16 per 100,000 at the end of 2007. The number of hotspots has more than doubled in France since 2006. In addition to the launch of a free public WiFi network in Paris in July 2007 with an initial 400 hotspots, fixed-line operators have expanded the number of hotspots by enabling their own users to access the home WiFi gateways of other customers subscribing to the same broadband provider.

Figure 5.67 Public wireless hotspots per 100,000 population, 2002 and 2007

40 36

30 30 28

21 2006 20 18 17 16 12 12 11 11 2007 9 9 10 10 8 6 Hotspots per 100 population 0 UK FRA GER USA ESP NED SWE IRL

Source: IDATE / industry data / Ofcom

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The International Communications Market 2008

6 6 Radio

243 The International Communications Market 2008

Contents

6.1 Radio market developments 245 6.1.1 The popularity of radio varies substantially by country 246 6.1.2 Radio listening over the web is most popular in the UK, France, Germany and Italy 247 6.1.3 Subscription-based satellite radio take-up approaching 20 million in the US and Canada - and is scheduled to launch in Italy by late 2009 251 6.1.4 Digital radio – following trials, launch plans are developing 252 6.2 The radio industry 255 6.2.1 Introduction 255 6.2.2 Global radio revenue 255 6.2.3 Revenues by nation 256 6.2.4 Radio’s share of total advertising spend 260 6.3 The radio listener 261 6.3.1 Station availability 261 6.3.2 Radio listening 262 6.3.3 PSB radio’s share of hours highest in Sweden, the UK, and Germany 263

244

6.1 Radio market developments

This section describes developments in the radio markets of the UK, France, Germany, Italy, the US, Japan and Canada: First, we report the results of Ofcom consumer research into the impact of digital platforms on patterns of radio listening. This is followed by a review of developments in digital radio standards, by country.

Figure 6.1 Key radio market indicators: 2007

UK France Germany Italy USA Canada Japan

Total industry revenue £1.3bn £1.1bn £2.3bn £0.9bn £10.6bn £0.8bn £1.7bn

Revenues per capita £21 £17 £28 £15 £35 £26 £13

% public funding 56% 57% 79% 54% 0.7% 19% 58%

Number of licensed stations 510 886 278 202 14,124 1,252 368

Number of digital stations 172 48 107 73 2,100 313 29

Listening per head per day 177 mins 171 mins 186 mins 180 mins 159 mins 157 mins 128 mins

Public radio listening share 55% 26% 49% 24% n/a 12% 15%

Source: Ofcom, IDATE Note: Digital stations also includes trial stations in countries where a full service has yet to be launched.

 Radio listening over the internet is highest in France with over a third (37%) using the web for this purpose. In Italy, the UK, and Germany around a third of internet users have listened online, compared to a quarter of internet users in the US and Canada. In Japan this is lower with only 17% of internet users claiming to have listened to live radio online.

 Over a third of listeners in Canada, the US, Italy, and in the UK claim to download audio (e.g. music tracks and podcasts). But downloads are less popular with people in Germany, with just one in five making the same claim.

 Of the seven large comparator countries surveyed, on average almost one in four people (23%) said they were listening to less radio, and around 13% said they were listening to more radio, since getting access to the internet at home. Within the nations, a third of people in Japan and France said they listened to less radio, while one in five in Italy claimed to listen to more.

 DAB digital radio is already established in the UK and Germany, but improvements in compression technologies have brought a range of new digital radio standards into development, some of which are at a pilot stage. Trials of DMB and DAB+ are under way in a number of countries including Germany, France and Italy.

 In North America, satellite radio continues to grow in popularity, with approaching 20 million subscribers across the US and Canada. The two main subscription satellite radio providers in the US, XM and Sirius, were given the FCC go-ahead to merge in July 2008. Radio listeners in Italy may also have access to subscription-based satellite services by 2009 with a new service being planned by WorldSpace, with other European countries to follow later.

245 The International Communications Market 2008

6.1.1 The popularity of radio varies substantially by country Ofcom commissioned an international quantitative online survey of consumers in the seven larger comparator countries (the UK, France, Germany, Italy, the US, Japan and Canada) to examine the adoption of new media and its effect on media consumption habits.

6.1.1.1 People in Japan least likely to listen to radio

Levels of radio listening are traditionally lower in Japan - for example, while radio listening often peaks at breakfast time in many countries, in Japan TV holds a large proportion of the early morning audience. Our survey showed that just 38% of adults in Japan claimed to listen to the radio at least once a week, compared to 83% in Germany. Almost 80% of adults in the US and Canada also claimed to be regular radio listeners, and approximately three- quarters of people in the UK, France and Italy.

Figure 6.2 Adults regularly listening to the radio Which of the following do you regularly do (at least once a week) – listen to the radio?

100% 90% 80% 70% 60% 50% 40% 83% 79% 79% 73% 75% 72% 30% 20% 38% 10% % to adultslistening theradio 0% UK FRA GER ITA USA CAN JPN Source: Ofcom Understanding International Communications Behaviour research, October 2008 Base: all adults aged 18+ who use the internet (UK 1001, France 1000, Germany 1002, Italy 1003, USA 1010, Canada 1000, Japan, 1003)

The expanding range of distribution platforms available to consumers has begun to have an impact on the allocation of media time between a range of competing activities; one approach adopted by some consumers has been the concurrent use of two or more media. Many households now access multimedia services such as TV, radio and the internet at the same time. Almost one in four respondents in Italy and the UK claimed to have listened to the radio while also having a television set on in the home, and around one in five people in the US, France and Canada had tried this. The proportions were slightly lower in Germany (16%) and Japan (13%) Figure 6.3.

246

Figure 6.3 Do you ever watch TV and listen to a radio station?

% adults listening to the radio & watching TV, at least sometimes

30%

20%

23% 24% 20% 21% 10% 18% 16% 13%

0% UK FRA GER ITA USA CAN JPN Source: Ofcom Understanding International Communications Behaviour research, October 2008 Base: all adults aged 18+ who use the internet (UK 1001, France 1000, Germany 1002, Italy 1003, USA 1010, Canada 1000, Japan, 1003)

6.1.2 Radio listening over the web is most popular in the UK, France, Germany and Italy Advances in digital distribution technologies are reshaping the way in which consumers access and listen to services that were traditionally delivered using analogue transmission formats. These include digital broadcast radio and distribution of audio over the internet.

In the UK, with one of the most established broadcast digital radio markets, 34% of respondents claimed they “owned and personally used” a digital radio, up by 8 percentage points year-on-year. In North America, growing take-up of satellite radio and the more recent development of the terrestrial digital radio standard, HD Radio, have increased access to digital radio services. DAB radio is also available in major cities in Canada where 14% of listeners claimed to own some form of digital radio device, compared to 12% in the US. In Japan digital radio set ownership was lowest (7%) which may be explained by the fact that there are proportionally fewer digital radio stations available (Figure 6.4).

247 The International Communications Market 2008

Figure 6.4 Devices owned and personally used: digital radio set Devices owned and personally used; A digital radio set that gives you access to a wider range of stations than a traditional radio set

2007 +8 +5 +2 -1 +1 0 +2 40% percentage point change

30%

20% 34% 32%

10% 21% 15% 12% 14% 7% 0% UK FRA GER ITA USA CAN JPN Source: Ofcom Understanding International Communications Behaviour research, October 2008 Base: all adults aged 18+ who use the internet (UK 1001, France 1000, Germany 1002, Italy 1003, USA 1010, Canada 1000, Japan, 1003) Note: It is possible that respondents in countries where digital radio is yet to be fully launched may have interpreted the term ‘digital radio’ to mean any radio with a digital display.

Use of the web to access radio and audio content is becoming increasingly widespread, aided by the increasing levels of broadband take-up and the growing range of online audio sites and services being offered to users.

Listening online was most popular in France, where 37% of adults said they used their internet connection at home for this purpose. Around a third of internet users in Germany, Italy and the UK were listening online, with around one in four adults in the US and Canada. However in Japan less than one in five claimed to use the internet for this purpose, reflecting the traditionally lower levels of radio listening in Japan (Figure 6.5).

Figure 6.5 Use of home internet for radio listening For which of the following do you use your home internet connection for; listening to the radio?

40%

30%

20% 37% 34% 33% 31% 26% 27% 10% 17%

0% UK FRA GER ITA USA CAN JPN

Source: Ofcom Understanding International Communications Behaviour research, October 2008 Base: all adults aged 18+ who use the internet (UK 1001, France 1000, Germany 1002, Italy 1003, USA 1010, Canada 1000, Japan, 1003) New and more convenient ways of accessing audio content, such as on-demand audio delivered through downloads and podcasts, are already popular with many consumers, helped in part by the growing take-up of broadband. People in Canada and Italy were the

248

most likely to claim that they accessed podcasts or downloaded audio (around 40% of our respondents). In the US and the UK over a third of adults had tried it (36% and 35% respectively), with a slightly lower propensity among people in Japan and France (31% and 27%). People in Germany were the least likely to access audio on demand through a download/podcast – with less than one in five having tried this. (Figure 6.6). Figure 6.6 Home internet use for downloading audio content For which of the following do you use your home internet connection for; listening to or downloading audio content, such as music tracks or podcasts?

40%

30%

20% 39% 40% 35% 36% 31% 27% 10% 18%

0% UK FRA GER ITA USA CAN JPN

Source: Ofcom Understanding International Communications Behaviour research, October 2008 Base: all adults aged 18+ who use the internet (UK 1001, France 1000, Germany 1002, Italy 1003, USA 1010, Canada 1000, Japan, 1003)

6.1.2.1 The impact of the internet on traditional broadcast radio listening

Access to the internet has for many people resulted in less time spent listening to traditional broadcast radio. However, in all countries a significant number of respondents claimed to spend more time listening to radio since acquiring internet access. Of the seven large comparator countries surveyed, on average almost one in four people (23%) said they were listening to less radio, while about 13% claimed to be listening to more.

Within the nations, listening in Japan and France appears to have been most affected by internet access; around a third of people claimed they were listening to less radio since acquiring the internet, while in the UK, Germany, Italy, the US and Canada, the proportion was about one in five. But other respondents claimed that access to the internet at home has had a positive impact on their radio listening – partly because audio lends itself to concurrent activities such as surfing the web. Almost one in five Italian people (18%) said their radio listening had risen since getting the internet, with slightly fewer people in the UK, France, Germany and the US making the same claim (Figure 6.7).

249 The International Communications Market 2008

Figure 6.7 Change in off-line radio listening since first using internet Since you started using the internet, which, if any, of the following activities do you believe you undertake more or less often OFFLINE? Listening to radio (%)

Net % of respondents 4% 16% 10% 2% 4% 7% 27% listening to less radio Less No change More

100% 6% 16% 15% 13% 18% 14% 11% 80%

61% 60% 54% 63% 65% 63% 68% 71% 40%

20% 31% 33% 20% 23% 20% 18% 18% 0% UK FRA GER ITA USA CAN JPN

Source: Ofcom Understanding International Communications Behaviour research, October 2008 Base: all adults aged 18+ who use the internet (UK 1001, France 1000, Germany 1002, Italy 1003, USA 1010, Canada 1000, Japan, 1003) Mobile phone handsets often incorporate audio technologies such as analogue radio tuners and MP3 players. Listening to MP3 tracks using a mobile phone had been tried by around one in four mobile users in the larger Western European countries in our survey. One in five Japanese mobile users had done the same. But people in the US and Canada were less likely to have listened to MP3 tracks on a mobile handset (14% and 12% respectively). Listening to podcasts via a mobile phone remains a relatively niche activity; with a maximum of just 3% of mobile users claimed to have done this across the nations surveyed.

One in five Italian mobile users had listened to the radio using their mobile handset. In the UK 16% had used this feature, followed by 13% in both France and Germany. Radio listening via a mobile platform was less popular in Japan (8%), and lower still in Canada (4%) and the US (3%) (Figure 6.8).

250

Figure 6.8 Mobile audio service use Which of the following activities do you use your mobile for: FM radio, MP3, podcasts?

Proportion of mobile users (%)

30%

20% FM radio

28% MP3 25% 26% 22% 10% 21% 20% 16% 14% Podcasts 13% 13% 12% 3% 3% 3% 2% 2% 8% 1% 1% 3% 4% 0% UK FRA GER ITA USA CAN JPN Source: Ofcom Understanding International Communications Behaviour research, October 2008 Base: all adults aged 18+ who use the internet (UK 1001, France 1000, Germany 1002, Italy 1003, USA 1010, Canada 1000, Japan, 1003)

6.1.3 Subscription-based satellite radio take-up approaching 20 million in the US and Canada - and is scheduled to launch in Italy by late 2009 The merger of the two US satellite operators XM and Sirius, first proposed in 2007, was approved by the FCC in July 2008, creating a business valued at around £1.9bn and with approaching 19 million subscribers across the US. As part of the agreement with the FCC, subscribers will be able to select smaller, cheaper packages of stations in the future. Whilst 8% of broadcast capacity (equivalent to 24 channels) will be allocated for non-commercial and minority programming.

The popularity of satellite radio in the US has been boosted by increasing take-up among commercial premises such as retail outlets, hotels and restaurants as well as among motorists, particularly commercial drivers, who value the ability to receive the same stations nationwide. A growing number of car manufacturers are now offering satellite radio as an option.

Sirius/XM differentiates its offer from free-to-listen radio by offering services that do not carry advertisements, as well as by covering major sporting events and by signing up exclusive shows hosted by high-profile presenters (such as Howard Stern and Oprah Winfrey). Sirius/XM plans to develop a larger in-home presence with the development of a range of portable satellite receivers, as well as equipment which can enable hifi equipment and PCs to receive satellite radio.

Both operators launched in Canada in 2005, following approval by the Canadian Radio- Television and Telecommunications Commission (CRTC). By November 2008 they had a combined subscriber base of over 1.2 million. The satellite operators in Canada are separate entities from their US counterparts, with majority ownership by Canadian companies, and also broadcast Canadian-produced content alongside the US service line-up.

Outside North America, WorldSpace satellite radio covers Asia and Africa, with two satellites that cover an estimated two-thirds of the world’s population. By Q2 2007 WorldSpace had nearly 200,000 subscribers, the majority of whom were in India. A third satellite will launch in 2008 that will extend the service’s coverage into Western Europe. The company plans to launch a service in Italy offering 40-50 channels by late 2009, with other European and

251 The International Communications Market 2008

Middle East countries to follow including Germany, Switzerland, Bahrain and the United Arab Emirates.

6.1.4 Digital radio – following trials launch plans are developing 6.1.4.1 A growing number of digital radio standards are in development

In Europe digital radio service development has been based principally around the DAB (Digital Audio Broadcasting) Eureka 147 standard. This was first developed in Germany and transmissions began there in 1988; the first national DAB radio service was launched in the UK in 1995. More recently, the DAB+ and DMB standards have been trialled in a number of countries including Germany, Italy and France.

Work on improving the Eureka 147 standard has focused on exploiting improvements in compression techniques, to accommodate more data and a wider range of services such as video. The result is that DAB has been joined by DAB+ (using higher-quality ‘MPEG Audio Layer 4’ technology) and DMB (Digital Multimedia Broadcasting) which accommodates video services. These variants are coordinated by the World DMB (Digital Multimedia Broadcasting) Forum. Countries which have not yet rolled out Eureka 147 services may launch using one of these new variants rather than the original version of DAB. In autumn 2008 WorldDMB in conjunction with the European Broadcast Union announced a new receiver profile, with the aim to encourage the production of standard receivers which will work with all Eureka 147 variants. The new multiple receivers should become available from manufacturers during 2009.

Looking ahead, a number of countries are trialling new digital radio standards:

 In Germany the coming year will see further digital radio developments, with two new digital radio national multiplexes launching using DAB. A coordinated promotional programme, led by PSBs and commercial radio broadcasters, is also planned. T- DMB was launched in June 2006 in time for the FIFA world cup, offering five TV channels and one visual radio channel. T-DMB mobile handsets also incorporate a DAB receiver which currently provides access to around 50 DAB stations. DVB-H is also to be launched in 2008 across various German cities by broadcaster MFD and partners.

 The Groupement Radio Numerique (Digital Radio Group) in France has been lobbying for digital radio using T-DMB to be licensed in 2008. The development of DVB-T networks is also being considered, with DVB-H networks proposed for the future. There are plans to licence multiplexes using DMB during 2009, with services expected on air by the end of that year. Trials of DAB+ and T-DMB are currently under way in Paris and Nantes.

 The Italian broadcasters are also considering a similar model; using both DAB+ and T-DMB concurrently. The Italian public broadcaster, RAI, plans to launch DAB+ to provide a service which will include visual radio channels, while T-DMB services will provide audio channels as well as TV and data services. DVB-H was launched in Italy in 2006, but take-up has so far been relatively slow.

 DAB sales in the UK were over 7.5 million by November 2008, with home ownership at almost 30%. Around 90% of the UK population now live in areas covered by both the public BBC and commercial Digital One multiplexes, following the addition of further transmitters over the past year.

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 Ireland is said to be likely to launch DAB services in the next year, following trials by RTE. By summer 2008 around 44% of the country was covered by the DAB trials, with around 23 stations available, 11 of which were digital-only stations. The Netherlands is planning to auction two national DAB licences by the end of 2008, with a further two DAB multiplexes to follow in 2009. There is currently around 70% outdoor coverage of the country. T-DMB and DVB-H are also being considered for mobile TV services, while a target for analogue switch-off for radio may be proposed for 2015.

 In Japan, the ISDB-T (Integrated Services Digital Broadcasting-Terrestrial) standard was launched in December 2003 by public broadcaster NHK alongside the commercial TV and radio operators. The ISDB-T standard is similar to DVB-T but is designed to carry services for both handheld and portable devices, as well as TV sets. Coverage in Japan is around 84%; over 7 million receivers had been sold by 2007. The expansion of digital radio services in Japan may, however, depend on digital television switchover, which is set to be completed by 2011. A standard based on ISDB-T is also now in use in Brazil and is also being trialled in a number of other South American countries.

 In the US satellite-based digital radio arrived in the late 1990s, followed by the terrestrial HD (Hybrid Digital) radio standard in 2002. HD radio technology can be used by AM and FM radio stations to digitally transmit audio and data in conjunction with their analogue signals. Around 1,800 stations, covering approximately 84% of the US, were broadcasting with HD by October 2008. HD receivers are now available for around $100; initially, manufacturers focused on developing models for vehicles and in-home hi fi, but are now also developing portable models. The Corporation for Public Broadcasting (CPB) allocated almost £24m in 2007 for the digital upgrading of over 600 public content radio stations, with over 300 public stations currently broadcasting via an HD signal in the US.

 In Canada, apart from satellite radio, other digital radio standards in use include DAB and HD radio. DAB coverage is currently around 35% of the population, covering Montreal, Ottawa, Toronto and Vancouver. T-DMB trials have also taken place in Canada this year in the Montreal area.

 Another standard Digital Radio Mondiale (DRM) was designed to use the AM spectrum and is therefore capable of providing digital services to a wider coverage area. DRM was first trialled in Geneva, Switzerland in 2003. DRM has also been trialled in a number of countries including Russia and China where it could offer a solution in providing services to larger and more dispersed populations.

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6.2 The radio industry

6.2.1 Introduction This section examines the revenues generated by the commercial radio sectors in each nation along with the levels of public funding that are available. Our main findings are that:

 Total world radio revenues reached £23.6bn in 2007, up by £0.3bn on last year. The seven countries considered in this chapter (the UK, France, Germany, Italy, the US, Canada and Japan) accounted for around £19bn, or 79% of the total.

 The US radio market generated around £10.6bn, equivalent to a 45% share of the global radio market; the UK industry generated £1.3bn, equivalent to approximately 5% of the world total, and up by £30m on 2006.

 Canada and Italy have the two fastest-growing markets of the seven countries profiled, although starting from lower revenue bases. Canada has seen revenue growth of 24% over the past four years, averaging 6.0% per year. The Italian market expanded by 21% over the same period (5.2% per year).

 Some radio markets experienced a fall in advertising revenues during 2007 as economic uncertainties impacted on advertising budgets. In the US, radio advertising revenue fell by 5.1%; in France it declined by 2.1% and by 3.8% in Japan.

6.2.2 Global radio revenue 6.2.2.1 Radio revenue worldwide rose in 2007, with reductions in advertiser revenue in some countries offset by rapid growth in developing nations, alongside new subscription revenue streams and an increase in public funding

Global radio industry revenue rose by 1.4% or £0.3bn to £23.6bn in 2007, this was however lower than the growth rate over the previous three years when annualised growth averaged 4.2% (Figure 6.9). Commercial revenue (principally advertising and sponsorship but also some subscriber revenue) accounted for around 74% (£17.7) of the total, up by 1.1% or £0.2bn year-on-year. This was partly fuelled by revenue growth in developing radio markets and by the growing popularity of subscription-based satellite radio services in the US and Canada; subscription radio revenues rose by around 40% in the year from £0.9bn in 2006 to almost £1.3bn in 2007. The BRIC nations saw revenues increase by 19% in the year, up by £0.1bn. This growth helped to offset a fall in advertising revenues in a number of the more established radio markets such as those of the US, France and Japan.

Public funding accounted for the remaining 26% (£6.1bn) of all radio funding in 2007 and rose by £0.1bn or 2.3% year-on-year. This was lower than the average annualised growth of 2.9% over the past four years.

255 The International Communications Market 2008

Figure 6.9 Global radio industry revenues, 2003 - 2007

Annual 3.7% 4.8% 4.1% 4.2% 1.4% growth (%)

Revenue (£bn) £23.3bn £23.6bn £25bn £22.4bn £21.5bn £20.5bn Total £20bn £16.2bn £16.6bn £16.4bn £15.2bn £15.8bn £15bn Commercial revenue

£10bn £5.3bn £5.5bn £5.7bn £5.8bn £6.1bn Public funding £5bn £0.1bn £0.2bn £0.9bn £1.3bn £0.5bn Satellite radio £0bn subscription 2003 2004 2005 2006 2007

Source: Ofcom analysis based on data taken from PricewaterhouseCoopers Global Entertainment and Media Outlook 2008-2012, with additional public radio data from CRTC and CPB Note: Ofcom has used an exchange rate of $2.001 to the pound. Interpretation of data is solely Ofcom’s responsibility

6.2.3 Revenues by nation 6.2.3.1 Advertiser spend on radio fell in some larger radio markets in 2007

The US radio market is the largest in the world, with 2007 revenues totalling £10.6bn, accounting for almost 45% of the worldwide total. Radio advertising spend in the US alone accounted for 57% of the global total (£9.3bn). However, this was down £0.2bn year-on- year, with advertising revenues 5% lower in 2007. The German market, the second largest, grew by £36m in 2007 to £2.3bn, driven by an increase in advertising revenues, up 6.7%.

Among the remaining nations, the Canadian sector was up by around £77m in 2007, aided by growth in both advertising and subscription revenues. Italy was the fastest growing European market, up by £44m, following an increase in both advertising revenues and public funding. The UK market expanded by £31m to reach £1.3bn in 2007, due to a rise in public funding from the licence fee. The Japanese and French markets both contracted slightly year-on-year, down by £12m and £3m, to £1.7bn and £1.1bn respectively (Figure 6.10).

256

Figure 6.10 Radio industry revenue, 2007

Change + £31m - £3m + £36m + £44m - £159m + £77m - £12m on 2006

) £3bn £10.6bn

£2bn

£2.3bn £1bn £1.7bn £1.3bn £1.1bn £0.9bn £0.8bn

2007 radio revenues (£bn revenues 2007 radio £0bn UK FRA GER ITA USA CAN JAP

Source: Ofcom analysis based on data taken from PricewaterhouseCoopers Global Entertainment and Media Outlook 2008-2012, with additional public radio data from CRTC and CPB Note: Ofcom has used an exchange rate of $2.001 to the pound. Interpretation of data is solely Ofcom’s responsibility

6.2.3.2 The Canadian and Italian radio markets were the fastest growing in 2007

The Canadian market has expanded rapidly since 2003, with revenue rising by almost 6.0% per year on average - revenues in 2007 were up by 10.1% on the previous year. Growth in Canadian radio has previously been driven by rising advertising revenue, but in the past year growing take-up of subscription-based satellite radio has also played a major part.

Historically, levels of radio listening in Italy have been lower than in the other countries. Despite this, spend on radio advertising in Italy grew fastest among the larger comparator European countries over the last four years, with average growth of 5.2% per year.

The US market has grown by 10.0% from four years previously in 2003, but contracted year- on-year by 1.5% amid reduced advertiser revenue. The German market has also expanded, up by 10.1% over the past four years, and was up by 1.6% in 2007. The markets in the UK (6.7%), France (6.9%), and Japan (5.3%) have all shown growth since 2003, but in the last 12 months, their fortunes were more mixed - France and Japan saw a fall of -0.3% and - 0.7% respectively in 2007, while overall funding in the UK market grew by 2.5% (Figure 6.11).

257 The International Communications Market 2008

Figure 6.11 Radio industry revenue growth, 2006 - 2007

Average four year growth annualised 1.7% 1.7% 2.5% 5.2% 2.5% 6.0% 1.3%

10%

5% 10.1%

5.2% 2.5% -0.3% 1.6% -1.5% -0.7% 0%

UK FRA GER ITA USA CAN JAP Annual growth rate in 2007 % in 2007 growth rate Annual -5%

Source: Ofcom analysis based on data taken from PricewaterhouseCoopers Global Entertainment and Media Outlook 2008-2012, with additional public radio data from CRTC and CPB Note: Ofcom has used an exchange rate of $2.001 to the pound. Interpretation of data is solely Ofcom’s responsibility

6.2.3.3 Germany has the highest level of public funding, North American markets the lowest

Of the seven markets reviewed in this report, the majority of revenue in five countries – the UK, France, Germany, Italy and Japan - comes from a public funding source. The German market benefits from the highest proportion of public funding, with £1.8bn or 79% of the total coming from the German license fee (to fund ARD’s public service broadcasting stations for the country’s 16 regions). In Japan, 58% of industry revenue comes from a licence fee which is used to fund NHK’s radio networks; in France the equivalent figure is 57% (to support Radio France). In the UK, 55% of radio industry revenue comes from the licence fee (to fund the BBC’s network of radio stations) while in Italy, RAI’s radio networks are also funded from the licence fee and in total account for a similar 54% of industry revenue.

Public funding plays a much smaller role in the US. In 2007 around £50m of federal funding was allocated by the Corporation of Public Broadcasting (CPB) for public radio services, while the National Public Radio (NPR) organisation spent around £76m on public programming and distribution. This equates to around 0.7% of all US radio revenue; the vast majority (almost £9.3bn or around 88% of the total) coming from advertiser spend, with satellite subscriptions accounting for the remaining 11% (£1.2bn – up by 36% year-on-year). In Canada, public funding accounted for around 19% of industry revenue, with CBC Radio Canada spending around £161m on radio services. Advertising revenue reached £628m in 2007 (74%), while subscription revenue from satellite radio increased to £58m (7% of total revenues in 2007), up from £12m in 2006 (Figure 6.12).

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Figure 6.12 Proportion of radio industry revenue, by source Proportion of total revenue (%) 100% £1,204m £58m 80% £76m £161m £693m £614m £480m £974m Subscription 60% £1,812m

£9,346m 40% Public £628m funding 20% £570m £458m £403m £712m Advertising £496m 0% UK FRA GER ITA USA CAN JAP

Source: Ofcom analysis based on data taken from PricewaterhouseCoopers Global Entertainment and Media Outlook 2008-2012, with additional public radio data from CRTC and CPB Note: Ofcom has used an exchange rate of $2.001 to the pound. Interpretation of data is solely Ofcom’s responsibility

6.2.3.4 US and German radio markets generate the highest revenues per capita

The US and German markets are the largest in terms of total revenues generated and are also the largest in terms of revenue per head of population. The US radio market generated around £35 per person in 2007, followed by £28 per person in Germany. The Canadian market generated the third highest revenues per head, at £26. The UK ranked fourth, with revenue of £21 per head, followed by France (£17) and Italy (£15). The Japanese market generated a slightly lower figure (£13).

Figure 6.13 Radio industry revenues, per head Industry revenue per capita (£) £21 £17 £28 £15 £35 £26 £13 Total revenues per head £50

£40 £4 £30 £0.3 £2 Subscription £5 £20 Public funding £22 £11 £31 £10 £10 £8 £19 £8 Advertising £9 £7 £6 £7 £6 £0 UK FRA GER ITA US CAN JAP

Source: Ofcom analysis based on data taken from PricewaterhouseCoopers Global Entertainment and Media Outlook 2008-2012, with additional public radio data from CRTC and CPB Note: Ofcom has used an exchange rate of $2.001 to the pound. Population figures used in this calculation can be found in the country profiles. Interpretation of data is solely Ofcom’s responsibility. Figures in chart are rounded.

259 The International Communications Market 2008

6.2.4 Radio’s share of total advertising spend 6.2.4.1 Radio has larger role in advertising in North America

The radio share of all advertising spend can vary significantly by country. In Canada advertisers allocated the greatest proportion of display advertising to radio. Spend on radio accounted for 12.2% of total ad spend in 2007, also similar to share in 2006. The US market has the second highest share, with radio accounting for 9.4% of all advertising; this was, however, down from 9.9% in 2006. The North American radio markets have a lower level of public funding however when compared to the European countries. Public funding accounted for less than 1% of radio income in the US and around 19% of radio revenue in Canada.

The German radio market attracts the highest level of public investment, at around 79%, while radio has a 4.2% share of all advertising. The radio market in France had a higher than average share of advertising (6.1%), but a similar ratio of public funding to other European countries (57%). The UK is similar to Japan both in its public funding level (55% and 58% respectively) and overall ad spend (3.9% and 3.8% respectively).

Figure 6.14 Radio advertising as a proportion of total advertising spend and levels of public funding in 2007 Public funding share of radio income (%)

100% Germany 80% Japan France 60% UK Italy

40% CAN 20% USA 0% 0% 2% 4% 6% 8% 10% 12% 14%

Radio as a proportion of total advertising expenditure (%)

Source: Ofcom analysis based on data taken from PricewaterhouseCoopers Global Entertainment and Media Outlook 2008-2012, with additional public radio data from CRTC and CPB Note: Ofcom has used an exchange rate of $2.001 to the pound. Interpretation of data is solely Ofcom’s responsibility

260

6.3 The radio listener

This section examines patterns of radio listening across the comparator countries including; the numbers of stations available, time spent listening to radio, and the listening share of the public and commercial operators. The main findings are that:

 Listeners in the US and Canada benefit from the highest number of stations per head, with an average of 47 stations per million people in the US and almost 38 stations per million in Canada. This compares to around three stations per million people in Italy, Germany and Japan. In the UK there are around eight stations per million.

 Radio listening is highest in Poland and Ireland with individuals spending 4.8 and 4.2 hours per day respectively listening to the radio. Listening in Spain and Japan was lowest among our comparator countries, at 1.8 and 2.1 hours per day respectively; while UK listening ranked fifth with 2.9 hours per person per day.

 Public service radio stations’ share of listening varies across our comparator countries. It is highest in Sweden, where Swedish Radio (SR) commands a 62% share of all listening. In the UK, the BBC attracted a 55% share in 2007 while ARD’s radio network in Germany enjoyed a 49% share. By comparison, Spain’s national public network, RNE (Radio Nacional de Espana) accounted for 7% of all listener hours in 2007. In Canada public radio share is around 12%, while public programming is estimated to account for less than an estimated 5% of listening in the US.

6.3.1 Station availability 6.3.1.1 US and Canadian listeners have access to the highest number of stations per head

Radio markets in North America are well developed in the sense that they attract higher levels of revenue per capita; they also offer the highest number of stations per head of population. In the US there are an estimated 14,000 licensed operators, equating to around 47 stations per million of population; in Canada there are around 1,250 stations, equating to almost 38 stations per million people. In France there were 13.9 stations per million and 8.4 per million in the UK. Listeners in Germany and Italy have access to around 3.5 stations per million people. In Japan there were 368 stations on air – almost 3 stations per million people (Figure 6.15).

It is worth noting that the number of stations in a country does not always equate to station choice; the figures below do not indicate station coverage in terms of population reached. In the US, for example, there are no nationally available terrestrial radio networks (although satellite services cover the whole country).

261 The International Communications Market 2008

Figure 6.15 Number of broadcast-based local and national radio stations, per head Radio stations per million people Number of AM/FM stations by country

510 886 278 202 14,124 1,252 368 50

40

30 46.9 20 37.5

10 13.9 3.4 3.5 2.9 8.4 0 UK France Germany Italy USA Canada Japan

Source: IDATE, Ofcom

The number of digital stations broadcasting in Europe has risen in the past year across a variety of digital formats, with a number of trial stations currently being aired using DMB / DAB standards. The UK currently has the highest number of digital stations available of the main European countries with over 170, followed by Germany with over a 100, whilst digital stations are also being trialled in Italy and France during 2008.

Sirius and XM in the US offer access to around 300 stations, there are also 1800 stations now broadcasting via HD radio in the US, with a further 3000 aiming to do so in the future. Canadian listeners have access to around 200 satellite radio channels through Sirius and XM, alongside 76 stations broadcasting using DAB. DAB coverage is currently mainly available to people living in Canada’s southern cities.

Figure 6.16 Radio stations available over digital radio platforms Number of radio stations available Digital radio stations 172 48 107 73 2,100 313 29 300 2,100 250

200 295 Private 150

100 129 62 Public 50 49 40 43 45 24 26 0 8 18 3 UK FRA GER ITA USA CAN JAP

Source: IDATE, Ofcom Note: Excludes internet-only stations

6.3.2 Radio listening 6.3.2.1 Time spent listening to radio varies by nation

Patterns of radio listening vary significantly from country to country. Listening is highest in Poland (33.5 hours per week) and the Republic of Ireland (29.3 hours). It is less popular in Spain and Japan (12.6 hours and 14.9 hours respectively). In the remaining comparator countries, listening typically averages around 20 hours per week (Figure 6.17).

262

Figure 6.17 Weekly listening hours: 2007

Average weekly hours, per head

35 30 25 20 33.5hrs 15 29.3hrs 20.6hrs 21.7hrs 21.0hrs 21.5hrs 10 19.9hrs 18.5hrs 18.3hrs 19.0hrs 14.9hrs 5 12.6hrs 0 UK FRA GER ITA USA CAN JPN POL ESP NED SWE IRL

Source: IDATE, Ofcom Note: Age ranges covered vary across countries

6.3.3 PSB radio’s share of hours highest in Sweden, the UK, and Germany The share of public radio listening is highest in Sweden, where Swedish Radio (SR) has an established radio presence; with commercial radio arriving in 1993. SR’s total share in 2007 stood at 62%, ahead of the BBC stations’ share in the UK at 55%’ and ARD’s radio network in Germany, at 49%. By comparison, Spain’s national public network, RNE (Radio Nacional de Espana), commands just 7% of listener hours. In Canada, CBC’s stations attracted a share of around 12% of all listener hours, while French stations from Radio-Canada (SRC) had a share of around 17% in French speaking areas.

In the US there are a substantial number of non-profit stations as well as commercial stations which carry public radio programming. According to media research from Arbitron, public radio programming reaches around 11% of the US population aged over 12 on a weekly basis. These consumers listen to around 8 hours per week of public programming. This would therefore approximately equate to around a 5% share of all radio listening hours in the US.

The National Public Radio (NPR) organisation provides public radio programme content for around 860 independent stations in the US, reaching an estimated audience of 26 million per week. Overall there are an estimated 1,700 public radio stations operating in the US, equivalent to around 12% of US stations. Of these around 700 are funded by the Corporation for Public Broadcasting (CPB) (Figure 6.18).

263 The International Communications Market 2008

Figure 6.18 Share of PSB listening, 2007 Audience share 100%

80% 38% 45% 51% 66% Commercial 74% 76% 70% 60% 85% 80% 88% 94% 40% 62% 55% 49% PSB 20% 30% 34% 26% 24% 20% 12% 15% 0% 7% UK FRA GER ITA CAN JPN POL ESP NED SWE IRE

Source: IDATE, Ofcom

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The International Communications Market 2008

7 7 Emerging Markets

265 The International Communications Market 2008

Contents

7.1 Emerging markets: Brazil, Russia, India and China 267 7.1.1 Introduction and summary 267 7.1.2 The telecoms industry in BRIC nations 268 7.1.3 Telecom revenues 272 7.1.4 The television industry in BRIC nations 275 7.1.5 Television revenues 278 7.1.6 The radio industry in BRIC nations 280

266

7.1 Emerging markets: Brazil, Russia, India and China

7.1.1 Introduction and summary This section of the report examines developments in the communications sectors of the world’s largest emerging economies, Brazil, Russia, India and China, collectively known as the BRIC nations. Together these countries account for 42% of the global population but only 14% (£120bn) of global communications industry revenue. As such they could well offer a significant growth opportunity for communications service operators in the future.

In contrast to most of the countries covered in the main section of this report, where communications markets have developed over several decades, a broad range of services have been deployed in the BRIC countries in a comparatively short period of time. Consumers have responded with rapid take-up of many of these services. While patterns of development for both the telecoms and broadcasting markets of BRIC countries differ from those in more mature markets, they also share key characteristics. For example, mobile is quickly emerging as the main method of voice telephony and, more recently, as a means of accessing internet services and email.

Some of the main points highlighted in this section include:

 Over 216 million new mobile subscriptions were added in the BRIC countries in 2007, a 17% rise on 2006 additions. The largest ever reported annual increase in new mobile connections in a country occurred in China in 2007 (88.2 million) with demand from consumers in smaller towns and rural areas driving much of this growth.

 Telecoms revenue grew by an average of 48% across the BRIC countries between 2004 and 2007, driven largely by growth in mobile services which made up over half (£53bn) of the telecoms revenue generated in the four countries in 2007.

 Take-up of mobile services has been rapid compared to fixed-line in the BRIC countries. This is particularly true in Russia, where penetration increased from 12% in 2002 to 123% in 2007, exceeding the 121% take-up in the UK.

 The average subscriber in China spends a similar proportion (24%) of total mobile spend on data services as the average UK consumer (24%). This contrasts with just 6% in India.

 Broadband penetration among the BRIC countries is low, averaging three connections per 100 population at the end of 2007, compared to 26 in the UK. Only three people in every 1000 had a fixed broadband subscription in India at the end of 2007 (just over 3 million connections); with 57.8 million people owning internet- enabled mobiles compared to 10.4 million fixed-internet subscribers27; more people are able to access the internet on their mobile than over a fixed broadband connection.

 The number of TV households grew by over 50 million in China between 2002 and 2007, compared to an increase of just 600,000 in the UK.

27 Telecom Regulatory Authority of India, Performance Indicators, Oct – Dec 2007, http://www.trai.gov.in/trai/upload/Reports/41/preport10april08.pdf

267 The International Communications Market 2008

 Since 2002 television revenue across the BRIC countries has grown by an average of 19% annually, compared to 5% in the UK. Despite having the lowest revenue of the four countries (£2.4bn), Russia’s TV industry increased fastest (32%). Growth was driven by rising income levels and the growing penetration of pay-TV, as IPTV and services from new satellite operators pushed down prices and stimulated take- up.

 The Russian radio market is the largest of the BRIC nations, with revenue of just over £300m in 2007, overtaking China, which had revenues of just under £300m. India was the fastest growing radio market from 2003 to 2007, expanding by an average of 52% per annum, albeit from a smaller base.

Figure 7.1 Key country data, 2007

Country statistics Brazil Russia India China UK

Population (m) 194 141 1,129 1,322 61

Median age 28.6 24.8 24.8 33.2 39.9

Surface area 8.5 million 17.1 million 3.3 million 9.6 million 243.6k (sq km, metres)

GDP (£bn) 657 645 585 1,639 1,363

GNI*/per capita £2,954 £3,778 £475 £1,179 £21,360

Telecoms

Total industry revenue (£bn) 23.6 13.4 10.4 49.4 26.9

Revenue per capita £122 £95 £9 £37 £443

Fixed lines per 100 population 20 32 4 28 56

Mobile connections per 100 population 63 123 21 40 121

Broadband connections per 100 population 4 4 0.3 5 26 Television

Total industry revenue (£bn) 6.4 3.6 4.7 8.1 15.3

from subscription 2.5 0.5 3.0 3.8 6.3

from public funding 0.0 0.01 0.01 0.0 3.8

from advertising 3.9 3.1 1.6 4.3 5.2

Revenue per capita £22.6 £17.2 £2.8 £4.2 £172

Largest TV platform ATT ATT ACab ATT DTT Proportion of homes 88% 55% 67% 56% 37% Radio

Total industry revenue (£m) 125 307 78 292 1,179

Revenue per capita £0.7 £2.2 £0.1 £0.2 £21 Source: The World Bank, CIA Factbook, US Census Bureau * Gross National Income

7.1.2 The telecoms industry in BRIC nations The following section considers first the growth of mobile and fixed telecommunications markets before turning to the new opportunities available to operators through broadband and mobile data services.

268

7.1.2.1 Take-up of telecom services

Growth in mobile connections accelerates in China, India and Brazil

Figure 7.2 illustrates the rapid growth in the number of mobile subscribers in the BRIC countries compared to the UK. Over 216 million new mobile subscriptions were added in the BRIC countries in 2007 (representing over one-third of new mobile connections worldwide in 200728), a 17% rise on 2006 additions. This compared with an increase of 3.8 million in the UK, and 68 million in total across the 12 countries covered within the main body of this report.

The largest ever reported annual increase in new mobile connections in a country occurred in China in 2007 at 88.2 million, more than the total number of active subscriptions in the UK at the end of 2007 (74 million). Lower call tariffs and the introduction of free incoming calls have made mobile services affordable to a greater number of low-income consumers, particularly in the small towns and rural areas of the central and western regions of China, which account for the majority of recent new subscriptions. Similarly in Brazil and India, demand from consumers based outside the main cities accounted for the majority of new connections during 2007.

Growth has slowed in Russia since its 2005 peak, as penetration of mobile services in the major cities and regions nears saturation. However, penetration levels continue to grow especially in urban areas, reaching 174 mobile connections per 100 population in Moscow at the end of August 2008 and 159 in St Petersburg29.

Figure 7.2 Mobile subscription growth: 2002 to 2007

Mobile connections 550 532

500 88 450 2007 400 69 2006 350 57 2005 300 48 250 234 Millions 61 2004 200 174 84 2003 22 150 122 27 22 74 Pre-2003 100 14 50 74 20 4 20 39 28 467 50 11 20 3 18 18 0 BRA RUS IND CHN UK

Source: IDATE/ Ofcom

28 The number of mobile subscribers increased from 2.7 billion at the end of 2006 to 3.3 billion at the end of 2007, http://www.itu.int/ITU-D/ict/statistics/ict/index.html 29Wireless Federation: http://wirelessfederation.com/news/category/mobile-penetration/

269 The International Communications Market 2008

Recent developments in the Chinese mobile market

Restructuring

The long-anticipated restructuring of China's telecom operators - announced in May 2008 by the National Development and Reform Commission (NDRC), the Ministry of Industry and Information Technology (MIIT) and the Ministry of Finance (MoF) - is now under way.

The restructuring involves a merger of the country's six state-owned mobile phone and fixed- line operators into three nationwide carriers that offer both fixed-line and mobile services. It is projected to be complete by mid-October and involves:

 China Unicom merging with China Netcom and operating under the Unicom brand;  China Telecom obtaining China Unicom's CDMA network assets;  China Mobile acquiring China Railcom; and  China Satcom selling its basic telecom services to China Telecom.

Although the impact of these changes are huge, this telecom restructuring has been expected by the industry for some time; it has been generally recognised that more competition is required, particularly in mobile telecoms, where China Mobile holds over two- thirds of subscriber market share.

Network sharing:

In a move designed to reduce infrastructure duplication, the Ministry of Industry and Information Technology (MIIT) has recently urged the country's three major telcos - China Mobile, China Unicom, and China Telecom - to share and jointly build core passive telecoms infrastructure.

All three remaining telcos face substantial network investment requirements as they move towards an integrated business platform and prepare for commercial 3G roll-out, so the infrastructure-sharing initiative will enable all three operators to reduce their capital expenditure (Capex) and operating expenditure (Opex) to some degree.

7.1.2.2 Strong fixed-line growth in Russia

The number of fixed lines in China increased by 47% between 2004 and 2007, although the rate of growth has slowed since 2006 as penetration started to saturate in residential areas, and as fixed-to-mobile substitution has accelerated. Similarly, increased use of mobile services in Brazil and India has led to a decline in the number of fixed lines. In Russia, however, high levels of mobile penetration do not appear to have diminished the national appetite for fixed-line services, which increased to 45 million in 2007, stimulated by government initiatives to introduce competition and lower tariffs.

270

Figure 7.3 Total fixed exchange lines (PSTN and ISDN): 2004 and 2007

Millions of lines 373 400 350

300 255 2004 250

200 2007 150 100 40 45 45 50 38 39 39 30 29 0 BRA RUS IND CHN UK

Source: IDATE/ Ofcom

7.1.2.3 Mobile penetration in Russia greater than in the UK

Figure 7.4 highlights the significant changes in the penetration of fixed and mobile services in the BRIC countries and in the UK over the five-year period. Mobile take-up has been more rapid than fixed-line in Russia, rising from 12% in 2002 to 123% in 2007, overtaking UK penetration at 121%.

Slower levels of mobile adoption in China and India (in comparison to Brazil and Russia) are explained partly by a significant proportion of the population on low incomes being unable to afford a mobile handset or subscribe to a mobile service. In addition, the extensive rural communities, (particularly in India where 66% of the population live in rural areas, according to the 2001 census), mean that large amounts of investment are required to roll out network coverage.

The development of fixed-line services has been particularly slow to develop in Brazil and India, where the success of mobile services, (requiring less per-capita investment per fixed line) combined with a lack of competition from the private sector against state-owned providers, gives little incentive for existing fixed-line providers to invest in improving voice quality and extending coverage.

Figure 7.4 Mobile and fixed-line penetration: 2002 and 2007

Fixed connections per 100 population 70 60 UK '02 50 UK '07 40 30 Russia '02 Russia '07 China '07 20 Brazil '07 Brazil '07 10 China '02 India '02 0 India '07 0 20 40 60 80 100 120 140

Mobile connections per 100 population

Source: IDATE/ Ofcom

271 The International Communications Market 2008

7.1.2.4 Low uptake of fixed broadband presents opportunities for mobile

Broadband penetration among the BRIC countries is low, averaging three connections per 100 population at the end of 2007, compared to 26 in the UK. Limited availability and relatively high charges have largely confined take-up to urban areas, with most providers concentrating on the more lucrative business segment. Multi-occupancy units in the large cities offer a significant opportunity for rapid take-up in the future, although this can only be realised if the fixed-line infrastructure is already in place. The potential seems particularly great in China, which at the beginning of 2008 had the world’s largest base of internet users (210 million30) but only a third of these had broadband connections.

In India a lack of fixed-line availability and low PC penetration are the main reasons why only 0.3 people in every 100 had a fixed broadband subscription at the end of 2007 (just over 3 million connections). But significantly, many more people in India are able to access the internet over their mobile than over a fixed broadband connection; 57.8 million people had internet-enabled mobile handsets at the end of 2007, according to the Telecommunications Regulatory Authority of India (TRAI), compared to 10.4 million fixed-internet connections. There are high expectations that broadband access over wireless (using WCDMA, CDMA2000 1xEV-DO and WiMAX) will be the main driver of future broadband take-up, not just in India but also in smaller cities and rural areas in Brazil, Russia and China.

Figure 7.5 Broadband connections per 100 households, 2007

Connections millions % 80 26 28

24 60 20 Broadband 16 Connections 40 12 Per 100 population

5 8 20 4 4 0 4 8 36516 0 5 0 BRA RUS IND CHN UK

Source: IDATE/ Ofcom

7.1.3 Telecom revenues 7.1.3.1 Mobile driving revenue growth

Telecoms revenue grew by an average of 48% across the BRIC countries between 2004 and 2007, driven largely by mobile services which made up over half (£53bn) of the total across the four countries in 2007. However, the contribution of mobile varies, accounting for two-thirds (66%) of revenue in Russia (reflecting its high mobile penetration) but less than one-half (44%) in Brazil (where a lack of competition in fixed and broadband services has allowed operators to charge high prices).

Broadband was the fastest growing telecoms revenue segment across the BRIC nations, up by 170% (albeit from a much smaller base than fixed or mobile). China accounted for 60% of the 2007 BRIC broadband total, followed by Brazil with 21%.

30 China had 210 million internet users at the end of 2007, compared to 215 million in the USA. Based on 2007 growth rates, China overtook the USA in late January, early February 2008. Source: China Internet Network Information Centre: http://www.cnnic.cn/uploadfiles/pdf/2008/2/29/104126.pdf

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Figure 7.6 Telecoms revenue by, service type: 2004-2007

£bn 49 50 45 40 40 39

30 25 27 Fixed 24 24 25 21 Mobile 19 20 17 Broadband 13 10 8 9 10 10 7 6 7

0 2004 2005 2006 2007 2004 2005 2006 2007 2004 2005 2006 2007 2004 2005 2006 2007 2004 2005 2006 2007 BRA RUS IND CHN UK

Source: IDATE/ Ofcom Note: Revenue excludes corporate data services and dial-up internet

7.1.3.2 Revenue per mobile connection rose in Brazil and China during 2007

Revenue per mobile connection increased in Brazil and Russia in 2007 (as it did in the UK), reflecting rising incomes and growing use of mobile services in preference to fixed-line. By contrast, falling mobile prices in both China and India have contributed to a downward revenue trend.

Revenue per broadband connection declined in three of the emerging economies with the greatest decrease in India, falling by 19% to just under £24 per month. But in China, despite reductions in monthly ADSL access fees, average revenue per user (ARPU) still rose by £0.10 as consumers migrated to higher bandwidth services to accommodate the growing appetite for data-hungry content such as video and music downloads and online gaming.

Fixed-line revenue per connection was almost static between 2002 and 2007 in Brazil, India and China, but increased slightly in Russia, reflecting growth in the adoption of fixed-line services outside the major cities where price competition is not as intensive.

273 The International Communications Market 2008

Figure 7.7 Average revenue per connection, by service type: 2006 and 2007

£ per month 35 29 30

25 24 23 23 21 21 21 2006 20 18 18 17 16 15 15 2007 10 10 7 8 7 8 6 7 7 6 6 4 5 4 5 5 5 3 2 3 0 Fixed Fixed Fixed Fixed Fixed Mobile Mobile Mobile Mobile Mobile Broadband Broadband Broadband Broadband Broadband BRA RUS IND CHN UK

Source: IDATE/ Ofcom Note: Revenue excludes corporate data services and dial-up internet

7.1.3.3 Mobile users in China spend similar proportion on mobile data as UK counterparts

The average UK mobile subscription generates between two and seven times more revenue per month than an equivalent in the BRIC countries. This largely reflects the lower prices required to reach populations with comparatively low disposable income in the developing countries, but high levels of multiple subscription ownership in Russia, India and China may also explain the difference.

Voice services accounted for the majority of mobile revenue in the BRIC nations (as they did in the UK) although data services are growing in importance. On average, across the BRIC nations, data accounted for 12% of 2007 mobile spend, compared to 10% in 2006. In China the pattern was much closer to that in the UK, with mobile data attracting 24% of total spend (compared to 25% in the UK). But in India, voice calls remain the dominant source of revenue, accounting for 94% of spend per subscriber.

The majority of mobile data revenue in every BRIC country comes from text messaging, although revenue from ‘colour ring back tone’ services31 (where a caller hears the receiver's favourite music rather than a standard ringtone) also accounts for a significant proportion in China (16% of China Mobile’s mobile data revenue).

Increasing use of SMS in Brazil and Russia is the probable reason behind the £0.10 increase in data ARPU during 2007. However, the launch of 3G services (using WCDMA) towards the end of 2007 in both countries may stimulate future demand for mobile internet and multimedia services

In China and India, full commercial 3G services have yet to be introduced. Trials of TD- SCDMA, the first 3G technology to be approved by the Chinese authorities, are already under way, but the assumption is that the government will issue three 3G licences to cover all three 3G standards (WCDMA, CDMA2000 and TD-SCDMA), although no date has yet been set for their award. In India commercial 3G licences are due to be awarded to private

31 Allows users to customise what a caller to their mobile number hears. Instead of a familiar ringtone, a particular music, message or other personalised audio content is heard by the calling party while they wait for the call to be answered.

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companies at the beginning of 2009; state-owned mobile operators BSNL and MTNL have already been granted 3G licences.

Figure 7.8 Mobile data and voice ARPU: 2006 and 2007

£ per month

20 17.6 17.1

15 3.9 4.3 Data 10 7.2 7.7 Voice 0.5 0.6 4.5 5.1 4.9 13.2 13.3 5 3.8 0.4 2.7 2.4 1.0 1.2 6.8 7.1 0.3 0.2 0.1 4.1 4.1 3.7 3.5 2.6 2.2 0 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 BRA RUS IND CHN UK Source: IDATE/ Ofcom

7.1.4 The television industry in BRIC nations The following section outlines the main developments in television platform adoption and revenue growth in each country, in addition to the progress being made in the BRIC countries towards digital switchover.

7.1.4.2 Take-up of television services

Over half a billion TV households in four emerging markets

The total number of households with a television set across the four BRIC countries totalled nearly 600 million in 2007 and there is near-universal penetration in Brazil, Russia and China. (The number of TV households grew by over 50 million in China between 2002 and 2007 compared to just 600,000 in the UK - Figure 7.9). However, in India the high number of people in the average household, the significant level of piracy and large-scale under- reporting of subscribers by cable operators, combine to bring the reported proportion of households with a TV connection down to just half that of the other BRIC countries and the UK.

275 The International Communications Market 2008

Figure 7.9 TV households: 2002 - 2007

Millions of households % of households with main TV set, 2007 375 369 355 BRA 95% 338 341 300 320 330 RUS 98% 225 CHN 96% 150 IND 44%

75 83 85 93 95 96 81 UK 99%

0 2002 2003 2004 2005 2006 2007

Source: IDATE / industry data / Ofcom

Terrestrial television main method of reception in all but India

Analogue television (terrestrial or cable) remains the most popular means of reception in the BRIC countries (Figure 7.10). Over 80% of homes in Brazil and just over half in Russia and China are connected to an analogue terrestrial (ATT) device, with almost all remaining homes connected to analogue cable. People in India are more likely to have analogue cable, with take-up running at 67% in 2007 and ATT accounting for an additional 18% of households. Analogue satellite services are in the minority across BRIC countries, accounting for 7% of households in India and in China, while Russia and India have the highest proportion of devices connected to digital satellite services at 5%, up from 2% in 2006. Figure 7.10 Reception devices connected to the main television set: 2007

Proportion of homes (%)

100% 0.1% 6% 7% 13% 4% ADSL TV 1% 1% 30% 80% 29% Digital cable 36% 5% 67% Analogue cable 60% 3% 7% Digital satellite 88% 40% Analogue satellite 37% 58% 5% 56% 20% 7% Digital terrestrial

18% 13% Analogue terrestrial 0% BRA RUS IND CHN UK

Source: IDATE / industry data / Ofcom

Pay-TV accounts for one-third of Russian market

The propensity of people to pay for additional television channels varies significantly between the BRIC countries. Relatively high take-up of analogue cable in India has meant

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that, historically, a large proportion of households have received pay-TV services. Rising income levels and the launch of conditional access for cable has further increased the penetration of pay-TV services to three-quarters of Indian households.

The dominance of analogue terrestrial reception in Brazil, Russia and China explains why take-up of pay-TV services is lower in those countries. But there has been an increase in the proportion of households receiving pay-TV in Russia since 2002, as new pay-satellite TV operators have lowered their prices and IPTV services have grown in popularity. In Brazil and China, by contrast, growth in pay-TV penetration has remained comparatively low. In China, the availability of a large number of free-to-view channels from CCTV may make it difficult to persuade people to pay for additional channels (in a similar fashion to free TV in Germany).

Figure 7.11 Proportion of households with FTA versus pay television: 2002 and 2007

100% 8 11 10 30 80% 36 36 37 51 47

60% 75 Pay

92 89 90 40% 70 Free 64 64 63 49 53 20% 25

0%

7 002 2 2007 2002 2007 2002 200 2002 2007 2002 2007 BRA RUS IND CHN UK

Source: IDATE / industry data / Ofcom

Slow progress in move to digital television

The number of households with a digital television platform remained below 10% in all of the BRIC countries during 2007. Despite government initiatives to encourage digital adoption, the shift from analogue has been relatively slow, with consumers on low incomes showing little appetite to pay for digital equipment that does not deliver much more than they can already receive.

Households in Brazil were the least likely to have converted their main sets to digital - just 5% had done so by the end of 2007 (and only 9%, 8% and 9% respectively in Russia, India and China) although the launch of the country’s first digital terrestrial TV service in December 2007 may change this. In China take-up of digital television remains low, but the rate of digital conversion has been higher than that in the UK, growing from just 300,000 households in 2002 to 32 million in 2007.

277 The International Communications Market 2008

Figure 7.12 Proportion of households connected to digital and analogue platforms: 2002 and 2007

100% 14

80% 63 60% 91 92 91 Analogue 97 95 100 100 100 86 40% Digital

20% 37

9 8 9 0% 3 5 0 0

7 2 7 2 7 2 7 7 0 0 0 00 00 00 2002 200 20 2 20 2 200 20 2002 2

BRA RUS IND CHN UK

Source: IDATE / industry data / Ofcom

7.1.5 Television revenues 7.1.5.1 Revenue growth fastest in Russia

Since 2002 television revenue growth across the BRIC countries has been brisk, growing by an average of 19% annually (from £9bn to £23bn in total), compared to 5% in the UK. Russia’s TV industry rose the fastest (32% per annum), driven by rising income levels and the growing penetration of pay-TV services. Pay-TV service adoption also boosted income in India and Brazil, with revenue rising by 23% and 20% respectively over the same period. The Chinese TV industry grew more gradually (at 14%), reflecting China’s slower adoption of pay-TV services.

Figure 7.13 Television industry revenue, 2002 - 2007

CAGR(%) Revenues (£ billion) 2002 - 2007 18 BRA 20%

15.3 RUS 32% 14.4 14.6 13.7 12 12.9 12.1 IND 23%

8.1 CHN 14% 6 6.9 6.1 5.5 5 UK 5% 4.3 3.6 2.7 1.6 1.9 0 0.9 1.3 2002 2003 2004 2005 2006 2007

Source: IDATE / industry data / Ofcom

7.1.5.2 Revenues per head in BRIC countries lower than in other comparator countries

Revenue per head more than doubled in Brazil, India and China, and quadrupled in Russia from 2002 to 2007, with growth driven by rising income levels and by the availability of more

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channels on a wider range of platforms. Revenue per capita was lowest in China, at £4 per head of population in 2007, and highest in Brazil at £23. Revenue per head in all four countries remains substantially below that of the UK (£172) and the other eleven countries covered in the main body of this report (ranging from £109 in France and Italy to £221 in the US).

Figure 7.14 Television industry revenue per head: 2002 and 2007 (£) 25

20

15 23 10 17 5 10 4 4 3 2 0 1 2002 2007 2002 2007 2002 2007 2002 2007 BRA RUS IND CHN Source: IDATE / industry data / Ofcom

7.1.5.3 Advertising is the largest revenue contributor in all BRIC countries except India

Advertising is the main source of television revenue in all BRIC countries, having expanded particularly rapidly in Brazil, Russia and China since 2002, reflecting the greater commercialisation of the television industry and the growing attractiveness of the medium to advertisers in these countries. In India, however, high levels of pay television take-up mean that total industry revenue is dominated by income from subscriptions, which accounts for two-thirds of the total. Figure 7.15 Television industry revenue, by source: 2002 and 2007 Revenues (£ billion) 20

15 15 12 5 Advertising revenues 0 10 8 5 Public funding 6 4 Subscription fees 5 4 3 5 4 4 3 4 2 2 2 6 1 1 3 4 4 3 3 2 0 1 0.5 1.3 2002 2007 2002 2007 2002 2007 2002 2007 2002 2007

BRA RUS IND CHN UK Source: IDATE / industry data / Ofcom

279 The International Communications Market 2008

7.1.6 The radio industry in BRIC nations In nations where TV ownership is not universal, radio can play a more prominent role in media consumption and as a primary source of daily news. Radio services are on the increase in the BRIC countries, with more stations being licensed on both analogue and digital formats. Radio ownership is also increasing as receiver costs fall. In some cases, such as in Russia, public broadcasters are finding their share of the audience reduced as more private and local area stations go live. This part of the BRIC countries’ section gives a general overview on radio listening trends and then focuses on the main activities in the development of digital radio services.

7.1.6.1 Radio listening

Radio station choice increasing in BRIC countries

Radio listening is growing in India; the audience in 2007 was estimated to have reached 700 million people - almost double the audience ten years previously. Similarly, ownership of radio sets had increased to around 250 million, again doubling in ten years. According to an AIR survey carried out in December 2007, 97% of people in rural areas claimed to listen to the radio at least once a week. Deregulation of the FM market has led to the arrival of 250 new stations in India, with another 75 planning to launch over the next couple of years, providing a boost to radio listening.

The services of public radio operator All India Radio (AIR or Akashvani) cover around 99% of the population and include 231 stations providing services in 22 languages and 146 dialects. On an average day, around 357 million people, equivalent to almost a third of the population, listen to AIR radio services. Fifty-two per cent of the Indian population say they listen to primary station AIR; this is higher in rural areas (55%) than urban areas (50%). AIR’s largest FM radio station ‘Rainbow’ is aimed at a younger audience and is available to over 900 million people, with a reach of 49.5% in 2007.

Satellite radio is also available in India, with 164,000 subscribers to the WorldSpace service by the second quarter of 2008. These listeners have access to 62 different satellite radio channels, and AIR also provides 20 satellite radio channels.

In Russia, radio services cover over 96% of the population. There are around 700 stations broadcasting and over 60 million radio receivers in the market. The All-Russia State Television and Radio Company (VGTRK), is the state-owned television and radio broadcaster. VGTRK runs the Russia TV channel, RTR, which covers around 90% of the Russian population and provides 80 local TV channels. It also operates national radio stations such as Radio Russia and Radio Mayak and the international service Voice of Russia.

In 2007 VGTRK stations’ share of radio listening was 28%, down by 6% on last year and down from a 49% share in 1999. This is largely due to the growth in commercial listening, with new commercial and regional stations gaining share in recent years, following awards of new frequencies. The main PSB stations are Radio Russia, which held a 15% share of listening in 2007, and Radio Mayak with a 10% share. Radio Mayak has changed its format to appeal more to younger listeners; its content now focuses on news and talk-based programming, which has increased listening among the 12-29 age group.

The coverage of terrestrial radio in China is estimated to be 95%, with over 500 million radio receivers in the market. Average time spent listening to the radio is around an hour a day, with 75% of radio listening in the home. By 2005 the radio audience was over 420 million, or almost a third of the population, listening on a daily basis. Increasing car ownership and take-up of portable and in-home radio devices, combined with the 2008 Olympics, was

280

expected to provide a boost to radio listening in China and a corresponding rise in advertising revenue.

Listening share in China is generally split three ways - national stations attract around 15% of listener hours, while regional stations in the provinces account for a further 60% and local municipal stations account for the remaining 25%. China National Radio (CNR) and China Radio International (CRI) are two main state-owned national radio broadcasting networks. CNR currently broadcasts nine main channels across China, with content covering news, business, music, entertainment programmes and stations aimed at ethnic groups within China. CRI launched a new radio station in July 2006 called CRI Olympic Radio, broadcasting on AM from Beijing.

In Brazil there are over 2000 radio stations on air, and around 75 million radio receivers in the market. This compares to around 60 million TV sets and around 120 TV stations. Radio listeners in Brazil in the main cities also have access to HD (Hybrid Digital) Radio services, with around 30 million people now having potential access to 25 HD stations. Main stations in Brazil include Rádio Nacional and news station CBN which operates in larger cities including São Paulo, Rio de Janeiro and Brasília.

7.1.6.2 Radio revenues

Rapid revenue growth in BRIC radio markets

For the BRIC nations radio revenue is predominantly from advertising – as is the case for the corresponding television broadcasting industries. There are generally lower levels of public funding and subscription radio only has a foothold in India, and is not established in Brazil, Russia or China.

The Russian radio market has more than doubled in size in the four years to 2007 (in parallel with its television industry), up from £111m in 2003 to £307m, aided by growth in the number of commercial radio stations available. It overtook the value of the Chinese radio market during 2007 to make it the largest among the BRIC countries. However the Indian radio market was the fastest growing radio market over the same period, expanding by an average of 52% per annum, albeit from a smaller base, to stand at £78m by 2007, this represented growth of 30% on 2006.

By head of population, the Russian radio market is the highest revenue generator with £2.16 of revenue per capita in 2007, followed by Brazil with £0.67. Although by comparison this is still much lower than the average for the Western European countries and North America, for example in the UK where revenues were £21 per head. The equivalent figures for India and China were much lower again, partly due to the much larger populations covered and partly as a result of lower levels of radio market development. In India radio revenues generated equated to just 7p per person; the equivalent figure in China was 22p (Figure 7.16).

281 The International Communications Market 2008

Figure 7.16 Radio revenues across the BRIC nations Total revenue (£bn) Average annualised growth rate 2003 - 2007 (%)

26% 44% 52% 37% £400 2003 2007 £307m £292m £300

£200 £125m £111m £117m £100 £78m £61m £25m £0 BRA RUS IND CHI

Source: Ofcom analysis using data taken from PricewaterhouseCoopers Global Entertainment & Media Outlook 2008-2012 Note: An exchange rate of $2.011 has been used. Interpretation of data is solely Ofcom’s responsibility.

Russian radio market has highest revenues, India the highest proportion of advertising spend

Radio advertising’s share of total advertising expenditure shows a degree of variation across the BRIC nations. In most cases radio’s share is increasing as markets continue to develop. Radio advertising share was lowest in China at 3.5% of all advertising expenditure in 2007, although this was up from 2.8% four years previously in 2003. By comparison the Indian radio advertising market plays a more significant role, accounting for 12.9% of all advertising spend in 2007. This was also up from a 9.6% share in 2003, illustrating the current rapid growth of radio in India. The Russian radio market commanded a 6.9% share of all advertising revenue in the year, (6.3% in 2003). While in Brazil this ratio is now 3.6%, relatively stable on the share in 2003 (3.7%) and also similar to radio share in the UK (3.9%) by comparison (Figure 7.17).

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Figure 7.17 Radio industry revenues per head and as a proportion of ad spend Industry revenue per head (£) Radio advertising as a proportion of all advertising spend (%)

3.6% 6.9% 12.9% 3.5% 3.9% £2.5 £21 £2.0

£1.5

£1.0 £2.16

£0.5 £0.67 £0.07 £0.22 £0.0 BRA RUS IND CHI UK

Source: Ofcom analysis based on data supplied by PricewaterhouseCoopers Global Entertainment and Media Outlook 2008-2012 Note: An exchange rate of $2.001 has been used. The UK has been included for comparative purposes; interpretation of data is solely Ofcom’s responsibility

7.1.6.3 Digital radio developments in the BRIC nations

Digital radio boosted in China ahead of 2008 Olympic Games

Radio stations in China are state-owned, but are primarily funded by commercial advertising. The State Administration of Radio, Film and Television (SARFT), an executive branch of the State Council in the People’s Republic of China, is responsible for licensing and regulating media standards.

National digital radio services are mainly distributed via the home-grown CMMB (Chinese Multimedia Mobile Broadcasting) platform, which is currently the predominant mobile TV and multimedia standard in China. CMMB uses both satellite technologies, alongside a terrestrial network, to deliver audio and visual services. The large coverage area required to serve the Chinese population makes satellite technology an effective solution. A CMMB network covering the major cities was set for completion by the end of 2008.

Local and regional radio services in China can be broadcast digitally either by DAB or DMB- T/H, which have both been trialled. The DAB standard was approved by SARFT in May 2006. DAB / DMB services are currently available to eleven provinces including Guangzhou (80 million people covered), Beijing (12 million people), Shanghai (15 million people), and Dalian (5.4m people). Currently there are 16 DAB digital radio services and six DMB services available on a free-to-air basis.

DMB receivers were available for around £170 this year, with 80,000 sold in Beijing by April 2008, ahead of the Olympic Games. Manufacturers have also developed dual receivers which can decode both CMMB and DAB/DMB signals. Another platform being trialled in China is HD radio, with initial tests carried out in Beijing in February 2008. A wider programme of tests is planned by SARFT for 2008.

283 The International Communications Market 2008

Station choice and radio ownership growing in India

The most widely used form of digital radio in India is satellite radio, provided by WorldSpace. This is a subscription service broadcast directly from satellite to portable receivers or PCs. Initially the WorldSpace service was free in India and some of the 62 specialist music and language channels are still free-to-air, but the annual subscription to the full service is now around £15 per annum, while satellite radio receivers are available for around £34.

The Indian government has also trialled DAB in local areas and has looked at DRM as a possible standard for short and medium wave digital transmissions. All India Radio (AIR), the public broadcaster, started experimental DAB broadcasts in New Delhi in late 1997, with trials covering around 1% of India’s population. Since January 2007, All India Radio has also been running test transmissions in DRM from its transmitter site in Khampur, Delhi.

HD radio launched in Brazil‘s larger cities

The HD (Hybrid Digital) radio format which began in the US is also being rolled-out in the main population areas of Brazil. One advantage of HD radio technology is that it enables AM and FM radio stations to simulcast both digital and analogue audio within the same channel with additional text information.

HD radio launched in Sao Paulo in 2005, and there are currently 25 radio stations on air, covering a population of around 30 million people. Broadcasters formed the Brazilian Alliance for Digital Radio in 2006 to promote and support the deployment of HD Radio technology.

For digital television broadcasts, Brazil is implementing a similar standard to the Japanese ISDB-T, in Brazil the standard is known as SBTVD-T (Sistema Brasileiro de Televisão Digital-Terrestre); switchover is planned to be complete by 2016. A number of other South American countries, including Argentina, Mexico, Peru and Chile, are also considering adopting the HD and ISDB-T standards; with a number of test broadcasts have already taken place.

Russia developing DRM services

The first digital radio transmitter in Russia was built in 2006 for the Voice of Russia international radio station which had originally began broadcasting its European service in DRM (Digital Radio Mondiale) back in 2003. DRM is also seen as a suitable option for domestic digital services, as it offers the ability to cover a large range of territory. The DRM service was developed by the Voice of Russia in conjunction with Russian Teleradio Broadcasting Systems, and supported by the Russian Television and Broadcasting Network (RTRN), with the aim to promote the commercial implementation of DRM across Russia. In total, the Voice of Russia service broadcasts to more than 160 countries around the world in 32 languages, with an audience of more than 100 million people. A DRM symposium was held in Russia in October 2007 to discuss future digital strategies.

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The International Communications Market 2008

8 8 Country Profiles

285 The International Communications Market 2008

Country profiles

This section provides a brief overview of each of the key comparator countries used in this report. The profile of each country includes basic demographic and economic information and market data for the telecoms and broadcasting industries.

The data in this section should provide both a context for analysing the trends described in this publication, and a flavour of the communications market in each of the key comparator countries.

Sources used for these country profiles include: IDATE and the World Bank.

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UK

Basic country data 2007

Size (km2) 243,600 Population (m) 60.8 Households (m) 26.1 GDP (£bn) 1,363 GDP per capita (£) 22,431

Telecoms market data

2004 2005 2006 2007 Revenues (£m) Fixed-line 10,576 9,825 9,432 9,250 Mobile 11,971 13,049 13,832 15,122 Internet 1,270 1,693 2,194 2,560 Total 23,817 24,567 25,459 26,932 Take-up (m) Fixed-line 34.6 34.1 33.6 33.7 Mobile subscriptions 59.7 65.4 69.8 73.5 Broadband connections 6.1 9.9 13.0 15.6 Penetration (%) Fixed-line (individuals) 58% 57% 56% 56% Mobile (individuals) 99% 108% 115% 121% Broadband (households) 24% 39% 50% 60%

Largest telecoms operators: Q4 2007

Mobile O2 (excl. Tesco Mobile) 25% Vodafone 24% T-Mobile (incl. Virgin Mobile) 24% Broadband BT Retail 27% Virgin Media 24% Carphone Warehouse 17%

287 The International Communications Market 2008

Broadcasting market data

2002 2003 2004 2005 2006 2007 TV revenues (£m) Subscription 2,883 3,252 3,585 3,891 4,029 4,288 Public funding 2,216 2,302 2,319 2,433 2,521 2,615 Advertising 3,147 3,242 3,481 3,548 3,469 3,544 Total 8,246 8,796 9,385 9,872 10,019 10,447 Radio revenues (£m) Public funding 524 580 610 640 582 570 Advertising 518 604 641 614 650 693 Total 1,042 1,183 1,250 1,253 1,231 1,262 TV take-up (m) TV homes 25.3 25.5 25.6 25.7 25.8 25.9 Multichannel homes 11.0 13.4 15.7 18.2 20.1 22.5 Digital TV homes 9.5 12.4 14.9 17.6 19.8 22.2 Penetration in TV homes (%) Multichannel homes 43% 52% 61% 71% 78% 87%

Digital TV homes 37% 48% 58% 68% 77% 86%

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France

Basic country data

Size (km2) 551,500 Population (m) 63.7 Households (m) 26.8 GDP (£bn) 1,281 GDP per capita (£) 20,109 Note: Population includes French overseas territories.

Telecoms market data

2004 2005 2006 2007 Revenues (£m) Fixed-line 9,516 9,166 8,742 8,371 Mobile 10,771 11,775 12,280 12,994 Internet 1,367 1,805 2,325 2,991 Total 21,654 22,747 23,346 24,356 Take-up (m) Fixed-line 33.6 33.1 31.6 28.7 Mobile subscriptions 44.5 48.0 51.5 55.3 Broadband connections 6.8 9.4 12.7 15.6 Penetration (%) Fixed-line (individuals) 54% 53% 50% 45% Mobile (individuals) 71% 76% 81% 87% Broadband (households) 26% 37% 48% 58%

Largest telecoms operators: Q4 2007

Mobile Orange 43% SFR 35% Bouygues 17% Broadband Orange 47% Neuf cegetel 21% Free 19%

289 The International Communications Market 2008

Broadcasting market data

2002 2003 2004 2005 2006 2007 TV revenues (£m) Subscription 2,585 2,748 2,826 2,873 3,078 3,283 Public funding 1,006 1,026 1,192 1,230 1,255 1,286 Advertising 2,017 2,058 2,192 2,214 2,313 2,402 Total 5,608 5,831 6,209 6,317 6,647 6,971 Radio revenues (£m) Public funding 519 572 579 602 608 614 Advertising 379 431 455 462 468 458 Total 899 1,003 1,034 1,064 1,076 1,073 TV take-up (m) TV homes 23.2 23.5 23.6 24.3 24.5 24.7 Multichannel homes 10.6 11.0 11.3 13.0 17.9 20.9 Digital TV homes 4.3 5.0 5.5 7.4 13.0 16.4 Penetration in TV homes (%) Multichannel homes 46% 47% 48% 53% 73% 84%

Digital TV homes 19% 21% 23% 30% 53% 66%

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Germany

Basic country data, 2007

Size (km2) 357,100 Population (m) 82.4 Households (m) 39.4 GDP (£bn) 1,648 GDP per capita (£) 19,998

Telecoms market data

2004 2005 2006 2007 Revenues (£m) Fixed-line 13,830 13,373 12,563 11,737 Mobile 15,974 15,594 15,956 15,472 Internet 1,698 2,038 2,517 3,218 Total 31,501 31,366 31,036 30,427 Take-up (m) Fixed-line 54.7 54.9 54.8 54.4 Mobile subscriptions 71.3 79.2 85.4 97.2 Broadband connections 7.0 10.7 14.7 19.6 Penetration (%) Fixed-line (individuals) 66% 67% 67% 66% Mobile (individuals) 87% 96% 104% 118% Broadband (households) 18% 28% 38% 50%

Largest telecoms operators: Q4 2007

Mobile T-Mobile 37% Vodafone 35% E-Plus 15% Broadband Deutsche Telekom 46% United Internet 14% Arcor 13%

291 The International Communications Market 2008

Broadcasting market data

2002 2003 2004 2005 2006 2007 TV revenues (£m) Subscription 2,863 2,902 2,985 3,044 3,031 3,061 Public funding 2,856 2,800 2,818 3,125 3,187 3,251 Advertising 2,708 2,612 2,640 2,688 2,815 2,961 Total 8,427 8,315 8,443 8,857 9,033 9,273 Radio revenues (£m) Public funding 1,576 1,701 1,712 1,764 1,807 1,812 Advertising 373 396 423 454 465 496 Total 1,949 2,097 2,135 2,218 2,271 2,308 TV take-up (m) TV homes 37.4 37.4 37.6 37.6 37.7 37.6 Multichannel homes 34.8 35.4 36.0 36.7 37.1 37.5 Digital TV homes 4.0 4.7 5.8 7.6 10.2 12.2 Penetration in TV homes (%) Multichannel homes 93% 95% 96% 97% 98% 100%

Digital TV homes 11% 13% 15% 20% 27% 32%

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Italy

Basic country data

Size (km2) 301,300 Population (m) 58.1 Households (m) 24.4 GDP (£bn) 1,053 GDP per capita (£) 18,114

Telecoms market data

2004 2005 2006 2007 Revenues (£m) Fixed-line 8,681 8,219 7,980 7,629 Mobile 9,560 10,257 10,261 10,603 Internet 1,084 1,406 1,977 2,298 Total 19,325 19,882 20,218 20,530 Take-up (m) Fixed-line 29.1 28.0 26.0 25.8 Mobile subscriptions 62.5 71.5 80.5 89.8 Broadband connections 4.7 7.0 8.6 9.9 Penetration (%) Fixed-line (individuals) 50% 48% 45% 44% Mobile (individuals) 108% 123% 139% 154% Broadband (households) 21% 30% 36% 41%

Largest telecoms operators: Q4 2007

Mobile TIM 41% Vodafone 33% Wind 17% Broadband Telecom Italia 67% Wind 12% Fast Web 11%

293 The International Communications Market 2008

Broadcasting market data

2002 2003 2004 2005 2006 2007 TV revenues (£m) Subscription 822 802 1,088 1,369 1,750 2,029 Public funding 1,003 1,039 1,070 1,070 1,092 1,114 Advertising 2,218 2,717 3,038 3,194 3,145 3,183 Total 4,043 4,558 5,197 5,633 5,987 6,326 Radio revenues (£m) Public funding 396 437 444 449 455 480 Advertising 238 294 356 356 385 480 Total 634 731 800 806 840 961 TV take-up (m) TV homes 22.1 22.1 22.1 22.6 22.8 22.9 Multichannel homes 4.8 5.1 7.2 10.1 11.8 13.7 Digital TV homes 3.1 3.3 5.7 8.8 10.7 12.7 Penetration in TV homes (%) Multichannel homes 22% 23% 32% 45% 52% 60%

Digital TV homes 14% 15% 26% 39% 47% 56%

294

USA

Basic country data, 2006

Size (km2) 9,632,000 Population (m) 301.1 Households (m) 116.2 GDP (£bn) 6,902 GDP per capita (£) 22,921

Telecoms market data

2004 2005 2006 2007 Revenues (£m) Fixed-line 57,426 54,531 50,891 47,504 Mobile 51,037 56,743 62,700 69,403 Internet 7,807 10,209 12,732 16,058 Total 116,270 121,483 126,323 132,965 Take-up (m) Fixed-line 177.7 175.2 167.5 160.0 Mobile subscriptions 175.5 207.9 233.0 256.8 Broadband connections 35.6 47.1 56.8 71.2 Penetration (%) Fixed-line (individuals) 61% 59% 57% 53% Mobile (individuals) 60% 70% 78% 85% Broadband (households) 32% 42% 50% 62%

Largest telecoms operators: Q4 2007

Mobile AT&T Wireless 27% Verizon Wireless 25% Sprint Nextel 18% Broadband AT&T 20% Comcast 19% Verizon 11%

295 The International Communications Market 2008

Broadcasting market data

2002 2003 2004 2005 2006 2007 TV revenues (£m) Subscription 22,104 23,373 26,046 28,528 30,577 33,266 Public funding 264 246 256 263 283 310 Advertising 27,737 28,930 30,155 30,564 32,928 33,063 Total 50,105 52,550 56,456 59,355 63,788 66,639 Radio revenues (£m) Subscription 12 62 192 506 886 1,204 Public funding 44 46 47 49 50 50 Advertising 9,446 9,548 9,791 9,826 9,850 9,346 Total 9,502 9,656 10,029 10,380 10,785 10,600 TV take-up (m) TV homes 106.7 108.2 109.6 110.2 111.6 112.2 Multichannel homes 87.1 88.8 91.9 97.1 101.2 106.1 Digital TV homes 39.1 44.5 50.8 60.2 68.4 78.3 Penetration in TV homes (%) Multichannel homes 82% 82% 84% 88% 91% 95%

Digital TV homes 37% 41% 46% 55% 61% 70%

296

Canada

Basic country data 2008

Size (km2) 9,984,700 Population (m) 32.9 Households (m) 12.6 GDP (£bn) 663 GDP per capita (£) 20,126

Telecoms market data

2004 2005 2006 2007 Revenues (£m) Fixed-line 6,148 5,935 5,740 5,465 Mobile 4,411 5,126 5,907 6,734 Internet 1,315 1,526 1,750 2,018 Total 11,873 12,587 13,397 14,218 Take-up (m) Fixed-line 20.6 20.8 19.2 19.2 Mobile subscriptions 15.0 17.0 18.7 20.3 Broadband connections 5.4 6.4 7.5 8.4 Penetration (%) Fixed-line (individuals) 64% 64% 59% 58% Mobile (individuals) 47% 53% 57% 62% Broadband (households) 45% 53% 60% 67%

Largest telecoms operators: Q4 2007

Mobile Rogers Wireless 36% Bell Mobility 31% Telus Mobility 28% Broadband Bell Canada 24% Rogers 18% Telus 18%

297 The International Communications Market 2008

Broadcasting market data

2002 2003 2004 2005 2006 2007 TV revenues (£m) Subscription 1,962 2,107 2,202 2,294 2,600 2,846 Public funding 391 436 434 436 468 458 Advertising 966 1,012 1,033 1,109 1,153 1,131 Total 3,319 3,556 3,669 3,839 4,221 4,435 Radio revenues (£m) Subscription 12 58 Public funding 140 140 145 150 158 158 Advertising 476 544 562 569 600 628 Total 616 684 707 719 770 844 TV take-up (m) TV homes 11.8 11.9 11.9 12.2 12.2 12.4 Multichannel homes 9.7 10.0 10.2 10.7 11.1 11.6 Digital TV homes 3.3 3.9 4.2 4.8 5.7 6.6 Penetration in TV homes (%) Multichannel homes 82% 84% 86% 87% 91% 94%

Digital TV homes 28% 33% 35% 39% 47% 53%

298

Japan

Basic Country data 2007

Size (km2) 377,900 Population (m) 127.4 Households (m) 49.5 GDP (£bn) 2,187 GDP per capita (£) 17,165

Telecoms market data

2004 2005 2006 2007 Revenues (£m) Fixed-line 16,683 16,233 15,664 15,243 Mobile 30,347 30,158 30,722 30,616 Internet 2,462 3,221 3,891 4,534 Total 49,492 49,612 50,277 50,393 Take-up (m) Fixed-line 69.6 67.4 63.8 60.4 Mobile subscriptions 85.5 90.2 94.9 100.5 Broadband connections 18.6 22.4 25.8 28.3 Penetration (%) Fixed-line (individuals) 55% 53% 50% 47% Mobile (individuals) 67% 71% 75% 79% Broadband (households) 39% 46% 53% 57%

Largest telecoms operators: Q4 2007

Mobile NTT DoCoMo 53% KDDI 29% Softbank 18% Broadband NTT 46% Softbank 18% KDDI 8%

299 The International Communications Market 2008

Broadcasting market data

2002 2003 2004 2005 2006 2007 TV revenues (£m) Subscription 3,260 4,020 4,564 5,156 5,271 6,072 Public funding 3,007 3,033 3,044 2,998 3,058 3,158 Advertising 8,937 8,802 8,882 9,134 8,664 8,480 Total 15,205 15,855 16,489 17,288 16,992 17,711 Radio revenues (£m) Public funding 831 834 884 936 959 974 Advertising 789 767 762 754 740 712 Total 1,620 1,601 1,646 1,690 1,698 1,686 TV take-up (m) TV homes 47.5 47.9 48.0 48.0 48.1 48.1 Multichannel homes 30.3 33.3 38.4 41.5 43.3 45.8 Digital TV homes 7.9 12.2 18.5 24.8 27.3 31.4 Penetration in TV homes (%) Multichannel homes 64% 70% 80% 86% 90% 95%

Digital TV homes 17% 25% 38% 52% 57% 65%

300

The International Communications Market 2008

9 9 Appendices, Glossary and Table of Figures

301 The International Communications Market 2008

Contents

Appendix A: Basic data used in the report 303 Appendix B: Comparative international pricing 304 Appendix C: International online survey methodology 305 Glossary 307 Table of Figures 317

302

Appendix A: Basic data used in the report

A.1 Financial years

Calendar year for all countries except Japan

A.2 Exchange rates

Source: IMF

Basis: Average during 2007

Average 2007 rate Currency (IMF)

UK GB Pound 1.00 Euro area Euro 1.462 USA US Dollar 2.001 Canada Canadian Dollar 2.149 Japan Japanese Yen 235.615 Poland Polish Zloty 5.538 Sweden Swedish Crown 13.524 Brazil Brazilian Real 3.896 Russia Russian Ruble 51.185 India Indian Rupee 82.735

China Chinese Yuan 15.222

A.3 Population figures

Source: US Census bureau

Basis: Mid-year figures

A.4 Households

Source: IMF

Basis: Mid-year figures

Note: for households, Multiple Dwelling Units (MDUs) are not explicitly considered. One subscriber or one telco line equates to one person or household, or one SIM card to one person in case of mobiles.

303 The International Communications Market 2008

Appendix B: Comparative international pricing

The full methodology is available online at: www.ofcom.org.uk/research/cm/icmr08

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Appendix C: International online survey methodology

This research was conducted in October 2008 by Synovate for Ofcom. The survey was conducted using CAWI (Computer Assisted Web Interviewing) across seven countries: the UK, France, Germany, Italy, US, Canada and Japan. Sample sizes were around 1000 adults in each country, designed to reflect national profiles of internet customers in terms of gender and age.

All respondents were internet users at home and therefore this data is not representative of each country’s population, and does not provide data on market take-up. Rather, it provides an illustration of comparative levels of usage across markets amongst internet users. Given that the samples are all internet users at home, countries with low internet take-up will present inflated usage figures overall, as these adults are likely to be high-end users and early adopters.

The table below shows sample size and spread for each country.

Base Gender % Age % Country Respondents Male Female 18-24 25-44 45-64 UK 1001 51 49 14 47 39 France 1000 51 49 19 54 27 Germany 1002 56 44 19 52 29 US 1010 51 49 14 50 36 Italy 1003 51 49 19 54 27 Japan 1003 54 46 23 57 20 Canada 1000 51 49 14 50 36

305

Glossary

1G First Generation Cellular Mobile Wireless. The first generation of cellular wireless was based on analogue technology. The systems were designed only to carry voice services.

2G Second generation of mobile telephony systems. Uses digital transmission to support voice, low-speed data communications, and short messaging services.

2.5G In mobile telephony, 2.5G protocols extend 2G systems to provide additional features such as packet-switched connections (GPRS) and higher-speed data communications.

3G Third generation of mobile systems. Provides high-speed data transmission and supports multimedia applications such as full-motion video, video-conferencing and internet access, alongside conventional voice services.

3.5G Enhanced Third Generation Cellular Mobile Wireless. 3.5G refers to evolutionary upgrades to 3G services starting in 2005-2006 that provide significantly enhanced performance. High Speed Downlink Packet Access is expected to become the most popular 3.5G technology (see HSPA).

3GPP Third Generation Partnership Project. The 3GPP was formed in December 1998 as a collaboration agreement bringing together a number of telecommunication standards bodies, referred to as Organizational Partners. The original aim of the 3GPP was to produce globally applicable technical specifications for third-generation mobile systems based on evolved GSM core networks and the radio access technology UTRA (Universal Terrestrial Radio Access).

LTE LTE A fourth-Generation Cellular Mobile Wireless technology (4G) that will succeed current 3G W-CDMA, HSDPA and HSUPA networks. The technology enables 100 Mbps downlink and 50 Mbps uplink speeds and uses an "all-IP" architecture where everything (including voice) is handled as data.

4G Fourth-Generation Cellular Mobile Wireless. 4G technologies are still in the early research stage and no consistent industry definition exists yet. NTT DoCoMo in Japan is one of the leading companies in driving 4G. Technologies such as VSF (Variable Spreading Factor), OFCDM (Orthogonal Frequency and Code Division Multiplexing) and VSF CDMA (Code Division Multiple Access) are being proposed, along with a target data rate of over 100 Mbit/s for downlink and 20 Mbit/s uplink. It is likely to be well into the next decade before the technology is commercially deployed.

Access network Electronic Communications Network which connects end-users to a service provider; running from the end-user’s premise to a Local Access Node and supporting the provision of access based services. It is sometimes referred to as the local loop or last mile.

ADSL Asymmetric Digital Subscriber Line. A digital technology that allows the use of a standard telephone line to provide high speed data communications. Allows higher speeds in one direction (towards the customer) than the other.

ADSL1 The first generation of ADSL, capable of data speeds of up to 8Mbit/s towards the customer and up to 640kbit/s from the customer.

307 The International Communications Market 2008

ADSL2/ADSL2+ Improved versions of ADSL, offering high speeds, especially on shorter telephone lines. In the case of ADSL2+, up to 24Mbit/s can be delivered towards the customer.

AM Amplitude Modulation. Type of modulation produced by varying the strength of a radio signal. This type of modulation is used by broadcasters in three frequency bands: medium frequency (MF, also known as medium wave: MW); low frequency (LF, also known as long wave: LW), and high frequency (HF, also known as short wave: SW). The term AM is often used to refer to the medium frequency band.

ARPU Average Revenue Per User

AVMS Audiovisual Media Services. A range of provisions designed to achieve coordination of the legal, regulatory and administrative frameworks of European Union member states with respect to television broadcasting, replaces the TV Without Frontiers Directive (TVWF)

ATT Analogue Terrestrial Television. The television broadcast standard that all television industries launched with. Most countries in this study are planning to phase out ATT in the next ten years.

AV Audiovisual

Bit-rate The rate at which digital information is carried within a specified communication channel.

Bitstream A wholesale service providing conveyance of data traffic from an end user’s premise to a point of interconnection made available by the incumbent to a competitive provider.

Bluetooth Wireless standard for short-range radio communications between a variety of devices such as PCs, headsets, printers, mobile phones, and PDAs.

Broadband a service or connection which capable of supporting always-on services which provide the end-user with high data transfer speeds. Large-capacity service or connection allowing a considerable amount of information to be conveyed often used for transmitting bulk data or video or for rapid Internet access.

CAGR Compound Annual Growth Rate. The average annual growth rate over a specified period of time. It is used to indicate the investment yield at the end of a specified period of time. The mathematical formula used to calculate CAGR = (present value/base value)^(1/#of years) – 1

CDMA Code Division Multiple Access. The basis for the primary 2G technology; and the later evolution of mobile technology in the US and related markets. A technology that allows a band of spectrum to be shared by multiple concurrent users. Rather than subdividing the spectrum (FDMA) or determining use on a round-robin basis (TDMA), unique codes are used to differentiate subscribers so they can simultaneously use the same spectrum.

CDMA 2000 EV-DO

308

CMMB (Chinese Multimedia Mobile Broadcasting) A Chinese broadcasting standard with many similarities to DVB-SH (see DVB-SH). It is intended for use in S-band spectrum at around 2.6 GHz and uses a transmission technology called STiMi.

Contention ratio An indication of the number of customers who share the capacity available in an ISP’s broadband network. Figures of 50:1 for residential broadband connections and 20:1 for business are typical).

Co-regulation The sharing of regulation between a statutory body (e.g. Ofcom) and its licensees.

CPS Carrier Pre-selection. The facility offered to customers which allows them to opt for certain defined classes of call to be carried by an operator selected in advance (and having a contract with the customer) without having to dial a routing prefix, use a dialler box, or follow any other different procedure to invoke such routing.

DAB Digital Audio Broadcasting. A set of internationally accepted standards for the technology by which terrestrial Digital Radio multiplex services are broadcast in the UK.

DAB+ Building on the success of DAB, DAB+ provides the capacity to use the more efficient AAC audio codec.

Data packet In networking, the smallest unit of information transmitted as a discrete entity from one node on the network to another.

Digital dividend The spectrum that will be released by the switch to all-digital television.

Digital switchover (DSO) The process of switching over the current analogue television broadcasting system to digital, as well as ensuring that people have adapted or upgraded their televisions and recording equipment to receive digital TV.

DMB Digital Mobile Broadcasting. A variant of the DAB digital radio standard for mobile TV services, and an alternative to DVB-H (see DVB, below).

Dongle A physical device, attached to a PC’s USB port, which adds hardware capabilities. A mobile broadband dongle enable access to the internet via a mobile network.

Double-play Supply of two communications services from a single supplier for a single subscription fee, usually broadband and fixed voice telephony.

Downlink speed Also downlink or download. Rate of data transmission from a network operator’s access node to a customer, typically measured in Megabits per second (Mbit/s).

DRM (1) DRM is a development of Digital Radio Mondiale, a broadcasting standard designed for use in the lower frequency Long, Medium and Short Wave bands. Standard channels are considerably wider at VHF so there is more scope for high audio quality and multiple services.

DRM (2) Digital Rights Management. Provisions for managing rights of material within a digital environment. DRM processes include protecting material from unauthorized use and managing financial transactions associated with using the material. It includes some form of encryption or digital watermarking for protection.

DSL Digital Subscriber Line. A family of technologies generally referred to as DSL, or xDSL, capable of transforming ordinary phone lines (also known as 'twisted copper pairs') into high-

309 The International Communications Market 2008 speed digital lines, capable of supporting advanced services such as fast Internet access and video-on-demand. ADSL, HDSL (High data rate Digital Subscriber Line) and VDSL (Very high data rate Digital Subscriber Line) are all variants of xDSL).

DTR See DVR

DTT Digital Terrestrial Television, currently most commonly delivered through the Freeview service.

DVB Digital Video Broadcasting. A set of internationally accepted open standards for digital broadcasting, including standards for distribution by satellite, cable, radio and handheld devices (the latter known as DVB-H).

DVB-SH (Digital Video Broadcasting - Satellite Handheld) DVB-SH is a version of DVB-H optimised for satellite transmission in S-band (around 2.2GHz) which is close to 3G spectrum and thus convenient for mobile phone integration. Services are generally expected to also have to make use of an extensive network of terrestrial relay transmitters.

DVD Digital Versatile Disc. A high capacity CD-size disc for carrying audio-visual content. Initially available read-only, but recordable formats are now available.

DVR Digital Video Recorder (also known as Personal Video Recorder and Digital Television Recorder). A digital TV set-top box including a hard disc drive which allows the user to record, pause and rewind live TV.

EDGE Enhanced Data Rates for Global Evolution. EDGE is a 2.5G technology being promoted by the TDMA and GSM communities that is capable of both voice and 3G data rates. It extends the GPRS 10-50 Kbps service to 100 Kbps or more. Cingular promised a full deployment by around mid-2004, and AT&T is expected to install EDGE technology in 6500 U.S. cities in 2004. Regarding EDGE Release specifications, see 3GPP.

Ex ante regulation Regulation to address behaviour before it happens.

Fibre-to-the-cabinet (FTTC) Access network consisting of optical fibre extending from the access node to the street cabinet. The street cabinet is usually located only a few hundred metres from the subscriber premises. The remaining segment of the access network from the cabinet to the customer is usually a copper pair but could use another technology, such as wireless.

Fibre-to-the-home (FTTH) A form of fibre optic communication delivery in which the optical signal reaches the end user's living or office space.

Fibre-to-the-building (FTTB) A form of fibre-optic communication delivery in which an optical fibre is run directly onto the customers' premises.

FM Frequency Modulation. Type of modulation produced by varying the frequency of a radio carrier in response to the signal to be transmitted. This is the type of modulation used by broadcasters in part of the VHF (Very High Frequency) band, known as VHF Band 2.

GDP Gross Domestic Product.

GPS The GPS (Global Positioning System) is a ‘constellation’ of 24 well-spaced satellites that orbit the Earth and make it possible for people with ground receivers to pinpoint their geographic location.

310

GSM Global Standard for Mobile Telephony, the standard used for 2G mobile systems.

HD Radio Hybrid Digital Radio. A radio standard developed in the US for terrestrial broadcasters, offering high-quality audio.

HDTV High-Definition Television. A technology that provides viewers with better quality, high-resolution pictures.

Headline connection speed The theoretical maximum data speed that can be achieved by a given broadband. A number of factors, such as the quality and length of the physical line from the exchange to the customer, mean that a given customer may not experience this headline speed in practice.

HSDPA High-Speed Downlink Packet Access: an add-on access component used to enhance the data speed to the end user on 3G/UMTS networks. Sometimes known as 3.5G.

HSPA Jointly, downlink and uplink mobile broadband technologies are referred to as HSPA (High Speed Packet Access) services.

HSUPA High Speed Uplink Packet Access – an upgrade to 3G mobile technology that allows data to be sent from customer’s devices more quickly.

Interconnection The linking of one Public Electronic Communications Network to another for the purpose of enabling the persons using one of them to be able (a) to communicate with users of the other one; (b) to make use of services provided by means of the other one (whether by the provider of that network or by another person).

International roaming A service offered by mobile operators that allows customers to use their phone abroad. The home operator has agreements with foreign operators that allows customers to make and receive calls, send and pick up text messages, and use some of the other mobile services (such as access to voicemail or topping-up credit on pre-pay phones). The exact services available and the charges for their use vary between operators.

Internet A global network of networks, using a common set of standards (e.g. the Internet Protocol), accessed by users with a computer via a service provider.

IP (Internet Protocol) The packet data protocol used for routing and carriage of messages across the Internet and similar networks.

IPTV Internet Protocol Television. Television and/or video signals that are delivered to subscribers or viewers using Internet Protocol (IP), the technology that is also used to access the Internet. We use the term to mean delivery over a ‘closed intranet’, typically operated by ISPs and local-loop unbundlers, rather than over the public internet. IPTV services are hosted on servers placed in the exchange, which means they can be delivered with assured QoS since the ISP has more control over the network.

ISDB Integrated Services Digital Broadcasting. A separate broadcasting standard developed in Japan during the early 1980s, which led to the development of the ISDB standard. Japan started terrestrial digital broadcasting using the ISDB-T standard through NHK and commercial broadcasting stations on 1 December 2003.

ISDN Integrated Services Digital Networks. A standard developed to cover a range of voice, data, and image services intended to provide end-to-end, simultaneous handling of voice and data on a single link and network.

311 The International Communications Market 2008

ISP Internet Service Provider. A company that provides access to the internet.

ITU International Telecommunication Union.

LLU (Local Loop Unbundling) LLU is the process whereby incumbent operators (in the UK this means BT and Kingston Communications) make their local network (the lines that run from customer’s premises to the telephone exchange) available to other communications providers. The process requires the competitor to deploy its own equipment in the incumbent’s local exchange and to establish a backhaul connection between this equipment and its core network.

Local Loop The access network connection between the customer's premises and the local PSTN exchange, usually a loop comprised of two copper wires.

MediaFLO Mobile data broadcasting technology developed by Qualcomm

MMS Multimedia Messaging Service. The next generation of mobile messaging services, adding photos, pictures and audio to text messages.

Mobile termination rate The ‘per minute’ fees that mobile phone companies charge other carriers to deliver incoming calls to users on their networks.

Multichannel In the UK, this refers to the provision or receipt of television services other than the main five channels (BBC ONE & TWO, ITV1, Channel 4/S4C, Five) plus local analogue services. ‘Multichannel homes’ comprise all those with digital terrestrial TV, satellite TV, digital cable or analogue cable, or TV over broadband. Also used as a noun to refer to a channel only available on digital platforms (or analogue cable).

Multiplex A device that sends multiple signals or streams of information on a carrier at the same time in the form of a single, complex signal. The separate signals are then recovered at the receiving end.

MVNO An organisation which provides mobile telephony services to its customers, but does not have allocation of spectrum or its own wireless network.

Narrowband A service or connection providing data speeds up to 128kbit/s, such as via an analogue telephone line, or via ISDN.

Next-generation core networks (NGN) Internet Protocol based core networks which can support a variety of existing and new services, typically replacing multiple, single service legacy networks

Next-generation access networks (NGA) Broadband access networks that connect the end-user to the core network capable of a bandwidth quantity and quality significantly in excess of current levels (a benchmark of 20Mbit/s or more is often used).

OECD Organisation for Economic Cooperation and Development.

PAYG Pay-as-you-go.

Pay-per-view A service offering single viewings of a specific film, programme or event, provided to consumers for a one-off fee.

PDA Personal Digital Assistant.

312

Peaktime In the UK, the period during which: a radio station broadcasts its breakfast show and, on weekdays only, also its afternoon drive-time show; a television station broadcasts its early- and mid-evening schedule. Typically used by Ofcom to refer to the period between 18:00 and 22:30 each day (including weekends).

Peer-to-peer distribution The process of directly transferring information, services or products between users or devices that operate on the same hierarchical level.

Podcasting Away for digital audio files to be published on the internet, which can then be downloaded onto computers and transferred to portable digital audio players.

PP Percentage point.

PSB Public Service Broadcasting, or Public Service Broadcaster. The Communications Act in the UK defines the PSBs to include the BBC, ITV1, Channel 4, Five and S4C.

PSTN Public Switched Telephony Network.

PVR See DVR.

Quad-play Supply of TV, broadband, landline and mobile from a single supplier for a single subscription fee.

Radio Authority The statutory body responsible for the licensing and regulation of non-BBC radio services between 1990 and 2003. It was one of the bodies replaced by Ofcom.

RAJAR Radio Joint Audience Research The pan-industry body which measures radio listening.

Regulatory holiday A commitment by a regulator not to impose regulatory measures on a given product or service for a specified period of time.

ROI Republic of Ireland or Return on Investment

Service bundling (or multi-play) A marketing term describing the packaging together of different communications services by organisations that traditionally only offered one or two of those services.

Service provider A provider of electronic communications services to third parties whether over its own network or otherwise.

Share (Radio) Proportion of total listener hours, expressed as a percentage, attributable to one station within that a defined area.

Share (TV) Proportion of total TV viewing to a particular channel over a specified time, expressed as a percentage of total hours of viewing.

SIM card (Subscriber Identity Module) A removable smart card used in mobile phones to authenticate the mobile subscriber and store data. Each card has a unique number known as International Mobile Subscriber Identity (IMSI).

Simulcasting The broadcasting of a television or radio programme service on more than one transmission technology (e.g. FM and MW, DAB and FM, analogue and digital terrestrial television, digital terrestrial and satellite).

313 The International Communications Market 2008

Streaming content Audio or video files sent in compressed form over the internet and consumed by the user as they arrive. Streaming is different to downloading, where content is saved on the user’s hard disk before the user accesses it.

Sub-loop unbundling A variant of LLU where a competitive operator takes control of only a portion of a customer’s local loop, allowing them to install their equipment closer to the customer and potentially offer higher-speed services. In Sub-loop unbundling, the point of handover is commonly the Primary Connection Point (PCP) or street cabinet.

TD-CDMA Time Division Code Division Multiple Access. One of the family of 3G mobile technology standards.

Telecommunications, or 'Telecoms' Conveyance over distance of speech, music and other sounds, visual images or signals by electric, magnetic or electro-magnetic means.

Triple-play Supply of TV, broadband and landline from a single supplier for a single subscription fee.

TVWF Television Without Frontiers. A range of provisions designed to achieve coordination of the legal, regulatory and administrative frameworks of European Union member states with respect to television broadcasting, adopted by the European Council in 1989 and amended in 1997.

UGC User-generated content.

VDSL Very high bit rate DSL. This is currently the fastest version of DSL and can transmit very high data rates on short reaches of the local loop.

VoD Video on Demand A service or technology that enables TV viewers to watch programmes or films whenever they choose to, not restricted by a linear schedule. Also Near Video on Demand (NVoD), a service based on a linear schedule that is regularly repeated on multiple channels, usually at 15-minute intervals, so that viewers are never more than 15 minutes away from the start of the next transmission.

VoIP Voice over Internet Protocol. A technology that allows users to send calls using Internet Protocol, using either the public Internet or private IP networks.

WCDMA Wideband Code Division Multiple Access. One of the family of 3G mobile technology standards.

Web 2.0 A perceived second generation of web-based communities and hosted services - such as social-networking sites and wikis, which facilitate collaboration and sharing between users.

WiFi hotspot A public location which provides access to the internet using WiFi technology.

WiMAX A wireless MAN (metropolitan area network) technology, based on the 802.16 standard. Available for both fixed and mobile data applications.

Wireless LAN or WiFi (Wireless Fidelity) Short range wireless technologies using any type of 802.11 standard such as 802.11b or 802.11a. These technologies allow an over-the-air connection between a wireless client and a base station, or between two wireless clients.

WLR Wholesale Line Rental A regulatory instrument requiring the operator of local access lines to make this service available to competing providers at a wholesale price.

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YOY Year-on-year.

315

Table of Figures

Figure 1.1 Global communications revenue ...... 24 Figure 1.2 Communications revenue, by sector, among larger countries: 2007 ...... 25 Figure 1.3 Five year average growth rates across communications industries ...... 26 Figure 1.4 Communications revenue, by sector, per head: 2007 ...... 27 Figure 1.5 Proportion of advertising spend allocated to TV, radio and internet ...... 28 Figure 1.6 Change in market shares of advertising segments, 2006 - 2007 ...... 29 Figure 1.7 Telecommunications equity price trends versus market indices ...... 29 Figure 1.8 Media equity price trends versus market indices ...... 30 Figure 1.9 Take-up of fixed and mobile connections, 2006 - 2007 ...... 32 Figure 1.10 Take-up of DTV and broadband (includes residential take-up and SMEs), 2006 - 2007 ...... 33 Figure 1.11 Technology take-up versus year-on-year increases in adoption ...... 34 Figure 1.12 Device ownership and use among internet users, 2006 - 2007 ...... 35 Figure 1.13 Proportion of male and female internet users using fixed-line or mobile on a weekly basis ...... 36 Figure 1.14 Proportion of men and women using gaming and audio-visual devices on a weekly basis ...... 37 Figure 1.15 Consumers intentions on mobile telephony spending ...... 38 Figure 1.16 Overall economic vulnerability scores for items of discretionary expenditure ...... 39 Figure 1.17 Likelihood of cutting back on expenditure ...... 39 Figure 1.18 Growth of telecommunications NRAs: 1990 - 2008 ...... 41 Figure 1.19 National regulatory authorities: timeline ...... 42 Figure 2.1 Household types ...... 56 Figure 2.2 Best prices available, including multi-play offers ...... 60 Figure 2.3 Best prices available for standalone services...... 61 Figure 2.4 Comparative single-service ‘weighted average’ fixed-line voice pricing ...... 62 Figure 2.5 Comparative single-service ‘best offer’ fixed-line voice pricing ...... 63 Figure 2.6 Comparative single-service ‘weighted average’ mobile pricing ...... 65 Figure 2.7 Comparative single-service ‘best offer’ mobile pricing ...... 66 Figure 2.8 Comparative single-service ‘weighted average’ fixed-line broadband pricing ...... 67 Figure 2.9 Comparative single-service TV pricing ...... 68 Figure 2.10 Composition of Basket 1 ...... 68 Figure 2.11 Basket 1: ‘weighted average’ single-service pricing ...... 70 Figure 2.12 Basket 1: comparative ‘best offer’ pricing ...... 70 Figure 2.13 Composition of Basket 2 ...... 71 Figure 2.14 Basket 2: ‘weighted average’ single-service pricing ...... 72 Figure 2.15 Basket 2: comparative ‘best offer’ pricing ...... 73 Figure 2.16 Composition of Basket 3 ...... 74 Figure 2.17 Basket 3: ‘weighted average’ single-service pricing ...... 75 Figure 2.18 Basket 3: comparative ‘best offer’ pricing ...... 76 Figure 2.19 Composition of Basket 4 ...... 77 Figure 2.20 Basket 4: ‘weighted average’ single service pricing ...... 79 Figure 2.21 Basket 4: Comparative ‘best offer’ pricing including multi-play tariffs ...... 80 Figure 2.22 Composition of Basket 5 ...... 80 Figure 2.23 Basket 5: ‘weighted average’ single-service pricing ...... 82 Figure 2.24 Basket 5: comparative ‘best offer’ pricing including multi-play tariffs ...... 83 Figure 2.25 Comparative average pricing of ‘single services’ for all countries ...... 84 Figure 2.26 Comparative cost of lowest price services, including multi-play, for all countries ...... 85

317 The International Communications Market 2008

Figure 3.1 HSPA availability: 2007 ...... 90 Figure 3.2 Free-to-view streams of TV shows per head, 2006-2007...... 93 Figure 3.3 Use of the internet to consume audio-visual content ...... 94 Figure 3.4 Selected broadcast mobile TV offers...... 95 Figure 3.5 Selected DVB-H service developments, 2007-2008 ...... 96 Figure 3.6 Digital music share of total recorded music sales: 2006 and 2007 ...... 100 Figure 3.7 Sales of online films per 100 population, 2007 (VoD/DTO) ...... 101 Figure 3.8 Use of the internet for user-generated content ...... 102 Figure 3.9 Use of the mobile phone for user-generated content ...... 103 Figure 3.10 Use of the mobile phone to watch video content ...... 104 Figure 3.11 Social networking access via a mobile phone: 2007/8 ...... 104 Figure 3.12 Digital music revenue per head, 2007 ...... 106 Figure 3.13 Online TV and video revenue per head, 2007 ...... 107 Figure 3.14 Internet advertising spend as a share of total advertising, 2006-2007 ...... 108 Figure 3.15 Most popular Google searches, by country: 2007 ...... 109 Figure 3.16 IPTV availability, 2007 ...... 112 Figure 3.17 IPTV subscribers: 2007 ...... 112 Figure 3.18 VoIP share of fixed telephony revenues: 2005-2007...... 113 Figure 3.19 Mobile distribution: 2G, 3G and HSPA availability...... 115 Figure 3.20 Selected fixed-mobile convergence offerings ...... 116 Figure 3.21 Take-up of consumer communications devices ...... 118 Figure 3.22 Cross-ownership of household telephony services: December 2005 to January 2006 and November to December 2007 ...... 119 Figure 3.23 Main method of making voice calls while in the home...... 120 Figure 3.24 Use of mobile phone functions to contact people Which of the following do you use your mobile phone for? ...... 121 Figure 3.25 Use of mobile phone to listen to music or FM radio ...... 122 Figure 3.26 Broadband connections per 100 population, 2004 and 2007 ...... 123 Figure 3.27 Internet unique audience, by gender ...... 124 Figure 3.28 Unique internet audience, by age ...... 125 Figure 3.29 Time spent online: 2004 and 2008 ...... 126 Figure 3.30 Frequency of surfing the internet while watching TV ...... 126 Figure 3.31 Frequency of using a landline phone while watching TV ...... 127 Figure 3.32 Top ten website brands, by share of unique audience ...... 128 Figure 3.33 Selected search websites’ reach and rank among all sites, by reach ...... 128 Figure 3.34 Use of the internet as a main source of information ...... 129 Figure 3.35 Use of the internet to consume audio content ...... 130 Figure 3.36 Use of the internet to consume audio-visual content ...... 131 Figure 3.37 Uses of the internet to contact people ...... 131 Figure 3.38 Impact of the access to the internet on watching television ...... 132 Figure 3.39 Impact of the internet on reading national newspapers ...... 133 Figure 3.40 Most-missed media activity ...... 134 Figure 3.41 Use of Voice over IP subscribers per 100 population: 2005-2007 ...... 135 Figure 4.1 Timeline for DSO ...... 141 Figure 4.2 Analogue terrestrial television take-up: 2005 - 2007 ...... 141 Figure 4.3 The changing television platform mix during 2007 ...... 142 Figure 4.4 DTT take-up since launch ...... 143 Figure 4.5 Pay-TV take-up: 2002 to 2007 ...... 144 Figure 4.6 Summary of developments from leading pay-TV operators ...... 145 Figure 4.7 Pay-DVR take-up ...... 146 Figure 4.8 DVR take-up by country and platform ...... 147 Figure 4.9 DVR take-up versus digital pay-TV take-up ...... 148 Figure 4.10 Number of HD channels on offer, by platform and country ...... 148 Figure 4.11 Number of HD subscribers, by platform and country: end 2007 ...... 149 Figure 4.12 Number of households paying for HD , by platform and country ...... 150

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Figure 4.13 Global television sector revenue, 2002 and 2007 ...... 151 Figure 4.14 Average subscription revenue per subscriber, by country ...... 152 Figure 4.15 Proportion of industry revenue by source ...... 152 Figure 4.16 Global television sector revenue ...... 154 Figure 4.17 Global television sector revenue: 2002 and 2007 ...... 154 Figure 4.18 Comparative analysis of television industry revenue ...... 155 Figure 4.19 Revenue analysis among European countries and Canada ...... 156 Figure 4.20 Revenue per head, by source: 2007 ...... 157 Figure 4.21 Components of revenue growth, per head: 2006 to 2007 ...... 158 Figure 4.22 Cost of a licence fee: 2007 ...... 158 Figure 4.23 Distribution of advertiser expenditure, 2007 ...... 160 Figure 4.24 Changes in patterns of advertiser spend: 2006 to 2007 ...... 160 Figure 4.25 Latest reported revenues from major free-to-view TV operators ...... 162 Figure 4.26 Subscriber numbers as a percentage of TV households, for a range of leading pay-TV operators ...... 163 Figure 4.27 Latest reported subscription revenues for a range of pay-TV operators ..... 164 Figure 4.28 Latest reported ARPU for some key pay-TV operators ...... 165 Figure 4.29 PSB network output, by genre: 2007 ...... 166 Figure 4.30 First-run originations, acquisition and repeats ...... 167 Figure 4.31 First-run originations: trends ...... 168 Figure 4.32 Acquisitions: trends ...... 168 Figure 4.33 Repeats: trends ...... 169 Figure 4.34 Platform availability, by country: 2007 ...... 172 Figure 4.35 TV reception devices connected to the main set in the home: 2007 ...... 173 Figure 4.36 TV reception devices connected to the main set in the home: 2007 ...... 173 Figure 4.37 Changes in platform take-up 2006 – 2007: percentage points ...... 174 Figure 4.38 Proportion of analogue main sets converted to digital, 2006 – 2007 ...... 174 Figure 4.39 Analogue and digital television households, 2007...... 175 Figure 4.40 Migration to pay-TV: 2006 - 2007 ...... 176 Figure 4.41 Pay versus free-to-view television, 2007 ...... 176 Figure 4.42 Minutes of viewing per head ...... 177 Figure 4.43 Collective audience share of top one, three and five channels, all households: 2007 ...... 178 Figure 4.44 PSB share of viewing, all households ...... 178 Figure 4.45 Terrestrial channels versus multichannel viewing shares ...... 179 Figure 4.46 TV as a source for media interests ...... 180 Figure 4.47 Concerns about television, all individuals ...... 181 Figure 4.48 Concerns about television, 18 to 24 year olds ...... 182 Figure 4.49 Concerns about television, 45 to 64 year olds ...... 182 Figure 5.1 Key Indicators, 2007 ...... 185 Figure 5.2 Growth of mobile voice volumes and revenues 2006-2007 ...... 188 Figure 5.3 Decline of fixed-line voice during 2007 ...... 188 Figure 5.4 Fixed and mobile call volumes per head , 2006 and 2007 ...... 189 Figure 5.5 Mobile-only households, 2005- 2007 ...... 191 Figure 5.6 Use of mobiles in the home ...... 192 Figure 5.7 Growth in take-up of broadband services, 2003 to 2007 ...... 193 Figure 5.8 Growth in broadband service revenues as a proportion of 2007 revenues ...... 193 Figure 5.9 Broadband penetration and growth rates ...... 194 Figure 5.10 Average monthly retail revenue per broadband connection, 2006 and 2007 ...... 196 Figure 5.11 FTTH/B subscribers, by region, end 2007 ...... 197 Figure 5.12 Major NGA developments, 2007 and 2008 ...... 200 Figure 5.13 MVNO share of total mobile connections, 2006 and 2007 ...... 201

319 The International Communications Market 2008

Figure 5.14 Numbers of MVNOs and service providers (estimated) in European countries, November 2008 ...... 202 Figure 5.15 Selection of multi-country MVNOs/service providers ...... 203 Figure 5.16 Text messages per head, 2002 and 2007 ...... 204 Figure 5.17 SMS messages per mobile connection and average revenue per SMS, 2007 ...... 205 Figure 5.18 Total telecoms service retail revenue, by sector: 2002 to 2007 ...... 208 Figure 5.19 Telecoms service retail revenue, by sector: 2007 ...... 209 Figure 5.20 Telecoms service retail revenues, 2002 and 2007 ...... 209 Figure 5.21 Total telecoms service revenue per head: 2002 to 2007 ...... 210 Figure 5.22 Fixed-line voice revenues: 2002 and 2007 ...... 211 Figure 5.23 Fixed-line voice revenue per head: 2002 and 2007 ...... 211 Figure 5.24 Monthly fixed-line voice call minutes per head: 2002 to 2007 ...... 212 Figure 5.25 Incumbent share of fixed voice call volumes: 2004 and 2007 ...... 213 Figure 5.26 Fixed exchange lines: 2002 and 2007 ...... 213 Figure 5.27 Mobile revenues: 2002 and 2007 ...... 214 Figure 5.28 Mobile as a proportion of total fixed and mobile revenues: 2002 and 2007 ...... 214 Figure 5.29 Mobile revenue, by service type: 2002 and 2007 ...... 215 Figure 5.30 Data as a proportion of total mobile service revenue: 2002 and 2007 ...... 216 Figure 5.31 Non-SMS data, as a proportion of total mobile data revenues: 2004 and 2007 ...... 216 Figure 5.32 Mobile voice call volumes: 2002 to 2007 ...... 217 Figure 5.33 Mobile voice call volumes as a proportion of total voice call volumes: 2002 and 2007 ...... 217 Figure 5.34 Mobile connections: 2002 to 2007 ...... 218 Figure 5.35 Mobile as a proportion of total telecoms connections: 2002 and 2007 ...... 218 Figure 5.36 MVNO share of total mobile connections, 2004 and 2007 ...... 219 Figure 5.37 Herfindahl-Herschman index of mobile subscription concentration: 2004 and 2007 ...... 220 Figure 5.38 3G as a proportion of total mobile subscriptions: 2004 and 2007 ...... 221 Figure 5.39 Availability of broadband services, 2004 and 2007 ...... 222 Figure 5.40 Broadband revenues: 2002 and 2007 ...... 222 Figure 5.41 Broadband revenue per head: 2002 and 2007 ...... 223 Figure 5.42 Broadband as a proportion of total fixed revenues: 2002 and 2007 ...... 223 Figure 5.43 Broadband connections: 2004 and 2007 ...... 224 Figure 5.44 Proportion of broadband connections with a headline speed above 2Mbit/s: end 2007 ...... 224 Figure 5.45 DSL as a proportion of all broadband connections: 2002 and 2007 ...... 225 Figure 5.46 Retail subscription share of the top three broadband providers: 2004 and 2007 ...... 226 Figure 5.47 Take- up of fixed and mobile services, 2007 ...... 228 Figure 5.48 Take-up of broadband services, 2007 ...... 229 Figure 5.49 Growth in take-up of broadband services, 2002 to 2007 ...... 230 Figure 5.50 Monthly outbound minutes per fixed line, 2002 and 2007 ...... 231 Figure 5.51 Average monthly voice revenue per fixed line, 2002 and 2007 ...... 231 Figure 5.52 Average fixed-line revenue, per minute: 2002 and 2007 ...... 232 Figure 5.53 Use of VoIP among internet users: 2007...... 233 Figure 5.54 Monthly outbound minutes per mobile subscription ...... 234 Figure 5.55 Mobile as a proportion of all voice call volumes ...... 234 Figure 5.56 Mobile subscriptions, by type: 2002 and 2007 ...... 235 Figure 5.57 Monthly mobile average revenue per subscription, 2002 to 2007 ...... 236 Figure 5.58 Mobile take-up and average monthly revenue per subscription: 2007 ...... 236 Figure 5.59 Monthly mobile voice and data revenue, per subscription: 2007 ...... 237 Figure 5.60 Monthly mobile SMS and non-SMS ARPU: 2007 ...... 238

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Figure 5.61 Mobile data revenue, as a proportion of total mobile revenue: 2002 to 2007 ...... 238 Figure 5.62 Average mobile revenue per outgoing voice call minute, 2002 to 2007 ...... 239 Figure 5.63 Mobile availability, by technology: 2007 ...... 240 Figure 5.64 Broadband availability by platform: 2007 ...... 240 Figure 5.65 Proportion of home internet connections that are broadband: Q4 2007 ...... 241 Figure 5.66 Average revenue per broadband connection: 2002 and 2007 ...... 242 Figure 5.67 Public wireless hotspots per 100,000 population, 2002 and 2007 ...... 242 Figure 6.1 Key radio market indicators: 2007 ...... 245 Figure 6.2 Adults regularly listening to the radio...... 246 Figure 6.3 Do you ever watch TV and listen to a radio station? % adults listening to the radio & watching TV, at least sometimes ...... 247 Figure 6.4 Devices owned and personally used: digital radio set ...... 248 Figure 6.5 Use of home internet for radio listening ...... 248 Figure 6.6 Home internet use for downloading audio content ...... 249 Figure 6.7 Change in off-line radio listening since first using internet ...... 250 Figure 6.8 Mobile audio service use ...... 251 Figure 6.9 Global radio industry revenues, 2003 - 2007...... 256 Figure 6.10 Radio industry revenue, 2007 ...... 257 Figure 6.11 Radio industry revenue growth, 2006 - 2007...... 258 Figure 6.12 Proportion of radio industry revenue, by source ...... 259 Figure 6.13 Radio industry revenues, per head ...... 259 Figure 6.14 Radio advertising as a proportion of total advertising spend and levels of public funding in 2007 ...... 260 Figure 6.15 Number of broadcast-based local and national radio stations, per head .... 262 Figure 6.16 Radio stations available over digital radio platforms ...... 262 Figure 6.17 Weekly listening hours: 2007 Average weekly hours, per head ...... 263 Figure 6.18 Share of PSB listening, 2007 ...... 264 Figure 7.1 Key country data, 2007 ...... 268 Figure 7.2 Mobile subscription growth: 2002 to 2007 ...... 269 Figure 7.3 Total fixed exchange lines (PSTN and ISDN): 2004 and 2007 ...... 271 Figure 7.4 Mobile and fixed-line penetration: 2002 and 2007...... 271 Figure 7.5 Broadband connections per 100 households, 2007 ...... 272 Figure 7.6 Telecoms revenue by, service type: 2004-2007 ...... 273 Figure 7.7 Average revenue per connection, by service type: 2006 and 2007 ...... 274 Figure 7.8 Mobile data and voice ARPU: 2006 and 2007 ...... 275 Figure 7.9 TV households: 2002 - 2007 ...... 276 Figure 7.10 Reception devices connected to the main television set: 2007 ...... 276 Figure 7.11 Proportion of households with FTA versus pay television: 2002 and 2007 ...... 277 Figure 7.12 Proportion of households connected to digital and analogue platforms: 2002 and 2007 ...... 278 Figure 7.13 Television industry revenue, 2002 - 2007...... 278 Figure 7.14 Television industry revenue per head: 2002 and 2007...... 279 Figure 7.15 Television industry revenue, by source: 2002 and 2007 ...... 279 Figure 7.16 Radio revenues across the BRIC nations...... 282 Figure 7.17 Radio industry revenues per head and as a proportion of ad spend ...... 283

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